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Energy: Production, Consumption, and Consequences (1990)

Chapter: 3. Evolving Vulnerbilities and Opportunities

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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Page 155
Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Suggested Citation:"3. Evolving Vulnerbilities and Opportunities." National Academy of Engineering. 1990. Energy: Production, Consumption, and Consequences. Washington, DC: The National Academies Press. doi: 10.17226/1442.
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Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

Bang ~lner~11hies and Opportunities

Energy: Production, Consumption, and Consequences. 1990. Pp. 145-164. Washington, D.C: National Academy Press. Managing Volatility in the Oil Industty JOHN F. BOOKOUT A concern often expressed nowadays is that the survivability of parts of the oil industry is threatened. Over the past 15 years the oil industry has experienced a succession of rapid and significant changes. The dimensions of change include oil price, of course, but also changes in activity levels, employment, supply and demand, and in economic and political conditions. In this chapter we will examine some of these changes. First, we will compare the volatility of oil prices with that of other commodities, to determine whether the oil industry environment is unique in any way. Also in this discussion we will consider the impact of futures market trading. Second, we will look at the performance of various parts of the industry the upstream exploration and production sector, the refining and retailing parts of the downstream sector, as well as a brief look at consumers. Last, we will consider whether the industry has adapted to this changed environment, and what we might expect in the 1990s. LONG-TERM COMMODITIES PRICES Although many in the oil industry may not think of it this way, the experience over the past 15 years, in fact over the past 60 years, has many precedents. A statistical analysis of the price history for corn, soybeans, tin, and oil indicates that price volatility of oil is similar to that of other commodities (see Figure 1~. The same picture emerges if oil prices are superimposed on plots of copper, sugar, cocoa, rubber, and many other commodities. It is also useful to note that there have been several epochs in 145

46 4.0 il 3.0 on <o _' X 2.0 ~ JOHN ~ B~KO~ corn jl ~ .-1,< . .b .: ~1~1,< /, l . 1.0 ~ ;/ :; A°il Tin i/ | \ ~ ,~.~1~'--':. /; \ I, . ,...~. Soybeans ~ ., 1920 1930 1940 1950 1960 1970 1980 1990 FIGURE 1 Real (inflation adjusted) price indexes for corn, soybeans, tin, and oil (1960= 1.0~. these various price series. In particular, the period from the early 1950s to about 1970 tended to be rather calm for many commodities, including oil. Before 1950 and after 1970, prices tended to be unstable. Statistical testing of the oil price series, including comparison with the other commodities, also indicates two other points: until 1973, price volatility in oil was less than in other commodities, but only marginally so; after 1973 volatility in oil prices was greater than in all other commodities. These facts suggest that the 20-year period of relative tranquillity before 1973 was just as abnormal as the 15-year period of instability after that date. We now shall argue that the oil industry has been adapting itself in a way that is likely to accommodate, and could moderate, volatility in the future. But before leaving the subject of commodities prices, let us address an issue dealing with futures markets. Some people have suggested that the introduction of trading in oil futures has been a major cause of the volatility evident in the market today. FUTURES TRADING AND PRICE VOLATILITY Most people would agree that day-to-day oil price movements are now more volatile than they were 20 years ago. At that time, most transactions were based on contract or other long-term relations. But in the context of prospects for the 1990s, have year-to-year price changes been affected? A study done recently by Shell analyzed the price volatility of 22 differ- ent commodities, before and after the start-up of futures trading (Bookout, 1988~. From the results, we concluded that for most commodities, including

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~. As we will see later, the establishment of oil futures is just one example of how the oil industry has embraced the technology of other industries, in this case, financial markets, as a way of adapting to an environment of volatile prices. U.S. OIL AND GAS ADDITIONS AND PRODUCTION Figure 2 shows the history of U.S. oil and gas production and additions to the known reserve base in equivalent barrels per year. Additions are

148 A lL 8 - C7 10 _ 6 o lo O cn cc 4 c: m me o J m JOHN ~ BOOBOOS | 19.7 (Including Prudhoe) - Additions 2 J Production ~V~j I O/0 wt;llrlu- ~ | | 70 80 86 1 , , , 1 , , , , 1 , I ~ I 1 , , , , 1 , , , , 1 , , , , 1 , , , , 1 , , , , 1 , , , , 1 , , , , 1 --- 1960 1970 1980 1990 `'( :f -1940 1 950 FIGURE 2 U.S. oil and gas production and additions to reserves (billion barrels of oil equivalent). The inset shows the reserve additions due to discoveries in Alaska and response to price increases. 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. Additionally, the regulatory bodies of the various states had proration policies that limited the oil production rates below capacity. For these reasons, until the late 1960s, additions were well above production. By the end of the 1960s, the backlog of low-cost prospects had been depleted, additions were down, and so reserve replacement was in decline. In 1970 the United States was fortunate to have added to its reserve base the giant field at Prudhoe Bay, Alaska. But reserve replacement in the lower 48 states continued to fall off, and production started to decline by 5 percent after 1970. It was not until the stimulation of the price increases in 1973 that reserve replacement picked up. The inset in Figure 2 shows that, if the 5 percent decline that was apparent after 1970 continued indefinitely, oil and gas production today would be nearly 40 percent less than it is, that is, about 6 million barrels of oil equivalent per day less. The data suggest that increase in additions to reserves, stimulated by the price increases in the 1970s, contributed about 65 percent of what was needed to stabilize production. Alaska contributed the remainder, and many would suggest that Alaskan production could be brought to market

MANAGING VOLATILITY IN THE OIL INDUSTRY 149 only because of the price increases. In both cases, the maximum volume effects came six to eight years after the price change. These statistics probably do not give a sense of the role that technol- ogy played over this period. The advances in the sciences of geology and geophysics before 1970 are now taken for granted. But where would the industry be without the breakthroughs in such fields as seismology, stratig- raphy, and plate tectonics? Those tools added to our routine vocabulary such terms as bright spots, source rocks, and lithofacies, to name a few. In more recent years, particularly in response to the imperatives perceived in the 1970s, advances in three-dimensional seismic imaging, enhanced re- covery 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. Three phases of wellhead price behavior can be identified: 1960 1973: oil and gas prices were constant or declining 197~1981: prices increased rapidly 1981-1986: prices declined Three key activities over this period seem to follow closely the oil and gas price profiles—the number of seismic crews employed in the United States, the number of rotary rigs in operation, and the number of wells completed. Each of these activities responds to the price pattern of gradual decline, surge, and collapse. There have also been changes in efficiency and productivity in response to this cycle. Behavior Patterns The number of well completions per active drilling rig is a measure of efficiency in drilling. During the era of declining prices in the 1960s, the level was about 24 to 28, as shown in the left graph of Figure 4. After price increases in the 197Os, the number of wells drilled increased, but the number of completions per rig declined about 20 percent. Reasons for this decline include lack of experience among the new drilling crews, lack of good matching between rigs and their prospects, and the fact that some older rigs may have been kept in service longer than they should have been. More recently, oil prices have come down and the utilization of the Beet of rigs has declined; productivity of the operating rigs has

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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 ! ~ . ·~ 1,,,,1,,,,1,,,,1,,,,1,,,,1,,,,1 1 990 1 960 1 970 1 980 1 990 . FIGURE 4 [tends in exploration performance by U.S. oil industry. soared, as the industry responded to the need to improve productivity during retrenchment. The graph on the right of Figure 4 shows another measure of behavior, the size of the hydrocarbon additions per successful well drilled. In the 1960s industry was upgrading by selecting higher volume prospects as prices gradually declined. With the price rises in the 1970s, the additions per well dropped as the incentives to drill smaller prospects increased. In 1986, the last year for which we have data, the size of the additions per well rose, suggesting that industry has once again started to upgrade its prospects. Revenues Turning now to the financial behavior of the industry, Figure 5 shows the sources of industry revenues, which peaked in 1981 at $180 billion. On the right, the percentage disposition of those revenues is divided among the royalties and production taxes and the costs of lifting, manpower, and materials (overhead). The remainder is operating cash income, which is the cash left for reinvestment, paying income taxes, dividends, or debt. The wedge labeled WET represents the revenues consumed by the windfall profits tax. Over the 26-year history shown in Figure 5, operating cash income has been a remarkably consistent 60 percent of total revenues, with the exception of the period when some $80 billion was paid in windfall profits tax. \

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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. The right graph shows the ratio of reinvested funds to operating cash income. Despite the unstable market that prevailed, and the intrusions of the federal government, the expansion and contraction behavior of the industry results in a rather stable ratio of about 70 percent.) Incidentally, the low point in 1971 was due to the absence of any federal lease sales in that year. And the high point in the early 1980s reflects the high price expectations that prevailed. Coupled with the behavior shown in these last few figures, this consistent pattern of reinvestment throughout the period is a sign of continuing adaptation to the changing environment. ~ URE CRUDE OIL PRICES lbrning to the future, let us look at the kind of volatility that might be expected. In a recent report by the National Petroleum Council (NPC, 1987), two oil price trajectories were used as guidelines for their study. In this chapter, the NPC price projections, shown in Figure 7, are used as boundary conditions for the variation in year-to-year prices. Crude oil prices in the year 2000 are projected to range from $20 to $35 per barrel, in 1987 dollars. Consistent natural gas prices are also assumed by equilibrating gas with fuel oil prices sometime in the early 1990s. 1b model the future performance of the U.S. oil industry, each boundary will be used as a price trajectory in conjunction with the industry behavior just described in the previous figures: expansion and contraction canahili~v chnnoe. in efficiencies, and financial performance. fir hi- --a, FUTURE U.S. OIL AND GAS ADDITIONS AND PRODUCTION The logic of the model that underlies the projections on Figure 8 is that the price in any year determines revenues, which in turn control investment level. After accounting for price effects on efficiency, productivity, finding rates per well, and additions to reserves, production for the following year is determined. With the model structured as described, depending on the price path, additions to reserves would fall to the level of the early 1970s, that is, the 3- to 5-billion-barrel range, and the rate of production would approach the rate of additions. With no surprises, U.S. oil and gas production would decline 1 to 3 percent per yeas.

154 .. o ._ CO Or ~ > ._ a) Or o c) ~ s In /.' C ~ a)- me ~ lN30~3d rot a) CO a) > ._ a) Or .' o <n a) Go . _ a) En: I 1 1 o ~ o o ~ ~ I_ SU~lOO JO SN011119 o ~ CO — Cal - ~: ._

MANAGING VOLATILITYIN THE OIL INDUSTRY 40 CC ~ 30 Q a, 2'l on V 10 155 A ':~ I ~ I ' ,J ~ . 1 1 1 1 1 1 1 1 1 1, 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ~ 1 1 1 1 1 1 1 1 1 1960 1970 1980 1990 2000 FIGURE 7 U.S. crude oil price history and National Petroleum Council projections to ~ 19.7 (Including Prudhoe) 11 em ~ 8 - a LL ' 6 o lo o can LL 4 cr: in in So 2 ~- Production ,_./ Ad::,, ~ ll ~ 1 1 1 1 1 1 , , , , 1 , , I 1 1 1 1 1 1 1 , , , , 1 , , , 1 1 1 1 1 1 1 1 1 1 1 1 , , 1 1 1 , 1 1 1 1 , , , , 1 1 1 1 1 1 1940 1950 1960 1970 1980 1990 2000 FIGURE 8 Projected U.S. oil and gas production and additions to reserves (billion barrels

156 JOHN ~ BOOBOOS TABLE 2 U.S. Discovered Oil Oil Resources Total Oil (billions Billions Percent of of bawls) of Barrels Resource Enhanced Recovery Oil Produced Proven Probable Total 146 3 30 21 197 Oil left in place 362 2 4 13 8 38 What this model does not reflect are the statistically less probable events such as Prudhoe Bay, which in the 1990s could substantially alter the oil and gas production profile. GEOLOGIC AND TECHNOLOGICAL SURPRISES The kind of change not reflected in the model could come as a geologic surprise capable of sustaining industry production at present or even higher levels. However, some initial period of decline is likely before any "surprise" can be brought into production. A surprise could be rooted in technological advances or even breakthroughs, which could release large resources of oil and gas that are not now considered economic. Tight sands gas, coal seam gas, shale oil, and enhanced oil recovery techniques are possibilities. ~ illustrate the advances in enhanced oil recovery, consider that a total of 197 billion barrels is expected to be produced from oil resources already identified, as shown in the left column of Table 2. That represents an overall recovery rate of about 35 percent of the oil in place, leaving 362 billion barrels behind. Present enhanced recovery technology has already boosted our yield by about 15 billion barrels, as shown in the center column of the table. 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. An average of more than half a billion 1987 dollars has been committed to research annually since the early 1970s. Technological milestones continue to be achieved in areas

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. On the top graph of Figure 9 are past and projected revenues from 1960 to 2000. On the bottom graph are the net cash flows associated with those revenues and the projected financial performance based on the model. During the 1960s the industry was generating surplus cash, even after paying out dividends. By the 1970s a combination of higher tax rates and higher capital spending rates drove net cash flow nearly to zero. In fact, the industry took in outside funds to support its activities. In the future, under the model assumptions, the revenues vary, both because of the different price trajectories and because of the different oil and gas production responses. By the year 2000, industry revenues could nearly return to the $180 billion level we have already seen. Perhaps more important to the viability of the industry under changing conditions is the projection of net cash flow. Even at the lower boundary of the NPC projections shown in Figure 7, the industry maintains a positive cash flow, in part by lowering the absolute level of reinvestment in the lower 6a ~ 200 0D o) - cn ~0 IL o He o - —m 30 - ~n o IL o en -15 o 3 -30 m Revenues 150 100 50 . O ,,,,1 1 1 1 1111111,,,11,, , _ ~ :~-~ \ _~-~ \_ ~~: :~ ~ ~~:~ % ~ ~ ; ~~ ~ : T :~ = ~ 111,,,,1,,111,,111 1 965 15 Net Cash Flow 1 975 Net Cash Flow ~ _~ After Dividends , I,, 1,,,, 1,, 1 1 1, 1 1 1 1 1965 1 975 1 985 1 995 ,,,, 1 1 1 1 1 1, 1 1 1 1, 1 1 1 1 1 985 1 995 FIGURE 9 Historical and projected financial performance of the U.S. oil industry (billions of 1987 dollars).

158 JOHN ~ BOOBOOS price environment. At both boundaries it would appear that dividends can continue to flow at historical levels. This model leads to a number of observations. If the behavior patterns that the industry has exhibited in the past continue in the future, the industry will continue to be financially viable. A moderate decline of the U.S. oil and gas production is likely based on our analysis of the NPC model. However, there is reason to be hopeful about eventual improvement in that position on the basis of some geologic and technological precedents. In any event, it appears that the upstream sector is resilient in its ability to accommodate large, rapid changes in its business environment. Other forms of volatility in the oil industry are important measures of the ability to adapt in sectors such as refining. U.S. CRUDE OIL IMPORTS The month-to-month variation in imports of crude oil from 20 different countries supplying almost all the U.S. imports is shown in Figure 10. By inspection, there seems to be more chaos at the middle and end of the period than at the beginning. Apical month-to-month changes in the exporting countries' receipts nearly tripled from 1971 to 1979, from plus or minus 1 million barrels to plus or minus 3 million barrels; since then, volatility has changed very little (U.S. Department of Energy, 1988~. The point of focusing on this measure of volatility is to consider the response of U.S. refiners to this changing environment. The quality of crude oil varies from source to source, requiring different refining facilities to optimize conversion of the raw material to finished oil products. As the Middle East OPEC Countries Other OPEC Countries ......... Non-OPEC Countries I 100 id o tar ~ 75 co 111 A: m So at J 25 Low Volatility W.............. Volatility 1 1 1 1 1 1 1 `~`V I - 1 ~ 41 /V e! I 1 1 ~ 1 1 1 1 970 1975 1 980 1 985 FIGURE 10 Monthly U.S. crude oil imports, by source (million barrels per month).

MANAGING VOLATILITY IN THE OIL INDUSTRY ooo 900 800 700 600 500 400 300 159 Desulfurization Capacity 1.2 1.1 1.0 .8 .7 Crude Oil - % Sulfur 81 82 83 84 85 86 87 88 1 000 ~ ~0 C) LLJ co LL hi: ca o cn Cl at: o I 800 700 Bottom-of-the-Barrel Conversion Capacity 38 36 32 Crude Oil Gravity-°API 400 81 82 83 84 85 86 87 88 1970 1975 1980 1985 1970 1975 1980 1985 FIGURE 11 Capacity of U.S. Gulf Coast refineries (thousands of barrels per day). The inset in the left graph shows a slowly rising average sulfur content of Jude oil, which is matched by rising desulfunzation capacity of refinenes. The inset in the right graph shows decreasing average refinability as measured by API gravity. This decrease is matched by rising bottom-of-the-barrel Heavy crude oil) conversion capacit,. availability of crude from any source has become more volatile, refiners seem to have positioned themselves to handle a broader range of quality. CHANGES IN REFINING CAPACITY Much of the imported crude oil in the United States is processed in refineries on the Gulf Coast. The left graph of Figure 11 shows the increase in capacity to remove sulfur from crude oil. 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. But just since that time, the sulfur content of the crude oil slate processed on the Gulf Coast has, on average, increased from 0.8 to 1.0 percent, as shown in the inset. This increase has occurred despite the fact that there are more lower-sulfur crude oils being produced in the world today than in 1980. Although refiners are now less likely to know what crude oil will be available, they appear to have increased their ability to be competitive in the light of this uncertainty. As shown on the right graph of Figure 11, facilities to process the bottom-of-the-barrel crude oil have been increased. The API gravity of a crude oil is one measure of its quality, since it indicates the amount of very heavy hydrocarbons contained in the crude.2 Without sophisticated refining

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. Nationwide, more than $4 billion has been spent in the past six years for these types of upgrading facilities. As the inset on the right graph of Figure 11 shows, this upgrading has permitted refiners to select crude oils that are increasingly heavy, as measured by their declining gravity. This change is in response to a generally increased, but more unstable, availability of lighter crude oils in the world. In sum, these two graphs indicate ways in which another sector of the oil industry has adapted itself to a changed business environment of increased volatility. They have sensed the need for changing the way they do business, and have developed or absorbed the technology necessary to accomplish it. RETAIL GASOLINE SECI OR Downstream of the refining sector, the retail gasoline business has adapted to change in a somewhat different way. The mid-1970s might be considered a watershed in the perceptions of consumer needs in gasoline retailing. As consumers saw gasoline prices increase, their requirements shifted from full service to economy. They were, in fact, deflecting the effects of the unstable prices back to the retail sector. As a consequence, although less than 25 percent of the gasoline sold was self-se~ve in 1976, nearly 80 percent of industry sales are self-serve today, as seen on the left graph of Figure 12. The right graph shows that after 1975, the number of service stations in the United States declined 4 percent annually, from 190,000 to 117,000 in 1987. But during that period of declining total station count, the throughput of the average station increased from 32,000 gallons per month to 55,000 per month (Lundberg Letter, July 17, 1987~. The retail gasoline sector has emerged from this recent period of volatility with substantially more productive facilities than it had 15 years ago. The change has come about through a combination of innovative management techniques, technological advances in electronics, and improved design. FUEL SWITCHABILITY IN INDUSTRIAL BOILERS One final example of the changes brought about by price volatility is not in the oil industry itself, but does have an impact on the industry. Energy consumers have done much to accommodate their vulnerability to instability in both price and volume. In the case of industrial energy consumers, the

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. 161 60 50 ~ Z O A: LO O 40 at, o I standard policy seems to be to install dual fueling capability in any major new installation. Many existing facilities have even been retrofitted in this manner. Figure 13 shows the switchability by fuel and the quantity of fuel that can be switched by several major industries. Industrial consumers, much lee refiners, have adapted their capital facilities to accommodate changes in both price and volume. These consumers are no longer captive customers. This capability of consumers to switch away from oil, and refiners to switch among sources of crude, suggests that supply disruptions like those experienced in both oil and gas in the 1970s might not have as severe an impact the next time around. Consumers now have more flexibility. A SYSTEMS THEORY APPROACH ~ draw conclusions from these analyses, some concepts from general systems theory might be borrowed. In that discipline, the oil industry might be thought of as an "open system" (Figure 14) that has to interact with its environment to remain viable. For the purposes of this discussion, the U.S. Oil industry can be regarded as an open system that includes the companies (upstream exploration and production sectors and downstream refining and marketing), the consumers, and the related service industries (e.g., oil field, financial). That system can be contrasted with many mechanical feedback systems, from a simple thermostat to a sophisticated expert system. These are closed systems and do not have the ability to rejuvenate themselves. When an environment changes abruptly, the initial reaction of an

162 2.0 1.5 1.0 3 o.5 0.0 JOHN ~ BOOKS By Fuel _ ....~..... ....... ............... ................. .-:::::::::: ·:-:-.-:-:-:-:-: ,................. ............... Nonswitchable Switchable ·.-:. :-:-:-:.: . :.2::.,:::2:': _ : :~: ,:: ~ ~ ........ ,..................... .~ :-: .................. _ ~:~ C, Q LIJ Q CD LL hi: m o co at O - By Industry : ::::::: :--::: ~ 1] n F....1 ma O'\ GO me 1~,oet e~\G~,aO\e'~ Bed FIGURE 13 Industrial boiler fuel switchability among industrial users (million barrels per day3. SOURCE: Petroleum Industry Research Associates (19863. in/ Hi: =::: ~:~) ~~:~ ~~:~:~:~ ;:: \ :~ ~~:~:~.~i:~: ~~ :~ ~~ ~ ~ \ :~? ~ ~ \ \ ~ i ~:~ :~? :~: ~~: ~~ ~~ :~ ~: :~ ~~.' Volatility / ~ ll \\ : \ : ~ ~ = ~ i: ::: it: ~~: ~~: ~~ ~:::~ ~ T~ ~ ~~: it: ~ ~ ~ i: Id,; ~~ ~~ : :::: ::::::::::: : Technology ~~~ \~=~ N~ ~~ ~~ ~~ ~ I :: :~:: :: ::; : ~~::::~; : ~~ ~ _ ~:~:~:~ ~~ : :::: ~ ~ t: ~ ~ ~~ T God; ~ ~~ ~ . ~~: :~ ~ ~~ t:~ ~~; ~~: ~~ ~~ ~~. :~ ~ ~~ :: ~ ~ Art .,, A: ~ ~~ ~~:` ~ ::: :~ ~ ~ ~~ Ear; I: ~~ : : ~:~ ~~ :: i: ::: ~ :::::::::: : ::: :::: i :: :: : : : :: t: :: ~ i ::: ~ Ti :::: ~~:~:~::~:~:~ ~ :::: ~ ::: ~~ ~~:~ ~~ ~~: ~~:~ :~ ~ ~~ ~~ it: ~~ ~ ~~ ~~ ~ :: ~~:~ ~~ : : :::: :: ::: :: ::::::: :: :: :::::: ::: ::? :::: ::: t: ::::::: :::: :: :::::: ::::::: ::::::::: :: :::::::::: ::::: :: ::: ::::: ::::::: :::s ::: ~ :: ~: :~ ~ ~::~ :~:2 I:: :~:: :~::~ ~~ ::~: hi: T::~::: i~:::~::~: i:: :\ ~~ ~~:~ ~~ ~ ~~ ~~ T:~ ~~:~ T~: ~~ :: ~ ~ :~ :~ ~~ ~~' ~~:~:::~ ~~:~:~ ~~ ~~:~:~ ~~ ~:~1 : ,~ t~ ~~ ~ ~ ~~ ~ ~ At: ~ ~ ~ ~~ ~ T~ ~~ ~ ~ ~ ~ ~ it: ~~ ~~ ~ ~ ~ Aft: ~~ ~~ ~ :::: ~~: it:: ~~ ~~ ~:~:1 my:::: :::: ~: ~~ ~~:~ ~ T~::~:~: :: t~ it: t:~ ~~:~: ~~ ~ ~ :: ~~ ;~ ~ t~ ~ ~~T :: ~ :~ ~ ~~: ,~, _ _ ~ ~~ ~~:~ ~ ~ 1 Information FIGURE 14 Oil industry and its interactions with its environment.

MANAGING VOLATILITY IN THE OIL INDUSTRY i 163 open system is often survival, by shutting out these changes. For long-term viability, the system must open up again and adapt. In the oil industry, the environment has changed with the increase in volatility. At the same time, the response capability of the industry was curtailed as the government encroached on the industry's boundaries. We saw the impact of windfall profits tax on the ability of the upstream segments of the industry to invest. Yet we have seen a number of examples of how the industry began to adapt. As the industry continued to develop its own technology internally, it adopted innovations from other disciplines- computer 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. The oil industry even changed the shape of its own environment, as industrial and retail consumers positioned themselves to accommodate a volatile oil market. From this analogy, and from the other observations already made, it seems clear that to remain viable the oil industry must continue to position itself to handle whatever the business environment presents. Some might feel that the industry ought to insulate itself from volatility, but that does not make the volatility go away. In the long run it only deflects the volatility somewhere else. If that target, which might be consumers, adapts to the environmental change, it becomes more viable, and the oil industry probably loses ground. Consider, for example, how much less oil and gas consumers need now than they did 15 years ago. U.S. consumption of oil and gas per dollar of real GNP has dropped to 62 percent of its 1973 level. CONCLUSIONS From this discussion, together with the studies that have been presented here, it appears that the oil industry has demonstrated considerable ability to adapt to a world of uncertainty and volatility. The refining sector seems to have adopted the position that the best approach to volatility is flexibility. The upstream sectors of the industry have exhibited substantial ability to expand arid contract. From a financial point of view, the oil industry can be expected to be a survivor and to be robust over a broad range of futures. And finally, although we might expect a gradual decline in U.S. oil and gas production in the future, there are reasons to hope that new and ingenious applications of technology in the coming years will favorably improve the outlook. It seems that there is hope for somewhat more moderate fluctuations in the oil industry's future than it has experienced in the recent past. But to remain viable for the long term, the oil industry must continue to sense the need to reshape itself through open, continuing interaction with its environment.

164 JOHN ~ BOOBOOS NOTES 1. The real (inflation adjusted) rate of return has varied over the period from highs in 1973 and 1977 of 8 and 9 percent to lows slightly below zero in 1982~1983. During the 1960s, real rates of return averaged about 4 percent; in the 1970s, about 6 percent. The drop in oil prices has reduced the real rate of return of investments made in the early 1980s to zero or below, given current price expectations. API gravity is the oil industry measuring standard and is inversely proportional to specific gravity in the following way: ° API = (141.5/specific gravity) - 131.5 REFERENCES Bookout, J. F. 1988. Impact of Volatility on the U.S. Oil Industry. Background studies. Houston, Rex.: Shell Oil Company. Lundberg Lever. July 17, 1987. Vital Statistics and Analysis in Oil Marketing and Related Industries. North Hollywood, Calif.: Lundberg Survey, Inc. National Petroleum Council. 1987. Factors Affecting U.S. Oil and Gas Outlook. Washington, D.C.: National Petroleum Council. Petroleum Industry Research Associates. 1986. The U.S. Industrial Energy Market Outlook: Demand Prospects, Interfuel Competition, Strategic Implications, Vol. 1. New York: Petroleum Industry Research Associates, Inc. U.S. Department of Energy. 1988. Monthly Energy Review. Washington, D.C.: U.S. Department of Energy.

Energy: Production, Consumption, and Consequences. 1990. Pp. 165-172. Washington, D.C.: National Academy Press. The Uncertain Future Role of Natural Gas WILLIAM T. McCORMICK, JR. Although the future role of natural gas in the U.S. energy picture is not certain, it is probably no less certain, and quite possibly more certain, than other energy fuels available in the United States in the next 20 to 30 years. We know this because natural gas ranks high among energy fuels when it is evaluated against the key criteria that will determine its competitiveness In the national energy fuels marketplace. Those key criteria are the size of the recoverable resource, the eco- nomics 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. energy mix. The future contribution of natural gas will depend on the viability of other fuels in the marketplace. And since each fuel type has its own challenges, the equation certainly has more than one variable. As a utility executive and a nuclear engineer, I strongly support nuclear and coal development, but I also understand the substantial and real challenges to the development of these resources: nuclear in the short term and coal, because of concerns about sulfur dioxide and carbon dioxide, in the longer term. To the extent that one or more energy resources are not developed in the normal economic pattern, this necessarily implies that some competitive resources must bridge the gap. Unfortunately, in the United States, because of political and other factors, the question is not necessarily which energy resource is best, but rather which might be least objectionable. On to natural gas. - 165

166 FIGURE 1 U.S. natural gas cumulative production, reserves, and potential in trillions of cubic feet (Tcf) as- of December 31, 1986. WILLIAM ~ MCCORMICK, JR. Potential Resources 739 Tcf ~ 698 Tot Proven Reserves 1 92 Tcf RESOURCE AVAILABILITY Figure 1 shows potential resources of natural gas are approximately four times larger than current proven reserves. Potential resources are gas volumes that are estimated to be recoverable, although not currently economical. Although natural gas has been in short supply in the past, it appears that, as a result of wellhead price deregulation, past shortages were due almost entirely to low regulated wellhead prices, which created a noneco- nomic exploration and development environment (Gibson, 1988~. Figure 2 shows that additions to natural gas reserves dropped when the level of development activities, as indicated by the annual number of well comple- tions, responded to the disincentives. In fact, since 1977, when wellhead gas prices for almost all newly discovered natural gas were first deregulated, the additions to new gas reserves in the United States have averaged about 90 percent of annual production. At this replacement rate, U.S. gas reserves would satisfy current levels of consumption for about 50 years. Moreover, the Potential Gas Committee, an industry, government, and academic group, estimates that in addition to the 160 trillion cubic feet (Tcf) of proven U.S. 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. Together these gas resources and reserves amount to about 50 years of supplies at the current annual U.S. consumption rate of 18 Of.

THE UNCERTAIN FUTURE ROLE OF NATURAL GAS - e 25 20 Us 1 8 ° 16 Oh 14 O 12 1 0 8 8 6 4 ~ O `~ 1960 1965 1970 /\~^ ~ Natural Gas / Its Production ~—_ ~~ \ W\ Gas Well / ~ '`\_ Completion>./ ~ \~N \ ~ / v\ \ -.' ~ ~ ~ TV Reserve Additions I I I I I I I I I I I I I ~ I - I I I I I I 1 1' 1975 1980 1986 167 22 20 18 16 14 12 10 8 6 FIGURE 2 Natural gas well completions, reserve additions, and production in the conte~minous United States. TABLE 1 Remaining Lower48 Gas Resources as of January 1, 1987 (Gas Research Institute Baseline Projection) 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. Deparunent of Energy (excludes Alaska). bIncremental resource for tight sands and Devonian shale Only.

168 WILLLdM ~ MCCORMICK JR. 20 15 t o a) 1 0 c: o 5 o 1 990 A:. :. .:::. ~ .:::.:...:.:.: :~ .:. -: .: ~ .:.--:- ·..---.:...--.:-.:.- :~ .: :. ·:~ :--: :-: :.-:.-. ..... .... 2000 ~ Minimum EM Median 03 Maximum FIGURE 3 Conventional production of natural gas in the conterminous United States (20 estimates). These estimates of gas resources do not fully account for the effect of expanding the recoverable resource base from the use of new or improved recovery technologies. Just as new technologies have added significantly to domestic petroleum reserves (see Bookout, in this volume), new technolo- gies could add hundreds of Tcf of new reserves, resulting in several decades of additional U.S. domestic gas resources. None of the preceding discussion assumes any contribution from Cana- dian gas, which is largely untapped, readily available, and secure. 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. gas supplies. In short, from a physical resource standpoint, natural gas is an energy resource that should be available for many years to come. Estimates of future gas production based on a consensus of government, industry, and academic studies range between about 15 Tcf and 18 lLf in 1990 and between 101Lf and 161Lf in 2000 (see Figure 3~. As shown in Table 2, the total available U.S. supply of natural gas exceeds current use for the present and immediate future. ECONOMICS OF NATURAL GAS The key question relating to the future contribution of natural gas in the next 20 to 30 years is not one of available resource base, but one of

THE UNCERTAIN FUTURE ROLE OF NATURAL GAS 169 economics; namely, is the supply curve for natural gas such that it can compete in the various end-use sectors? The answer to this question, of course, depends as much on the costs of, and technological developments that influence, resource extraction as on transportation economics and end-use efficiencies. Figure 4 shows the results of a Gas Research Institute-funded study that concludes that with existing technology about 400 Tcf of gas resource can be recovered at $6.00 per million Btu (MBtu) or less. With improved technology, the recoverable resource can be increased to 700 Off at the same price. From the standpoint of end-use efficiencies, there are several recent applications and developments that can make natural gas an increasingly economical fuel. 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. It shows that today natural gas delivered retail equates to only about 60 cents per gallon of gasoline. Thus, there now appears to be sufficient operating savings to offset the capital cost of vehicle conversion. TABLE 2 U.S. Gas Supplies, Gas Research Institute Baseline Projection (quads), 1987 Production Basis 1986 1990 2000 2010 Content practice Domestic production 16.6 16.3 14.3 9.3 Canadian imports 0.8 0.9 1.4 1.1 Liquefied natural gas imports a 0.1 0.3 0.8 Supplemental sources a 0.2 0.3 0.3 Total 17.4 17.5 16.3 11.5 N. . . . ew mluatlves Lower48, advanced technology 0.0 0.3 2.6 5.4 Alaskan pipeline 0.0 0.0 0.0 1.2 Canadian frontier 0.0 0.0 0.5 0.7 Other imports 0.0 0.0 0.0 1.0 Synthetics 0.0 0.0 0.0 0.1 Total 0.0 0.3 3.1 8.4 Total supply 17.4 17.8 19.4 19.9 NOTE: 1 quad = 0.979 Tcf. aLess than 0.05 quad.

170 10.00 8.00 m 6.00 4.00 2.00 o WILLL4M ~ MCCO~IC~ JR. No Advanced Tech - - _ _~ V\fith Advanced Technology , I I , I I I , , ~ , , , t I ~ I I I ~ ~ l I ~ 0 100 200 300 400 POTENTIAL RESOURCE Ice 500 600 700 800 FIGURE 4 Effects of advanced technology on cost of potential gas resources in tight sands, Devonian shale, in the oonteIminous United States (as of January 1, 1981~. Cofiring involves the use of small amounts of natural gas (generally 5 to 15 percent of the boiler heat input) with coal in utility boilers. Because natural gas burns cleanly, cofiring of relatively small amounts of gas with coal in utility boilers will (1) directly reduce emissions of nitrogen oxides (NOx); (2) increase the productivity and operating flexibilities of boilers; and (3) 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. TABLE 3 Relative Economics of Natural Gas versus Gasoline as Vehicle Fuel, 1988 Fuel Cost ($) Natural gas $IMBtu $1Ba'md $/Gallon Gasoline $/Gallaa 4.50 26.~ 0.60 1.00

THE UNCERTAIN FUTURE ROLE OF NATURAL GAS 171 Gas has negligible sulfur and no particulate content and can be used as a reborn fuel to reduce NOR emissions by 50 to 60 percent. Consequently, gas can be used in small amounts with coal to help control pollution in marginal compliance situations, such as when the sulfur content of the coal is out of specifications (sulfur trim) or the electrostatic precipitator (to remove particulates) is not operating properly. Gas can also be cofired with higher sulfur coals to meet sulfur dioxide compliance limits being considered in acid rain legislation and to extend low-sulfur coal reserves. A most important aspect of the above elements of gas cofiring is that gas does not displace coal. The use of gas would enhance coal combustion by improving efficiency or by solving a problem with slagging, opacity, or system reliability or by helping the boiler achieve peak load. A fine example is the use of natural gas for electricity generation, which 5 to 10 years ago was considered unthinkable. However, today, many utilities are not only considering it but believe it to be a first-choice option. How can this be when the cost of delivered coal is between $1.50 and $2.00 per MBtu and delivered gas is $3.00 to $3.50 per MBtu? 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) results in a situation in which a utility can pay 50 to 100 percent more for natural gas fuel than for coal on a $/MBtu basis to get the same end-user costs for electricity generation (see Table 4~. In addition, because of the short construction time and lower capital cost of gas plants, utilities perceive less financial risk with a gas-fueled plant. ENVIRONMENT, SAFETY, AND SITING One of the most serious challenges facing all energy projects today relates to public acceptance. From this standpoint, natural gas ranks high. As a clean-burning fuel with minimal pollution, gas is the cleanest of the fossil fuels. Although, in contrast to nuclear power, it does have some modest air pollutant emissions, it does not share some of the difficult public acceptance challenges of nuclear power, namely, in plant safety and waste disposal. Moreover, unlike coal, gas does not suffer some of the problems that require the use of scrubbers and other expensive equipment in power plants. Another consequence of public acceptance problems for nuclear and, to some extent, coal plants is the long delay in authorization and con- struction of new plant facilities. This is becoming increasingly important in

172 WILI L4M ~ MCCORMICK JR. TABLE 4 Comparison of Costs of Electric Generation Fueled by Coal and Gas Cost Factor Gas Cow (ccxnb~ed lo) Capital cost ($pcW) $1,800 $1,000 Ihennal efficiency (%) Existing technology 36 43 New technology 37 46 Plant availability (%) 80 90 Construction iune (years) 6 - 8 3 - 4 CU]T={ fuel cost delivered (4ilMBm) $2 $3 utility decision making because of the increasing prevalence of State Public Utility Commission prudency investigations (see Balzhiser, in this volume) of plants that experience construction delays and cost overruns. 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. The economic savings resulting from these advantages appear to be substantial enough to offset the increasing price of natural gas for some time in the future. How long into the future this will last depends to a large extent on new, emerging technologies not only for natural gas but also for its competing fuels in the marketplace. REFERENCE Gibson, D. E. 1988. The United States natural gas industry: The transition to a free market. Paper presented at 17th World Gas Conference, Washington, D.C., June 5-9 1988. Order no. IGU/J188. Washington, D.C.: International Gas Union.

Energy: Production, Consumption, and Consequences. 1990. Pp. 17~183. Washington, D.C.: National Academy Press. European Natural Gas Supplies and Markets HENRIK AGER-HANSSEN During the past 15 years a remarkable shift in the composition of the world hydrocarbon reserves has taken place. Although the natural gas reserves in the early 1970s equaled only half the energy content of the oil reserves, today the proven reserves for the two fuels are about equivalent. This development can be explained by the fact that the addition of reserves has exceeded the consumption of gas, whereas the situation has been the reverse for oil. It is highly probable that this shift in the resource base in favor of gas will lead to increased use of this fuel in the next century. This chapter will briefly review the supply and demand situation for gas in Europe and identify some of the more important issues that will determine whether or not a revitalization of gas will come about in the European energy market. THE NATURAL GAS RESOURCE BASE AVAILABLE TO EUROPE The four major sources of gas available to Europe (Figure 1) 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. The gas resource base in the Netherlands is, however, being exploited at a rate that will substantially reduce its importance to the Western European gas supply after the turn of the century. Major gas discoveries during the past 10 years on the NoIwegian - 173

174 HENRIK AGER-HANSSEN 43,900 born 3,000 3,000 born Western Europe bcm ~/W _ //// _ 2,000 born ~ _ 600 700 hem hem ~~ To (~ Denmark an/ (105 bcm) FIGURE 1 Proven reserves of natural gas in the Soviet Union, Algeria, and Western Europe, in billions of cubic metem (bcm). Continental Shelf have established Norway as an important supplier of gas to Western Europe. The proven and probable gas reserves on the Norwegian Shelf are likely to ensure this role for Norway far into the next century. About half of the Western European proven gas reserves, or 3,000 x 109 m3 (billion cubic meters), are located in Norway, and the potential resources could be as much as 2 to 3 times larger. Thus, the ultimate gas resource base in Norway could be ranging from 6,000 x 109m3 to 9,000 x 109m3 or from 212 to 318 trillion cubic feet (lLf). The dominant suppliers of nonindigenous gas to Western Europe are the USSR and Algeria. The gas reserves and resources of the USSR are so large that, if unhindered by political forces and considerations about the security of supply, the USSR could potentially supply the total Western European demand for gas far into the next century. This is, however, a highly improbable scenario. 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) in 1965, gas accounted for 2.5 percent, while in 1985 gas accounted for 16 percent of a total energy consumption of 1~245 x 106 toe. It is Probable that the availability, public acceptance,

175 ~ o Z o 8m J o o cn o o _ . ~ ~ 22 2 "gilds ""22 """ ""'22 -I ~ ;::::::: ,,,,1q :: :::: ::: ::::::::: :: :::::::::::: ~ t :: :,:,:,:,:,:,: :. :. ,: :.:.:,:.:.:,::: :,: :.: :::,:::::::::: ,:: ::: i ,:,:,:,:: :.:,:: :::::: ,:. ,: :, ,,:, ,:.:,:,:,., :, :.: . ~ : . ~ - . 2 ' 2 2"2 " I 2222""""'"" ''"'"''''"""""'"'" ... . .... .. .. ... . ... . . .. .. .. , ., . , . . . . ~ . . .. .. . ... 9,, a .. · . ~ ... XQWQW . or -..,.U ,,¢ .... ::::::::::: , j V ~ o - z E o lo Cal no J . ::: ff:::::: :,: :-:.:.:,:,_,:.:.: :.: :. . ::: ::,, ~ : ,,.. I, .,,, :.:,' . ,,,.,.,.~r . :::: ::::: : ::::: :] .: :~ : :::_ lo `.. C) o _' Cal > ._ - ._ o ~4 to A a: o - ~: o ._ - ._ At: ._ U) 8 - U) ~o on a, _ ~ o ._ CO 8 L. in: cat - ~t _1 1m

176 HENRIK AGER-~SSEN and economics of gas In relation to other fuels will further increase its percentage share of the Western European energy consumption to at least 18 percent in 2005. Figure 3 shows the gas consumption in the various Western European countries. As will be noted, the penetration of gas in the different markets varies widely. There is considerable scope for increased gas penetration in many of the countries. In particular it can be expected that gas will assume significantly greater shares of the markets in Denmark, Finland, Norway, Sweden, Spain, and Portugal, that is, the countries in the northern and southern periphery of Western Europe. Since the oil crises of 1974 and 1979, policymakers in Europe have been advised that gas consumption should be promoted where it substitutes for oil, but that gas is too valuable to burn under boilers in industry or for electricity generation. 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. With a relaxation of tension between Western and Eastern Europe, there will be less political inhibition about increasing imports from the USSR. _ ~ At the same time in certain European countries, the fashion for large electric power units centrally owned and operated is giving way to a belief in small, dispersed local units, for which new gas technologies are becoming available, such as systems that use the waste heat from power generation for district heating. This trend will very likely be reinforced by the privatization of electricity now taking place in the United Kingdom. Gas for electricity production is also likely to become important in the Scandinavian countries. In Sweden this development will be spurred by the need to substitute new and publicly acceptable power generating capacity for the nuclear power stations that are to be phased out in the beginning of the next century as a result of the political decision to abandon nuclear power by year 2010. In Norway the rising cost of hydroelectric facilities will make gas the least costly way of producing new electricity. In Denmark, for environmental reasons, gas will very likely supplement coal to fuel new electric generating capacity. A similar development is likely to take place in a number of other countries in the world where discoveries of significant amounts of gas have been made in the past 10 to 15 years.

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178 l HENRIK AGER-HANSSEN _~....2. . ..... ...... : , r :: 1 '. '.2 2 '.' '' ''. ........................... ... .... .. ................... . . . .................. .. ............................................. ................................ ............................................................... ............................... ........ . ~ it.,, hi ~ <2 ' 2' .' ~ I. .. ' ' ' ""'""1 1 , "'~ '''' '5 ~ ~2~ 'it ' ~ ~ If.... - ~s Add l ~~...~_ <~.,.,.1 '.,, ~ i. F Le Havre I. ` ~ I , , ,., ., Am, I, ·:-:-:-:-:-::::::::-:-:-::::::::::::::::-::-:2.-:-:-:. ,, , ...... or ,:.:,:: :,:'..-:: :,::::::::: :::,:-:-.: :::',. :::::-,:,:2:::: :-~::::: ... -.- - :.-- - : ' ' 2.~:: : :~ :~ ::~ ::::::::::-—:: i,.,..,...,...:::: _::::::: :-:-:-:-::::::::::::: _.::-::::::-::-:-::::-::-:-:- _.:-::-:-:::-:::::::::-:-:-:::-: I:,:' ...'-.2.-,22-..., .'-2. ','.'.:,', -,:.- a::-:-:::-::::::::::-:::-:-::::-.': I.: :-:': :,:,:.:':::,:,:::2:,:,:::,'': f.2...2.'.."'.'.'.-.'...-...-2.-... A:::::::::::::: :-:-:-:-:-:-':-: A:-: :-:-:: :-:-:-: :-:-:: :'-. :-: :-:-:-: :-:-:-:-:-: :-:-:-:-: [-2.'"-"-'''"2.2.2-2-2 2.-.2,":` I--.2 - '' - - ~ ' ' 2 2,\ l.' "'"'"""''"'""'"'""""'' 7.-'' V -2 -.- - - -- _ ~;....................................... A:.': ~ Eroded ~ Mod. ~ ~ ~ id \,.,,,,,.,.,.,,~ / ~ i, I~ 2''' I'll ...... ",,, ' "''y'"""''"''"'"'"'I''" ...... c:. ,,., , ,, ~ ¢ ,.~ ~ ah \` Spezia :-::::::1 `.. ;.. ;....% ...... I : Amp % _ ~,3.,~...,..~ -~.'''.~ i_ FIGURE 4 Main gas transmission system in Western Europe. 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. The market for imported gas in continental Europe and the United Kingdom can be reached by a system of trunk pipelines and through liquefied natural gas (LNG) terminals located in France, Belgium, Italy, and Spain. NoIwegian gas is available to continental Europe and the United Kingdom through a system of submarine pipelines that terminate,

EUROPEAN NATURAL GAS SUPPLIES AND MARKETS 179 respectively, in Emden, Federal Republic of Germany, and St. Fergus, Scotland. The total capacity of these pipelines is currently about 35 x lO9m3 per year, or about 3,384 million cubic feet per day (mcf/d). This capacity will be extended to about 50 x lO9m3 per year, or 4,834 mcf/d by 1995, when a new submarine pipeline, Zeepipe, will connect the Toll Field in the North Sea with the main gas transmission system in continental Europe. 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. A substantial part of the gas on the Norwegian Continental Shelf is located in waters more than 300 meters, or 1,000 feet, deep. This is true of the Troll Field, for example, with recoverable reserves exceeding 1,200 x lO9m3, or 421tf. Considering the challenges associated with building and operating production platforms in one of the most hostile climatic environments in the world, the high cost of these developments may be understood. Through successive phases of technological development (Figure 5), the industry has, however, gradually learned to build and operate the giant platform structures necessary to cope with these challenges and with predictable unit costs. In mid-1986, Norway entered into a contract to supply large quantities of gas for a 25-year period (199~2018) to Germany, France, Belgium, and the Netherlands from Toll and other Norwegian North Sea gas fields. This contract demonstrates the belief of both the sellers and the buyers that 150 100 50 o 50 In a: 1 00 150 200 250 300 350 _ _ ~ ~ ~ ~ ~~.':~ ~ 1 _ ~ . _ _1 _ ~ Oslo \ _ Town Hall \ _ - \_ 1 973 \ Ekof isk ~- 1 977 Stafford ~ in ~ in nit l ~ ~ ~ Y 1 ~ Fr9i7959 \ 1 1 BTn 1111 r SEA LEVEL l Troll FIGURE 5 Progress in building and operating offshore production platforms at greater depths in the North Sea.

180 30~ c) r, CD lo: J ~ 20 11 o o x z 10 LLJ o of HENRIR AGER-HANSSEN Lit . ~ .................. The Netherlands ,, ~ I I I I 1 1,,, I, I,,, 1 0~ 1 1 l I I I I I I 1 1, 1976 1 980 1 990 2000 2010 FIGURE 6 Norwegian natural gas export commitments to date. New contracts are expected to increase export volumes substantially in the future. even this relatively high-cost offshore gas will remain a viable proposition for a long time. The amount of gas Norway exports on the basis of the contracts already in force is shown in Figure 6. It must be expected that new contracts will substantially increase the export volumes after the turn of the century. In particular, a revitalization of gas exports to the United Kingdom and the development of a substantial market in Scandinavia are highly probable. The necessary pipelines to the United Kingdom are already in place. The pipelines to service the emerging Scandinavian gas market must, however, be developed. Some alternatives for this purpose are depicted in Figure 7. The technical costs associated with the development, liquefaction, and transportation of gas to the United States from gas fields in the llomsoflaket (see Figure 7) in the extreme north of the Norwegian Continental Shelf have been assessed. For a sufficiently large scale LNG operation (i.e., ~10 x lO9m3 per year), Norwegian gas could possibly become competitive in the U.S. 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. For the gas fields in the northern part of the Norwegian Continental Shelf, Figure 8 depicts a unique method for liquefying the gas offshore. Liquefaction of the gas occurs through heat exchange with liquefied nitrogen brought to the field by LNG tankers especially designed for this purpose.

EUROPEAN NATURALGASSUPP~lES~D~ 181 Ha lten ba n ken ~ \ ~ . w . w l . _ l Statfiord _~ 1 1 Ull _ _ _ _ __ ~ ~ . 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.

HENRIK AGER-HANSSEN FIGURE 8 Advanced tanker concept to produce liquefied natural gas (LNG) onboard through heat exchange with liquefied nitrogen (LIN) obtained onshore. This method of offshore liquefaction has a substantial potential for reducing unit cost. 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. Thus, gas is likely to reenter as an important fuel in the electricity producing sector. The technical unit costs for exploitation of the indigenous Western

EUROPEAN NATURAL GAS SUPPLIES AND MARKETS 183 European gas are tending to increase as a result of high development and transport costs associated with a substantial part of the remaining resources. The research and development effort to cope with these challenges indi- cates, however, that it should be possible to lower the cost of developing the indigenous resource base, making it competitive with other available and acceptable fuels. In summary, the technical and economic prospects for increasing West- ern European gas consumption are good. Western Europe can further develop this increased reliance on gas in its energy balance without be- coming overly dependent on nonindigenous gas supplies with the inherent negative political implications. The large gas resources on the Norwegian Continental Shelf thus provide the necessary insurance for a revitalization of gas in the European energy market.

Energy: Production, Consumption, and Consequences. 1990. Pp. 184 201. Washington, D.C: National Academy Press. 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) discharged to the atmosphere, U.S. energy policy remains strangely silent on the need for options other than fossil fuels. At the same time, today's market conditions for oil and gas seem to be taken for granted. The presumption seems to be that these fuels will be available indefinitely at current prices without constraint on use and that coal will play an increasingly important role in electricity supply, with clean coal technologies alleviating urban and regional environmental concerns. Although the latter assumption may be reasonable, the increased use of coal will add to industrial releases of CO2, which could further accelerate global warming. Elimination of CO2 from coal plant emissions, although technically feasible, would significantly increase the cost of coal-generated electricity and will give rise to a new waste management problem. Since the 1960s, the number of environmental laws has increased expo- nentially, as shown in Figure 1, and we have seen resultant improvements in the environment. We still have a way to go, however, particularly in reducing emissions in the urban areas. Of course, we have paid a price for that improvement, so pollution control costs have also increased exponen- tially, contributing to increasing cost and declining efficiency for electricity generation after decades of cost decreases (Figure 2~. Despite this upward cost trend, the electrification of the nation continues. Since the upward trend started in the mid-1970s, electricity's share of the nation's total energy supply has grown from 28.8 percent to 36.3 percent. 184

FUlURE CONSEQUENCES OF NUCLEAR NONPOLICY 50 An is a: A 25 llJ z o cr: z IIJ o SARA NWPA EPM CWA ~ RRCLA FLPMA '~RCRA ESECA ~ TSCA ESA ~ SDWA MMPA ,~DPA WPCA NEPA it OSHA NHPA ,~ CM SWDA red WSRA Wl VIA TGA WR A ~ WRPA 1895 1915 1935 1955 1975 1995 1899 - River and Harbors Act (RHA) 1902 - Reclamation Act (RA) 1910 - Insecticide Act (IA) 1911 - Weeks Law (VVL) 1934 - Taylor Graring Act (TGA) 1937- Flood Control Act (FCA) 1937 - Wildlife Restoration Act (\/VRA) 1958- Fish and Wildlife Coordination Act (FWCA) 1964 - Wilderness Act (WA) 1965 - Solid Waste Disposal Act (SWDA) 1965 - Water Resources Planning Act (VVRPA) 1966 - National Historic Preservation Act (NHPA) 1968 - Wild and Scenic Rivers Act (WSRA) 1969 - National Environmental Policy Act (NEPA) 1970 - Clean Air Act (CM) 1970 - Occupational Safety and Health Act (OSHA) 1972 - Water Pollution Control Act ~NPCA) 1972- Marine Protection, Research and Sanctuaries Act (MPRSA) 1972 - Coastal Zone Management Act (CZMA) 1972 - Home Control Act (PICA) 1972 - Federal Insecticide, Fungicide and Rodenticide Act (FIFRA) 1972 - Parks and Waterways Safety Act (PWSA) 1972- Marine Mammal Protection Act (MMPA) 185 1973 - Endangered Species Act (ESA) 1974 - Deepwater Port Act (DPA) 1974 - Safe Drinking Water Act (SDWA) 1974 - Energy Supply and Environmental Coordination Act (ESECA) 1976 - Toxic Substances Control Act (TSCA) 1976 - Federal Land Policy and Management Act (FLPMA) 1976 - Resource Conservation and Recovery Act (RCRA) 1977 - Clean Air Act Amendments (CMA) 1977 - Clean Water Act (CWA) 1977- Surface Mining Control and Reclamation Act (SMCRA) 1977 - Soil and Water Resources Conservation Act (SWRCA) 1978 - Endangered Species Act Amendments (ESM) 1978 - Environmental Education Act (EEA) 1980- Comprehensive Environmental Response Compensation and Liability Act (CERCLA) 1982 - Nuclear Waste Policy Act (NWPA) 1984 - Resource Conservation and Recovery Act Amendments (RCRAA) 1984 - Environmental Programs and Assistance Act (EPM) 1986 - Safe Drinking Water Act Amendments (SDWM) 1986 - Superfund Amendments and Reorganization Act (SARA) FIGURE 1 Exponential growth of U.S. laws on environmental protection. 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. Development of clean burning coal technology has been of key importance. Coal gasification has been demonstrated in the highly successful Cool Water project in the Southern California Edison system, and fluidized bed combustion is now being commercialized at utility scale and operating conditions. We may well have a breakthrough in solar electricity, with testing and manufacturing development under way on the highest efficiency photovoltaic conversion device in the world. But despite this progress, we see nothing that could

186 RICHARD E. BALZHISER 8 6 cn a) N 03 o 4 - ~ O , . . . 1950 1960 1970 1980 1990 FIGURE 2 [tends in average U.S. electnaty cost (1982 cents per kilowatt-hour). compete with nuclear energy in the long run as it has been deployed in countries such as Sweden, Finland, France, and Japan. Granted, nuclear power has fallen far short of the euphoric prediction of the postwar years. But it has achieved performance levels, in many U.S. utilities, on the same level of excellence as in France and Japan. What differentiates the successes from the failures in this arena lies not in the technical factors, but in the human and institutional ones. Yet, it appears that the technology has been virtually written off in this country as a candidate for meeting future energy needs. It is my contention that, because of continued environmental concerns and because of our need for optimum economy and strategic development in the nation's electrical energy supply—we must preserve the nuclear option. This chapter explores three questions central to the evolution of a comprehensive and rational U.S. nuclear energy policy: What went wrong? How do we fix it? And what are the consequences of continued indifference to the nuclear option? BUT FIRST, WHAT WENT RIGHT? Before embarking on this unpleasant but necessary diagnosis of what went wrong, a brief statement is in order as to what went right. Nuclear electric generating capability has been deployed throughout the world at an unprecedented rate, on the order of 5 times faster than any other previous new source of energy. Today 397 nuclear power plants are operating around the world, generating more than 274,000 megawatts of electricity (MWe) in 26 countries (International Atomic Energy Agency [IAEA], 1987~. In 1986 alone we saw a 20 percent increase in nuclear power capacity worldwide.

FlJ7URE CONSEQUENCES OF NUT NONPOLI~ ~ . ~~ . 187 And ~~;~ more plants are under construction worldwide. When completed, these new plants will be producing another 118,000 MWe (Blix, 1987~. Another 134 units of 130,000 MWe are now in various planning stages. As of the end of 1986, 4,200 reactor years of operating experience have been achieved (IAEA, 1987~. Many countries vitally depend on the electricity generated by nuclear power. In 1986, as shown in Figure 3, France generated 70 percent of its electricity from nuclear power plants, Belgium 67 percent, Taiwan 44 percent, Korea 44 percent, and Finland 38 percent (Blix, 1987~. What may not be as well known is that in the Soviet bloc, Bulgaria generates 30 percent of its electricity from nuclear power, Hungary 26 percent, and Czechoslovakia 21 percent (Blix, 1987~. Although the United States is not a leader in percentage, it has the largest total electric output for nuclear power: 85,000 MWe from 108 plants, generating 17 percent of U.S. electric power in 1986 (Blix, 1987~. 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 fos- sil fueled plants. But in 1986, 288 operating units achieved an average Q at: C) =~ 80 Z ~ m lo' ~ Q _ ~~ 60 Q z LL or Z ~ IL to Q >- [1J 40 O Q A LL lo 20 o 100 _ .:. ; I war <~ ~~ a 0~ Get FIGURE 3 Fraction of electricity (in percent) generated from nuclear power in various countries. Although the United States exhibits the smallest fraction, it is the largest producer of nuclear power.

188 RICHARD E. BALZHISER o G 1.0 En o 0.5 o.o France Federal Belgium Japan Finland Spain Republic of Germany FIGURE 4 Coal-to-nuclear total cost ratio for electnaty generation, based on 1986 data. SOURCE: International Atomic Energy Agency (19g7~. availability of 70.4 percent, and 55 percent of these achieved a plant avail- ability of 75 percent or better (Bl~, 1987~. Everything indicates that these impressive improvement trends will continue. IAEA statistics (IAEA, 1987) for 1986, charted in Figure 4, indicate the following ratios of total baseload power generation costs of coal over nuclear: France 1.8, Federal Republic of Germany 1.68, Belgium 1.62, Japan 1.37, Finland 1.33, and Spain 1.2. The United States is an exception to this trend. On the average, nuclear electricity is not now produced more cheaply than coal electricity, although many individual nuclear plants do so. In fact, as shown in Figure 5, 14 of the 20 U.S. steam electric plants with lowest variable costs (fuel and operating expenses), from 1982 to 1986, were nuclear plants. The nuclear plants recently brought on-line have been so capital-intensive as to slip the total average cost above coal. Nevertheless, the electricity produced by nuclear power in the United States since 1973 has resulted in a cumulative reduction of $65 billion in electricity costs (U.S. Council for Energy Awareness, 1987), mostly due to avoided foreign oil imports. We must not forget that if we set aside amortization costs on the investment, the average variable cost of nuclear electricity in 1986 was less than that of fossil electricity: 19 mills/l`Wh for nuclear, 21.6 mills/kWh for coal, and 34 mills/kWh for oil (En erg Daily, 1987~. An indirect economic benefit has resulted from the substitution of nuclear power for oil to generate electricity. This substitution is estimated to have reduced the world market for oil by as much as $50 billion annually (Lennox and Mills, 1987), thus cutting the pricing powers of the Organi- zation of Petroleum Exporting Countries (OPEC). The resultant lower oil and gas prices have reduced inflation and helped the world recover from the economic recession caused by OPEC.

FUTURE CONSEQUENCES OF NUCLEAR NONPOLICY 189 Add to this the environmental benefits. Under normal operation, nu- clear plants are environmentally clean. IAEA data (Box, 1987) show a 66 percent reduction in sulfur dioxide emissions in Belgium because of in- creased nuclear penetration into the generation mix, even though a major amount of additional power has been generated. Similarly, reductions of 50 percent in France and 40 percent in Finland have also been achieved. Regrettably, the Chernobyl accident has caused significant land contamina- tion, the consequences of which are still not fully understood, nor is the extent of recovery from the environmental insult. The safety of nuclear power is a more complex issue. The nuclear industry has compiled an unprecedented safety record among major in- dustrial enterprises. The total industrial safety record of nuclear power is superior to that of alternative methods for generating electricity and of many other activities in our daily lives: the normal annual risk of mortality among the U.S. general population is 330,000 from smoking cigarettes, 120,000 from general accidents, 57,000 from automobile accidents, 7,000 from fires, 6,200 from drowning, 1,100 from accidental electrocutions, 88 from lightning, 1~20 per gigawatt of electricity (GWe) 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. Chernobyl marks the world's most serious accident involving nuclear power, and it occurred in a reactor system that does not ~ 20 - cn cat 15 it: 10 C: J LL] o 5 o o o a) .° FIGURE 5 Top 20 period 1982 1986. ~ Gas a Nuclear O Coal l ~ at Q ~ ._ ~ ._ in o a) ~ en a) O ~ ._ .— ~ ._ ~ N ~ ~ Q _ a) ._ m ~ a' ~ ~ 3 a' ~ a) m 8 oh 0 ~ 0 Is m ~ ,a) 0 c' — A c) ._ en 0 cat ._ ~ a) ~ O ,_, ~ a) A m a' ~ _ I: 0 , if U.S. steam electric plants with lowest average variable costs over the

190 RICHARD E. BALZHISER meet Western safety standards because of its unstable characteristics and its lack of containment. The immediate death toll was 31 plant operators and firemen. Some members of the public will have their lives shortened from cancer induced by the accident. Conservative estimates of incremental cancer incidence are in the thousands. Yet, except in the population that had to be evacuated from the area around the plant, the percentage of increased cancer incidence is so low that the experts judge the increase will not be quantitatively verifiable (U.S. Department of Energy [DOE], 1987~. The nuclear accident at Three Mile Island (TMI), which involved a core meltdown, caused no immediate deaths. The incremental latent cancer incidence is estimated to be between 0 and 1, using the same conservative methods as applied in the Soviet estimates. The importance and effectiveness of containment were demonstrated in that accident. The radiation released in that accident was less than that emitted in the volcanic material from the 1980 eruptions of Mount Saint Helens. This comparatively good safety record gives no cause for complacence. The record to date does not in itself ensure continuance of a good record. The two severe accidents that have occurred, although not as serious in their consequences as had been expected by the technologists, were financial disasters and have had a profound, negative public and political impact. Thus, there is a need to continue to address the technical safety issues associated with prevention and mitigation of severe accidents. WHAT WENT WRONG? We do not have to leave the shores of the United States to diagnose what went wrong with the generally impressive record of accomplishment in nuclear power. There have been two fundamental failures in the per- formance of the U.S. program. 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 catas- trophic 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. The second failure was in the performance of financial investments in the U.S. nuclear program. Economic problems arose in many individual projects—including significant increases in construction costs and increased unreliability in plant operations, which escalated operating costs. Strong contributors to these problems were the regulator and the intervener, who, through the judicial system, effected major delays in construction and caused lengthy shutdowns, thereby exacerbating the cost problem. The Calvert Cliffs court decision marked the first time a detailed environmental

FUTURE CONSEQUENCES OF NUCLEAR NONPOLICY Atoms For Peace ; ' ; Atomic Energy Art First Commercial Nuclear Plant 1 ~ , ~ , , ~ , , , , , ~ National Environmental Protection Act Nuclear Regulatory Commission Established Calvert rOPEC 11 l Clefs ~ ', Decision I TMI I | OPECI ~ ,, I,,, Aft, I, ~ ~ ~ ~ ,, 1954 1958 1964 1972 1 979 1973 1 980 1 974 FIGURE 6 Key events shaping the course of nuclear power in the United States. 191 analysis was required for a nuclear power project, as required by the National Environmental Policy Act (see Figure 6~. 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 in- troduction of this new energy technology into a competitive environment with multiple owners and suppliers. This rapid expansion rate, shown in Figure 7, put tremendous strains on the utility industry in implementing the construction and operations programs, did not permit sufficient time to ascend the learning curve, and did not permit an orderly approach to standardization. The economic consequence of the rapid expansion rate was that the 50 40 oh So a: lo: o 20 10 o Plant Orders Generated Electricity — Cal ~ ~ Lo ~ ~ of ~ 0 — Cal co ~ ~ co ~ 0 Cal 0— (D CD C.D CO ~ C.D C-D CO (0 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 0D a) ~ ~ ~ of En ~ c}) Cal Cal ~ a' ~ An ~ CJ) 00 C5) ~ CD _ _ ~ _ _ ~ _ _ ~ _ ~ ~ ~ _ _ ~ _ _ _ _ _ 50 40 30 o CD 20 Z (a 10 O I O FIGURE 7 Rate of introduction of nuclear power in the United States by generating capacity and number of plants ordered.

192 RICIL4RD E. BALZHISER 20 16 z 12 G 8 4 Prime Interest Rate Committed Capac| ~ ~ ~~ OPEC I OPEC II ~ 50 TMI | l o , , 1 . 11 , 1960 1965 1970 1975 1980 1985 250 ~, 200 ~ — IL 150 LLI 0 cr c,0 O 1 00 ~ ~ IL In t ~ :~ _ o o J A: FIGURE 8 fiends in financial environment affecting nuclear power in the United States. commitment to nuclear power plants reached a peak as inflation and interest rates were reaching double-digit levels, as shown in Figure 8. The delays already resulting from intervention and order backlogs were substantially increased for all plants after the TMI accident in 1979 at a time when prime interest rates approached 20 percent. A capital-intensive technology encountered both high inflation and high interest rates—coupled with regulatory uncertainty and large increases in the time required to complete and license plants and created the absolute worst-case cost environment. Plant cost increased dramatically, undermining the long- promised economic advantages and providing market resistance to nuclear power. In.addition, a large number of backfits and redesigns imposed on the industry by the regulators after the TMI accident substantially increased the direct construction costs and reduced labor productivity. It is ironic that the seeds of these failures were planted at the outset of the program by two visionary actions: the Atomic Energy Act and the decision to provide containment. · The Atomic Energy Act was framed to provide a continuing and in-depth level of public participation in the commercial deployment of nuclear power. But this ultimately allowed opposition groups to intervene in nuclear plant construction and operation in any locality. · The containment design process required studies of the loss of integrity in the reactor systems, which in turn led to studies of the loss of integrity of the containment systems so that the ultimate public risks could be quantified. 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.

FUTURE CONSEQUENCES OF NUCLEAR NONPOLICY 193 In sum, the decisions to give unprecedented attention to safety and public scrutiny have generated a much greater level of detailed regulatory oversight and knowledgeable public opposition than would otherwise have occurred. There was a blind spot, however, in the implementation of these visionary safety-motivated policy decisions. The focus of development and attention was placed primarily on the nuclear systems. It was assumed that the balance of plant technology, construction methods, operation standards, and maintenance approaches had already been developed in the power industry and could be put to use essentially as is in nuclear power plants. As history shows, this was not the case. HOW DO WE FIX IT? The first step in resolving the problems that now beset the U.S. nuclear power program is very much the responsibility of the nuclear power industry. Confidence must be restored in the public mind, in political and financial communities, and among senior utility management—confidence in the safety and effectiveness of nuclear power in the United States. It is imperative that we achieve a uniform level of excellence across the industry with an extremely low incidence of technical problems even under continued detailed scrutiny by the public and the media. And the industry must accept fair or unfair the fact that its overall performance will be measured by that of the poorest individual performer. This excellence must also reflect itself in improved economic performance. There is a vital need to turn around the continuing increase in nuclear power operating costs shown in Figure 9. The U.S. utility industry is fully committed to this drive for excellence and has established three cornerstones to assist in achieving this goal: 1. Formation of the Nuclear Utility Management and Human Re- sources Council to conduct an integrated review and development of man- agement 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) to establish and monitor high standards of operational performance; and 3. Continued funding of EPRI to provide improved technology. An important part of these industrial activities is exhaustive scrutiny of plant safety: both enhancing design and operations to minimize the chance of a severe accident, and evaluating and improving accident mitigation features and containment systems to ensure protection of the public in the event of a severe accident. A dominant element in the pursuit of enhanced plant safety is the improvement of human factors in the control room along

194 RICHARD E. BALZHISER 20 16 - cn 1 2 8 4 o _ ..~ ] Fuel Cost Maintenance . Cost // Operating ..2...: .~] 22 2.. 1 .... 3 .... ..... -. 3 _~ .......... : ........... .. .:... .................... : .:.:,..:. . .... ................ ................ .. . . [::::: ,: : . ~ (...,.. .....2,e,_ ~ .~2~ ~ ....... ,_ _..~.... ......... .......... .~ .W · ~ ·2 L ·:-:-:-:-: :-:-:-:L ........... ~ .l ........ ... 1 · ..... 1 .... - ........ ] ... , , ...... 1 ....:-.:.: :.:-:--1 ......... ....... ' ...-.-.. ·..:...] . . ................... .:-:. ::-. :-:-:-:-:-:-:-:-- ·:~ :-:-2 :- - ·- :-:-:-: -:-- ~ · ::- ::: - :. :] :.-::. d .-::--: :.: .-.-:.-:.-.:-.- ::::::*: : .: :] ...-.............. :-.-.:-:-:.:.:..:, :-: :-: :- ·~ :-:-: . :-:-:-.-:-2~ .-::. .2..,:. .~ .,., , , _ ....... , ~ ....... ..~ :, 1 1981 1982 1983 1984 1985 1 986 FIGURE 9 Average variable costs of nuclear power. with the intense effort made by the utilities and INPO—with technical input from EPRI to increase the level of proficiency in operations and maintenance. Of equal importance to this operational drive for excellence is the licensing, construction, and operation of a permanent repository for spent fuel. Congress has acted forthrightly to provide for this high-level ra- dioactive waste repository as well as for regional repositories for low- and intermediate-level radioactive waste. The U.S. Department of Energy is dedicated to accomplishing this difficult task. The completion of the TMI cleanup is another critical remedial action, now in its final phases. At the same time, the utilities have gained tremen- dous research and development (R&D) value from the cleanup effort. Decontamination methods, robotics developments, equipment qualification diagnoses, and waste-handling methodologies are of value to all nuclear utilities. 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

FUlURE CONSEQUENCES OF NUCLEAR NONPOLICY 195 these significant results, supplementing the funding provided by the utilities and EPRI. The progress being made in this drive for excellence is encourag- ing. The challenging performance goals set by INPO and the utilities are generally being met, and the success has been noted by several Nuclear Reg- ulatory Commission sources. In testimony before Congress, Lando Zech, chairman of the Nuclear Regulatory Commission, said, "There has been a substantial improvement in nuclear power plant performance over the 1984 1987 period" (Zech, 1988~. According to the Office of Analysis and Evaluation of Operational Data at the Nuclear Regulatory Commission, "Overall performance at nuclear power plants steadily improved during 1987, continuing the trend which has developed over the past several years" (Nuclear Regulatory Commission, 1988~. Success in these important efforts must continue as a first and fundamental step to a nuclear power future. In light of the Chernobyl and TMI experiences, an improved inter- national 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. With the recent development of the World Association of Nuclear Operators, all countries with commercial nuclear programs partic- ipate freely in an exchange of information on a working level. Moreover, the USSR, a participant in this operator-to-operator exchange, extended a formal invitation to chief executives at nuclear utilities throughout the world to take part in an open forum in Moscow in May 1989. Even as these measures are taken to restore confidence in present nuclear power generation, there is a need for parallel effort to prepare to reopen the nuclear option in the future. Over the past several years, EPRI and DOE have sponsored a major program to develop an advanced light water reactor (ALWR) for the next increment of nuclear power generating capacity. There is exceptional promise in providing a design that both builds on the extensive operating experience with current designs of light water reactors and incorporates state-of-the-art technological improvement. Utilities in Japan, the Netherlands, Taiwan, and the Republic of Korea are contributing financially and technically to this effort. For the ALWR to be a viable candidate for utilibr investment, it must have the following three attributes: 1. It must meet the highest standards of safety and environmental protection. 2. It must be economically attractive in relation to its alternative fossil-fired units.

196 RICHARD E. BALZHISER 3. It must provide the utility with a reasonable opportunity to earn a fair return on investment. 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. To achieve these fundamental acceptance criteria, the utility sponsors have established design principles to govern ALWR development, with emphasis on passive safety, simplicity, design margin, human factors, and standardization. Passive safety means that the design principles of the reactor are such that no active safety system is required in the event of a major subsystem failure. These principles are being applied by defining detailed utility requirements for future light water reactor plants, ensuring that the extensive experience gained to date is fully incorporated. Both 1300-MWe and 600-MWe ALWR designs are being sponsored. Both designs are achieving levels of severe-accident prevention 10 times better than present systems, and both have robust containments in- corporating the experience from TMI and extensive testing of containment integrity. Much of the increased prevention capability comes from im- proved human factors and increased passive safety features. The 600-MWe plant designs have taken a further step in passive safety by incorporating passive decay heat removal features. The liquid metal reactor (LMR) and the modular high-temperature gas-cooled reactor (MHTGR) have been mentioned as successors to the light water reactor in the United States. In addition to electricity produc- tion, each of these systems has its own unique function in the long-term energy strategy of the United States the LMR as a source of fuel supplies and the MHTGR as a source of industrial process heat. However, these concepts are less mature than the ALWR and will require considerably more development time and the construction of demonstration reactors be- fore they will be ready for commercial introduction to this nation's power grid. Having discussed the necessary technical fixes, we now must discuss the more difficult and important subject of institutional repair. The needs for regulatory stabilization, Price-Anderson extension, and domestic en- richment supply remedies are well known, and supportive congressional action is being taken in each of these areas. But there is little action to remove the most formidable barrier to reopening the nuclear option in the United States the problem of financing a nuclear power plant. Both the regulatory and the financial communities are loath to support any move by a utility to raise funds for nuclear power

FUTURE CONSEQUENCES OF NUCLEAR NONPOLICY 197 plants. At the same time, it is doubtful that a utility executive would wish to proceed with construction of a nuclear plant considering the billion- dollar prudency issues that could be placed at his doorstep if the predicted demand does not materialize.2 lUday's nuclear plant owners face economic risk far greater than any- thing contemplated before. Their risk goes well beyond the plant itself, as TMI and Chernobyl have dramatically illustrated. Clearly we must develop a symmetry between risks and rewards if we are to reestablish the incentive to build. Either we lower the risk or we raise the potential reward. ldday's utility executive is not likely to see either alternative as highly probable in an economically regulated environment, at least not one based on historical rate-making practices. That is not to say that business opportunities could not be structured to offer attractive returns over the lifetime of a project. There is much tank today about restructuring and economic deregulation of the utility industry. It may well be that restructuring and economic dereg- ulation are prerequisites to the authorization of a future nuclear plant. Further study is needed to identify appropriate initiatives for overcoming this barrier. More important, however, a national consensus on nuclear power is needed to provide a stable foundation for public understanding. The con- sensus process must be defined. Serious efforts should be brought forth to develop the options for consensus from a broader base of both society and science. There is an important need to introduce new players into this process because of the polarization that has set in among the old players- the industry and the antinuclear segments of the environmental movement. 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 sup- port of them. The players must include the nuclear industry, environmental interests, the ratepayers represented by the financial analysts, nuclear op- position groups, media leaders, and the public as represented by elected officials at both the federal and the state levels. The approach would consist of a persistent, logical, step-by-step build- ing process. It must be agreed that the issue is important and urgent. Common ground must be defined among all parties with a stake in the outcome. The individual interests must be established and options for reconciling them must be explored. The R&D and evaluations involved in consensus making should entail evaluation of comparative risk and par- ticipation by the behavioral and communications sciences as well as the physical and economic sciences. The toughest and most important of all is public acceptance of nuclear power. As essential as the technical and political steps are, it is not

198 RICHARD E. BALZHISER clear that they will be sufficient to turn around public opinion sufficiently to restore the nuclear option. The industry-sponsored U.S. Council for Energy Awareness is active in presenting the case for nuclear power to the public, but it cannot be expected to cause a major turnaround in public opinion. We need a consensus process in which all the interested, key players from all sides of the issue participate. CONSEQUENCES OF CONTINUED INDIEPE;RENCE If we fail to restore the viability of the further use of nuclear power in the United States, we risk major losses. 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. Two broad ramifications of these consequences are of special concern. First is the loss of the infrastructure that would be needed to expand nuclear power again. This loss carries a correlative weakening of the skilled personnel needed to operate and maintain the present nuclear power capability. The lack of incentive for qualified people to enter an industry that has no future is a formidable problem and inevitably will result in lower staff capability, which will militate strongly against the drive for excellence. The lack of this infrastructure with which to rebuild implies that if nuclear power is needed in the United States again, that need will be met from foreign sources. The potential impact on the trade balance is obvious. The picture of a country the size of the United States being dependent on an overseas supply for a vital form of electricity production is disturbing. Compare this possibility with the overreaction expressed in calls for "energy independence" in the immediate aftermath of the OPEC embargo—plausible scenarios border on the incredible. ISSUES Ironically, there is no serious issue that has been raised as a problem for nuclear power that does not have its counterpart in a broad segment of industry today. The difference has been that the nuclear power version

liUTURE CONSEQUENCES OF NUCLEAR NONPOLICY 199 of the problem has been identified earlier and publicized more fully in the United States than in other industries. Radioactive waste disposal, still the single most serious problem for the nuclear industry, has now burgeoned into the widespread issue of toxic waste disposal. The political problems we have in dealing with radioactive waste may appear mind-boggling. Indeed, the public is becoming increasingly cautious about the handling of all wastes, as evidenced by the Long Island garbage scow that wandered the oceans for months in the spring of 1987; "NIMBY" (not in my back yard) has now become a household word. Emergency response plans are deemed essential to protect lives in the event of a severe reactor accident. 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. This subject is still fraught with uncertainty because the radiation levels of interest are so low that the effects cannot really be distinguished from other causes of cancer, particularly from the prevailing natural background radiation. This uncertain has a counterpart in the rising controversy over the carcinogenic effects of low levels of contaminants in food and even the natural carcinogens in food. Other emerging concerns are associated with the effects of low-level nonionizing radiation such as very weak magnetic fields. Another dimension of regulatory uncertainty is the issue of prudency, that is, conducting post hoc audits to disallow utilizer costs. As can be seen in Figure 10, this is another escalating problem in the nuclear industry. But prudency audits are now spreading to other generation systems and will probably grow until the extremes perpetrated on the utilities lead to effective reform. The problems of nuclear power are largely specific forms of broader issues that affect our society overall. In many respects we are well ahead of the rest of industry in solving them. A Forbes cover story entitled "Nuclear Follies" concluded with the question: "In the end, the problem may well boil down simply to this: Can a technology as rigorous and as useful as nuclear power find a place in a society as open as the United States?" (Cook, 1985). It is becoming more and more apparent that this question applies not only to nuclear power but to most, if not all, high-technology industry. Yet, these technologies are vital to our quality of life. The implications of a negative answer are far more serious than losing the nuclear power option.

200 RIC1~4~?D E. BALZHISER 20 LL] CC LU CL cn a) Cal IL O 10 cow: LU ~ 5 CD C: LU o V///// ~ 1945-1974 1974-1983 1986 FIGURE 10 Growing trend in prudency audits of utility capital investments. NOTES 1. In August 1988, Congress authorized a 15-year compromise version of the Price- Anderson Act. The measure raises the pool of potential no-fault insurance funds available to compensate victims of an accident at a nuclear power plant from $700 million to $7 billion. It also exempts Department of Energy contractom from liability for accidents, although it does allow DOE to impose civil penalities on contractors who violate safety regulations. The money would come from two sources: nuclear liability insurance of about $160 million per reactor, which utilities purchase from private insurance companies, and retrospective assessments on each operating reactor in the event of an accident. Such prudently hearings are conducted when a plant is being brought into the rate base to determine whether the utility made a prudent decision in building the plant, given the information available at the time, and whether the utility proceeded with construction of the plant in an efficient manner. If it is determined that the utility may have been imprudent in any of the decisions it took regarding the nuclear project, it may be disallowed to recover a portion of the plant cost through the rate base. 2. REFERENCES Blix, H. 1987. Address to International Atomic Energy Agency Conference on Nuclear Power Performance and Safety, September 28, 1987. Vienna, Austria. Cook, J. 1985. Nuclear follies. Forbes 135:82-100. Energy Daily. November 12, 1987. Nuclear power seen as least expensive. Washington, D.C.: King Publishing Group.

FVI ORE CONSEQUENCES OF NUCLEAR NONPOLICY 201 Gotchy, R. Lo 1983. Health risks from the nuclear fuel cycle. In Health Risks of Energy Technologies, C Travis and E. Etnier, eds. American Association for the Advancement of Science Selected Symposium Series. Boulder, Colo.: Westview Press. International Atomic Energy Agency (IAEA). 1987. Nuclear Power Status & Mends: 1987 Edition. Vienna, Austria: IAEA. Lennox, F. H., and M. P. Mills. 1987. An Analysis of the Role of Nuclear Power in Reducing U.S. Oil Imports. Washington, D.C.: Science Concepts, Inc. Nuclear Regulatory Commission, Office of Analysis and Evaluation of Operational Data. 1988. Report to NRC Commissioners, March 1988. Washington, D.C.: Nuclear Regulatory Commission. U.S. Council for Energy Awareness (USCEA). 1987. Nader report on nuclear economics. INFOWIRE 87-72. November 6, 1987. Washington, D.C: USCEA. U.S. Department of Energy (DOE), Office of Health and Environmental Research. 1987. Health and Environmental Consequences of Chernobyl Nuclear Power Plant Accident. Report No. DOE/ER-0332. Washington, D.C.: DOE. Zech, Lo 1988. Testimony before House Appropriations Water and Energy Subcommittee, March 1988, Washington, D.C.

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Energy provides a fresh, multidisciplinary approach to energy analysis. Leading experts from diverse fields examine the evolving structure of our energy system from several perspectives. They explore the changing patterns of supply and demand, offer insights into the forces that are driving the changes, and discuss energy planning strategies that take advantage of such insights.

The book addresses several major issues, including the growing vulnerabilities in the U.S. energy system, the influence of technological change, and the role of electricity in meeting social objectives. The strongest of the book's themes is the growing influence of environmental concerns on the global energy system.

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