America’s Strategic Competitiveness, China and Economic Growth

Secretary Chu is right about America at risk of losing our strategic competitiveness, but for the wrong reasons.  His presentation to the National Press Club has sparked a useful and timely debate about our national priorities and economic strategies.

The problem is that while Energy Secretary Chu urged more R&D investment to jump start our economic growth and restore our declining strategic competitiveness his Administration colleagues Secretary Salazar at Interior and Administrator Lisa Jackson at US EPA are successfully executing a strategy to shut down America’s energy development.  This isn’t a problem of America’s technological prowess—we still have plenty of that—but now it is being outsourced to China and other nations more willing to use it to improve their own strategic competitiveness.

To wit:

2011 is likely to be the first year since 1965 that the US will have NO new Gulf of Mexico oil and gas leases as a result of the decision by the Administration to continue a moratorium on new leases and permits until 2017 to “give the Department of the Interior time to conduct thorough environmental impact studies”. About 30 percent of US domestic production of conventional oil and gas comes from offshore rigs. The depletion rate on these Gulf of Mexico sites is fast so unless E&P producers can keep moving around the Gulf to gain access to pockets of new oil and gas by leasing new sites or drilling new wells on existing sites production drops off quickly and the current leases are uneconomic to maintain.  The Interior Department is stopping this.

The impact of the Federal Government’s de facto moratorium on new E&P activities is driving America’s technology to go elsewhere costing thousands of jobs and forcing firms to move rigs and crews to projects elsewhere in the world to keep working. A Wood Mackenzie study of the potential economic impact of the Government’s initial moratorium on drilling after the BP spill found that a six-month moratorium would cost 1,400 direct jobs lost, and as many as 46,200 other jobs, both on–and offshore, if the 33 drilling platforms were shut down. The study said as many as 120,000 jobs could be lost by 2014.  Similar work by Professor Joseph Mason at LSU supported the conclusion that the moratorium would have profound economic impacts.

Federal courts overturned the moratorium but Interior reissued its regulations to avoid the injunction and continue its policy. Today there are 13 active deepwater rigs in the Gulf, the same number as at the beginning of November putting severe financial pressures on the oil services firms accustomed to working the Gulf.

  • Pride International’s (PDE) new Deep Ocean Ascension drillship rig has been idle since May 2010 receiving a standby rate of $360,000 per day from BP instead of its usual $540,189 per day. It is likely to be redeployed elsewhere.
  • Ensco (ESV) rig under contract to Cobalt International Energy (CIE) decided to sublet the ENSCO 8503 to Tullow Oil (TUWOY.PK) and its partners in French Guiana for an initial three-month drilling project. Nexen (NXY) agreed to an undisclosed special rate with Ensco to keep another rig available.
  • Noble (NE), said its client Marathon Oil (MRO) is trying to use force majeure to terminate its contract for the Noble Jim Day rig because of the permitting situation.

So let’s compare this situation to that in China :

President Hu Jintao responded to complaints that China was ignoring global warming and denying its role in the climate change issue.  China said the developed world caused the problem and should thus help the developing world to correct it without giving up the economic growth essential to China’s development.  That ‘pay me or I will emit again’ logic cratered the Copenhagen Conference a year ago and stalls agreement between the developed and developing world in Cancun this week.

China set a policy of expanding renewable energy technology investment to achieve a domestic goal of enabling non-fossil fuels to produce 15 percent of China’s energy by 2020. It did not do this merely to be good global citizens—China saw the potential for market share growth in exports of wind turbines and solar panels craved by the EU and US markets.

Cleverly it used the EU and US subsidies of wind and solar to grow market share and sell its exports into those markets at lower prices than domestic producers.  This seriously ‘ticked off’ the EU and, combined with the unsustainable subsidies especially in a recession market, saw Spain cut back its feed in tariffs (FiT) which fuels China’s market share growth.  Germany followed suit but China by then owned a large share of the EU market for PV panels and wind turbines.

So should we blame the Chinese for being good businessmen or the EU for being so self-absorbed to think that they could subsidize their way to market manipulation?

But the energy demand for the growing Chinese market cannot be sustained by wind turbines and solar panels.  If China is to avoid becoming the global villain in the climate change debate it had to do something to meet its energy needs without continuing its reliance on coal fired generation.  And, not coincidentally, China must address coal because its coal mines have the worst safety record in the world and thus are increasingly an unreliable supplier and its own pollution problems are becoming serious health concerns and threaten the economic growth it depends upon.

For China, and for other nations—-like the US, I would add—there are only two solutions that make sense—build gas fired generation and/or build baseload nuclear power to meet future energy demand.  For China, the demands are so large and the requirement is truly baseload only nuclear makes sense.

“Developing clean, low-carbon energy is an international priority.  Nuclear is recognized as the only energy source that can be used on a mass scale to achieve this.”— Zhao Chengkun, vice-president of the China Nuclear Energy Association.

China has accordingly raised its target for new nuclear power plant construction to 114 GW by 2020, a 62.8 per cent rise on an earlier target of 70 GW according to the National Development & Reform Commission.  China currently has 23 reactors under construction and another 140 in various stages of engineering.  China Daily reported that if this target (114 GW) is met, nuclear power will account for just 7 per cent of the nation’s estimated need for 1600 GW of power by 2020 suggesting nuclear power plant construction would likely expand further.

How did China do this?

It seduced the French to come to China and bring their nuclear experience and technology to help China get started.  With that technology in hand, China re-engineered it to improve performance, reduce construction  time and lay the foundation for an export business that now terrifies Areva and is a looming rival for South Korea the current leader and inheritor of America’s nuclear power legacy in Westinghouse.

Meanwhile,  while Exelon is on a path to add 1.5 GW of uprated nuclear capacity by making use of the South Korean technology improvements to upgrade its existing plants,  America has not build a new nuclear power plant since in the 1970’s.  Only recently did the US began the process to enable Southern Company to build a new plant in the Southeast but the government’s enthusiasm for new nuclear power is underwhelming .

If Secretary Chu wants to do something really useful on his ‘watch’ he would champion speeding up the nuclear permitting process and enable America to start building new nuclear plants—-if we can get in the Chinese or South Korean export queue that is.  And he would tell his friend Secretary Salazar that he is wasting America’s technological competitive advantage by outsourcing it to our competitors around the world for the sake of political correctness.

So what?

America’s technology strategic advantage is being wasted and suppressed by policies that prevent it from being used at home and make it necessary for American companies to go elsewhere to put that technology to work.  If we want to get our strategic technological mojo back the Government must get out of the way.

We don’t need subsidies—we need permits—and a regulatory environment that allows America to put its technology to work at home to build market share and grow our own economy again.