ENERGY SECURITY: A NORTH AMERICAN APPROACH

by Dr. Lourdes Melgar

Forging North American Energy Security
Conference, Monterrey, Mxico April 1-2, 2004
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ENERGY SECURITY: A NORTH AMERICAN APPROACH

I. II.

Introduction Energy Security: Evolution of the Concept and Current Understanding III. Furthering Energy Integration as a means to Ensure Energy Security IV. Rendering North American Energy Markets more Dynamic V. Imagining the Future: North American Energy Security as a Reality
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ENERGY SECURITY: A NORTH AMERICAN APPROACH Introduction

Energy has become a key issue in NAFTA. Ensuring the availability of adequate, reliable and affordable supply of energy is key to 3 countries. Energy security is to - U.S.: a priority of its trade and foreign policy. - Canada: a matter intimately related to environmental protection. - Mexico: a sovereignty issue.

After 9/11, broader concept, encompassing the integrity of critical infrastructure.

Is it possible to consider energy security from a North 3 American perspective?

ENERGY SECURITY: A NORTH AMERICAN APPROACH

Energy Security: Evolution of the Concept and Current Understanding

Energy security: essential to sustained development of nations. household concept 1970s oil shocks, AIE 74 reliable availability of oil supply at affordable prices. 1990s defined in terms of:
external factors (geopolitics); internal factors (operational and investment); temporal factors (short-term; long-term).

Multidimensional policy approach: energy efficiency conservation; fuel diversification; adequate margins of reserves. Precondition: protection of environment, 4 climate change mitigation.

ENERGY SECURITY: A NORTH AMERICAN APPROACH Energy Security: Evolution of the Concept and Current Understanding

U.S. at the forefront of definition of energy security. 2001 National Energy Policy proposes a North American Energy Framework as key element in ensuring energy security:
Support a North American Energy Framework to expand and accelerate crossborder energy investment, oil and gas pipelines, and electricity grid connections by streamlining and expediting permitting procedures with Mexico and Canada.

NAFTA partners should be NAFTA energy partners. Mexicos Challenge: investment. Solution: opening up energy sector to foreign investment and fostering energy markets within the region. But Sovereignty issue. Canadian participation: precondition for success. Accent on sustainable development, fulfilling Kyoto Agreement. March 2001, North American Energy Working Group.5

ENERGY SECURITY: A NORTH AMERICAN APPROACH

Furthering Energy Integration as a means to achieve Energy Security

Energy map: point of departure in design of viable policies to achieve energy security from a North American perspective.

North America: most energy intensive region in the world, but not self-sufficient, relies on foreign trade to supplement 6 its needs.

Source: North America-The Energy Picture

ENERGY SECURITY: A NORTH AMERICAN APPROACH

Furthering Energy Integration as a means to achieve Energy Security

Canada and Mexico are net exporter of energy with 5 and

3 quads respectively. The U.S. produces 72 of the 99 quads it consumes. Imports have doubles over the past decade and are growing.
U.S.: main importer of energy from Canada and Mexico, 36% of its needs.

Canada provides 15% natural gas, 15% oil, 1% electricity.

Mexico provides about 15% oil, imports refined petroleum products and trades electricity.

Source: North America- The Energy Picture

ENERGY SECURITY: A NORTH AMERICAN APPROACH

Furthering Energy Integration as a means to achieve Energy Security

North America energy challenges: oil and gas supply. Oil dominant fuel in energy mix until 2030. US: #3 world producer, 7.9mmb/d, imports over 50% needs. Most mature oil producing region in the world. Canada: 3.1mmb/d of crude and oil sands, exports 1.9 mmb/d. Oil sands production offsetting decline in crude, but more costly. Mexico: 4th producer 3.8mmb/d, exports 1.8 mmb/d, mostly to US. Probably the most closed country worldwide in terms of foreign participation in oil sector. U.S. oil market offers goods prospects for Canada and Mexico: geographical advantage, political closeness, and appropriate refineries. Increasing oil trading: win-win situation, favors security 8 of oil supply in NA.

ENERGY SECURITY: A NORTH AMERICAN APPROACH

Furthering Energy Integration as a means to achieve Energy Security

Natural gas supply: critical to NA energy security. NAFTA approach most likely to produce most beneficial response. Natural gas preferred fuel 90s: wide availability, cost competitiveness, environmental friendliness.

1999 patterns of consumption surpassed production rates. 2000 prices skyrocketed new equilibrium US$ 4.5mcf.
NA largely self-sufficient, highly integrated with vastly interconnected grid. But, U.S. and Mexico import 15% of respective needs and demand in 3 countries growing. Ambitious projects to increase domestic production: Mac Kenzie gas project, Alaska, Burgos. But not sufficient.

Imports needed to maintain adequate balance: LNG option, 9 supply flexibility =security of supply + lower prices.

ENERGY SECURITY: A NORTH AMERICAN APPROACH

Furthering Energy Integration as a means to achieve Energy Security

Existing and proposed LNG Terminals

Existing terminals with expansions A. Everett, MA: 0.715 Bcfd (Tractebel) B. Cove Point, MD: 1.0 Bcfd (Dominion) C. Elba Island, GA: 1.2 Bcfd (El Paso) D. Lake Charles, LA: 1.3 Bcfd (CMS Energy) E. Guayanilla Bay, P.R.: 0.093 Bcfd (Eco Electrica)

B C D E

Proposed LNG terminals

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Source: LNG Ministerial Summit Presentation, 2003, SENER

ENERGY SECURITY: A NORTH AMERICAN APPROACH Rendering North American Energy Markets more dynamic

Debates about benefits of NA energy integration surpassed by reality. Dense natural gas grid reflects the intensity of the flows.

Main Canadian Natural Gas Pipelines

Source: North America- The Energy Picture

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ENERGY SECURITY: A NORTH AMERICAN APPROACH Rendering North American Energy Markets more dynamic Natural Gas Pipeline Interconnection between Mexico and the United States
Source: North America- The Energy Picture

Modern and transparent regulatory frameworks in 3 countries allow competitive participation of private sector in upstream natural gas business.

Structure of market facilitates a NAFTA response to natural gas challenge. Cross-border trade: better allocation of resources Furthering NA natural gas market =useful instrument to 12 enhance energy security

ENERGY SECURITY: A NORTH AMERICAN APPROACH Rendering North American Energy Markets more dynamic

Secure power supply: essential, limits to substitution

ST: Guaranteeing system reliability; LT: secure adequacy of generation and transmission. Adequate and timely investment: prerequisite to ensure a secure power supply. Paradigm shift: from regulation to competition NA reflects diversity of debate, but same challenge: meeting growing electricity demand. Electricity market remains local market. NA: major power grid but not a comprehensive one. 13

ENERGY SECURITY: A NORTH AMERICAN APPROACH Rendering North American Energy Markets more dynamic
Canada. Major international interconnections and electricity trade

Source: North America-The Energy Picture

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ENERGY SECURITY: A NORTH AMERICAN APPROACH Rendering North American Energy Markets more dynamic Mexico-US power border interconnections

Source: North AmericaThe Energy Picture 15

ENERGY SECURITY: A NORTH AMERICAN APPROACH Rendering North American Energy Markets more dynamic

California Crisis showed limits of cross-border trade: -infrastructure -Presidential permits Several projects under consideration gas and electricity Business opportunities will arise from more expedient approval processes. Intensifying NAFTA electricity trade requires solving interconnectivity capability and compatibility issues. Trilateral integration: key to security of power supply. Important gains from growing trilateral trade:
Fuller coverage Greater reliability Increased reserve margin
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ENERGY SECURITY: A NORTH AMERICAN APPROACH Imagining the Future: North American Energy Security as a Reality

Development of NA energy markets will accelerate process of integration. Core issues in 3 countries will not change. Challenge: harmonizing rules and regulations to attract investment for infrastructure to sustain trade. Lack of capital investment could bring flexibility. Multi-dimensional approach to energy security: -Energy efficiency and conservation: Star Program -Reviving nuclear option, NAFTA waste disposal facility. -Use of coal with clean-coal technologies. Energy security: strategic factor in economic development and stability of North America. 17