MASTER TIMOTHY W STANLEY Giorge J STATHAKIS Ril?M I STRAUS ROMRTS STRAUSS DISTRIBUTION of THIS DOCUMENT Is GEORGE a STRICHMAN LEONARD SULUVAN

CHAIRMAN ANDREW J GOODPASTER THE ATLANTIC COUNCIL VtCtCHAMMfN EXECUTIVE VICE PRESIDENT OAVIOC ACNESON OF THE UNITED STATES JOSEPH vu HAHNED HENRY H FOWLER JOHN E GRAY U ALEXIS JOHNSON 1616 H STREET, N.W. • WASHINGTON. D.C. 20006 CAROL LAISE FAX (202) 737-5163 • CABLE ATCOUN • TELEX 248965 ATCN UR wu MCCH MARTIN EUGENE V ROSTOW 12021 347-9353 KENNETH RUSH TMASUMIt WILLIAM H G FITZGERALD DEVELOMKNT COMMITTEE CHMMMN LAWRENCE M WOODS SCCMTARV CONP-8810273- JAMES W SYMINGTON DMCCTOM DE89 03853 DAVfOM ABSWRE THEODORE C ACHILLES JR DONALD S AGGER STEPHEN AILES MADELEINE K ALBRIGHT OVWYNE 0 ANOREAS WILLIS C ARMSTRONG NORMAN R AUGUSTINE ROBERT SATEMAN W TAPLEY BENNETT JR JAMES H BHJ.INGTON GEORGE S BLANCHARD US-JAPAN ENERGY POLICY CONSULTATIONS GENE E BRADLEY HAROLD (DOWN L OEAN BROWN MARRY F SYRD. JR DANIEL J CALLAHAN HI MARK H CURTIS October 16-18, 1989 WILLIAMS DALE KENNETH W DAM W KENNETH DAVIS RUSSELL E DOUGHERTY LAWRENCES EAGLEIURGER LLOYD H ELLIOTT ROKRT t ELLSWORTH SHERWOOD L FAWCETT Westin Mauna Kea Hotel, Hawaii GERALD* FORO GEORGE S FRANKLIN JR ROBERT F FROEHLKE HICHAM} N GARDNER LINCOLN GOROON DONALD L. QUERTIN ALEXANDER M HAKa JR PAMELA C IIARRIMAN MARTIN J HILLENBRAND WALTER E HOAOLEV CLAIRE GlANNM HOFFMAN ROKRT D HOMHATS DISCLAIMER J ALLAN HOVEY.JR THOMAS L HUGHES COROELL W HULL This report was prepared as an account of work sponsored by an agency of the United States ISAAC C KIDO. JR Government. Neither the United States Government nor any agency thereof, nor any of their LANEKMKLAMD JEANE J KBKPATAICK employees, makes any warranty, express or implied, or assumes any legal liability or responsi- HENRY A KISSINGER bility for the accuracy, completeneit, or usefulness of any information, apparatus, product, or JUANITA M KR8PS met F KROQH proceu disclosed, or represent! that its use would not infringe privately owned rights. Refer- JAMES TLAMY LYMAN L LEMMTZER ence herein to any specific commercial product, process, or service by trade name, trademark, SOL M LINOWITZ manufacturer, or otherwiK does not necessarily constitute or imply its endorsement, recom- LEONARD H MARKS JAYMAZUR mendation, or ravoring by the United States Government or any agency thereof. The views GEORGE C MCGHEE DONALD F MCHENRY and opinions of authors expressed herein do not necessarily state or reflect those of the ROBERT $ MCNAMARA United States Government or any agency thereof. LAWRCNCE C MCQUADE FAYMETCALF JACK N MERMTT STEVEN MULLED THOMAS J MUMNN EDMUNDS MUSK* GCOROE R PACKARO HH.LIARO. W PAK3E EOMUNO D PELLEORWO JACQUES J RfWSTBN STANLEY R RESOR EMMETTJ MCE ELLIOT L RCHAROSON PAUL H ROBNSON JR OUNC ROSItON BERNARD W ROGERS H CHAPMANROSE NATHANIEL SAMUELS J ROBERT SCHAETZEL JAMES R SCHLESMGER •REI IT SCOWCROFT RAYMOND Pt#UP SHAFER C J SKAS WILLIAM E SIMON JOSEPH j asco SHERWOOO H SMITH JR HELMUT JONMENf ClDT FRANK A SOUTHARD JR MASTER TIMOTHY W STANLEY GiORGE J STATHAKIS Ril?M I STRAUS ROMRTS STRAUSS DISTRIBUTION OF THIS DOCUMENT iS GEORGE A STRICHMAN LEONARD SULUVAN. JR JOHN 1 SWCCNEY PETER TARNOFF WILLIAM C TLMNC* STEPHEN L VAN HONOWHUY DMCCTOMS CYRUS H VANCE GEORQEWBALL H»RU>N CLEVELAND CHRISTIAN A HERTER JR SANFORO N MCDONNELL EARLE C WILLIAMS ADOLPH W SCHMtOT EOWARO W BARRETT EMILIO G COLLAOO JOHN O HICKERSON LAURIS NORSTAD MASON WH.LRICH CORTLANOTvR SCHUUEft ANOOCWH BEROmG C nOuGLASCMUON TOhKILLEFER SAMNUNN CHARLES M SPOFFORD EUGENE » BLACK JOHN FERGUSON III RUTHC LAWSON WILLIAM » ROGERS THOMAS J WATSON JR JOSEPH 1 WOLF LESLIE S BRADY RALPH C M FLYNT JAY LOVESTONE ROBERT VROOSA R JAMES WOOLSEY SOLC CHAIKIN ANOREW HEISKELL JOHNJ MCLOY OEAN RUSK Table of Contents

List of Japanese Participants List of US Participants Meeting Agenda "The Impact of Pertinent International Issues on US-Japan Energy Interests and Relations", by C. J. Silas "The Age of Asia and US-Japan Cooperation", by Ariyoshi Okumura "Comments on the Middle Eastern Situation", by William C. King "US Energy 1988: Countdown to the Next Crisis", by the US Energy Association's Ad Hoc Committee on National Energy Outlook, W. J. Bowen, Chairman "The Present Situation and Problem of Introduction of LNG in Japan", by Yoichi Akiyama "US Electricity Outlook: Ensuring the Future of Electricity's Role in a Changing Environment", by Thomas R. Kuhn "Three Major Issues Confronting Japan's Electric Companies", by Wateri Mizuno "Nuclear Power and Related Issues: The US Outlook", by Sol Burstein "Outlook for Nuclear Energy in Japan", by Yoshihisa Akiyama "Oil, Coal, and Related Issues in the United States", by William C. King "Oil and Related Issues in Japan", by Kenzo Saikawa "Status of US Coal", by Constance Holmes "Comments on Coal and Related Issues in Japan", by Kunio Kakizawa "New Energy Development", by W. Kenneth Davis "New Energy Development", by Mamoru Sueda "Summary of Consultations from the US Perspective", by W. Kenneth Davis "Summation of the Conference in Hawaii as Viewed from the Japanese Side", by Toyoaki Ikuta US-Japan Energy Policy Consultations Hawaii, October 16-18, 1988

U.S. PARTICIPANTS

John E. Gray, President, ERC International; Chairman, Atlantic Council's Energy Policy Committee.

W. J. Bowen, Chairman, Transco Energy Co.

Sol Burstein, former Executive Vice President, Wisconsin Electric Power Company.

W. Kenneth Davis, Consultant, Bechtel Power Corporation; former Under Secretary of Energy.

Robert: It. Fri, President and Senior Fellow, Resources for the Future.

Donald L. Guertin, Senior Research Fellow, Atlantic Council; former Senior Advisor for Public Affairs, Exxon Corporation.

Joseph If. Harned, Executive Vice President, Atlantic Council.

Constance Holaes, Vice President, National Coal Association.

Williaa C. King, former Vice President, Corporate Planning, Gulf Oil Co.

Hilton Klein, "Vice President, Electric Power Research Institute.

Myron B. Kratzer, Consultant, International Energy Associates Limited.

Thoaas R. Kuhn, Executive Vice President, Edison Electric Institute.

Eliane Loaax, Assistant Director, Programs and Projects, Atlantic Council.

C. J. Silas, Chairman and CEO, Phillips Petroleum Co. JAPANESE PARTICIPANTS U.S.-Japan Energy Dialogue 16-18 October 1988

Yoshflriio Nakayaaa President, Middle East Institute of Japan CEPP Standing Committee Member, JUERC Member Toyoalri Ikuta President, The Institute of Energy Economics, Japan CEPP Standing Committee Member, JUERC Member Mrs. Taeko Ikuta Watari Miiuno Executive Vice President, Tokyo Electric Power Co., JUERC Member Yoshihi*. Akiyaaa Senior Managing Director, The Kansai Electric Power Co., Inc., JUERC Member Kenso Saikawa Managing Director, Nippon Oil Co., Ltd., JUERC Member Yofchi Senior Managing Director, Tokyo Gas Co., Ltd. Kunio Kakteawa Senior Managing Director, C. Itoh and Co., Ltd., JUERC Member Ariyoabi Okuawra Managing Director and Chief Financial Economist, The Industrial Bank of Japan CEPP Advisory Experts Committee Member, JUERC Member

Takao Toaritate Managing Director, The Institute of Energy Economics, Japan CEPP Advisory Experts Committee Member

Sued* Executive Director, CEPP Akinori Soha* Managing Director and Secretary General, CEPP Tsuyoabi Otani Assistant to Manager, General Planning Dept., Tokyo Electric Power Co. Laura Manager, Economic Survey Corporate Planning Dept., The Kansai Electric Power Co., Inc. Seiji Sakaaoto Manager, Management Office Section III, Nippon Oil Co., Ltd. US-Japan Energy Policy Consultations October 16-18, 1988 Westin Mauna Kea Hotel, Hawaii

AGENDA

Sunday 16 October 1988: 3:00- 5:00 Hotel check-in for arriving participants 5:15- 5:45 Special working session: Presentation by W. J. Bowen on "US Energy Issues, with special emphasis on Gas". 6:00- 8:00 Welcoming Reception

Monday 17 October 1988: 8:30- 9:00 Opening Remarks: John E. Gray and Yoshihiro Nakayaaa 9:00-11:00 1. Impact of Pertinent International Issues on US-Japan Energy Interests and Relations: US Perspective: C. J. Silas Japanese Perspective: Ariyoshi Okiumra Discussion 11:00-11:15 Refreshment Break 11:15*12:45 ' Comments on the Middle East Situation: US Perspective: Willta C. King Japanese Perspective: Yoshihiro Nakayaaa Discussion 2. Gas and Related Issues: Japanese Outlook: Yaichi Akiymas. Discussion 12:45- 2:15 Lunch Break 2:15- 3:30 3. Electric Power and Related Issues: US Outlook: ThosMS Kuhn Japanese Outlook: Watari Mizuno Discussion 3:30- 3:45 Refreshment Break 3:45- 5:45 4. Nuclear Power and Related Issues: Japanese Outlook: Yoshihisa Akiywa Discussion 6:30- 8:30 Cocktails and Dinner (US-hosted) Tuesday 18 October 1988 8:30-10:15 4. Nuclear Power and Related Issues (continued): US Outlook: Sol Burstein Discussion 10:15-10:30 Refreshment Break 10:30-12:30 5. Oil, Coal and Related Issues: Japanese Outlook (oil): Kenxo Saikawa US Outlook (oil): William C. King Discussion Japanese Outlook (coal): Kunio Kakizawa US Outlook (coal): Constance Holmes Discussion 12:30- 1:45 Lunch Break 1:45- 3:15 6. New Energy Development: Japanese Outlook: Mnwim Sued* US Outlook: W. Kenneth Davis Discussion 3:15- 3:30 Refreshment Break 3:30- 5:45 7. Summary: Japanese Perspective: Toyomki Ikuta US Perspective: W. Kenneth Davis Discussion of future work and next steps towards meeting in Japan on April 9-11, 1989. 6:30- 8:30 Cocktails and Closing Dinner (Japanese-hosted) Shunzo Ueda Research Associate, Center for International Affairs, Harvard University, Tokyo Gas Co., Ltd. Yasuteru Nishshiro Chief Economist, The Institute of Energy Economics, Japan Kazuo Ichikawa Economist, The Institute of Energy Economics, Japan Yashuhiro HinuHi Manager (Research Division), CEPP Hiroshi Araki Deputy Manager (Research Division), CEPP Interpreters: Hiroko Yokoyama Hiroko Suzuki PNEStOCNT ANDREW J GOOOPASTER THE ATLANTIC COUNCIL VtCECHMMMN EXECUTIVE VICE PftESH DAVIOC ACHESON OF THE UNITED STATES JOSEPHw MAFWP HENRY M FOWIER JOHN E GMV U ALEXIS JOHNSON 1616 H STREET. N.W. • WASHINGTON. D.C. 20006 CAROL UUSE WM MeCH MARTIN FAX {2021 737-5163 • CABLE ATCOUN • TELEX 248965 ATCN UR EUGCNE V ROSTOW (2021 347-9353 KENNETH RUSH TMASWCn WILLIAM H G FITZQERALO DCVEIOPMC NT COMMITTEE

LAWRENCE M WOOOS MCMTMV JAMES W SYMINGTON DMfCTOM DAVID M UtHW THEODORE C ACHILLES. JR DONALD Q AGGER STEPHEN AH.ES MADELEINE K ALtRlGHT DWAYNE O ANDREAS WILLIS C ARMSTRONG NORMAN R AUGUSTINE THE IMPACT OF PERTINENT INTERNATIONAL ISSUES ROKRT 1ATEMAN W TAPLEY 1ENNETT JR ON U.S.-JAPAN ENERGY INTERESTS AND RELATIONS JAMES H BH.LINGTON GEORGE S BLANCHARO GENE E BRADLEY HAROLD IROWN L OEANIROWN HARRY f BYKO JR DANIEL J O.LAHANlH MARK H CUXTIS WILLIAM 1 DALE KENNETH W DAM W KENNETH DAVIS RUSSELL E OOUGHERTY LAWRENCE S EAGLtiURGER LLOYD H ELLIOTT KOKRT f ELLSWORTH SHERWOOOL FAWCETT GERALD R F0K3 GEOROE S FRANKLIN. JR ROKRT f FROEHLKE RICHARD N GARDNER LINCOLN GOROON DONALD L GUERTIN ALEXANOER M HAK>. JR MWU C HAMDMAN by MARTIN J HH.LENMANO WALTER E HOADLEY CLAIRE GIANNMI HOFFMAN ROKRT D HORMATS C.J. Silas J ALLAN HOVCY.JR THOMAS L HUGHES CORDCLLWHULL Chairman and Chief Executive Officer ISAAC C MOO. JR Phillips Petroleum Company LANEKIRKLAN0 JEANE J KMKMTRICK HENRY A KISSINGER JUAWTA M KREPS PETER f KIIOOH JAMES T LANEY LYMANLLEMMT2ER SOL M LINOWITZ LEONARD H MARKS JAYMUUR GEOROE C MCGHEE DONALD F MCHENRY ROM RT S MCNAMARA LAWRENCE C MCOUADE FAY METCALF JACK N MERMTT STEVEN MUiLER THOMASJ MURRIN EOMUNOS MUSKIE GEOffOf R PACKARD HULIAROWPAIOE Drafted for the U.S.-Japan Energy Policy Consultation tOMUNOD PELLEQRINO JACOUESJ RCMtTEIN Hawaii, 16-18 October 1988 STANLEY R RESOR CMMCTTJ WCE ELLIOT L RICHARDSON PALH.H ROtiNSON.JR OLINC ROMON •ERNAROW ROGER* H CHAPMAN ROSE NATHANIEL SAMUELS J ROtERT SCHAETZEL JAMES R SCHLESMGER •RENT SCOWCROFT IWYMONO PHILIP SHAFER C J SILAS WILLIAM E SIMON JOStPHJ SISCO SHERWOOD H SMITH. JR HELMUT SONNENFELDT FRANK A SOUTHARD JR TIMOTHY W STANLEY GEORGE J STATHAKIS RALPH I STRAUS ROMRT % STRAUSS GEOROE A STRICHMAN LEONARD SUUIVAN.JR JOHN J SWEENEY PETER TARNOFF WILLIAM C TURNER STEPHEN L VAN CYRUS R VANCE HONOMMV 0IMCTOM EARLE C WILLIAMS GEORGE W (ALL HARLAN CLEVELAND CHRISTIAN A H£HTEF| SANFOR0 N MCDONNELL ADOLPH W SCHMIDT MASON WH.LRICH E0WAR0 W tARRCrr EMILIOG COUADO JOHN D HICKERSON LAURI5 NORSTAD CORTLANOTVR SCMUYUH WATSON W WISE ANDREW H HROING C DOUGLAS DILLON TOMKILLEFER SAMNUNN CHARLES M SPOFFORD JOSEPH J WOLF EUGENE R BLACK JOHN FERGUSON III RUTHC U/i.OH WILLIAM r ROGERS THOMAS j WATSON JR R JAMES WOOLSEY LESLIE S MtAOY RALPH C M FLYNT JJY LOVES. -.' ROKRT V ROOSA SOLC CHAWIN ANDREW HEISKELL JOHN J MCLO. DEAN RUSK Silas Atlantic Council

The Impact of Pertinent International Issues On U.S.-Japan Energy Interests and Relations

U.S. Perspective

Three key issues seem likely to influence U.S. and Japanese interests in the months ahead.

Growing Pacific Basin Orientation

There are-encouraging signs that seem to indicate new appreciation of the potential for trade between the United States and Pacific Basin nations.

-- Phillips 66 Natural Gas Company and Marathon Oil Company recently were authorized by the Economic Regulatory Administration to extend for an additional 15 years their shipments of liquefied natural gas (LNG) from the Cook Inlet of Alaska to Japan These shipments remain the only export of LNG from North America. -2-

— However, other petroleum products in significant amounts are being ex- ported to Japan from the West Coast of the United States.

-- And etforts by a number of companies are underway to begin the export of Alaska North Slope gas to the Pacific Basin. The Reagan Administration has decided it will not stand in the way of commercial agreements worked out in this area, which is an important departure from previous policy.

This improvement in relations may be due in part to an ongoing dialog between U.S. and Japanese trade representatives which has resulted in the relaxation of trade policies considered overly restrictive from the U.S. perspective. For example, Japan has liberalized access to its tobacco and pharmaceutical markets. In addition, Japan has eased regulation of financial institutions, reformed restrictive inspection requirements that prevented some foreign firms from selling products in domestic Japanese market and adopted some fiscal and monetary policies designed to encourage domestic consumption.

Increasing Political Confrontation

In spite of the encouraging improvement in economic relations, however, the political climate between the United States and Japan seems to be growing more confrontational. -3-

~ Talks aimed at increasing American beef and citrus exports to Japan were recently turned over to international arbitration. American negotiators had demanded an end to all quotas. Japanese negotiators agreed, but insisted on right to impose variable duties, which the U.S. opposed. Japanese Agriculture Minister Takashi Sato blamed the breakdown in talks on U.S. intransigence.

- The renewal of a pact calling for technological cooperation between the U.S. and Japan stalled recently because Americans wanted stronger assurances that Japanese technology would be readily available to American scientists.

- Japan's minister of international trade and industry, Hajime Tamura called the new U.S. trade bill "racially discriminatory."

- U.S. Trade Representative Clayton Yeutter contends that issues between the U.S. and Japan "are more confrontational today than 10-20 years ago" because the U.S. is no longer backing off and allowing the Japanese to procrastinate on policy changes.

This "get-tough" attitude and the continuing U.S. emphasis on competitiveness may seem surprising in view of the fact that the United States is now enjoying its fifth year of solid economic growth. The low U.S. inflation and unemployment rates are envied by many other countries. In addition, American exports have been growing sharply for the past year, although imports of capital goods have also been growing rapidly because of the economic expansion, and this has restricted improvement in the U.S. nominal trade balance. It's important to acknowledge that political pressures exist both in the United States and Japan with potential to limit the gains made on energy issues.

In the U.S., not all sectors of the economy are participating equally in the nation's economic growth. Many U.S. manufacturers are confronting unfamiliar economic circumstances. Exporting is hard work. Languages, time zones, taxes, regulations, customs inspections, laws, transportation systems and business practices are among the most obvious obstacles. It's often easier to seek protection or blame trade barriers than it is to attain the improvement in products and services that would make them truly competitive on an international basis.

In Japan, pressures are equally strong to retain long-established values and customs. Imports of beef and rice, for example, are seen as a threat to an agricultural way of life in Japan.

Significant differences will remain between the outlook in the United States toward private enterprise and free trade and the Japanese view of industry and technology as strategic national enterprises. In Japan the government identifies key industries, finances research, brings companies together in collaborative efforts and covers risks that U.S. companies are expected to shoulder alone.

On the plus side, however, is the fact that the U.S. and Japan are now sharing more national security responsibilities. Japan is assuming greater costs -5- for U.S. bases in that country and Japanese defense spending is increasing significantly. In the United States, this is seen as the assumption of a key responsibility by Japan that puts both nations on more of an equal footing with regard to trade issues.

U.S. Budget Deficit

One other important factor affecting U.S. trade relations generally is the approach taken in coming months toward reduction of the U.S. budget deficit. The United States is already the world's biggest international debtor and if current trends continue will need to borrow abroad an estimated $100 billion a year or more until the end of the decade. • : J

The need to borrow on such a large scale will undoubtedly increase pressure on the United States to shrink its current-account deficit. This could happen in a relatively harmless way if the lower dollar allows American exporters to sell more abroad. However, the results could be more painful if efforts to reduce the U.S. trade deficit lead to more tariffs or quotas on imports - or if imports drop because of an economic recession. Conclusions

Thus far, despite the escalating political rhetoric, we have seen little in the way of concrete evidence that international investments in the U.S. energy sector are threatening the nation's historic commitment to an open investment environment.

We anticipate a continuation of the trend on the part of governments and companies from consuming nations (like Japan) to make substantial investments in the upstream activities of U.S. energy companies.

And we anticipate continuation of downstream investments by producing governments (like Saudi Arabia).

Nevertheless, from the political standpoint, it wilH>e important to avoid the perception in the United States that governments and companies investing in U.S. assets are from areas of the world where U.S. investment is restricted or excluded. The concept of reciprocity is important in the United States and needs to be reinforced wherever possible.

The efforts of The Atlantic Council and others will be important to insure that political rhetoric does not get out of hand or become a useful tool for those who have an interest in widening the divisions between the United States and Japan, two countries which have a 40-year history of cooperation and a fundamental need to continue that close relationship in the future. The A. « e of Asia

and

T_J. S. — J" a i> a n Cooperation

riyoshi Oku m xx r a

Managing Director

The Industrial Bank of Japan. Limited

October 17, 1988 The Age of Asia and U.S.-Japan Cooperation

This morning I would like to share with you my

observations on energy problems of Asian countries, which are expected to stand out in the middle of 1990s and thereafter.

1. The Age of Asia

Some point out that the age of Asia is likely to come in the 21st century. What are reasons for that?

I think the biggest reason is a high rate of economic growth of Asian countries• When we look at rate of economic growth achieved by major countries of the world in 1987, we see it was 2.9% in the U.S. and 2.4% in EC.

Compared with the growth rate of less than 3% in the U.S. and EC, the growth rate among Asian countries was extremely high, 4.2% by Japan, 11.6% by Asian NIEs, 4.6%

ASEAN and 9.3% by China. Taking an average rate of economic growth during the coming 5 years, both the U.S. and EC are expected to attain 2.5% growth while 3.75% is projected for Japan, 6.5% for Asian NIEs, 5% for ASEAN and

7% for China. So we can see that high rate of economic growth is still proiected for Asian countries. Let me introduce here an interesting data which

supports the high economic growth of Asian countries. As

you are well aware of, volume of containers handled by

Rotterdam was the largest in the world until 1986.

However, in 1987 Hong Kong got ahead of Rotterdam, thus becoming No.l port handling the largest volume of containers in the world. It is also worthy to note that eight out of top 10 container ports now are located in the

Pacic Basin. (They are Hong Kong, Kaohsiung, Singapore,

Keelung, Busan, Kobe, Los Angeles, Long Beach, that is five Asian ports, one Japanese and 2 West Coast ports.)

This clearly indicates the increasing volume of trade by

Asian countries reflecting the high economic growth in these countries.

2. Energy Growth and Demand Supply Structure in Asia

Energy demand in Asia is expected to grow at the average rate of 5 to 7 percent during the coming ten years with the increasing volume of trade and high econonic growth. Considering that energy demand of the world is projected to grow only at the rate of about 2%, this 5 to

7% is a very high rate. Then do Asian countries have enough capacity to meet

increasing energy demand in this region? As things stand

now, we have to take a pessimistic view. Analyzing demand

supply structure in this region, we can point out two

distinctive features. One is very high dependency on oil

and secondly high dependency of oil on the Middle East.

For example, oil occupies nearly 60% of the supply of the

primary energy in South East Asia in 1987. Despite some

countries of Asia such as China, Indonesia, Malaysia,

Brunei produce oil, Asian region as a whole needs to

import about 3.5 million barrel/D of oil from abroad.

This level amounts to more than 50% of U.S. oil import.

Moreover, dependency of oil on the Middle East is

exceeding 60% and we must say the demand/supply structure

in this region is fragile compared to OECD countries that

import oil. I have told you that in Asia dependency on oil is presently high and that they are greatly in short of supply.

Should present situation of cheap oil continue, it is estimated that oil consumption would rapidly increase and great shortage of supply would expand in this region. 3. Dependency on Oil and the Middle East in Japan and U.S.

Let us now turn our eyes to energy situation in Japan

and the U.S.

In Japan, oil consumption in the fiscal year of. 1987

increased 4.2% over previous year supported by expansion of

domestic demand. In this fiscal year of 1988, 5.6%

increase is expected. Because of this, dependency on oil

which was 55.6% in the fiscal year of 1986 increased

slightly in 1987 and we are not in a position to see

further reduction of our dependency on oil in 1988. As you

all know, 99.6% of oil consumed in Japan is imported from

overseas. Out of oil we imported in 1987 68% came from the

Middle East. This tells us that our dependency on the

Middle East is still high. Even in the United States,

cheap oil has caused reduction of domestic production of

oil and increase of oil consumption. In 1987, more than

40% of oil consumed in the United States was imported and out of this 22% came from the Middle East. This percentage

is expected to further increase in 1990"s. 4. US-Japan Cooperation

Well, then what can U.S. and Japan do under these

circumstances? That is, under the circumstances where oil

consumption might continue to increase in the 1990's, what

can two countries do in concrete terms in order to bring

about the stable supply of energy in Pacific Basin

countries including Asian countries, Japan and the United

States while reducing the high dependency on oil and

dependency on the Middle East?

What are the areas where U.S. and Japan can

contribute? What Japan believes she has are a big domestic

market, available capital and willingness to act as a

bridge between Asia and other countries while U.S. possess

outstanding technological capability, experience and

know-how of exploration, drilling and development, for

instance in the area of oil.

The first concrete project of cooperation is to hold

consecutively seminar and workshop such as energy data workshop, which was already held. I think you are all

aware that IEA(International Energy Agency) and Asian

Development Bank co-sponsored a seminar and workshop last

year in Japan to propagate the know-how of collecting and analyzing energy data.

Secondly/ it is important to promote the efficient use

of energy by providing technology and know-how that U.S.

and Japan have fostered, with respect to promotion of

transfer of energy conservation, and on utilization of gas

when energy demand is expected to increase in Asian

countries.

Thirdly, in the field of supply of energy, it is

necessary to increase the share of non-oil energy or

alternative energy to reduce dependency on oil by

developing coal mines and natural gas fields whose reserves

are not yet confirmed in the Pacific Basin countries, while

it might be feasible to develop, for instance, Alaskan oil

and bring oil to Asian region. What is important in that

case is to hold an idea of making a full use of Pacific

Basin market including Japan. It might become feasible to

absorb the big volume of supply in a big market, where it might not be possible to do so in a small market. Also it might be worth-while to study an idea of joint stockpile of

oil by participation of all countries in the Pacific Basin

from the point of security in that region. What we should bear in mind, when we work together

toward stabilization of demand supply structure of energy

by developing energy resources, is an environment

problem. Recently, distruction of an ozone layer by

chlorofluorocarbons, damage of acid rain and greenhouse

effect are drawing attention. These environmental

problems have no national boundaries, so to speak and

therefore it has become important to cope with these

problems world-wide. Japan suffered from many problems in

the 1970's such as air pollution and water contamination but she has overcome these by setting the strict environmental standard and development of technology. Can she not make use of her experience internationally?

Today's environmental problems, compared with ones in the

1970's are more complex and it is important for every country to promote scientific research jointly and to exchange information.

For example, in the midst of increasing use of fossil fuel in Asia, what is the level of contamination that we can afford to live up to? With respect to a more important issue of non-fossil

fuel, for instance, nuclear energy , what is a desirable

way to promote a shift toward nuclear energy? This issue

has to be discussed at the same table by Pacific Basin

countries, studied and carry out anything that can be done

step by step. This is very important. As to nuclear,

anti nuclear power movement is spread throughout the

world. In order to cope with the present situation, an

establishment of safety operation of nuclear power in all

the countries of the world has become important. You are

all aware that to improve safety operation of nuclear power, it was agreed to establish four regional centers

(in Paris, Atlanta, Moscow, Tokyo), exchange information on accident and trouble and for each country to cooperate mutually to promote exchange of experiences on operation of nuclear power plants. It is indeed a pleasure to report that Tokyo center will be established next year by nuclear power operators of Asian region. With these remarks I made so far, I will end my talk.

But before concluding, I would like to make a proposal.

From the point of securing stable supply/demand structure

of energy in Pacific Basin, how about establishing Pacific

Basin Energy Cooperation Committee, which is similar to

OECD but focusing soley on energy issues in Asia.

Inviting people from government, academic circles, energy

related industries of Pacific Basin countries including

the U.S. Japan, Asian countries and China, at this

committee energy problems would be discussed from the

long-range point of view. This is not a committee where opinions and comments are spoken freely for discussion's

sake, but is a committee which makes recommendations to each government on how each country in concrete terms can cooperate and contribute to solve energy problems. This is a new type of committee to draw, so to speak, "action program".

Thank you. CHAMMAN PflESIOENT ANDREW J GOOOPASTEP. THE ATLANTIC COUNCIL GEORGE V SEIGN'OUS 'I VICECHAMMEN EXECUTIVE VICE PRESIDENT DAVID C ACHESON OF THE UNITED STATES JOSEPH w HAPfjED HENRY N FOWLER JOHN E GRAY U ALEXIS JOHNSON 1616 H STREET, N.W. • WASHINGTON, D.C. 20006 CAROL LAi S€ FAX (202) 737-5163 • CABLE ATCOUN • TELEX 248965 ATCN UR WM McCH MARTIN EUGENE V ROSTOW (2021 347-9353 KENNETH RUSH TMMUMH WILLIAM H G FITZGERALD DEVELOPMENT COMMITTEE CHAMMAN LAWRENCE M WOODS

JAMES W SYMINGTON DMCCTORS DAVID M ABSHIRE THEODORE C ACHILLES. J1 OONALO G AGGER STEPHEN AILES MAOELEINE K ALBRIGHT OWAYNE O ANDREAS WILLIS C ARMSTRONG NORMAN A AUGUSTINE COMMENTS ON THE MIDDLE EAST SITUATION ROBERT BATEMAN W TAPLEY BENNETT JR JAMES H BH.UNGTON GEORGES BUtNCHARO GENEE BRADLEY HAROLD BROWN L DEAN BROWN HARRY F BYRO..IR DANIEL J CALLAHAN HI MARK H CURTIS WILLIAM B DALE KENNETH W DAM W KENNETH DAVIS RUSSELL E DOUGHERTY LAWRENCE S EAGLEBURGER LLOYD H ELLIOTT ROBERT F ELLSWORTH SHERWOOD LFAWCETT GERALORFOm) GEORGE S FRANKLIN. JR ROBERT F FROEHLKE WCHARON GARDNER LINCOLN GORDON DONALD L GUERTO ALEXANDER M HAKS.JR William C. King PAMELA C HARRIMAN MARTIN J HH.LENBRANO WALTER E HOADLEY CLAIRE GIANNM HOFFMAN Former Vice President for Corporate Planning ROBERT 0 HORMATS J ALLAN HOVEY. JR Gulf Oil Company THOMAS L HUGHES COROELL W HULL BR INMAN JOHN N. IRWI^i H ISAAC C KIDD. JR LANE KIRK LAND JEANEJ K'WPATRICK HENRY A KISSINGER JUAMTA M KREPS PETER F KROOH JAMES TLANEY LYMAN L LEMNITZER SOLM LINOWITZ LEONARO H MARKS JAYMA2UR GEORGE C MCGHEE OONALO F MCHENRY ROBERT S MCNAMARA LAWRENCE C MCOUAOE FAY METCAIF JACK N MERRITT STEVEN MULLER Prepared for the US-Japan Energy Policy Consultations THOMAS J MURRW EDMUNDS MUSK* Westin Mauna Kea, Hawaii OEOROE R PACKJMO HH.LIAROW PAIGE 16-18 October 1988 EOMUND 0 PELLEGRMO JACOUESJ REWSTEm

STANLEY R RESOR EMMETTJRICE ELUOTLRCHAROSON PAW.H ROBINSON. Jfl OUNC ROBMON BERNARD W ROGERS H CHAPMAN ROM NATHANIEL SAMUELS J ROBERT SCHAETZEL JAMES R SCHLESINOER BRENT SCOWCROFT RAYMOND PHILIP SHAFER C J SILAS WILLIAM E SIMON JOSEPH J SISCO SHERWOOD H SMTH. JR HELMUT SONNENFELDT FRANK A SOUTHARD. JR TIMOTHY W STANLEY GEORGE J STATHAKIS RALPH I STRAUS ROBERT S STRAUSS GEORGE A STRICHMAN LEONARD SULLIVAN. JR JOHNJ SWEENEY PETER TARNOFF WH.LJAMC TURNER STEPHEN L VAN HOMOMAHV DMCCTOM CYRUS R.VANCE GEORGE W BALL MARLAN CLEVELAND CHRISTIAN A HERTER JH 5ANFORD N MCDONNELL ADOLPH W SCHMIOT EARLEC WILLIAMS EDWARD W BARRETT EMILIO G COLLADO JOHN D HlCKERSON LAURIS NORSTAD CORTLANOT vfl SCMUYLER MASON WHLRKH ANDREW H BEROING C DOUGLAS DILLON TOM KILLEFER SAMNUNN CHARLES M SPOF^ORO WATSON W WISE EUGENE R BLACK JOHN CERGUSON III RUTHC LAWSON WILLIAM P ROGERS THOMAS J »»TSON JR JOSEPH J WOLF LESUE S BRADY RALPH C M FL/NT J/.Y LOVESTONE P.OOEB? V ROOSA R JAMES WOOLSEY SOLC CHAIKIN ANDREW HEISKELL JOHNJ MCLOY DEAN RUSK In this all too brief presentation I would like to mention four

significant developments in the Middle East over the past year, their omplications,

and basic steps uhich I believe must be part of a peace effort if it is to be

successful.

The r\f*st development is the cease-fire in the Iran-Iraq uar. In reaching

the military stalemate uhich lead to the cease-fire, the role of the European

nations, the U. S., Russia and China was critical. They supplied arms to Iraq

to neutralize but not prevail over Iran's much larger numerical superioroty.

Similar aid uas denied to Iran, and the active presence of the U.S. fleet in

the Gulf forestalled any Iranian overt or covert flanking move through the

wealthy but small and essentially defenseless Gulf States.

In short, this coordinated, controlled intervention played a major role

in achieving the stalemate, uhich uas so burdensome that a cease-fire was accom-

plished.Long, tedious negotiations uill undnubtedly be required in reaching

a stable peace, but this is likely if pursued uisely and uith the continuing

constructive support of the U.S., Europe and Russia.

This uar has demonstrated that modern ueaponry, uhen reliably and

adequately supplied, can prevail over larger numbers and religious zeal, no matter hou righteous the zealots.This uill have an important'moderating effect in Middle East politics.

The second significant development is the agreement uith Russia for their uithdraual from Afghanistan. In Afghanistan, Russia's great superiority in tanks and modern ueapons enabled it to controll the key cities and touns.

But the anticommunist Plujahedin, aided by the tortuous mountain terrain and stinger missies to counter the Russian air superiority, effectively controlled the countryside.The result uas another costly and politically burdensome stalemate. Uhile the Soviet withdrawal from Afghanistan does little to diminish their

superpower status, it starkely demonstrates that they are not invincible, and will

not blindly follow the Breshnev doctrine of never reducing support for a friendly

Communist government. This realization will have a major moderating effect on

Russia's allies in the Middle East, such as Iraq, Syria and South Yemen.

The third significan development relates to Turkey. Turkey continues to

make slow but important progress in developing its economy, and has applied for

membership in the European Community. There are major economic and political

problems in admitting Turkey to the Community and some European nations are

thus rekuctant to initiate meaningful negotiations. Yet Turkey is a key NATO

partner, is a counter to the increasingly socialistic policies of Greece, and

is a major moderating influence in the Middle East.

Should the European Community either reject or take no action on the

Turkish request, the implications are likely to be far-reaching. Such action

could force Turkey to turn elsewhere for support, possibly to ftussia; and

would stregthen the position of the small but growing number of Islamic fund-

amentalists in Turkey. Even more seriously, it would send a loud clear signal

throughout the entire Middle East that the OECD nations are willing to protect their

access to vital Middle East oil and gas, but place a low or no priority on helping

Middle Eastern nations to improve their economies and standard of living.

In the long run, the political implications of such an attitude could do as much to destabilize the Middle East as the Israeli/Palestinian confron-

tation. Conversely, OECD programs to help develope economic growth in the Middls

Esst csn he a kf?y factor in providing an environment in which a resolution to the Israeli/Palestinian conflict can be successfully sought. Such economic growth can be selective, need not be rapid, but must be visible and sustained.

Due to these considerations I believe that the European Community must find a way to admit Turkey, though not necessarily by 1992. The OECD nations must also initiate more effective programs to aid economic growth in other areas of the diddle East.

The fourth significant event relates to the Israeli/Palestinian conflict.

In recent months the Palestinian street doemonstrations in the West Bank and Gaza

have become well organized, sustained and show signs of increasing in intensity.

I believethat this development is strategically important. It provides a tragic

buteffective uay for the Palestinians to keep the Israeli military is a costly

and frustrating state of seige. In this situation the superiority of Israel's

armor and modern ueapons technology is of little help. In epfact, these street riots

comprise a uar of attrition against the Israelis - much as they uere subjected to

during their occupation of south Lebanon.

The Israelis can only lose in a sustained uar of attrition. There are some

4 million Israelis and perhaps 150 million people of Islamic faith from Egypt to

Iran, or 200 million including Turkey. The Islamic populations ahve a higher grouth

rate than the Israelis. The Israelis would probably win a blitzkreig uar, but not

a uar of attrition, and they cannot use nuclear ueapons or chemical Warfare agaiost

tne Uest Bank of Gaza without killing large numbers of their oun citizens. Nor

can the Israelis maintain international support by continuing to shoot civilians

in the streets. The Palestinian unrestalso represents a major handicap to the

Israelis in developing a via&le and growing economy.Time is not in the Israelis favor.

In summary then, the truces in the Iran/Iraq uar and in Afghanistan strengthen the position of moderates in the fliddle East; the Turkish initiative for entry into the European Community uill pressure the OECD nations to assist economic grouth in the Middle East; and the intensifying Palestinian unrest will pressure the Israelis to come to grips uith the Palestinian demand for autonomy.

Thus conditions in the Middle East appear to be more conducive to effective peace efforts than has been true for some years.

The limited time I have today does not permit a meaningful review of the

.•riany complex factors related to a Middle Easb peace initiative, and this subject is covered very effectively in the policy paper, "Western Interests and U. S. Policy Options in the diddle East", published by the Atlantic Council of the United States this past February.Instead I will mention a number of considerations important tc a peace initiative:

1. It is essential that the Iran/Iraq cease fire be maintained and that there is progress, even though slou, touard a lasting peace treaty. It is equally essential that the Russians complete their evacuation from Afghan- istsn.

2. The OECD nations muet realize that programs need to be established in the Middle East to foster economic development there.Peace, with little hope for an improved standard of living, will not be a lasting peace. Economic growth should not be faster than a nations culture can adapt to, its benefits should be available throughout the populace and corruption in business and finance must be curtailed and ultimately eliminated.

3. The most practical focal point for the peace effort is, in all liklihooc, an international conference. This conference would, of necessity, include all interested nations. Extensive negotiations must precede the conference to assure support of common goals; an agenda must be prepared including proposals on which at least limited agreement could be reached' and an out- line of the ongoing procedures required to achieve an honorable and mutually acceptable peace must be specified. Such a conference is a critically important component, but only one component in a more extensive effort.

4. For any success to be achieved in such a conference, crscanrjitiono must bs mat. These include, fa--:

A. Israel - Accept the inevitability of transferring '.be: Usst Bank and Gara to a Palestinian Stats. - Provide equal civil rights and eccinrjmic opportunities to Palestinians remaining in Israel. - Recognizs a neu Palestinian state, uhen it is successfully and legally constituted. B. The Palestinians - Establish a unified and representative group to act for the Palestinians in the peace negotiations. - Recognize Israel's right to continue permanently as a sovereign state. - Abandon all terrorist activities, cease military activities and civil unrest. - Agree that any securuty forces and materiel needed by a Palestinian state uould be provided by designated neutral nations or by a neutral multinational force. C. USSR and East Block Nations - Give full diplomatic recognition to Israel. - Remove restraints to Jewish emigration. - Establish a common stance with Uest Block nations regarding terrorism. - Uork constructively with the Uest Block nations to achieve a viable peace settlement in the Middle East. D. Uest Block Nations - Guarantee the political independence of both Israel and a Palestinian State. - Provide effective and continuing support to economic development in Israel, Palestine and the Middle East. (page 5a)

The preconditions involve many tradeoffs. Each nation or group has much to gain, but also must make concessions. All of the various preconditions are interrelated and thus need to be developed concurrently and as a package. For example, Israel will not give up the West Bank and the Gaza Strip unless their independence is guaranteed.

The Soviet Union will not cooperate unless given full recognition as a senior partner in the peace process. Such recognition will be of help to Mr. Gorbachev in countering domestic problems resulting from his "perestroika" program.

5. All nations participating in the Middle East peace process must recognize that a lasting and equitable peace will only be realized with the participation of Uest Block, East Block and Middle Eastern Countries, and policies adopted by these individual countries must be such as to make the common goal attainable. Because of their proximity and growing international importance, the Peoples Republic of China, India and Pakistan should be included as observers or in more active roles. All of these nations must assign a top priority to achieving a just and lasting peace in the Middle East.

6. Participating natio ns should adopt common security measures, treatment of terrorist acts and treatment of terrorists. These nations should adopt a strict embargo of economic aid and arms supply to any nation which'permits hostages to be held within its borders, or which provides directly or indirectly any aid, support or sanctuary to terrorists at home or abroad.

7. Comparable steps should be taken against any nation participating in or encouraging violent internal political or social change in another nation or in establishing vassal governments in other nations.

8. Given some meaningful resolution of the Arab/Israeli problem, correspond- ing attention should be directed toward providing a peaceful and lasting resolution to the internal strife in Lebanon.

Such a program as I have just outlined is indeed fraught with difficulty, hazards and complexity. It uill require unprecedented skill, patience and dedi- cation. Success is Dy nc means assured. Yet the Middle East contains over one-half of the worlds invaluable oil and gas resources and is the vital strategic geopolitical bridge bstueen the Atlantic and Pacific basins. Without peace in the Middle East, that region has the potential for destabilizing uorid peace.

In conclusion, the importance of peace in the Middle East is so critical that constructive steps to achieve peace there merit the high&st national priorities. And as I mentioned above, developments over the past tuelve months may well provide the best opportunity inyears to make real progress tnuard a viable peace. This is a transitory opportunity. It should not be lost. ANDREWJ GOOOPASTEB THE ATLANTIC COUNCIL MCECHMMKN ncTUCllMiTcnCTATCc EXECUTIVE VICE PRESIDENT DAMOC ACHESON OF THE UNITED STATES JOSEPHVM HARMED HENRY H FOWLER UTEXISJOHNSON 1616 H STREET. N.W. • WASHINGTON, O.C. 20006 9j; FAX (202) 737-5163 • CABLE ATCOUN • TELEX 246965 ATCN UH EUGENE v ROSTOW (202) 347-9353 KENNETH RUSH TMEAWNCT WILLIAM H. G FITZGERALD OEVELOMKNT COMMITTEE

LAWRENCE M WOODS SCCHETAMV JAMES W SYMINGTON OMECTOM OAVOM AMHME THEODORE C ACHILLES. JB OONALDG AGGER STEPHEN A1LES MADELEINE K ALMUGHT IHWYNE O ANDREAS SSi^;"^^ J U.S. ENERGY '88: COUNTDOWN TO THE NEXT CRISIS ROKRTIATEMAN WTAnEVKNNETT.JR JAMES M MUJNGTON QEORGESILANCHARO QENEEWADUV HAROLD WtOWN IDEANIROWN HARRY F tVRD. JR OAMCLJ CALLAHANW MARKH CURTIS

KENNETH W DAM W KENNETH DAVIS RUSMUE OOUOHERTV LWWRENCEI EAGIEMRGER uorDH imorr ROKRTF ELLSWORTH SHCRWOOD L FAWCETT OEIULD»FOMO QCOfMESF)MNKUN.JR ROMRTF FROCHUCE RKHARON OAWNER LINCOLN GOROON OONALDLGUERTIN iSi^'ZiUS^ Reported by the United States Energy Association MARTINJ HUEMRANO WM.TERE.HOA0U1Y This document will be the basis of the presention by J AUANHOVEV.JR THOMAS L HUGHES (AMMAN W.J.. Bowen JOHNN mull ISAAC C KIOO.JR with a special emphasis on gas HENR»A JUAMTA M KREK »£Tf«F KROOH JAMES TLANEY Chairman of the Board Transco Energy Company GCOROECMCGMfE DONALD F MCHENRV ROKRTS MCNAMAHA LAWRENCE CMCOUAOE FAY METCALF JACK N MERRITT STEVfNMULLER THOMAS J MURRW OEOROERJJSSSo Presented to the U.S.-Japan Energy Policy Consultation ^NOD^IaRMo Hawaii, 16-18 October 1988 JACQUES.) ROMTEM ' STANLEY ft.REIO R EMMETTJ RICE ELLIOT L RICHARDSON MULHHOBNION..M OUNC ROMON •ERNARDW ROGERS HCHAMXANROK NATHANIEL SAMUELS J ROKRTSCHAETZEL JAMES R SCHLEStNOtft •RENT SCOWCHOFT RAYMOND PWJP SHAFER C J SILAS WILLIAM € SIMON JOSEPH J S4SC0 SHERWOOD H SMITH. JR He'LMUT SONNENFELOT FRANK A SOUTHARD. JR TIMOTHY W STANLEY GEOROCJ ITATHAKH RALPH I STRAUS ROMRT t. STRAUSS OCOROEASTRICHMAN LEONARD SULLMAN.JR JOHNJ SWEENEY mm TARNOFF WHUAMC TURNER STEPHEN L VAN HONOWMY DMECT0M CYJUSR VANCE GEOROEWSALL MAHLAN CLEVELANO CHRISTIAN A HERTER. JR SANFORO N MCDONNELL ADOLPH W SCHMKJT EARLECWHUAMS EDWAR0 W iARREH EMIUO 0 COLLADO JOHN O HICKERSON LAURIS NORSTAO CORTLANOT VR SCHUYltR MASON WHJ.RICH ANDREW H SERDING C DOUGLAS DILLON TOMKILLEFEP. SAM NWMN CHARLES M SPOFFORD WATSON W WISE EUGENE R SLACK JOHN f ERGUSON III RUTHCLAWSON WILLIAM P ROGERS THOMAS J WATSON JR JOSEPH J WOLF LESLIE SSRADY RALPH c M FlyNT JAYLOVtSTONE ROSERT V ROOSA R JAMESWOOLSEY SOLCCHAXIN ANOFIEW HEISKELL JOHNJ MCLOY DEAN RUSK ENERGY: The Re-Emerging Crisis

A year ago. the United States Energy reached the lowest level in a decade must reduce the consumption of oil. Association warned that our country and by the end of 1987 was down especially in transportation, and in- was drifting toward a serious energy about 1 million barrels a day. or 10 crease the production of all domestic problem, because of a growing de- percent, from early 1986/ Also, re- energv sources. pendence on imported oil.1 Patterns duced exploration acti\ ities in the like those that led to soaring energv United States are resulting in fewer The Impact of Rising Oil Imports costs in the 1970s were reappearing. additions to oil reserves and lower Current trends in oil use are raising future production levels. serious concerns. Oil imports have Now. in the spring of 1988. the risen 29 percent in the past two countdown to another energy crisis • One domestic form of energv vears since OPEC began its price has progressed a year further. Oil im- that has helped reduce our dependence cuts. For 1987. imported oil cost ports account for more than 40 per- on imported oil—electricity—is now the United States about S?0 billion. cent of the U.S. oil suppK. The facing its own uncertainties. Electric- 46 percent more than in 1986. and a United States has moved some 40 power demand continues to rise much sum equivalent to more than one- ships and 25.000 men to the Persian faster than new capacitv is being fourth of America's foreign trade def- Gulf to face down the pressures ema- added. icit." The United States is likely to nating from Iran. The largest energv be more than 50 percent dependent industry in the United States—the • Although our nation is drifting on imports by the early 1990s. oil industry—has been impaired. toward a serious energy crisis, many U.S. political leaders are reluctant to Oil imports deepen the nation's There is no way that production from address energv issues and implement trade deficit. An annual oil import American oil wells can completely v table strategies to reduce our depen- bill ranging from SI50 billion to close the gap of 6.5 million barrels dence on imported oil. S200 billion is projected within the daily between what the U.S. produces next ten years"—an amount greater and what it consumes. In fact, the This is clearly a time for action. If than our total trade deficit today, gap will widen as U.S. oil consump- the United States is to make the raising serious questions about our tion grows and production continues transition to a more secure, balanced ability to reduce the trade deficit. to decline. The elements of our and diversified energy system, it countdown:

• Oil demand is rising, while the 1. U.S. Energy Consumption by Fuel Source domestic production of oil continues 1975-2000 to drop. Oil production from the Prudhoe Bay field on Alaska's North Slope—our country's largest oil field, which accounts for 20 percent of U.S. production—is expected to peak this year, and soon will begin to declined

• The U.S. transportation sector is consuming 20 percent more oil than it did in 1974. This sector alone uses more oil each year than our nation produces.' With lower gasoline prices. Americans burned an average of 302 million gallons per day in their cars in 1987. compared with an average of 287 million gallons per day in 1985. an increase of 5 percent.-1

• Despite record crude oil produc tion in Alaska, domestic oil output The cost of imported oil is not the reservoirs has failed to offset deplet- domestic requirements. If available most serious threat. Over the next ing fields. This does not mean that gas supplies cannot meet future lev- few years. Free World oil consump- the United States is running out of els of consumption, the gap is likely tion is expected to increase while gas in any physical sense. According" to be filled by increased oil imports. non-OPEC oil production is expected to the Potential Gas Committee, to decline. This will lead to in- enough gas exists onshore and off- Coal and NuclaarPovKr creased dependence on supplies from shore to sustain a national consump- Fortunately, the United States has the unstable Middle East, raising tion rate equal to the current level tor the resources to provide a secure and significant concerns about our abnai 50 years—but it will require an balanced mix of fuels. Our country's national security. The Middle East active exploration effort and higher huge deposits of coal and uranium nations hold 75 percent of the prices than Americans are currently can lessen our dependence on for- world's proven oil reserves, much of accustomed to paying. Much of the eign oil and offset our own dimi- it (unlike U.S. reserves) capable of gas is in hard-to-reach areas that nishing oil reserves. In the case of being produced at very low cost." have not been heavily explored be- coal, which can be converted to cause of the high costs involved. synthetic oil and gas. U.S. resources Tht Natural GaaOuMook These include deepwater sites, gas in could last for centuries. Coal use is The outlook is more favorable for "unconventional" geologic forma- expected to continue expanding, natural gas supply, because, unlike tions, and "deep gas" at depths of with most of the increase being for oil. adequate gas reserves and re- more than three miles. In addition, electric power, generated from new sources exist in the United States to opportunities exist to increase recov- clean coal technologies. meet gas demand at current levels of eries in existing fields through consumption and even at increased advanced techniques. levels. However, the long-term availability of natural gas will re- Whatever volumes of new gas are quire higher prices and possibly discovered, the price will be linked greater economic incentives than to competing refined oil product and currently exist. other fuel prices. Nevertheless, it will be a challenge to find enough Moreover, the majority of recent re- gas at competitive prices to maintain serve additions has come from exist- U.S. production at current levels. In ing fields. Most experts agree that addition to domestic gas production. such fields are nearing full develop- Canadian. Mexican and LNG imports ment. And the discovery of new can be drawn upon to satisfy

2. EsNnMltd RtnuJninQ U.S. RMfN Futl Rttourott, 1966 (On*)

Natural Gas Liquids 128 Crude CHI 928 OIL: Growing Imports

The trends that led to the oil shocks more than 750.000 barrels a day. are smaller or more remote, and con- of the 1970s have been set in mo- sequently more cosily to explore and tion again. Oil imports are more develop than the sites from which we than 40 percent of our domestic con- Since February 1986. U.S. crude oil have obtained oil in the past. Above sumption and are increasing at an production has plunged by about 1 all. the costs of finding and produc- alarming rate. Within the next few million barrels a da>. to about 8.3 ing oil are higher in the United years they are likely to account for million barrels. In the Iower-4K States than in any other nation—

3. U.S. Pttrolaum Imports in Halation to DonMic Oil RMOUTOM Total U.S. Petroiaum Consumption Short of a breakthrough in technolo- 1985-2000 . gy, costs of American oil will keep rising. Of course, new oil discover- Gross Imports as li ies and better drilling methods would 70 i of Total Consumption •r 70 extend the amount of oil we can obtain at various cost levels. In seek- 60' ing to make fuller use of domestic resources. U.S. energy policy should 40 encourage greater exploration, pro- 40- duction and development of the na- I tion"s oil resources, to help provide 30- a bridge to long-term solutions. This will require a review of all possible 20 • :n l0 options, including tax incentives, 10-1 1 price floors to protect domestic pro- k^k^k^k^k^k^kl ducers from very low market prices, import fees, and increased research 1985 1986 1987 1990 1995 2000 and development as well as increased Sutures L' S Department of Ener

~~NOTES: t~~

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~~5. Mi * 1M7H an. MpM * *• U.S. DwMt * lFEMM~~

~~IS Dt'ftjrrmi'in i)f Commt'in1 i ln\t tmieit tmiti OKI h.nen\ i~~

vulnerability. U.S. Naval Forces arc leaning toward larger cars, rather patrolling the sea lanes in the Per- than compacts and sub-compacts. By sian Gulf, trying to maintain the contrast, new imported cars are aver- flow of oil to the Free World. This aging i\ miles a gallon/ Similarly, commitment of the U.S. fleet to pro- there has been less incentive to re- tect Middle East oil demonstrates the duce oil use in the utility and indus- danger. inal sector.

RWnQ 01 Ownnd Large State OK RMOurct U.S. oil demand is projected to The Lolled States has immense de- continue rising through the end of posits of oil shale—containing an the century, with the growth concen- amount ot' oil greater than the trated in the transportation sector. known reserves of erode oil in Saudi Currently the U.S. transportation Arabia. But like another rich source NATURAL GAS: A Versatile Domestic Resource

Vuural gas JN our second largest con- declines, significant amounts ot Growing Gas Consumption \eniiiinal domestic energy source, af- imports and new unconventional gas Proiectimis show that (he 1 ,S. >..>uld ter axil. I .S. natural gas resources supplies can be developed. Kventual- meet ^as demand ot 2u ui .i year — are large enough lo support ^urrem ly. large amounts ot liquelied natural slightly-higher than today — well be- levels ot production well into the iias (LMii could be imported by >hip vond the vear 2nno. Main cleurii. next century. Ami. t-\cn in certain transportation markets like fleet us- age and urban transportation, com- pressed natural gas can be substituted 5. Potential U.S. Gas Resources, 1986 lor oil. thus reducing dependence on imports. Probable Possible Speculative Total Proven gas reserves amount to abnut lf>0 trillion cubic feet itct'i in the Low er-4X lovver-4N states and are backed up States: 153.6 269.2 196.9 619.7 by large potential reserves o(' con- Alaska 9.0 29.1 S0.7 I IS.S ventional gas that would become Total L'.S. S62.6 298.3 277.6 73S.5 economic at higher prices. It ha-, been estimated that an additional fi2d tcf' ot' coinentional natural gas is remaining to be discovered. Thus. I'.', '.'HI;, (;,/\ ( ";'./i.l"c i proved and potential reserves could support approximately 5(1 years ot Potential US. gas rwourcM amount to 7315 t) TbayiMluoa 162.6 Kl of Mi 277.6 let ot^MuWht raaourcat. consumption at current rates. prebafait raaourcat, .296.3 Icf of poaaiblt from other countries. The gas indus- utilities are looking to gas-fired In addition. Alaskan gas. enhanced try 's major challenge will be to combustion turbines and combined- gas recovery in ousting fields and develop these supplies at competitive cycle gas turbines to provide new uneotnentionu! gases—Devonian pnce> to satisfy demand. generating capacity in relatively shale, coal bed methane, and gas small increments. Similarly, indus- from "tight sands"—have a resource Natural Gas Damand tries are making greater use oi gas- base in the I'.S. that is several Today, natural gas provides nearly fired cogeneration in produce heat limes greater than conventional one-fourth of the nation'-- energy. for industrial processes and to gener- proven gas resources. Unlike oil. natural gas remains a ate electricity. Finally, commercial domestic fuel: only 5 percent of the gas requirements such as office build- DtcNnmg Exploration supply is imported, virtually all ings and shopping malls are expect- Because ot' a reduction in drilling in from Canada. ed to grow as the I .S. economy he United States since the late becomes more serv ice-orienied. 1970s, proven reserves have been The collapse in world oil prices has falling. New discoveries have failed had serious consequences for the IS. However, in order to develop natural to replace consumption. The level natural gas industry, because of the gas supplies and construct gas pipe- oi proven reserves in the Iovver-4X " complex interactions between the lines, large investments are required, .tales has dropped 36 percent during 'wo markets. Gas prices ^r<; closely with delays ot many years between he last 15 years, from 250 tcf to linked to the price of residual oil. the time capital investments are made 159 tcf. Today's level of proven re- since about a third oi total I .S. gas and income is realized. In the near tu- serves equals nine years of eon- consumption is subject to fuel : ture. deliverahility (torn domestic ami .umption at the current rate. Even switching in dual gas- and oil-fired imported sources is adequate. he high rate of drilling from 1 L*s2 boilers in industries Mid electric o I9N5. at significantly higher power plants. In addition, an e\ces> lolling prices, did not result in nei ot ^.i^ availability—the so-called gas •4C'£5 additions to reserves. "bubble"—pushed g.i- prices well he- or slue cs c< •> 3 low the costs required lor discovering ')ver the long term, however, .is new ..M-. Held-, to replace reserves. conventional domestic deliverabihtv COAL, URANIUM AND RENEWABLES: Long-Term Abundance

Since the Arab oil embargo of power generated in the United Slates, gas in producing it." In 19X7. Amer and the lessons about dangers from now being the second largest source ica's nuclear plants displaced an heavy dependence on imported oil. of primary energy for electricity. Its equivalent of ! million barrels a day nui domestic energy resources have share is expected to exceed 20 per- of imported oil, potentially saving become increasingly important to cent by 1990 as nuclear plants now the country about S7 billion in for- our economy: coal and uranium. under construction begin operating. eign exchange." Although they are They are the only two domestic fuels secure domestic energy resources available that can generate large- However, public concerns about whose importance in this country is scale, reliable supplies of electricity nuclear plant safety and disposal of still growing, coal and nuclear powe on an economical basis in the long radioactive wastes have been serious face serious institutional obstacles term to replace imported oil. In addi- obstacles to expansion of the indus- and uncertainties that threaten their tion, solar, wind, biomass and other try. The costs of recent U.S. nuclear additional use. renewable* will provide a relatively plants have increased up to seven- small amount of energy. fold, with obvious effects on the Obstacles to Expanded Coai Use competitiveness of nuclear power. With coal, one limiting factor is Coal Availability The average time to complete nuclear transportation. Transportation ex- Coal is the United States" most plen- plant projects has increased from 7 penses typically represent about 30 tiful resource—representing about SO years for those plants that came on percent of the delivered cost of coal percent of our fossil-fuel resources— line in the early 1970s to more than and they can rise to more than 70 and provides about 55 percent of our 14 years for those entering commer- percent." If the demand for coal electric power. In 1987 coal con- cial operation in 19X7. in part due increases sharply, its use could be sumption approached 90S million to an unnecessarily complex licens- limited by inadequate transportation tops, with an all-time high of 714 ing and judicial process. until railroad facilities are expanded million tons used by electric utili- or slurry pipelines are put into ties.1 The balance of the coal output Renewable Energy Sources operation. was used as a fuel in making steel and Roughly half of the 6 quads of renew- for other industrial purposes. able energy used in the United States Many experts agree that coal slurry today comes from conventional pipelines make coal transportation As oil becomes more expensive, hydroelectric plants—a technology in the United States more efficient coal will become an increasingly whose future growth potential is and competitive. However, until important energy source. Synthetic slight.-1 Essentially all acceptable slurry pipelines have the necessary- oil and gas can be made from coal to sites for large-scale hydropower pro- access to rights-of-way. construction replace imported oil. Since 19X3. jects are already developed. Other ma- cannot be undertaken. Only a few there have been dramatic improve- jor renewable energy sources—solar, states have adequate processes to ments in the technology for con- wind, geothermal. and biomass ener- permit such access. Proposed legisla- verting coal into gasoline and other gy—are not yet proven as economi- tion before Congress would remove liquid fuels. New designs have re- cal source fuels for large amounts of impediments to the construction of duced the cost of coal liquefaction electric power nationwide. Experts slurry pipelines. by 60 percent, to an equivalent of agree that the pace of research-driven S35 per barrel for crude oil.- With technological developments over the Another problem is inadequate finan- additional improvements, synthetic coming years will play a large part cial incentives on the part of utili- oil and gas from coal could become in determining the status of renew- ties. Utilities are increasingly facing profitable for the United States as able energy options and. therefore, a regulatory test known as a "pru- technology improves and other the degree to which their potential dence" audit for both coal-fired and enerev costs rise. can be realized. nuclear power plants, in which state commissions are requiring them to NudMTrOWW Tht Electricity Connection absorb the risks of new investments. The United States has nearly 30 per- Since 1973. coal and nuclear power These audits undermine the traditional cent of the world's known uranium have been responsible for 95 percent regulatory compact and compromise reserves, although better grades of of the generating capacity that has the ability of utilities to supply uranium can be mined abroad at lower been added in the United Slates to new capacity. cost. Nuclear power presently pro- meet growing demand for electricity vides 17 percent of the total electric jnd to reduce the need to use oil and Another major uncertainty is envi- ELECTRICITY: ronmental standards for coal-fired boilers. Although total emissions of The Growing Demand sulfur have declined, over time the environmental issues associated with Electric power is a large and steadih Capacity Requirements acid rain may be overshadowed by s>row ins; element in the nation's In the coming vears. new electric more global concerns, such as the enepjv picture. While overall L S. power capacity will be needed. The carbon dioxide-induced "greenhouse eners:> use grew bv 2 percent between Northeast region has been experi- effect." Any additional environmen- 14".' and ll»S". electricitv consump- encing 4 to 5 percent electric tal regulations would add to capital tion increased i>ver 42 percent. growth since I4S2. The Northeast is and operating costs of coal-fired Electric generation accoun'.s for more currently importing electric power boilers, making it more difficult for than half ol all the pnnurv encrgv from the Midwest and Canada to coal to displace oil generation used in ihe countrv. excluding help meet rising demand. However, ,of electricity. transportation. While consumers, the extent to which the Northeast businesses and industries are using can import additional power is con- Because of the uncertainties sur- electricitv more efficientlv todav. strained by limited transmission rounding coal and nuclear power. thev are also using it lor more capability. If the growth in demand L.S. utilities are not ordering any purposes. continues to exceed forecasts by the major new capacity, despite the North American Electric Reliability continuing growth in demand Electricitv demand, unlike total ener- Council, utilities in the Northeast for electrtcitv. gv demand, has kept pace with the will have to begin making decisions growth in GNP. As new technologies about providing additional generat- improve the nation's ability to ing capability.' NOTE* compete in the international market- : Jmay 1M. I.NMMiCM place—-computers, minimills for Currently, the Northeast is carrying s. itaM fnrm m t» Ona UMMCMI of Ce»: Rrttn E •ton. tfncwtf Co* IMWan Pn^ea Br *ma> Cwp, Sam*. industry, lasers, electronic communi- a capacity margin of about 24 per- cations—electricitv is becoming cent compared with the margin of 3.0.5. Department of EflfR^. TitertMy zflUQf www. even more important, and our use about 17 percent needed for reliable ttnmtm IM7. continues to rise.1 For example, operation.4 But the trend of U.S. 4 OOE,<*. at. H«wt» *m fmtui on Em» Swunty • industrial electricity consumption in electricity consumption is up. 5. Se»iw Cone**, tit. • V, Ampk *f»» Mt ol NucMr Pvm> n IS)X7 was an estimated 3.6 percent Capacity margins throughout the fMwxg US. 01 M»a*- S M7 greater than consumption in 1986.-' country are steadily shrinking, as MMMy ,'Sam Ctnow*. tUbiiMI. 6. Electricity Supply and Demand 1986-2000

~~Current i*lus nned {.\ip.u.ii\~~

I 1 I I I 1—I 1 1 1 I I 1—I demand continues to grow faster fired plants—are owned by indepen- and reliability of our electric power than plans for new supply. Because dent producers. Another 2S.0OO supply. The North American Electric of over-building in the past decade— megawatts of capacity are under Reliability Council has estimated and because of financial and regula- construction or being planned. Hall that the United States will need tory risks of major additions— of the projects use eogeneration. about 79.000 megawatts of new utilities are reluctant to begin build- and more than three-fourths of this electric generating capacity by ing new plants that will be needed cogeneration is gas-fired/ N95.' That's equivalent to over KK in the years ahead. coal-fired power plants. About 45 New Supply Strategies percent of that is not yet under Utilities have reacted to the new en- Instead of their historic "build and construction. vironment—regulations that discour- grow" approach, utilities are count- age building new capacity—with a ing on customer involvement in Lack of New Orders variety of strategies. Some utilities conservation and load-management As a result of the pressure utilities have established their own cogenera- programs to reduce peak demand in are feeling, there has been only one tion subsidiaries. Many utilities are areas where capacity margins are coal plant and no nuclear plants purchasing power from one another, diminishing. They are also trying to ordered in the 1>-)S(K. Because of encouraging conservation, and build- extend the operating life of aging obstacles and disincentives, major ing small-scale gas turbines. Utili- generating stations, to postpone new baseload electric power capacity ties are also importing Canadian any need for commitments to new planned oy utilities is at risk. The electricity, mostly hydropovver. bascload generating plants. only nuclear and coal-fired plants Sales of Canadian power to the U.S. that will be generating electricity in have grown by 9.5 percent annually Non-Utility Producers 1995 will be those that are either over the past few years, rising from More significantly, electric utilities already built or at least under con- S billion kilowatt-hours in 1976 to are purchasing more and more power struction." The result could very well 35 billion kilowatt-hours in I986." from independent power producers be that commitments for new capaci- that are not utilities. A recent survey ty will not be made until the need for found that some 24.000 megawatts— While effective in meeting current de- power is essentially at hand, with 4 percent of the nation's capacity mand, such strategies do not com- too short a lead-time to commit to and the equivalent of 40 large coal- pletely provide for the future adequacy the most economical baseload systems. This could lead to further 7. Fuel Mix of U.S. Electric Power Generation dependence on oil and natural gas for generating electricity. 1980-2000

Vs Percent Percent A series of institutional changes in | 100 f^_ p^pv- 100 necessary—changes in governmental -. 411 -^H L^H- 40 regulation, utility planning, state rate-making and construction financ- i so .^H ^^H- so ing—in ordeT for the nation to have confidence in the reliability of our " M) -PS Hrx) electric power system in the years ahead. ; 50 ••& •••• 50 4O 'afl 4 Given the difficulties in making L^Lw " accurate forecasts of electricity de- '. •'" fl a^aW M) L^H. 2o mand, but recognizing there is a hi.gh 20 ^H probability that significant addition- IO -^H L^H- io al supply will be needed in the future, 0 •!••&> the United States needs to have all I4S0 2000 the economic and environmentally acceptable options available for gen-

~~""" •""•"•'-•' -• ™> - erating electricity.~~

Advanced Power Plants IOUnnS 01TTW MOQiy JKHlMO HI tnt UTNIM ppp^gyidto^iilfp7 Future power plants won't necessarily int«f7to7rjf«roMtinf»yMr2000. During the same pmd, electricity gtmrMMl by oil- wd resemble today \ coal or nuclear fJrtnd planii it projeded to grow *om 15 percent in 1967 to t8 percent in the year 2000. plants. They are expected to offer «Me tacanMuion from hydro and renewaWee is expectedto remain reMwiyslaWe at 11.5 major improvements in proven tech- CONSERVATION: nology—higher efficiency, greater reliability, and shorter construction Realizing The Potential time. Energy efficiency is an important The most promising savings lie in The most significant need for future part of America's energy mi\. both the transportation sector—cars. power plants, including coal and nu- today and in the years ahead. trucks, buses, and airplanes—which clear power, is reduced construction uses about one-fourth ol the energy time. Cutting recent construction Americans are using energy much consumed in the United States times of 10 to 15 years by a factor more efficiently than a decade ago. every year. Even more importantly, of 2 to 3 would result in ihe savings From 197X to 14X6. the economy it uses nearly two-thirds of the oil of billions of dollars, mainly by grew 19 percent, while energy con- we consume. avoiding the extra financing costs sumption fell 5 percent, from 7X.I caused by delays in construction. quads in 197X to "4.3 quads in Because the technical opportunities 19X6. Had U.S. energy efficiency are far from exhausted, improv ing Among coal plants, units with more stayed at the 147S level, the econo- fuel efficiency still otters the single advanced designs will provide more my would have required 43.1 quads best hope of minimizing the impact complete control of sulfur dioxide in 19X6. In other words, improved of a new oil crisis in the coming and other emissions and. in some energy efficiency sa\ed the energy decade. Raising fuel efficiency of systems, have the flexibility to burn equivalent of 9.4 million barrels of new cars sold in the United States to 1 any coal and even other fuels. Clean oil per day. the level of 40 miles per gallon— coal integrated gasification/ compared with the average fuel effi- combined-cycle (IGCC) systems, for Opportunities for Conservation ciency of 28 miles per gallon for example, produce clean fuel gas that The United States could sa\e consid- 1987-model cars—would reduce can be used in a variety of power cy- erably more energy in the future if gasoline consumption substantially. cles, and they can be built in phases existing technologies and those starting with combustion turbines. anticipated from future R&D are Mass transit systems—especially applied more fully to improve those in urban areas—offer an alter- enerev efficiencv. native to the private car and its NOTES. consumption of gasoline. 1 DO€. Mont% Ermrr *vi—; Octtr 1M7

~~2. DOE. -MMNy EMV RIM.' Nomittr 1M7~~

~~3. NMft Amman EKcn R«*tf*ty Count* ihCK). *i 1917 8. Energy Consumption per Capita, 1966~~

5. Htfm. M* I CO. MMy. M 1MAW «1 iKms. Nov. 23.1917. 6 00E.. HM* Eiwgy RMM/(MOM 19(7. BBL Oil • Total Enerav Oil Equivalent* I. NBC. Q» a. i OOt. OQ Ol. -Mm » *» fnttn on En»g> SKuHy: 160 140 120' 100 80. 60 • 40- 20- 0 USA Western Europe Japan

~~S,uinr HP SMfM'/M// tfrwiu .•/ \\,~~

ToU ptr ess* in 9m IMM SMM it mm ton twin *• ptr ogto NMn Einp* or j*m MM, US. ptraptaol omunplM* 9. U.S. Gasoline Tax Compared to Other Countries U.S. Dollars per L.S. Gallon United States West Germany United Kingdom Japan France Italy

~~: (ntemuttoftat Energy SttWSfiivi mi Ertthasii\ t>f Japan~~

And the formation of car and van the commercial sector. These design pools offer an additional savings of features include added insulation, pas- fuel and money. sive solar options, and heating and cooling systems which can be Elsewhere in the transportation sec- electronically monitored to ensure tor, the airline industry is experi- comfort and minimize energy menting with new engine and body consumption. designs on small planes which may eventually lead to design changes Industry is also developing new ener- and fuel savings for larger aircraft. g> -saving ways to manufacture their Higher fuel efficiency standards for products. The latest industrial equip- trucks could also achieve oil savings. ment is much improved over what was available a decade ago. Much Improved building designs and mate- more could be done, in a cost- rials, more efficient appliances, and effective way, simply by applying some behavioral changes have al- technology that is already available. ready reduced energy use by the resi- The fact is. while U.S. oil con- dential sector by about 10 percent sumption by industry increased since 1973, despite a 23 percent in- slightly from 1974 to 1983. con- crease in the number of households.-' sumption by the industrial sectors But greater savings are possible in Japan and West Germany declined through changes in building codes. by more than 20 percent.4

AddNontl Energy Swings NOTE* Federal appliance efficiency stan- i. u dards, which were enacted last year, will save consumers billions of dol- r •*» H« TIM.' MMR 1MT. lars on their electricity bills over the next few decades and reduce peak 4 D electricity demand at the turn of the century by an estimated 22.000 megawatts.1

~~Improvements in thermal efficiency are expected to reduce heating use in~~

~~10 CONCLUSIONS AND RECOMMENDATIONS~~

The United States is on a countdown frontier areas can take over 10 that conservation can be a tremen- to a new and probably prolonged en- years. Bringing a coal-fired or nuc- dous resource. In order to encourage ergy crisis. Over-reliance on oil im- lear power plant from early planning conservation and energy efficiency, ports is swelling our nation's bur- to start-up can take from 10 to 15 the government should take steps to densome trade deficit, now running years. For any large amounts of new reduce our nation's consumption of about SI59 billion each year. As oil energy supply from renewable fuels, oil. particularly that used as gaso- imports continue to climb, the L'nit- the lead times are even greater. line. For example, increasing the ed States will pay a much higher tax on gasoline by 50 cents per gal- price. Higher oil costs will add to B> contrast. Japan and most West lon would raise additional revenues our trade deficit, shifting L.S. eco- European countries have much short- of about S50 billion annually. This nomic wealth to other countries. er lead times on energy projects, no amounts to about S300 per car per And by importing more oil. the moratorium on the development of year. Three immediate and valuable United States will be exporting more nuclear energy, and they engage in purposes could be served by the tax oil-related jobs. Our economy will long-range energy planning. increase: Oil imports would be re- be weakened, with higher prices for duced, the trade deficit would de- a wide range of consumer goods With a serious crisis lying in wait cline, and net Treasury revenues and services. only a few years away, the United would rise. States needs to commit itself to a Even the presence of the U.S. fleet strong long-term energy policy. 3. Increased Exploration for in the Persian Gulf will not present Clearly, all domestic energy resour- Oil and Gas: America needs to serious damage to our energy and ec- ces must be developed in an econom- maximize production of its domestic onomic security. Increased worldwide ic and environmentally acceptable fuels. Only by finding and develop- demand for OPEC oil—and Middle manner. In addition, increased ing more oil and gas from U.S. East oil in particular—will give a conservation is essential. Now is reserves in the near-term can the few nations the ability to exact the time to act. country buy the time to increase the large price increases by limiting use of coal, uranium, synthetic fuels, production. Growing dependence on and renewables that could contribute insecure oil supplies will also reduce 1. A Need for Immediate increasingly to the nation's energy our flexibility in the conduct of U.S. Action: The United States must re- mix in the 1990s and beyond. foreign policy. Some forecasts indi- cognize the dangers to its national cate that we may depend on other security and economy from heavy Accordingly, the government should countries for as much as two-thirds dependence on imported oil. and adopt policies that will increase the of our oil in the mid-1990s. Oil im- move now in the direction of more exploration, production and develop- ports could then amount to 12 to 13 U.S. control over its own energy ment of the nation's oil and natural million barrels a day—if that much affairs. The U.S. oil import bill to- gas resources. This requires a review oil turns out to be available. talled about S50 billion in 1987, of all the various options such as: and energy experts predict it could tax incentives, price floors, land What could produce an energy crisis reach between SI50 billion and access, repeal of windfall profits and in the next few years is a combina- S200 billion within a decade. We other tax disincentives, and import tion of three factors: continuing will then find ourselves paying sub- fees. The most cost-efficient and decline in domestic oil production, stantially higher prices for imported effective ways to increase the explo- an increasing demand for oil. and oil—or find ourselves cut off from ration and development of oil and growing dependence on the unstable vitally needed supplies. For those gas reserves should be pursued. Middle East. reasons, energy must be put back on the national agenda as a high priori- 4. Greater Use of Coal: Because Energy solutions require very long- ty and addressed now with a strong. our nation's huge resources of coal range planning and large invest- effective plan and implementation are crucial in any effort to regain ment. The United States cannot policy for both the near-term and American energy security, the gov- begin producing new oil and gas long-term. ernment should work aggressively supplies overnight or develop alter- with industry to speed the develop- native energy sources on short 2. More Conservation and ment and use of clean coal technolo- notice. Under present conditions, Efficiency: The experience of the gies. Coal slurry transportation lead times between initial explora- past decade—as consumers adjusted should be a viable option. tion and first production in some to rising energy prices—has shown

11 5. Intensified Research and uncertainly and encourage reasonable empowered to speed licensing of all Development: Coal is rhe corner- growth in nuclear power. essential energy projects and to cut stone ot' our energy supply for the short unnecessary delays. Projects next century. Realizing its potential 8. Reduce Regulatory and Judicial would not he relieved of the respon- for conversion to synthetic liquid Delay for Priority Knergy sibility to meet all licensing, safety and gaseous fuels will require in- Projects: Because of long lead and environmental requirements. But creased government funding to he times required to bring major new they would he spared endless ap- undertaken in cooperation with in- energy proiects into production, the peals, litigation and delays imposed dustry and universities. A critical Executive Branch and the by. minority interests. Important en- objective should be economic pro- Congress should implement a well- ergy proiecis should stand or tail on duction of transportation fuel from founded concept conceived in the their merits and not he deteaied by coal to substitute for imported oil. late ITOs called the Energy Mobili- resiulatorv or judicial delav. In addition, adequate research and zation Board—a federal entitv development funds should also be committed for conservation, renewable energy sources, and advanced TWO ENERGY SCENARIOS oil and ga.s exploration and production techniques. THROUGH THE YEAR 2000: A Choice 6. Regulatory Reforms for Electric Power: Electricity is The United States can follow two tive energy sources more swiftly very useful for maintaining long- possible roads in its energy strategy into play. Such a program does not term energy security, because it can through the rest of the century. require any major technological be generated from virtually all of our breakthroughs—only commitment domestic energy resources. Yet be- One is to import considerably more by government and individuals. It cause of obstacles and disincentives oil. Over-reliance on imported oil will require that unnecessary govern- they face, utilities have essentially from the Middle East will lead our ment regulatory roadblocks, red tape stopped planning for major new country into a future laden w iih and legal delays be substantially baseload electric power capacity, uncertainty and danger. Without reduced and that energy options be despite the recent increased growth measures to strengthen U.S. energy allowed to stand or fall on their own in demand. Indeed, under the present security, oil imports are likely to ex- merit. And it means that, because of and proposed Federal and state frame- ceed 60 percent of total oil consump- the long lead times required to bring work for electricity regulation, the tion by the year 2(KK). which is just major new energy projects into electricity supply system is moving 12 years away. This in turn will production, that these improvements away from coal and nuclear power. mean that our country will have to in government policy would need to Accordingly, regulatory reforms are come to terms with ever-growing be made soon. needed now to ensure that the U.S. dependence on imported oil—a has a secure and reliable electric burgeoning trade deficit, an even By choosing to produce more do- power system over the long term. weaker dollar, and the possibilities mestic energy, conserve more and of supply cutoffs and much higher rely less on oil imports, we can 7. Reinstate the Nuclear prices. As oil imports increase, the become less vulnerable to a sudden Power Option: The United States United States will have less maneu- disruption in oil supply By exercis- developed the basic technology for verability in international relations. ing that choice, we Americans tan nuclear power and committed itself Even at our current level of depen- protect our national security and to measured growth of this form of dence on foreign oil. a sudden cutoff strengthen our economy. Sot only energy. However, orders for new ot imports would exact a heavy price would the outlook for the nation's nuclear plants have stopped, while in terms of lost jobs, lost income balance of payments be more favor- other nations—such as France and and more inflation. able, hut we would have more con- Japan—are planning additional elec- trol over decisions and events lluu tric power capacity from nuclear power. The U.S. Government needs The second road is to slow or reverse affect our well-hem*:. to resolve the nuclear waste disposal our dependence on oil imports. This problem, establish a streamlined can be achieved by encouraging the one-step licensing process for nuc- exploration and development of new lear power plants, and adopt I S. oil and gas reserves, making consistent policies that reduce greater use of energy efficiency and conservation, and bnrnimu alterna- About This Report

This is the second annual assess- and seminars on electric utilities, ment of America's energy posture by energy trade, research and develop- an ad hoc committee on National ment, acid rain, protection of the Energy Outlook of the U.S. Energy environment, supply/demand, and Association. The ad hoc committee other energy policy issues. was chaired b\ W.J. Bovven. second vice chairman of the USEA and The World Energy Conference (WEC) Chairman of Transco Energy Com- is a 63-\ear-old organization of 75 pany. The ad hoc committee had a countries—North/South. East/West. representative from each member Market/Planned. Industriali/ed/ group except the government agency Developing—devoted to the peaceful group, which had an observer. production and use of energy for the Drafts were circulated to other inter- maximum good of all. Some 20 ested USEA members for comment, committees and study groups deal but full responsibility for this report with global issues involving most rests with the ad hoc committee. or all of the member countries. Some USEA members may disagree These groups meet from iwo to four with part or all of the ad hoc times a year. Every three years the committee's views. WEC sponsors a World Energy Congress that brings together The U.S. Energy Association (USEA) energy leaders and scholars from all is the U.S. member of the World over the world to discuss technical Energy Conference. USEA is a non- papers and exchange views on a wide profit, tax-exempt coalition of about range of energy issues. 100 public and private energy-related organizations and individuals. USEA The material for this report was coordinates U.S. participation in the gathered from a wide variety of World Energy Conference, selects sources: interviews with senior ex- representatives to WEC activities, ecutives in the energy industries and and organizes the U.S. delegation to government officials; analyses and the triennial Congresses. USEA also reports from government agencies, sponsors programs on domestic energy companies, trade associations enerev issues. These include studies and research groups. The Present Situation and Problem of Introduction of LWG i«

~~Yolcht Aklyana Senior Managing Director Tokyo Gas Co., Ltd.~~

~~Dear Conference Participant*,~~

~~Today, I vould like to touch on the present situation surrounding LNG In Japan and its future problem.~~

~~1, Entrgy supply demand situation in Japan~~

~~First, I would lilts to Introduce the energy supply demand record In Japan,~~

~~In fiscal year 1987, final energy consumption in Japan showed a high Increase of 4.8X against the previous year after a long Interval.~~

The reason seems to be recovery of economy based on domestic demand and sharp reduction In energy price. In addition, we can point out the fact that countcrmeasures for energy conservation almost approached the limit and people aim at the comfort and convenience oriented life style as background of these Increase in energy consumption.

On the other hand, looking at primary energy supply situation against such increase in demand, It achieved an Increase by 457.0 million kl oil equivalent or 5.OX compared to the previous year In total. In energy supply sourcewlse, firstly oil which showed continuous decreaae in two fiscal years 1965 and 1986 turned to increase by 5.6X compared to the previous year and kept its share of 57% in total primary energy continuously from the previous year.

As for non-oil energy, due to intensification of competition among energies following oil price drop during these two years. Its increase ratio remained lower level of 4.2X than increase ratio of total primary energy. Among them, nuclear power showed an Increase by U.6X, coal by 3.9X and as to LNC, it Increased by 3.2Z and marked 29.7 million tonnes. - 2 -

~~2. Introduction of LNC In Japan~~

Tht history of LNG trade Is relatively new in Japan and initiated when LNG was introduced for tht first time from Alaska in November 1969 as a joint project between Tokyo Electric Power Company and our company.

One of the direct motivations for introduction of LNG was public corrosion problea which was taken seriously at that time. For this, LNG was adopted as fuel for big scale thermal power generation. At the same time, city gas Industry was on the way for the carolle conversion aiming at establishing the integrated high calorie gaa supply system and thus LNG was welcomed as a new ace In energy supply source.

One more cause which accelerated LNG introduction into Japan at later stage was that through two oil crises in 1973 and 1979, the requirement to overcome the fragility in energy supply structure in Japan which was highly dependent on unstable crude oil supply was keenly recognised.

In these circumstances, LNG held s position aa an Important pillar of countermeasurt for alternative energy to oil and steadily won the role of bast load fuel from oil fuel in power Industry, while in city gas, shift from conventional oil base raw materiel to LNG has proceeded smoothly.

Through these developments, total LNG Import in Japan reached 29.7 million tonnes in fiscal year 1987 and power Industry received three quarters of it or 22.7 million tonnee while city gas received 6.2 million tonnea. - 3 -

~~3. Chant* in LN6 •***•* In Japan~~

~~However, LNG market situation in Japan is now going to change largely.~~

~~1) Existing projects facing renewal of contract~~

As I touched above, LNC in Japan achieved sharp growth aa a primary energy for base load for power and city gas replacing oil of which unstability in supply could not be viped off. LNG projects with large scale and long term contract which were born one after another on such background are now scheduled to face renewal of contract within coning several years following that Alaaka LNG project, the initial one in Japan, renewed and extended its contract recently.

~~2) Change in LNG demand~~

~~Meanwhile, as for the position of LNG in energy market in Japan, demand for base losd now almost resched the limit.~~

First, as to situation in power industry, though I understand Mr, Mituno, executive vice president of Tokyo Electric Power Company will make a comment, nuclear power and coal which have superiority in cost are going to establish the position aa base load source, and LNG is positioned as middle load or peak load aource.

While, in city gas industry, the major three gas companies who are main users of LUG have been proceeding the carolls conversion work and LNG share in raw materials now reached the level of over 801. In addition due to intensification of competition in energy market, now a cloud begins hanging over the gas demand for industrial field which has achieved so sharp growth. 4. Change in environment around LUC and future problem

As above, while situation of LNG market itself is changing, outside environment around LNC ie alao showing a sign to change. Now, while worldwidely energy demand ftarta showing a tendency of revival, as I mentioned at the beginning, also in Japan energy consumption of the previous year showed an Increase by as much at almost 51 after long interval and increasing tendency in energy still continues.

However, LNC Increase in fiscal year 1967 remained at 3.2* following the decreasing tendency in these several years, and LNC share among primary energy renaina at far lower level of 10Z compared to 15-252 of natural gas in Europe and U.S.A. Japan mist keep paying its utmost efforts to try to expand LHG demand from now on.

~~We think that now is the time for us to seriously tackle improvement of LNG price and trade conditions by fully realising those changes in energy market and environment,~~

~~Namely, the most important teak for the moment ia to aim at flexible supply conditions as removal of Take or Pay on one hand and to secure inexpensive and competitive price level,~~

In order to aolve these problems, it seems to be necessary to combine in flexible manner middle and small scale, short and middle term deal which is able to cope with marginal demand or spot deal, etc. with conventional base loed oriented long term and large acale one in LNC introduction from now on.

Above concept is already reflected in recent extension contract for Alaska LNC and additional contract for Indonesian LNG and we think we need to expand a breakthrough step by step for making stiff LNG price flexible by applying these measures to other existing projects.

~~Thank you for your listening. t~~

~~CHMMMM TlIT ATT A *.TT¥<""« f**f~\l T»k.T*—>¥» f. 'ATSTGOOOPASTER THE ATLANTIC COUNCIL aecwGEM SEIONIOUS.'I~~

• % ^AVOTACHESON OF THE UNITED STATES HENRY H FOWLER 1616 H STREET, N.W. • WASHINGTON, O.C. 20006 FAX (202) 737-5163 • CABLE ATCOUN • TELEX 248965 ATCN UR EUGENE v ROSTOW [202) 347-9353 KENNETH RUSH

~~IMU1AMH & FITZGERALD~~

~~LAWRENCE M WOOOS Revised 11 October 1988~~

OWOM I THEOOOREC *cm.us.jn OONALDG AGGER STEPHEN AILES MADELEINE K ALSRIGHT OWAYNEO ANDREAS WILLS C ARMSTRONG MORMANR AUGUSTINE ROBERT 1ATEMAN W TAPLEY MNNETT. JR JAMES H BLUNGTON U.S. ELECTRICITY OUTLOOK LOEANtROWN Emurinii the Future of Electricity's Role MA*KH CUHTIS WILLIAM • DALE w KENNETH cm* In M. Changing EnTirofuneat (HJHtLLEOOOOHEHTV LAWWtllCE t IAOLE1UIIOEW ILOTOH ELLIOTT KOtfltTF flLSWOHTH SHCKWOOOLFAWCETT QIMLOKFOW SCOmCS FMNKUN.JN WMEHT F FMOf HUtE HICHMION OAHONEB uNComaoMOON DONALD LOUCItTIN ALEXANDMM HAIG.JM MMELAC Ill—Ill MARTIN J WLUH1AIIO WUTiRE HOAOLEV CLAMC QIANNM HOf FMAN NOKRT D HOKMATS , J ALLAN HOVEY.JK DV THOMAt L HUOHES COKOELLWHULL I<>*inU»N. Thomas R. Kuhn ISAAC C KIOO.JH LATCKMKLANO JEANEJ KIBKftOTIICK _ . -,. _. . . HENRYAKIMINQEO Executive Vice President JUAMTA M KMPS — ,. —,, , . - minr KHOOM Edison Electric Institute JAMES TLANfy LVMANLLEMWTZEM SOLM uNOwrrz LEONARD H MARKS JAVMA2UR QEORQCCMCOHEE OONALO r MCHE NRT HOSWT s MCNAMARA LAWRENCE C MCOUADE FAVMfTCALF JACK N MEMUTT STEVEN MUUCR THOMAt J MURRM EDMUNDS MuanE QEOROE R. MCKARO HUIARDWMKX EOMUNO D WLLEOMNO JACOUESJ RtlMTEIN Drafted for the U.S.-Japan Energy Policy Consultations ELUOT L RICHAROtON r BI J MULHROIINEON.JR sERNARDWRooERt Hawaii, 16~18 October 1988 HCHAMIAHROEE NATHANIEL SAMUELS 1 ROMRTSCHAET»L JAMES R SCHUilNOER •RENTSCOWCROFT RAYMOND PHH# SHAFER C J SILAS WHJJAME SIMON JOSEPH J WCO SHERWOOD H SMITH. JR HELMUT SONNENFILDT FRANK A SOUTHARD. JR TIMOTHY W STANLEY OEORQEJ STATHAKIS RALPH I STRAUS ROiERTS STRAUSS OEOROE A STRKHMAN LEONARD SULLIVAN. JR

PETER TARNOFF VWLLIAMC TURNER STEPHEN LVUN NOMOMMV MMCTMS 5YIUiif^ll*:t^ OEORQEWSALL MARLAN CLtVELANO CHRISTIAN A HERWR. JR SANFORO N MCDONNELL ADOlPH W SCHMIDT SSLCJ??i!JSl EWMARp W SARRETT EMH.IO G COLLADO JOHN 0 HICKERSON LAURIS NORSTAD CORTIANOT UR SCHUYIER SJJ£H3i"S< ANDREW HiEROWG C DOUGLAS DILLON TOMKIUEFEP SAMNUNN CHARLES M SPOFrORO "i22'"JJ!lt EUOENER SLACK JOHN FERGUSON l» RUTNCLAWSON WILLIAM P ROGERS THOMAS j WATSON JR JOSEPH J WOLF LESLIE S SRAOY RALPH CMFLYNT JAY LOVESTONE ROIERT V RCOSA R JAMES WOOLSEY SOLCCHAKIN ANDREW HEISKELL JOHNJ MCLOY DEAN RUSK ••U.S. llectrioity outlook: insuring The Future of Bleetrieity's Bole in * Changing Environment" remarks hf Thomas Buha, Bxeeutive Tie* Vresident and 000 Bdison Bloetrie Institute before the Atlantic Council of the Umited States Vastin Mauna Kaa Botel, Bawaii Ootobor 17, !•••

I'M grataful to tha Atlantic Council for this opportunity to discuss tha U.S. outlook regarding electric povar. Tha U.S. alactric utility industry is oparating in a shifting economic and regulatory structure. Today I'd lika to highlight what America must do to ansura tha continued reliability of future electricity supplies in this changing environment. Many of the changes affecting U.S. electricity use are being brought about by economics. The U.S. economy witinues to focus on global opportunities to increase competitiveness. Productivity differences between the U.S. and its primary trading partners are diminishing. For example, productivity levels in Europe and Japan averaged 40 percent of the level in the U.S. in 1950, but that gap narrowed to 85 percent of the U.S. level in 1984. To better compete in world markets, many American industries are turning to technologies based on electricity to improve efficiencies and cut production costs. Computer-aided design systems and robotics are helping revitalize traditional manufacturing operations into highly specialized, value added businesses. And for the fast 2 Merging services sector of our national economy, there's no substitute for electricity's efficiency and flexibility to operate sophisticated data automation and telecommunications systems. Other changes in the U.S. affecting electricity use are demographic. America's population is aging and becoming more ethnically diverse. The outlook for electricity needs includes geographical shifts in demand to our south and western regions, and greater reliance on convenience appliances at home. In the workplace and at home, America's dependence on electricity is growing despite a decline in overall energy use. While total energy use grew just 2 percent between 1973 and 1987, total electricity use in the United States increased over 42 percent during the same period. Electricity generation now accounts for 51 percent of all the primary energy use in the United States, excluding transportation. And E.E.I, projects that the heat wave this past summer, coupled with steady economic growth, will push up total electricity demand 4.2 percent this year.

Changes in the economic and demographic outlook are being reflected in structural changes within the electric utility industry. Electric utilities continue to maximize their resources to benefit customers and shareholders. Improved coordination among the nation's transmission networks has increased power transfers between utilities. These coordination sales now represent 16 percent of all power sold to end users. The electric utility structure also is changing as a result of 3 increased regulatory involvement in electricity supply decisions. Rules proposed by the Federal Energy Regulatory Commission vould further alter the regulator and utility relationship by encouraging third party electricity generation. In view of these and other changes, the electric utility industry is pursuing aggressively a number of policy reforms to meet present and future needs. Current changes that the industry is making and proposals for change are driven by broad concerns about the future need for electricity; how it will be reliably met and at what price. Let me today highlight just a few points that must be addressed by a strong electricity policy. First, our nation's electricity policy must promote fuel diversity and develop America's domestic resources. The United States relies on a mix of resources to keep electricity supply reliable and affordable. Here's how the types of fuels used for electricity generation will develop, according to a study by the North American Electric Reliability Council. This year, coal and uranium accounts for 74 percent of electricity generation, natural gas and hydro each account for almost 10 percent, and oil is 4 percent. Geothermal and other alternative energy sources provide over 2 percent of electricity supply.

In 1997, M.E.R.C. estimates show little change in the fuel mix. Coal will continue to provide over half of our nation's electricity supply. Completion of nuclear power plants already under construction will account for most new electric power capacity 4 additions over the next few years. There are challenges to the further development of each domestic energy resource. The future for hydroelectric power is limited primarily to existing sites. Two hundred investor-owned utility hydro projects will be relicensed over the next 12 years. Federal regulators must ensure fair treatment for consumers when reallocating this national electricity resource. Natural gas will continue to play a competitive role in fueling short term generating facilities. It will be especially helpful in meeting peak demand, although long term availability and probable higher prices dictate some caution. Promotion of technologies that allow utilities to build in increments and repeal of legislation that restricted new gas boilers favors greater use of this domestic fuel. Although coal will continue to dominate electricity generation, there is greater awareness within the industry of the need to burn it more cleanly. The current Clean Air Act is working and has significantly reduced sulfur dioxide emissions while coal use has increased. The results show that from 1973 to 1986 while coal use by electric utilities increased by 76 percent, sulfur dioxide emissions from power plants decreased 18 percent.

America must continue this trend. Pursuing technologies that both reduce emissions and raise efficiency is the correct, long-term approach. The United States is on the verge of a breakthrough in developing new coal-powered technologies. Just three weeks ago, the Department of Energy selected 16 projects to share $575 million in 5 federal funding for clean coal technology projects. The Southern Company and American Electric Power, two of our nation's largest coal burning utilities, received almost half of the funds. A partnership of the federal government and American industry will accelerate the technologies' development and its commercialization. Our nation's electricity policy should continue to address other environmental issues. But we must balance our economic and environmental goals. United States participation in international agreements on chlorofluorocarbons and nitrogen oxide signal America's willingness to work with world leaders to regulate emissions on a global basis. Another challenge in developing domestic electricity sources is to restore public confidence in nuclear power. The electric utility industry-organized Institute for Nuclear Power Operations is spurring efforts to achieve the highest level of efficient plant operations while insuring maximum safety. E.E.I, is proud of its role in promoting the new U.S.-Japan Agreement of Cooperation in the Peaceful Uses of Nuclear Energy. The agreement furthers the shared interests of our two countries in advancing nuclear power. Recent federal proposals seek to standardize plant designs and streamline licensing procedures. This indicates that policy makers recognize what's needed to provide long term stability, and to help assure that nuclear power plants are economically competitive.

Our electricity policy also must promote an industry structure that allows for increased competition, but only if that competition 6 benefits customers by providing adequate and reliable electricity at the lowest reasonable cost. Legislation passed in 1978 to encourage conservation has contributed to a significant rise in electricity generation by third party sources. The amount of electricity distributed through electric utility systems fro* non-utility generators has climbed 575 percent since 1979, the year before the Public Utility Regulatory Policies Act was implemented. Non-utility generators now account for 3.5 percent of U.S. generating capacity. Proposals by the Federal Energy Regulatory Commission would likely lead to a further shift in responsibility for electric power generation to third parties. The electric utility industry supports enhancing all power supply options. However, the F.B.R.C. should be guided by some key principles if it must move forward with its competitive proposals. Among the most important principles are that a utility's decision to purchase from an independent power producer must be truly voluntary; that utilities must control non-price factors such as determination of the suppliers* reliability and financial stability; that utilities must be able to build power plants themselves; and that transmission services must be arranged with the voluntary consent of all affected utilities. These principles must be part of any regulatory changes to ensure that competition is fair and workable. Investor-owned electric utilities need the ability and flexibility to fulfill their obligation to serve all customers. The investor-owned electric utility industry is pursuing a strong 7 U.S. electricity policy to develop domestic electricity supplies, regulate emissions in a prudent and efficient Banner, and encourage an electric utility industry structure that serves the best long tern interests of all Americans. Japan-U.S. Energy Policy Consultations Hawaii Conference

~~(October 17, 1988)~~

~~"Three Major Issues Confronting Japan's Electric Companies"~~

~~Watari Mizuno~~

~~Executive Vice President~~

~~Tokyo Electric Power Company~~

~~As you know, since the cease-fire in the Iran-Iraq war,~~

~~stepped-up production by the oil-producing nations has sent the~~

~~price of certain grades of crude oil down to below the US$10 mark. Developments like these certainly make the immediate~~

~~outlook for the energy situation difficult to assess.~~

Even in the Japanese electric power industry, which for the past few years has enjoyed relative stability, we have recently been seeing the beginnings of changes in both the supply and demand situation. I would like now to explain three principal changes that have been occurring.

~~The first of these changes is that demand for electric power has recently been rising at a more rapid rate than expected.~~

Last fiscal year, electric power demand in Japan showed its strongest growth since 1984—fueled by the expansion of domestic demand, it grew at the high rate of 6.3 percent over the previous fiscal year. This robust increase has been continuing during the current fiscal year, with demand growing by 6.2 percent above its year-earlier level during the April-June quarter, which was well above the rate forecast. Demand for power for industrial uses was above year-earlier levels for fifteen successive months up to August this year. Demand for electric lighting, for use in buildings, and for other day-to-day non-commercial uses fell below its level a year earlier because of the temperatures prevailing during August, but nevertheless recorded a firm uptrend, rising by 6.4 percent during the April-June quarter. In spite of unfavorable weather conditions, the maximum electric power supplied during the summer was 121.39 million kilowatts, which represented an increase of 6.17 million kilowatts, or 5.4 percent, over last year, and was an all-time high. I believe the two main causes of this robust demand for electric power are, firstly, the relatively favorable progress of the shift in Japan's industrial structure from an export-led pattern to one led by domestic demand, and, secondly, changes in lifestyles, characterized by stronger desires for comfortable living. This robust demand is not a phenomenon found solely in the field of electric power, but applies to all types of energy, and I understand that this is not confined to Japan, but is also being experienced in the leading industrialized countries of North America and Europe. These changes in the supply of and demand for electric power and other forms of energy make it inevitable that sooner of later Japan review its long-term plan for electric power supply and demand, which at present is still in its initial- study stage. The problems affecting electric power are an important element within global energy problems and are closely linked with the progress of the world economy and of mankind in the approach to the twenty-first century. For this reason alone the problems must be addressed from a long-term perspective with eyes fixed firmly on the future. Security and economy of supply have traditionally been the basic yardsticks in considering the merits of electric power, but in view of political, economic, and social changes taking place both at home and abroad, I believe that in future we will have to pay particular attention to the flexibility of electric power in meeting demand. It will not be enough for Japan's electrical industry just to guarantee security; it must also tackle the more important issue of pursuing adaptability to economic and social changes, or in other words to changes in users' needs. For this purpose we must of course employ the traditional methods of guaranteeing security of supply—through promoting quasi-governmental energy supplies in the form of nuclear power generation and the storage of oil reserves, and diversifying sources of electric power and sources of supply. But in addition it is essential to implement energy-saving measures that conform with the realities of electric-power use, and to adopt a multi-faceted approach that includes the relaxation of the regulatory environment to ensure that the wishes of users are reflected in the system. The establishment of a solid management base is indispensable for ensuring that the electric power industry is able to respond adaptably to circumstances. The second change is the increase in the activities of the anti-nuclear power movement, which poses a threat to stable power supplies. I will only touch on this problem very briefly, as Mr. Akiyama of Kansai Electric Power will be covering it in detail later on. Unlike previous opposition movements, the Japanese anti-nuclear-power movement has sought to spread its activities at grass-roots level, involving urban housewives, young people, and others in a bid to whip up unease among the general population. There are a number of factors behind the growth of the movement. These include the direct effect of the Chernobyl incident on the pollution of foodstuffs; the dwindling of concern about security of energy supplies as a result of the relaxed supply-demand situation for energy; and growing feelings of unease and distrust with regard to current economic, social/ and technological progress and the progress of civilization as a whole. Japan today accounts for 2 percent of the world's population but 5 percent of global energy consumption. It is a major energy-consuming nation and yet is poor in natural resources, relying on other nations for more than 80 percent of essential energy supplies. As I explained earlier, demand for electric power is expected to continue to grow steadily in the future. Thus to ensure security and flexibility of supply it is essential to realize the optimum mix of diversified energy sources, including oil, coal, LNG, and nuclear power. No such mix would be conceivable without the inclusion of nuclear power. Also, in view of the rapid increase in energy consumption by developing countries, I believe that for their sakes the industrialized nations should see it as their international responsibility to bring nuclear power generation—a technology- based rather than resource-based energy source—into efficient practical use, and at the same time to secure supplies of oil for as long a term as possible. Japan's society and economy are strongly influenced by the United States, and for this reason I very much hope to see the United States establishing long-term policies for nuclear power generation. The third change, and this is rather a long-term problem, is the increasing scrutiny being given to the global environmental problems associated with energy use. Through technological advances and improvements in primary energy sources we have succeeded in stopping the deposition of sulfur oxides and nitrogen oxides in the vicinity of power stations, but the global problem of acid rain will be a continuing cause of concern, particularly in view of the expected increase in energy consumption by developing countries. A major problem that has recently begun to be highlighted is that of the buildup in the atmosphere of carbon dioxide given off by the burning of fuels, and the consequent greenhouse effect. At an international meeting held in Toronto in June, representatives of leading industrialized nations studied a proposal to reduce carbon dioxide emissions by 20 percent from current levels by the year 2005. This problem poses fundamental questions as to the advisability of a global energy structure that is centered on fossil fuels, and it underscores the necessity for international coordination in the area of energy policy. I believe that nuclear power generation offers an effective option for a solution to this problem, and will form an integral part of any solution to environmental problems, as it holds a key to the question of how we should structure a combination of future sources of electric power, which must entail the diversification of energy sources. In this context I would add that some 70 percent of the present structure of Japan's sources of electric power is composed of nuclear power, hydroelectric power, and LNG, all of which produce little or no carbon dioxide. This proportion is planned to be maintained at this level or increased in the future. How to realize this goal will be an issue we must tackle. When we devise the best ways of saving energy, I believe that we should not merely economize on energy use, but that it is also essential to adopt economic and technological approaches in seeking new energy-efficiency that makes possible the coexistence of energy conservation and economic development. Amid the increasing demand for energy and electric power, the three long-term issues that I have just described may well aggravate the future supply-demand situation for energy. In times such as these it is all the more vital that we, the economically and technologically advanced nations, bring all our wisdom to bear and improve the substance of our cooperation. Japan-U.S. Energy Policy Consultations Hawaii Conference, October 16-18, 1988 Watari Mizuno Executive Vice President Tokyo Electric Power Company

~~kWh Sales Growth of 9-Utilities by Type of Consumer~~

~~Average Growth Rate Fiscal Year 73/65 75/73 79/75 82/79 86/82 87/86~~

~~Lighting (Residential ) 12-3 6.5 6.4 2.2 4.9 7.0~~

~~Commercial 18.9 7.7 10.1 5.0 8.0 10.3~~

~~Industrial Large 9.6 A 2.0 4.2 A 1.3 0.9 4.2~~

~~Total 11.2 1.6 6.0 0.8 3.5 6.3~~

~~Composition of Electricity Generation by Type of Fuel~~

~~Less CO -oriented Japanese Electricity Generation (%) 2~~

~~9-Utilities TEPCO The U.S.~~

~~616.7TWh 210.3TWh 2,621.9TWh~~

Source: Japan, The Central Electric Power Council ( Electricity Generated including purchased power,FY 1987 ) The Tl s rvgrn vuvvr.v PAT-AMPTTJO iQa*7 CHAHMMN PflESIOENT ANDREW j GOOOPASTER THE ATLANTIC COUNCIL 'jEOHGE M -SEIGNIOIJS ;I VICECIMMMEN EXECUTIVE VICE PNESIOENT DAVID C ACHESON OF THE UNITED STATES HENRY H FOWLER JOSEPH W MARNED JOHN E GRAY U ALEXIS JOHNSON 1616 H STREET, N.W. • WASHINGTON, D.C. 20006 CAROL LAISE WM McCH MARTIN FAX (202) 737-5163 • CABLE ATCOUN • TELEX 248965 ATCN UR EUGENE V ROSTOW 12021 347-9353 KENNETH RUSH TUCASUMR WILLIAM H a FITZGERALO MVEIOMKNT COMMITTEE CHAMMAN LAWRENCE M WOODS SEcncnutr JAMES W SYMINGTON OWECTOm DAVID M ASSHIRE THEOOORE C ACHILLES. JR DONALO G AGGER STEPHEN AILES MADELEINE K ALBRIGHT DWAYNE 0 ANDREAS WILLIS C ARMSTRONG NORMAN R AUGUSTINE NT3CLEAR POWER AND RELATED ISSUES: ROBERT BATEMAN W TAPLEV BENNETT. jR JAMfSH BILUNGTON GEORGE S BLANCHARD THE U.S. OUTLOOK GENE E BRADLEY HAROLD BROWN L DEAN BROWN HARRY F BVRD. JR DANIEL J CALLAHANIII MARK H CURTIS WILLIAM 8 OALE KENNETH W OAM W KENNETH DAVIS RUSSELL E DOUGHERTY LAWRENCE S EAGLEBURGER LLOYD H ELLIOTT ROBERT r ELLSWORTH SHERWOOD L FAWCETT by GERALD R FORD GEORGE 5 FRANKLIN. JR ROBERT P FROEHLKE RICHARON GARDNER LINCOLN GORDON OONALO L GUERTIN AlfXANOER M HAIG. JR Sol Burstein PAMELA C HARNMAN MARTIN J HILLENBRAND WALTER E HOADLEY CLAIRE GIANMNI HOFFMAN Former Executive Vice President ROBERT 0 HORMATS J ALLAN HOVEY. JR Wisconsin Electric Power Co. THOMAS!. HUGHES COROELt. W HULL BR INMAN

ISAAC C KIOO. JR LANE KIRKLAND JEANEJ KIRKPATRICK HENRY A KISSINGER JUANITA M KREPS PETER F KROGH JAMES T LANEY LYMAN L ICMNircER SOL M LIN0W1TZ LEONARD H MARKS JAY MAZUR GEORGE C MCGHEE OONALO F MCHENRY ROBERT S MCNAMARA LAWRf NCE C HCOUAOE FAY MCTCALF JACK N MCRRITT STEVEN MULLER Prepared fop the US-Japan Energy Policy Consultations THOMAS J MURRIN EDMUNDS MUSKS IVestin Mauna Kea, Hawaii GEORGE R PACKARO HILUARO W PAIGE lfi-18 October 1988 EDMUND D PELLEGRINO JACQUES J REINSTEIN STANLEY R RESOR SMMErTJMCE ELLIOT L RICHAR050N PAUL H ROBINSON. JR OLIN C ROBISON BERNAROW ROGERS H CHAPMAN ROSE NATHANIEL SAMUELS J ROMRT SCHAETZEL JAMES R SCHLCSINGER BRENT SCOWCROFT RAYMOND PHILIP SHAFER C J SILAS WILLIAM E SIMON JOSEPH J SISCO SHERWOOD H SMITH. JR HELMUT SONNENFELDT FRANK A SOUTHARD. JR TIMOTHY W STANLEY GEORGE JSTATHAKIS RALPH I STRAUS ROBERT S STRAUSS GEORGE A STRICHMAN LEONARD SULLIVAN. JR JOHN J SWEENEY PETER TARNOFF WILLIAM C TURNER STEPHEN L VAN CYRUS R VANCE HONOftMY IMRECTOn EARLE C WILUAMS GEORGE W BALL HARLAN CLEVELAND CHRISTIANA HERTER SANFORD N MCDONNELL ADOLPH W SCHMIOT MASON WHLRICH EDWARD W BARRETT EMILlO G COLLADO JOHN D HICKERSON LAUP.IS NORSTAD CORTLANDT VR SCHUYLEO WATSON W WISE ANDREW H BEADING C DOUGLAS DILLON TOM KILLEFER SAMNUNN CHARLES M SPOFFORD JOSEPH J WOLF EUGENE R BLACK JOHN FERGUSON III RUTH C LAWSON WILLIAM P ROGERS THOMAS J WATSON JR R JAMES WOOLSEY LESLIE S BRADY RALPH C M FLYNT JAY LOVESTONE ROBERT V ROOSA SOLC CHMKIN ANDREW HE'SKELL JOHNJ MCLOY DEAN RUSK Once again, it is my pleasure to review with you the U.S. outlook on nuclear power. Some of you may recall the report I presented at our meeting in Kawana in April of 1986. At that time I spoke of the erratic pattern of electric load growth in the United States. I also addressed the nature of power plant costs and how these two major factors and their uncertainties had resulted in unusual and non-traditional actions by U.S. utilities. These actions included the avoidance of investment in large generating facilities, such as nuclear plants, the attempts to reduce financial risks by cost-sharing and other means and by seeking regulatory reform. I thought at that time that these factors would continue to influence the U.S. utility industry and particularly the nuclear power industry for some time. Indeed, this has been the pattern in the U.S. since our Kawana meeting. We continue with efforts to control load growth. The emphasis on dealing with the demand-side of the energy equation has, if anything, increased. We continue to seek minimal financial risk with increasing emphasis on cost-sharing. Utilities who must build new generation are planning for lowest capital cost. This criterion favors life extension of existing plants, smaller size new plants preferably fueled by natural gas or oil, or supplies of electricity by new independent, non-utility producers. There are now 108 nuclear units licensed to operate in the U.S. There are 18 more under construction or like Shoreham and Seabrooke completed but not licensed. The licensed plants total about 95,000 megawatts of net summer capacity and those in construction another 23,000 megawatts. A number of these units are not in operation at this moment because of operating or licensing difficulties. Despite these problems, nuclear power provided 19.5% of the total electrical energy used in the U.S. during the month of May, 1988. Nuclear is now second only to coal as our electricity source. Availability and reliability statistics for operating nuclear units show improvement over the past reaching 57.5% in Hay. While much of these disappointing results are due to a few units that remain out of service for extended maintenance or other improvements, the U.S. nuclear industry continues to seek better performance. For example, 34 units were operating at less than 25% capacity the beginning of this summer and that is termed unsatisfactory.

One of the more disturbing items is the increase in operating and maintenance costs of U.S. nuclear plants. In some cases, these costs including fuel expense exceed the costs of coal-fired generation. It is unlikely that nuclear operating and maintenance costs will be significantly reduced in the near future. This does not encourage new nuclear power planning but nuclear cost control programs and expected increases in competitive fossil generating costs may restore the economic nuclear advantage. The U.S. leadership in nuclear power has lost much momentum in implementing this technology due primarily to institutional difficulties rather than technological problems. We hope that the American concerns which have interrupted nuclear power development over the last ten years are not contagious and do not spread to other parts of the world. But we in the United States are beginning to see several indications which suggest that the anti-nuclear fever of the past is receding. One of the industry concerns has been that the U.S. government has not taken more positive and aggressive actions to assure energy supplies and particularly nuclear power options. Recently however President Reagan endorsed the need for nuclear power in his signing of the legislation extending Price-Anderson nuclear insurance protection. The U.S. is of course in the midst of national elections and the two primary candidates have not made energy an important issue in their campaigns. Mr. Bush has however given support to safe nuclear power expansion and Mr. Dukakis has significantly moderated his earlier anti-nuclear rhetoric. It is likely that the next administration in Washington will have to deal with more prominent energy issues and this is likely to favor the nuclear option.

A second industry concern that has worked against new nuclear generation has been the uncertainties of the regulatory process in the U.S. The nature of these concerns has been more and more appreciated by legislators and others. Several proposals are being considered by the U.S. Congress which would change the structure and procedures of the Nuclear Regulatory Commission. Several individual state agencies, such as in New York and California, have arrived at financial settlements with nuclear utiities that give indication of transition to a more realistic and predictable economic regulatory environment. The NRC itself has taken a number of actions which appear to clarify and may expedite licensing proceedings. For example, rules have been proposed which would allow the issuance of a provisional operating license at the time a construction permit is granted. Such "one-stop" licensing has long been sought by the nuclear industry. Other rules proposed by the NRC include procedures to deal with standardized plant designs and criteria for advanced reactor concepts. The Commission's actions on emergency plan programs together with approval of underlying basis by U.S. Court of Appeals provide further definition and remove some impediments that have delayed operation of some completed plants. Nuclear waste issues continue to play prominent roles in U.S. nuclear power concerns. Much has occurred since passage of the Nuclear Waste Policy Act at the end of 1982, the most important being 1988 amendments to this legislation designating a single site in Nevada as the nation's first permanent repository. Actual site characterization work at Yucca Mountain in Nevada is underway. A special committee to address aspects of a Monitored Retrieval Storage facility is engaged in evaluating this concept. As with other components of nuclear power issues in the U.S. the waste matter is not all positive. The Department of Energy has announced a further delay in the repository completion from 1998 to 2003 and the utility industry has expressed its frustration and disappointment with such progress. Anticipation of problems in storage of military nuclear wastes in salt formations in New Mexico has caused the government to delay insertion of waste packages into this completed facility. As the time for building regional low level waste storage nears, much effort is being given to reviewing the need for multiple locations, their design and schedules because of the significant reductions in waste volume achieved by nuclear plants and the political concerns of local areas. The most significant signs of encouragement in the U.S. nuclear outlook are occurring in the area of public acceptance. While supportive public opinion is not the only condition on which a nuclear future depends, it is certainly a necessary one in the U.S. The improvement in public acceptance has been documented by national opinion surveys, and this has been reflected in the news media and by political leaders.

Some of the favorable public view is unquestionably due to the unusual hot dry summer weather experienced in the U.S. in 1988, with attendant concerns for air quality, greenhouse effects and global warming trends. Surveys taken early in this year, however, show more acceptance of nuclear power which was later reinforced by the unusual weather. Even influential, generally anti-nuclear newspapers in the U.S. have began to reflect more positive nuclear opinions. This is evident not only in the prominence given positive nuclear news stories but also in editorial comments. The electronic media has given considerable attention to greenhouse and climate changes and called for reduced combustion of fossil fuels world-wide. It is perhaps not strange that these changes in public perceptions have had a significant contribution from environmental interests. The involvement of those concerned with the long term global environment suggests these issues will not disappear if next summer is cool and wet. This public opinion and attitude change is being acknowledged in the U.S. Congress. During 1988, a number of proposals were introduced in support of nuclear plant licensing, standardization and research. This, as we said earlier, is an election year and it is unlikely that any major legislation enhancing nuclear options will be adopted. Nevertheless, political attention is being focused more sharply on these matters and prospects for an improved nuclear political environment appear brighter than they have for the last ten years.

It may be important to the U.S. outlook to recite a few other items which are influencing current thinking in this country. Decommissioning - Activities continue on demonstrating decommissioning technology at Shippingport and at West Valley. Proposals for decommissioning Pathfinder and mothball ing TMI-2 have been advanced. Financial arrangements in the form of depreciation reserves or trust funds to pay for future costs of decontamination and decommissioning are in place for most nuclear plants. Plant aging - The U.S. population of nuclear plants is older than most other nations' and faces questions of aging effects due to this fact and the 40-year license requirement of U.S. law. Both procedural and technical questions of aging are being given increasing attention. Radon - New public concerns with radioactivity have been raised in the U.S. due to radon gas de tection in residential and business structures. Some of these phenomena ironically are throught to have become significant because of energy conservation practices. Advanced Reactors - Substantial progress has been made in the U.S.-Japan joint efforts on design of advanced light water reactors. Recent emphasis by U.S. utilities has prompted research on smaller size, 600 megawatts or less, plants. A number of people in the U.S. believe that rebirth of nuclear power will come only if there is a basic change in the technology and they call for "inherently" safe designs such as liquid metal or gas cooled reactors. The Department of Energy has recently selected a modular liquid metal design for further funding and a high-temperature gas cooled reactor for weapons material production.

Now all I have said has not resulted in a single order for a new nuclear unit in the U.S. I venture to predict that the many prevailing uncertainties will continue to compel electric utilities in my country to seek means other than new nuclear generation to meet their energy needs in the 1990's. Still, there are the several signs I have described which show changes in government attitudes, regulation, financial risk, waste disposal and above all in public opinion that suggest a brighter outlook for U. S. nuclear power. OUTLOOK FOR NUCLEAR ENERGY IN JAPAN

~~YOSHIHISA AKIYAMA~~

~~Senior Managing Director The Kansai Electric Power Co.,Inc,~~

~~Presented to the Japan-U.S. Energy Policy Consultation Hawaii, 16-18 October 1988 OUTLOOK FOR NUCLEAR POWER IN JAPAN~~

I.The Significance of Nuclear Power Generation A Decision to be Made Toward the 21st Century As we move toward the 21st century, we, living population on earth, are urged to make an important decision on the energy problem. Should we continue to increase nuclear power generation, while more countries in the world are becoming less eager for nuclear energy development? Or should we completely withdraw from nuclear power, discarding all of nuclear technologies and achievements we have built so far?

Historic Significance of Nuclear Power Generation Nuclear power generation is a technology developed by the wisdom of mankind, with a view to freeing us from restrictions of limited natural resources available. I believe the ultimate purpose of the peaceful utilization of nuclear power is to bring this fundamental energy of the cosmos under proper human control through the mobilization of the latest technologies, and thereby, to transform the global society from a resource-dependent into a technology- -based society and eliminate the international disputes or conflicts over natural resources to realize peace in the world community. There has been a steady increase in nuclear power generation, and as of the end of 1987 the world nuclear power generation plants have an aggregate capacity of over 300 million kilowatts and are in operation in 26 countries of the world. Electricity generated by this nuclear capacity is now equivalent to some 7.4 million b/d of petroleum, or 40% of the OPEC production. We must recognize the fact that human beings are enjoying the immense benefits from nuclear power application.

The Two Accidents and the Safety of LWR Unfortunately, however, the two accidents which took place at the TMI and the Chernobyl nuclear power plants gave rise to the movement against nuclear power generation all over the world. The fact is that the two accidents are totally different in character. Light water reactors are designed to secure the "actual" and "practical" safety with the concept of self-control and multiple protection devices. Meanwhile, the Chernobyl reactor is built with a totally different concept of safety, and with no proper self-control and protective measures.

As a matter of course, we learn a lot from the Chernobyl accident, including the human-related aspects of the accident. However as far as the design and construction of light water reactors are concerned, lessons of Chernobyl had already and early been taken into account. We have to note that the anti-nuclear arguments quoting the Chernobyl accident are neglecting these basic facts. The Significance of Nuclear Power from the Global Viewpoint At present, nuclear power development is quite stagnant in many parts of the world in the light of newly emerging anti-nuclear movement. If such a situation continues, the number of nuclear reactors to be newly commissioned into service will drop sharply after the middle of 1990's, when the supply of petroleum is anticipated to become tight against growing demand. It is, therefore, no exaggeration to say that how we address ourselves to the problem of nuclear power now will play a decisive role in stabilizing the supply and demand situation of total energy in the 21st century. In this context, we are required to evaluate the nuclear power from the long-term and global point of view, and reconfirm its present-day significance.

First, the worldwide demand for energy, particularly for fossil fuel, is expected to increase rapidly in the future, with the expanding economic growth and the rising standard of living in the developing countries. I believe it is the responsibility of the developed nations to promote nuclear power and help stabilize the global energy market in the future, because the developed area has technical and industrial base to do so. Nuclear power, as it has little environmental consequences, can also help eliminate the global environmental problems such as the green house effect caused by carbon dioxide (CO?) coming from the combustion of fossil fuel. On the other hand, it will still take a long time before various forms of the "fourth" energy sources come into use in adequate quantity, cost competitive efficiency and safety to match the fission based nuclear energy. By the "fourth" energy sources, I aear. magma power generation, nuclear fusion, space satellite power generation and other exotic forms of energy. When viewed in the time span of decades, we cannot expect much from these exotic forms of energy. Thus if we look at various world issues including the long-term energy problem, the global environmental problem, and the North-South problem, we must reasonably arrive at a conclusion that we can not simply abandon the nuclear technology, this intellectual asset that we, human race, have developed over the past years.

II.What Is To Be Done in the Nuclear Power Development The Policy of Japan Japan has positioned nuclear power as a key energy source in the optimum energy supply structure, and has promoted the nuclear power exclusively for peaceful purposes. We are determined to continue actively to promote the development of advanced light water reactors and to establish an independent closed nuclear fuel cycle. The Establishment of Public Acceptance As the Most Important Task It does not mean, however, that we can work easy way out. In Japan, like other nations, the public has shown a growing concern over the radioactive pollution of living environment and natural foods, and an unprecedented grass-roots movement against nuclear power generation has gained momentum. We are afraid that such a new development could cause a trouble or troubles to the nuclear power plant siting in the future. We are of the opinion that the LWR technology is matured and its cost competitiveness and safety have already been proved and demonstrated. However, when it comes to introduction of any new technology like nuclear-related one, and when you live in a democratic society, you have to obtain the acceptance of such a technology by the general public as well as convincing them of its cost effectiveness and safety. Therefore, it will become a great issue to relieve the uneasy feelings that the public naturally maintains about huge nuclear power technology, and to have the society take it for granted, the established safety record of nuclear power engineering and technology.

This is one of the reasons why we give top priority at present to the establishment of public acceptance and why electric power utilities, government and industrial associations are making every effort to build the organizational setups and stage campaigns to win acceptance of nuclear power by the general public.

What is To Be Done for the Establishment of Public Acceptance Energy saving effort is an important prerequisite for obtaining public acceptance of nuclear energy. We should take an active part in wise and efficient use of energy in the economy and society. At the same time, it goes without saying that we need to improve further nuclear technology and make sustained and steady efforts to run nuclear power plants without any accident. Thorough quality control is essential to establish a higher level of plant safety and reliability. Improvement of educational and training programs for plant operators and general employees to eliminate human errors is also another important dimension of safe and reliable plant performance. Careful studies must be conducted to assess the impact of human factors in the accidents, because the accident at Chernobyl has given us many serious lessons. In the field of technological development, we are making efforts to upgrade and advance LWR technology. Research and development of inherently safe reactors will certainly assume more importance as we can reasonably anticipate more use of nuclear energy in the developing nations in the future. Close international cooperation is another lesson we obtained from the Chernobyl accident. As far as safe nuclear plant operation is concerned, the nuclear reactor operators of the world get together and plan to form the World Association of Nuclear Operators (WANO). The electric utilities of Japan are also making preparations to set up an Asian center of WANO in Tokyo, in cooperation with the counterparts in the Asian region. I think that it has also become necessary to promote international cooperation for enhancing the public acceptance of nuclear energy. We should contemplate, for example, an information exchange program about the socio-psychological aspects in promoting public acceptance, and an international consulation to build consensus on the nuclear problems on the international plane.

It is my honest argument that today is a very critical time to make a definite proposition for us and for our future generations to continue to develop and improve nuclear power technologies and the nuclear industry which mankind has so far put many resources to establish. Let me give you my answer to the questions I raised at the beginning. We are determined and prepared to go along with positive nuclear program for light water reactor development. I may reiterate that this is the option we have in order not to leave a source of energy embarrassments to the future generations. Ill.Conclusion Japan and the United States have maintained very close cooperation in the field of nuclear energy. Revision of Japan-US Co-operation Agreement on Peaceful Uses of Nuclear Energy, a new basis of this co-operative framework, came into effect this July. The revision is of great significance as it helps develop the Japan-US partnership in the field of nuclear energy development and application. Here, I express my sincere gratitude for your assistance in bringing the revision of the agreement into effect. The United States is the most advanced nation in the field of nuclear power technology and the biggest nuclear power generating country. In closing my presentation, I would like to express my sincere hope for your understanding and assistance to Japan as we promote the development of nuclear power. ANOREWJ GOODPASTEB 1 HE ATLANTIC COUNCIL OEOHGEMSEIGNIOUS.' VKCOMWMEN OP TUP 1 TUITPn ^TATPS; EXECUTIVE VICE PHESOEWT DAVIDC ACHESON UK I HE UNITfcU 3IATh5 JOSEPHW HARNED HENRY H FOWLER ^EXISSSHNSON 1616 H STREET, N.W. • WASHINGTON, D.C. 20006

CAROL LAISE FAX (202) 737.5163 • CABLE ATCOUN • TELEX 248965 ATCN UR WM MCCH MAHTfN EUGENE V ROSTOW (202) 347-9353 KENNETH RUSH TMCAMMER WILLIAM H G FIT2GERAL0 OEVCLOMKNT COMMtTTtE CHAMMAM LAWRENCE M WOODS SECKTMY JAMES W S'MWQTON DMCCTOM OAVIOM. ASSHME THEODORE C ACHILLES. Jl- DONALD G AGGER STEPHEN AILES MADELEINE K ALBRIGHT DWAYNEO ANOREAS ;£££H^T£ OIL, COAL, AND BELATED ISSUES ROKRTIATEMAN W TA.PIEY KNNETT JR jAMtG M (HXINGTON GEORGE S (UVKHARO GENEE.MUDLEV HAROLD IROWN L DEAN MOWN HARRY F BVRD.JR DAMELJ CALLAHANW MARK H CURTIS WH.UAMI DALE KENNETH W DAM W KENNETH DAVIS RUSSELL E DOUGHERTY LAWRENCE S EMSLHuRGER LLOVO H ELLIOTT ROBERT F ELLSWORTH SHERWOOD L FAWCETT GERALD RFORO GEORGES FRANKLIN.JR ROKRTF FROEHLKE RICHARD NOANONER LINCOLN GORDON DONALD LGUERTW ALEXANDER M HAH3.JR . MMCLA C HARRIMAN UV MARTIN J HH.LENWUNO WALTER E HOADLEY * CLAIRE GIANMNC HOFFMAN „.„. _ _ ROKRT DHORMATS mUlUI C. J ALLANHOVEY.JR THOMAS L HUGHES

N N IHWlM H farmer Vice President of Corporate Planning JOHN N IHWlM H ^^ •SAALANEKMKLANC CK100.JDR Gtilf Oil Company JEANEJ KMKMTRICK HENRYAKISSmOELANEKMKLAND R * JLMMTAM KREFS PETER F KROGM JAMES TLANEY LYMANLLEMMTZER SOLM UNOWIT2 LEONARD H MARKS JAVMAZUR OEOROEC MCQHEE OONALDF MCHENRY ROMRTS.MCNAMARA LAWRENCE C MCOUAOE FAYMETCALF JACK N MCRRITT STEVEN MULLER THOMAS J MURRIN Drafted for the U.S.-Japan Energy Policy Consultations

JACQUES J REINSIEIN Hawaii, 16-18 October 1988 STANLEY R RESOR EMMfTTJ RICE ELUOT L RICHARDSON MULH ROHNSON.JR OUNC ROMON •ERMARDW ROGERS H CHAmANROSE NATHANIEL SAMUELS J ROMRTSCHAETZEL JAMES RSCHLESMGER •RENT SCOWCROFT RAVMON0 'ML# SHAFER C J SILAS WILLIAM E SIMON JOSEPH JSUCO SHERWOOD H SMITH. JR HELMUT SONNENFELOT FRANK A SOUTHARD. JR TIMOTHY W STANLEY OEOROEJ STATHAKIS RALPH I STRAUS ROtERTS STKAL4S GEOTCC A STRICHMAN LEOMARO SULLIVAN, JR JOHNJ SWEENEY PETER TARNOFF WILLIAM C TURNER STEPHEN L VAN HOMOWMV DMfCTOm CYRUS R VANCE GEORQE W tALL HARLAN CLEVELAND CHRISTIAN A HERTER JR SANFORD H MCOONNELl AOOLPH W SCMWOT EARLE C WILLIAMS EDWARD. W BARRETT EMH.IO G COLLADO JOHN D HICKERSON LAURIS NORSTAO CORTLANOT VR SCHUYLEB MASON WK.LP5CH ANDREW H iERDING C DOUGLAS DILLON TOM KILLEFER SAM NUNN CHARLES M SPOFFORD WATSON W WISE EUGENE R BUCK JOHN FERGUSON IK RUTHC LAWSOV WTUIAMP ROGERS THOMAS j WATSON JR JOSEPH J. WOLF LESLIES BRADY RALPH CMFLYNT JAY LOVESTONE RO1ERTVROOSA R JAMES WOOLSEY 5OL C CHAmiN ANDREW HEISKELL JOHN J MCLOY DEAN RUSK It's always a pleasure to meet with this stimulating and challenging group, and , as usual, Mr. Gray has asked me to give a comprehensive and thought- provoking paper on Oil and Coal Issues in an allotted tijne of ten minutes. I'll try. Certainly the major oil issue is,What price levels can we expect over the coining years? Today there are two schools of thought on this issue: one holds that world oil prices will start to increase steadily in the early 1990's, and the other holds that such increases will not occurr until the late 1990's or beyond. Interestingly, a number of major oil companies are in the latter group. I concur with the second group. My starting point is to examine possible production levels in 1995. If by 1995, all of the OPEC and Middle Eastern producers, except Saudi Arabia increase their production to their highest historic levels, the 1979 levels, and if the Saudis increase production proportionately over present levels, the resulting production would be 28.4 million barrels per day. World consumption would be 65.4 million barrels per day, representing an average annual growth rate of 2% over the eight year period. This would appear to be a high enough OPEC production rate to trigger significant price increases. But I think such price increases are not likely for several reasons: •1. In that situation the Saudis would still have 3 to 4 million barrels per day of unused capacity. They would be likely to use it to moderate price levels since this conforms with their policy of minimizing economic disruptions and deferring the development of alternate energy sources in the consuming nations. 2. The 1\ growth rate in oil consumption would be a relatively high one, resulting in high import bills in the consuming 2. nations, causing them to increase conservation, fuel switching and domestic development. 3. Last year Iraq, Iran and Abu Dhabi announced aggregate additions to reserves of 132 billion barrels, a 22% increase in total world reserves and the largest in two decades. Iraq's reserves are now reported at 100 billion barrels, second only to those of Saudi Arabia. While this number may require confirmation, it is based on twenty years of exploration and deliniation and there is little doubt that Iraq has massive untapped reserves in giant fields. With the cessation of the war, Iraq and Iran will be anxious to increase production and exports of oil to pay off war-related debts and to build their economies. Oil companies, faced with diminishing prospects in the U. S. and elsewhere will be interested in working in those countries, and consuming nations will encourage their exports as a means of moderating price levels. There is little question but that in time oil prices will rise significantly, but this could well be deferred until the late 1990's or beyond. The Chevron Corporation estimates that OPEC could hold the price near $15/BbL for ten years, and below $30/Bbl for up to 20 years. The growing economies of Russia, China and India will result in increased oil demand, but they will also require a lot of hard currency so those countries will try to restrict energy imports. A second oil issue is, How long can we expect to have significant quantities of oil available? The Chevron Corporation estimates that the world can sustain oil production at the rate of about 65 million barrels per day for the next 100 years. This would require rising prices to accomodate the increasing costs of producing undiscovered conventional resources, enhanced oil recovery, heavy oil production and recovery of oil from tar sands. 3.

A reasonable estimate of undiscovered recoverable conventional oil reserves is in the range of 350 to 430 billion barrels. When combined with the presently proven reserves of 890 billion barrels, the total reserves would sustain a 65 million barrel a day production rate to about the middle of the next century. In actuality, production would be at progressively lower rates, but for a longer time period. The production of these undiscovered reserves would put upward pressure on prices since today the cost of finding and producing the average incremental barrel is above market prices and will continue to increase because of exploration in smaller fields and in remote and high cost areas. Chevron further projects that the oil supplies in the latter part of the period will be derived from enhanced oil recovery, and heavy oil and tar sands. These can be economically produced at prices of $25-40/Bbl and $35-50/Bbl respectively, in 1987 dollars. While such long range projections are highly speculative, they do indicate significant quantities of oil will be available and at manageable prices for many decades to come. The combination of declining oil prospects in the U. S., soft markets and the need for large investments and advanced technology to develope new resources is leading to major restructuring of the oil industry: - There have been numerous mergers of oil companies, both large and small. This will continue. - Export producers such as Kuwait and Saudi Arabia have purchased equity in large downstream operations in the U. S. and Europe to obtain assured outlets during soft markets. - U. S. companies have restructured assets: Texaco sold a half interest in its eastern refining and marketing to the Saudis, Sun Oil has spun off its domestic production operations to its shareholders, Exxon has purchased $10 billion 4.

worth of its stock, or 22% since 1983. - Companies with oil subsidiaries are selling their reserves and production to other oil companies, wh often find this cheaper than exploring for new reserves. - U. S. independents are merging and looking overseas for exploration prospects where the potential is more attractive. - The international oil companies have established major exploration activities in China and are likely to do so in Russia. - The British government has privatized its oil and gas operations, but the Canadian government has established a national oil company. It is likely that such restructuring will make advanced petroleum technology more readily available in areas where there are attractive resource prospects. It is also likely that there will be a growing seperation between domestically committed upstream and downstream operations. This will mean that refining and marketing will move toward a more independent and economically viable position. I doubt that importing nations will let product imports from crude exporting nations rise to the point where the domestic refining industry is threatened. An emerging issue in the United States will be the rapidly rising cost of oil imports. For 1987 the U. S. ijiported $50 billion worth of oil, or 46% more than in 1986 and equal to one-forth of the national trade deficit. By the mid 1990*s oil imports could comprise half of the trade deficit, even with increased conservation. Such an import cost would severely strengthen the pressures in the U. S. for trade protectionism. However, rather than to raise import barriers for other goods, it may well be more economically sound to impose a tax on oil imports, or on domestic gasoline consumption. U. S. current federal and average state gasoline taxes are $0.24 per U. S. gallon, ranging from one-fourth to one-tenth of the taxesin major industrial countries. An additional fifty cents per gallon tax would raise $50 billion annually of additional revenues, preferentially reducing imports and the trade deficit. I believe that some kind of oil tax will be initiated as the import burden grows. When OPEC production approaches capacity and oil prices start to rise dramatically, intensified conservation efforts will be needed, as well as a domestic oil tax. If effective conservation actions can be initiated before that time, the advent of large and sustained price increases can be postponed appreciably. However, it is politically much more difficult to encourage conservation in anticipation of a price rise rather than in reaction to one. The impact of energy conservation is demonstrated by noting that in the U. S., if energy use had continued at the 1972 rate, by 1986 the nation would have used the equivalent of 9 million barrels a day more in all forms of energy, or a 25$ increase. The major cause of such conservation was the dramatic increase in oil prices during this period. Yet legislation and regulations, such as the minimum miles per gallon requirement for new cars also jaade material contributions. In the future, additional energy conservation legislation, regulations and taxes will be needed. The issue is not the merits of conservation, but is finding ways to conserve effectively without limiting economic growth or punishing specific sectors of the economy.

Now let's turn to some coal issues, but first for some perspective on coal. In 1986 the worldwide production of coal accounted for 28% of total world energy production, ranking second only to oil. During the ten-year period, 1976-1986 the growth in coal production, when measure in total energy units, was the highest of the major energy sources. Its relative growth, however, moderately lagged that of natural gas and hydroelectric power and was dramatically lower than that of nuclear power. The growth in oil production over this period was essentially zero. 6.

The world's proven coal reserves are several times larger than the oil reserves, and it is likely that the ultimately recoverable coal resource base will sustain or exceed this ratio. At current production levels the world's presently proven oil reserves would be exhausted in some 44 years and coal reserves in 205 years. It is obvious that over time our reliance on coal as an energy source must increase, but this is not without its problems. Almost two-thirds of the world's current proven reserves are located in just three countries - the United States, the U. S. S. R. and China. Another 24% are in the four countries, West Germany, South Africa, Poland and Australia. The remaining 101 is dispersed through many countries. Thus, in time, coal importing countries may be faced with an uncomfortably limited number of supply alternatives. This concentration of reserves has led to an increasing number of joint coal ventures, particularly in the United States and, to date^involving chiefly foreign oil and coal companies. As coal becomes a relatively more important energy source, such industry restructuring is likely to increase. Coal is more expensive to transport and handle than oil. This problem can be accomodated by converting the coal to synthetic oils, but at significant penalties in increased investment and costs. Interest in such conversion processes was high in the late 1970's and early 1980's, but virtually disappeared with the dramatic fall in oil prices in the mid 1980*s. Today in the U. S. there is only one coal liquefaction pilot plant operating, at Wilsonville, Alabama.Recent improvements achieved at that plant have lowered costs by a reported 60%, making the process economically attractive at a crude oil price of $35.00 per barrel. Additional nominal efforts are continuing in in-situ coal gassification,both as a direct *ource of combustible gasses and as a source of synthesis gas for further conversion to transportation fuels. I do not believe that the deferral of the development of coal conversion technologies presents a practical problem, since the transition from prime reliance 7.

on oil to other energy sources such as coal will take many years. But the resulting price fluctuations will undoubtedly be more dramatic, resulting in political pressures. Let's hope that when such pressures arise we have the sense not to repeat the mistake of establishing a Federal Synthetic Fuels Corporation, as it was set up in the late 1970's, to serve as the fulcrum for commercializing new fuel and energy technologies. So far I've covered the good news on coal. The bad news is, as you all know, its environmental hazards. The two most significant, and intransigent, of these are the acid rain problem and the greenhouse effect. For acid rain, the regulatory pressures focus on coal fires power plants, since many types of coal contain sulfur, which is transformed to sulfur dioxide during combustion of the coal and this material in turn can combine with moisture in the air to form sulfurous acid, a relatively strong acid. However, the combustion of any carbonaceous material also results in the production of nitric oxides, which can for nitric acid - a strong acid, and in the production of large amounts of carbon dioxide, which can form the relatively weak carbonic acid. Thus, automobiles, airplanes, railroads and wood stoves also may contribute to the formation of acid rain. As was found in Los Angeles during the smog investigations there, small amounts of air contaminates, when catalyzed by sunlight and other natural phenomena, can produce unexpected and undesirable results. It would indeed be a severe imposition on the electric power consumer if major costs were imposed on coal fired plants, without more credible information that this is in fact the solution to the problem.

Since acid rain does cross political boundaries, it is logical that international programs be established to definitively determine what causes acid rain and how. To be efficient it might be best to have such programs conducted on a bilateral basis, involving pairs of nations, with annual conferences 8.

to review and discuss progress. The record drought in North America this past summer resulted in considerable speculation as to the role that the greenhouse effect might have had. This effect is the trapping of heat in the earth's atmosphere caused by increasing concentrations of carbon dioxide in the atmosphere due to the combustion of gas, oil, coal and wood. As energy dependence on coal increases, this effect will accelerate since coal produces more carbon dioxide per unit of heat released than do the other fuels. It is unlikely that the greenhouse effect was much of a factor this past summer, since this effect will become significant only over a long period of time as carbon dioxide levels continue to increase,and global temperature changes are very likely the result of a number of factors. Between 1880 and 1940 average global temperatures rose about 0.6 degrees Celsius, but then steadily decreased a total of 0.2 degrees Celsius between 1940 and 1978. Over the past ten years they have maintained an average increase of about 0.3 degrees Celsius over the 1978 level, or only 0.1 degrees above the average level for 1927 to 1964.

The typical portrayal of the greenhouse effect is of an increasingly hot and arid climate, accompanied by melting of the polar ice with a resulting rise in the sea level. Yet the greenhouse effect will result in increased amounts of water, carbon dioxide and heat - conditions conducive to the growth of rain forests since plants convert, through the photosynthesis process, carbon dioxide and water to food, using light as the energy source. So the resulting climate might well be a warm wet one with increasing amounts of vegetation and with increased cloudiness moderating the temperature rise. Perhaps the best controls are reforestation, achieving high levels of efficiency in the combustion of fossil fuels, especially coal, and renewed emphasis on nuclear power. As with acid rain, the greenhouse effect is an area where our knowledge is inadequate and where international research is called for. A United Nations meeting has been called for 1990 to draw up 9. the first international agreements on climate change. Effective results will require unprecedented global cooperation. Mr. Chairman, this concludes my remarks. US-Japan Energy Policy Consultations

~~Oil and Related Issues~~

~~Kenzo Saikawa Managing Director Nippon Oil Company, Ltd.~~

Westin Mauna Kea, Hawaii 16-18 October 1988 In the past, the Japanese oil industry has been represented in this group by Kiyoshi Yamamoto of the Nippon Oil Company. I am pleased to be able to take Mr. Yamamoto's place at these consultations beginning with today's meeting.

1. Demand for Oil in Japan The total amount of primary energy supplied in Japan during the last fiscal year (1987) jumped sharply, increasing 5.0% over the previous year. This change was especially large considering that in the previous two years the supply had remained nearly constant, with a 0.4% increase in fiscal 1985 and a 0.7% decrease in fiscal 1986. Last year's 5.0% increase was nearly the same as the economy's real growth rate of 4.9%, so the elasticity coefficient with respect to the GNP was 1. This is a significant change from the previous five years, when the average elasticity coefficient had been 0.4. The demand for oil grew apace, increasing by 4.8% in fiscal 1987. This year has been even better for oil, with an increase of 10.7% in the first quarter of calendar year 1988 and 9.7% in the second quarter. At present, we estimate the increase for fiscal 1988 to be about the same as for last year, with an 8% increase in the first half and a 3% increase in the second half, giving a yearly average of 5%. This is a large jump over the government's initial supply plan (a 1.6% increase). Fiscal year 1985 1986 1987 1988 (forecast) Real GNP (%) +4.4 +2.6 +4.9 +5(?) Primary energy (%) +0.4 -0.7 +5.0 Elasticity coefficient 0.1 — 1.0 Oil (%) -4.3 -0.2 +5.6 (Oil's share of total primary energy, %) 56.3 56.6 56.9

The demand has risen for every type of oil. This increase has been especially noticeable with middle distillates such as kerosene (5%), diesel gas oil (8%), and fuel oil A (9%), though the demand for gasoline, fuel oil C, directly burned crude, etc., has also grown. While some view the increase in the demand for oil as no more than a temporary phenomenon brought about by Japan's policy of expanding domestic demand, I believe that the country's prosperity will continue for some time. For this reason, I expect the demand for oil during the next fiscal year to increase by about 2 or 3%.

2. Implementation of Deregulation Program I am sure that you are aware of the deregulation program announced by the Japanese government in June 1987 to stimulate the domestic oil industry. This program is now being implemented according to the following schedule: (1) Deregulation of petroleum product imports (January 1986) (2) Flexibility of plant permits (June 1987) (3) Elimination of gasoline production quotas (by March 1989) (4) Elimination of government regulation of service station construction (by March 1990) (5) Elimination of government regulation of crude oil processing (by March 1992)

Effect of Deregulation of Petroleum Product Imports With the deregulation of the import of petroleum products, the ratio of product imports to the overall oil demand in Japan jumped to 25% in fiscal 1986 and to'31% in fiscal 1987. In this area, Japan has surpassed the major countries of Europe and North America. The increase in imports of kerosene and diesel gas oil has been especially strong. The effect on the domestic market has been to create a trend toward oversupply and to drive prices down. Ratio of Imported Products

~~Japan U.S.A. France W. Germany U.K. 31% 8% 29% 28% 10%~~

~~Calendar year 1987 (Japan: fiscal year 1987)~~

Elimination of Gasoline Production Quotas Quotas on the production of gasoline are scheduled to be eliminated by the end of March 1989, but there are fears that after the quotas are ended an oversupply will cause a worsening of market conditions. Gasoline is the only profitable type of oil for Japanese oil companies. If the market for gasoline should collapse, it would have a serious effect on those companies' profits. The oil companies have already begun eliminating excess refining facilities and taking other measures because of continuing deregulation, including the elimination of production quotas. Further streamlining is still needed, though.

~~Topper Capacity Reduction March 1983 5,940 (-967) March 1984 4,973 (-421) September 1988 4,552~~

Units: thousands of barrels per day 3. Stockpiling The need to stockpile petroleum has long been recognized internationally. In Japan as well, the fragility of our country's energy supply structure has led us to take concrete steps in that direction. The government has plans to increase its reserves to the 90-day supply mandated by the International Energy Agency, and this year (fiscal 1988) those national reserves have increased by 3 million kiloliters to a total of 30 million kiloliters. The schedule is to continue to increase the stockpiles by 3 million kiloliters a year until fiscal 1995, when the total will reach 50 million kiloliters (315 million barrels). On the other hand, beginning next fiscal year, commercial stockpiles will be reduced gradually from the presently mandated 90-day supply until they reach a 70-day supply five years from now (in fiscal 1993). The reasoning behind this shift of emphasis to the national reserves is that the government must have control over the stockpiles in order to respond flexibly during a crisis. The national reserves will be stockpiled in ten locations throughout Japan. Some of these sites have already been completed and are now in operation. March 1988 March 1989 National reserves 27 million k/ 30 million k/ (48 days) (53 days) Commercial 49 million kl 48 million k/ reserves (92 days) (90 days) Total 76 million k/ 78 million k/ (140 days) (143 days)

~~March 1996 National reserves 50 million k/ (90 days) Commercial 38 million k/ reserves (70 days) Total 88 million k/ (160 days)~~

4. Independent Development For Japan, a country with virtually no petroleum resources, the development of independent sources of oil by Japanese industry and government is a vital part of our national oil strategy. Nippon Oil and many other oil companies are actively involved in such development projects, which the government is supporting as well. Oil-related expenditures from the national budget amount to ¥387 billion; of this, ¥95 billion is targeted at oil development. However, the results obtained thus far have been less than satisfactory. Last year, only 300,000 barrels per day of the oil imported to Japan were independently developed by Japanese companies—about 10% of total crude oil imports. Further- more, because of recent low crude oil prices and uncertainty about what lies ahead, the independent development of sources of oil is becoming more and more difficult. In addition to development activities, the purchase of oil fields overseas is also being studied.

Conclusion The constant wish of the Japanese oil industry is for stable crude oil prices. We believe that even though we will continue our development projects, the maintenance of an appropriate price level will remain essential. PKESIOENT ANDREW J GOOOPASTER THE ATLANTIC COUNCIL GEORGE M SEIGNIOUS n WCECHAMMCN EXECUTIVE VICE PRESIDENT DWDC ACMESON OF THE UNITED STATES JOSEPH IV HABNED HENRY M FOWLER JOHNE OUT U ALEXIS JOHNSON 1616 H STREET. N.W. • WASHINGTON, D.C. 20006 CAROL LAISE WM McCH MARTIN FAX (2021 737-5163 • CABLE ATCOUN • TELEX 248965 ATCN UR EUGENE V ROSTOW KENNETH RUSH (202) 347-9353 TMMUMHt WILLIAM H G FITZGERALD OCVELOMMNT COMMITTEE CHMMMN LAWRCNCE M WOODS SECMTMY JAMES W SYMINGTON OMECTOW OAVIOM ASSHME THEODORE C ACHILLES. JR OONALDG AGGER STEPHEN AHES MAOELBNE K AUWGHT OWAVNE O ANORCAS WILLIS C ARMSTRONG NORMAN R AUGUSTINE STATUS OF U.S. COAL ROSCRTSATEMAN W TAPLEY KNNETT JR JAMES H DUJNG'ON GEORGE* SLANCHARO GENE E. BRADLEY HAROLD MOWN LDCANSftOWN HARRY F SYRD.JR OAMEU CALLAHAN* MAHKH CURTIS WKJJAMS'OAI.E KENNETH W OAM W KENNETH OAVIS RUSHLLE DOUGHERTY LAWRENCE S EAGttiLWOtR LLOYO H ELLIOTT ROMRTF ELLtWORTH 3HCRW000LFAWCETT OERALDR FORO GIOROC 3 f RANKUN JR ROMRTf FROEHLKE RKHAHONOARONER LINCOLN 0OR0ON 0ONAL0LOUERTW ALEXANDER M HMG.JR PAMELA C IIARRIMAH Constance D. Holmes MARTIN J HHUMMND WALTER E HOAOUY CLMRE gUNHM HOffUUi ROMRTOHORMATS Senior Vice President for Policy Analysis J ALLAN HOVCr JR THOMAS L HUGHES National Coal Association CORDELLWHULL

JOHNN IRWINH I1AACC MJO.JR LANCKMOAND JEANEJ KMKMTMCK HENRY A KIMIMKR JUAMTAMKRIPf PETER f KROOH JAMESTUWtV LYMANLLEMMT2ER SOLMUNOtMTZ LCONAROH MARKS JAVMAZUR GEOROE C MCGMte OONALDF MCHENRY ROECRT 1 MCNAMARA LAWRENCE C MCOUAOE Prepared for the US-Japan Energy Policy Consultations FAY MfTCALf Westin Mauna Kea, Hawaii STEVEN MULLER THOMM/MURMN 16-18 October 1988 EOMUNOS MUSKK OEOROCRPACKARn WUJAROWMIOt EDMUND DPfOEORMO .'ACOUESJ RtlMTCM STANLEY R RMOR EMMinjRICE ELLIOT L RICHARDSON

OLJNC ROfMON •ERNAROW ROGERS H CHAPMAN ROSE NATHAMEL SAMUELS J ROECRT SCHAETZEL JAMES RKHLEtMGCR •RfNTSCOWCROfT RAYMONO PHHJP SHAFEP. C JSKAS WHJJAMESIMON JOSEPH J SltCO SHERWOOD H SMITH. JR HELMUT SONNENFELDT FRANK A SOUTHARO.JR TIMOTHY W STANLEY OEOROtjSTATHAKIS RALPH I STRAUS ROECRT S STRAUSS OEOROEA.STRieHMAN LEONARD SULLnMN.jR JOHNJ SWHNEV PETER TARNOFF WUJAMC TURNER STEPHEN LWN HOMOAAAY ONMCTOM CYRUSR VONCE GEOROE WSAU HARLAN CLEVELAND CHRISTIAN A HERTER JR SANFORON MCDONNELL EARLEC WILLIAMS AOOLPH W SCHMtOT EOWARO WSARRCTT EM0.IO G COLU0O JOHN D MCKCRSON LAURISNORSTAD CORTLANDT VR SCHUYLER MASON WU.RICH ANDREW H SCROMG C DOUGLAS DILLON TOMKILLEFER WATSONWWIK CHARLES M SPOFFORO EUGENE R SLACK JOHN FEROUSONIH RUTHC LAWSON WH.UAM P ROGERS THOMAS J WATSON JR JOSEPH J WOLF LCSUE S MAOY RALPH C M FLYNT JAY LOVESTONE ROSEBT V ROOSA R JAMES WOOLSEY SOLC CHAWIN ANDREW HEISKELL JOHN J MCLOY DEAN RUSK It 1s an honor to be asked to participate 1n these very important meetings, to have the opportunity to give you some information about the status of the United States coal industry and to respond to your remarks on U.S. - Japan coal trade.

Coal production 1n the United States will set records for the third consecutive year in 1988 when 945 million short tons will be mined. Most of this, 750 million tons, will be used by utilities throughout the U.S. Coal is the fuel for 57 percent of the electricity generated 1n our country. Far less Is used for metallurgical coal or for industry. We expect that growth 1n the industry will average about 2 percent per year for the next 11 years and that the consumption patterns seen now will continue thru the rest of this century.

The Issues facing the U.S. coal Industry are not production related. Productivity is improving, labor relations are - for the most part - excellent. Production costs are manageable and prices, at the mine, have declined since the early 1980's.

The issues that will shape the future of the coal industry are environmental Issues - the problems of SO2 and N0x emissions, the new issue of CO2 emissions and global warming or the "greenhouse effect".

In the area of SO2 emissions, progress is being made. SO2 emissions from power plants have declined by some 26% since a peak in 1973 while coal use has increased by over 70 percent. This is because utilities are using lower sulfur coal, because controls are required on all utility plants that have begun operation since the early 1980's. Utilities in the United States must meet the requirements of our Clean Air Act and are doing so. We firmly believe that new and more stringent legislative controls, that would force utilities to meet tight deadlines and depend on old technologies are unnecessary and are not warranted. Emissions will continue to decline with no further Congressional actions. We can say that we expect both S0£ and N0x emissions to continue to be reduced due to advances being made by the Clean Coal Technologies program. This research and development program, partially funded by the U.S> government and heavily supported by utilities (separately and collectively through such organizations as EPRI) and by the coal industry, is resulting 1s the development and deployment of new technologies from precombustion to post combustion clean up which mean greater removal of both SO2 and NOX. Much of this R&D effort is directed at retrofit technologies for plants already operating and as existing plants are repowered or life extended, as new capacity Is put on line (capacity that is likely to be in small increments of 50 - 250 MW), these new technologies will be employed. What is important to remember 1s that this will take time to accomplish, a fact often forgotten by our political decisions makers and their advisors.

A bigger challenge facing the coal and the utility industries is the concern over increases in COg and the alleged gradual warming of the world temperature. The U.S. coal industry realizes that, in the eyes of the general public there is at least a problem of perceptions although we certainly do not believe that their is scientific evidence to support the contentions of those that have raised this Issue. Nonetheless we do support suggestions that this issue must be carefully analyzed on a scientific basis for causes and effects, and 1f necessary to find appropriate, cost effective, solutions.

As has been pointed out by many participants in the meeting, solution for both the add rain problem and the Issue of global warming must be international in scope. These solutions will certainly include conservation and an increase in the world wide use of nuclear power. However, the solutions must also embrace a substantial increase in the use of coal as coal is the world's greatest energy resource. Both industrialized and developing countries are dependent upon coal - often times an indigenous fuel - to supply the basis for energy security and economic growth. My association's President, Mr. Richard Lawson, is today giving a speech in Tokyo, at the International Committee for Coal Research conference and is suggesting that the U.S. - Japan - Australia - Canada and the other ICCR countries form a cooperative group to look at coal and the environmental questions on coal use.

To this end -- to practically discuss the need for energy and the need to balance the goals of energy security, economic growth and environmental protection, while taking maximum advantage of all fuels, coal, oil, natural gas and uranium, we would support yesterdays suggestion that a Pacific Rim conference be organized to address the inter-relationships of these issues. In fact, we understand that Japan is planning an energy conference of all Pacific Rim nations in early 1989 and we would suggest that, if not already planned, such a discussion could be included on the agenda.

On the trade issues, Mr. Kakizawa has discussed the expected growth in coal demand and in coal trade. We agree with his observations that coal exporting countries are taking every opportunity to reduce costs, to become more price competitive. This is certainly the case in the United States, although we cannot expect -- and Mr. Kakizawa does not expect -- that prices will be below costs of production over the long term as has been the case for the past few years.

In our country there are still problems to be solved, especially as Mr. Kakizawa pointed out, in bringing down the costs of inland transportation. But, unlike 2 or 3 years ago when our coal trade relations were on a very rough portion of the road, be believe that they have now returned to a smooth path, both between industry and between our governments. This has required better understanding and a cooperative effort on both our parts. As your economy grows and your coal needs change, I am sure that you will find U.S. coal suppliers to be sufficiently flexible to respond to your requirements, both in the short and the long term. (Translation) Coaaents on Coal and Related Issues

~~K. Kakizava Senior Managing Director C. ITOH k CO., LTD.~~

~~1. Current Status of World Coal Trade~~

* As the steady growth in the world's econoiy continues, the doiestic coal production of all coal producing countries hate increased, accompanied by the growth is international trade of aetallurgical coal and steaa coal. (7% growth in the first half of 1988 over the saie poeriod of last year.)

1 Japan's coal iaports (81 iillion tons in 1987) represents aore than one quarter of the world's total coal trade (341 ail lion tons in 1987). This Toluae is also steadily expanding in pace with tbe sound growth of the national econoay (it ia 1987).

* Regarding today's international coal supply, the coal productions of the People's Republic of China and Coloabia hate fallen under their targets. Production in Australia has been reduced due to labor disputes, while the supply froa the U.S. and Canada has increased.

* Japan's electric power deaand has deaonstrated a higher growth rate than her econoaic growth (6.3% in fiscal 1887). This, together with planned reduction in doaestic coal production (which has bees reduced froa 15 Billion tons to 10 ail lion tons according to the Phase 8 National Coal Policy), has increased the iaport of coal (B% growth in fiscal 1987).

* The coal price level, which has constantly declined since 1881, hit bottoa in fiscal 1887 and then began to rise again. This trend has been the results of coal production costs in exporting countries which had been reduced to the lower threshold, and consequently iaporting countries were also forced to review the over-all situation. The change in the international exchange rate has also affected the trend. 2. Future Prospects of Coal Supply and Deiand

* Deaand for aetallurgical coal is expected to show steadj growth over the short and intermediate teras, supported by increases in steel production, reflecting the growth of doiestic deaand. There are various points of vie* regarding the long ten prospect, but no clear prediction can be established.

* No rapid increase in deaands for steaa coal can be espected over the short tern due to factors such as reduced oil prices and price competition with LNC. However, in the long tera, steady growth in deaand can be expected du to the continuous growth of electric power deaand.

* Growth of coal deaand is also expected in the developing countries, and in particular, the Asian countries other than Japan, assuring a steady increase in the international coal trade.

* In the coal exporting countries, particularly in those countries where export of coal occupies substantial portion of the coal production, there have been aoveaents toward reducing coal production costs by Beans of scrapping and building of coal aines and iaproving labor relations, especially in low productivity areas. In Australia, aajor doaestic coal companies have once put substancial investaent into coal lines with the anticipation of high growth of coal industry. Soae of these coapanies hav becoae discouraged and have transfered their coal interests to big oil coapanies.

* New environaental issues related to coal such as acid rain and the greenhouse effect are coaing to the forefront and these aay provide adverse effects on the economic coapetitiveness of coal in the future. 3. Comments on U.S. Coals

* Our basic policy in the procurement of overseas coals is to secure a stable and economical supply of coal on a long term basis. For this, we try to diversify supply sources.

* We regard U.S. coals to be reliable and powerful supply sources considering their abundant reserves, long-time established pruduction, and managerial technology, and the flexibility of supply.

* There is new expectations that U.S. coals can be supplied to Japan at a competitive price equivalent to Australian coals. If inland transportation costs can be reduced, as has been duscussed in the past, this expectation will become even more realistic.

* As the U.S. exports approximately only 10% of its 800 Billion ton production, we are interested in its significant export elasticity and potentiality in the future. CHAIRMAN PRESIDENT ANDREW J GOOOPA THE ATLANTIC COUNCIL VICE CHAIRMEN EXECUTIVE VICE PRESIDENT OAVID C ACMESON OF THE UNITED STATES

~~1616 H STREET, N.W. • WASHINGTON. DC. 20006 CAROt FAX 1202- 73? £.163 • CABLE ATCOuN • TELEX .?48965 ATCN UR JVM Ur 202' 3-^-9353~~

~~TREASURER~~

DEVELOPMENT COMMITTEE CHAIRMAN UtWRENCe M W0O05 SECRETARV JAMES W SYMiNGTON OIRECTORS QAvfD M A8SHJHE •HEODOREC ACMILLES JR OONALO G AGGER STEPHEN AILES MADELINE * AtBRfGHT OWAYNE 0 ANOPE.AS WLLIS C 4RMST»On«G NORMAN P AUGUSTINE NEW ENERGY DEVELOPMENT ROBERT BASEMAN W TAPLEV BENNET* JR JAMES M BILLING TOM GEORGE S BLANCNARO GENE E BRADLEY HAROLD BROWN L DEAN BROWN MARftY f 8YRD JR DANIEL j CALLAHAN in MARK H CU°T'S WILLIAM B DALE •CgNNgTM w DAM W KfNNETM DAViS RUSSELL E OOuGMER'v LAWRENCE S EAGLEBURGER LLOVDM ELLIOTT ROBERT F ELLSWORTH SHERWOOD L 'AWCETT GERALD R FORD GEORGE S FRANKLIN JR ROBERT c FROEMLKE PlCHARON GARDNER LINCOLN GORDON OONALDL GUERTIN ALEXANDER M HAIG JR PAMELA C HARA'MAN MARTIN J HILLENBRAND WALTER £ MOAOLEr- CUHflt UIANNINI HOFFMAN ROBERT o HORMATS j ALLAN MOVE* JR IV. Kenneth Davis fMOMAS c HUGHES CORDELL W HULL BR INMAN Consultant jOHNN iRWIN ii ISAAC C KIOO JR Bechtel Power Corporation ,_ANE KIRKLAND j£ANE J KiRKPATRiCK HENRY A KISSINGER JUANlTA M KREPS P£T£R P KROGH jAMES T LANEY 1.YMAN I LEMN1T2ER SOL M LINQWITZ LEONARD H MARKS jAY MA7UP GEORGE C MCGMEE DONALDF MCMENRY ROBCRT 5 MCNAMARA i_»^RENC6 C MCOUAOE FAr M£TCAt.P JACK N MERRlTT STEVEN MULLER THOMAS J MURR1N EDMUND S MUSKtE GEORGE R PACKARD MILLIARD W PAIGE Drafted for the U.S.-Japan Energy Policy Consultation EDMUND D PELLEGRINO JACQUES J REiNSTErN Hawaii, 16-18 October 1988 STANLEY R RESOR EMMETT j RiCE ELLIOT L RICHAROSON PAUL H ROBINSON JR OUNC RO&SON BERNARD W ROGERS H CHAPMAN ROSE NATHANIEL SAMUELS j ROBERT SCMAETZEL JAMES R SCMLESINGER BRENT SCOWCROFT RAYMONO PHILIP SHAFEH C J SILAS WILLIAM E SIMON JOSEP* J SiSCO SHERWOOD H SMITH jR HELMUT SONNENf ELDT CRANK A SOUTHARD JR riMOTMY W STANLEY GEORGE J STATHAKiS RALP« STRAUS ROBERT s STRAUSS GEORGE A STRICMMAN LEONARD SULLIVAN JR JOHN J SWEENfr

STEPHEN L VAN HONORARY DIRECTORS CYRUS R V*NCE GEORGE *• BALL HARLAN CLEVELAND CHRISTIAN A M6RTEH jR AOOLP« W SC.HMI0' EARLE C WILLIAMS EOWARO W BARRETT IMILIOG COLLADO JOHN 0 HtCKERSON CORTLANDT vB Si^w MASON WILLRICH ANOREWH SERD'NG ( OOuGLAS DILLON SAM NUNN CHARLESM SPOfCO WATSON W WISE EUGENE R BLACK JOHN FERGUSON in RUTH C LAWSON WILLIAM P ROGERS THOMAS ^ WATSON 1 JOSEPH j WOLf LESUf S BRAD* RAiPHt, M FLYNT JAY LOVESTONE ROBERT v ROOSA a JAMESWOOLSC SOL C CHAIKIN ANDREW H61SKELL JOHNJ MCLOY OEAN RUSK 13 October 1988 Page 1

MKW KMKKGY DBVgLOPMBMT V. Kenneth Davis U.S.-Japan Energy Policy Consultations 18 October 1988 Manna Kea, Hawaii It is a pleasure to be here and participate again in discussions of energy matters with our colleagues from Japan. These serious and frank discussions are always thought provoking. This meeting is no exception.

The subject of this session "New Energy Development" is sufficiently vague so it could cover a variety of topics. This probably was intended. In any case, it provides me an opportunity to discuss policies which I believe must be considered in thinking about new energy developments. This includes the development of resources and sources, conversion and utilization as well as advanced technology.

I would like to review briefly the events of the past 15 years. Then I will suggest that it is possible we have been on the wrong track. This is, of course, a most serious matter. Your comments and suggestions are most welcome. My intent is to stir up constructive discussion.

Up until the early 1970's the driving force behind energy developments was to achieve increasing supplies but at lower prices. In general, prices were held down. New technologies and large scale implementations such as those for electric power often reduced the prices. It was recognised then that energy, and energy at low costs, was a key factor in economic development. These were also key factors in raising the standard of. living.

The event! of the 1970's increased the price of crude oil by a very large amount and drastically changed this approach. Ve set out on a far different course—"energy independence", "energy security", conservation, etc.—almost regardless of the costs. There has been a significant reduction in energy use < except electricity ), distortions of trade arrangements, and a worldwide economic slowdown. The result has been recessions and unemployment, with only modest progress towards the stated goals. 13 October 1918 Page 2

Ve set out on very ambitious technology development programs—synthetic fuels, geothernal, solar, wind, shale oil, conservation, etc., These were justified on the basis that crude oil was going to cost 50, 75, or 100 dollars per barrel ( in real dollars ). I was a party to this planning!

This worldwide effort was driven by a basic economic fallacy. Even today the "free market" price of crude oil ( if there was a "free market" ) would likely be around $ 10 per barrel. It might be as much as $ 15 per barrel by 2000 AD in today's dollars. Anything higher is due to cartel actions or other ways of "rigging" the market. These may be successful for a time, or perhaps partially successful for longer periods ( as is the case now ). however, they are basically unstable arrangements destined to fall apart at some time. Such expectations are a poor basis for long-term energy policy planning and energy research and development.

In addition to the oil price increases, another driving force was the notion of an "interruption" in oil supplies. This was something which never really happened. There were problems in distribution in 1973/74 and 1978. These were caused by the public perception of potential shortfalls and incredibly bad attempts to manage the situation by the U.S. government.

Technology can make substantial contribution if pursued with the correct goals in mind. These include lowering costs and/or improving health, safety and the environment, and improving "energy efficiency". However, it must be recognized that the broader aspects of energy supply and price are basically geopolitical issues, not technical issues. He have not acknowledged this or sought to solve our energy problems through political actions. The International Energy Agency is an exception. We cannot continue to follow this course or we will be in serious trouble—trouble which technology alone cannot possible cure. 13 October 1988 Page 3 tfhy hasn't energy been treated from the political point of view? it is apparent ( based on some personal experience! ) that: a) the political leaders do not understand the nature of the problem ( and are unwilling to listen ), and/or b) they believe that the "miracles of modern science" will solve the energy problems. One problem is the lack of national leadership in energy matters in the U.S. as well as other countries. This seems strange considering the basic importance of energy to our modern civilization, our economic health, the prospects for economic growth, and a stable international "atmosphere".

The relatively calm period of the past several years with lower oil prices, etc., has led to increased economic growth. It has also resulted in a feeling of complacency about energy. Now the use of energy is growing ( rapidly increasing oil imports into the U.S. and growing electric power shortages, etc. ). There are emerging claims of an emerging energy crisis, demands for large-scale development including synthetic fuels, andsuggestions of oil and energy taxes, as well as extreme measures to stimulate "conservation", etc. This is compounded in the U.S. by the furor over the "greenhouse effect" resulting from a long hot summer in the U.S. ( if not everywhere! ), and the lure of more dollars for studies in the field. ( This is convenient for those such as myself who believe we should use more nuclear power—but I feel a little guilty about using the argument!

Nevertheless, it is becoming increasingly urgent to establish viable energy policies in the U.S. and other countries, particularly among our friends in OECD. My concern is that policies aimed at new energy development over the coming years be based on realistic evaluations of the facts and the true nature of the energy problems and possibilities for solutions.

As I understand all too well, it is much more difficult to devise energy and energy R & D policies without the "crutch" of a threat of much higher future oil prices. Not only is it a tough planning job but it is more difficult to achieve the goals. However, since the go&ls should not be changing like a "roller coaster" it is not unlikely that imaginative and dedicated work will see sound progress. 13 October 198$ Page 4

As I have said, I believe the solutions to our energy problems lie to a large extent in geopolitics . What this Beans is that our international policies and politics must take energy into account as one of the main considerations and not a completely separate consideration.

There are vast reserves of oil in the tar sands in Canada as well as in the Canadian heavy oil deposits. There are enormous heavy oil deposits in the Orinoco in Venezuela ( probably far larger than the oil reserves of the Kiddle East ). These, while more expensive than conventional oil, can probably be recovered at costs which are very attractive coaparsd with other alternatives. However they must be developed cooperatively and on a very large scale. We are far froa having to depend on oil from coal in order to make sure we have adequate supplies of oil.

However, we should do soae research and even deaonstrations of technology which could be used in a long term emergency. Such technology developments could also furnish indications of the probable economics and show where the "ceilings" might lie for other alternatives. However, it would be the height of folly to envisage the development of a full-scale synfuels industry in the U.S.—and it would certainly have an adverse impact on our economy. We should not count on such developments to solve our future energy problems—at least in the c&xt few decades.

On the other hand, the geopolitical approach to our energy problems means that we aust find ways to aake it mutually advantageous to work together with the main oil supplying countries, largely OAPEC. They must be persuaded not to use cartel tactics. The concept of market driven prices being in the best interest of everyone including the supplier nations aust be accepted for its overall benefits. 13 October 1988 Page 5 The vertical integration of the oil supply chains under the ownership of the oil supplying nations is certainly one key element in such a geopolitical evoluti-a. Ve need, all of us, to find other nutually advantageous arrangements to resolve the issues. I would suggest that this is of vitalimportance not only to worldwide economies but also to future peace in the world.

My tentative conclusion is that we have, indeed, been on the wrong track and that it is high tine to "regroup". Ve should seek to find solutions to our energy problems based on practical international politics supplemented with such new technology as will be helpful. We should not expect that new and exotic technologies or "conservation" will somehow be the "magic solution" to our future energy problems.

~~Thank you. N' e w F nerg y !",' e v e I o p rr. -i :. r.~~

~~Thr«ft major pilio-5 of Japan's *n«rgy foiicv '•»-> : C> a;-1*.!- ;••..::';•• of c'•~~

~~(2) energy conservation, fi£ -is* >f •ilv.-.w.'..?. -w.7? ,<> .-m..:~~

~~Given the vulnerab'-; ^nergv sappl> itri.'fivrrj of Japan • '^rc'. :~.i \?sr *:• .:rt^~~

~~total dependence on impr-ru-d oil mort of n?uch r.^rnes fr-n i.l'j li'jd'- -" ,^>,. tf:^~~

~~third policy pillar of " increasing u-jii ••:•• al r.er«a« ive onsr.jv ''«:r• ^ " :s~~

~~particula. / i «p:>r un t.~~

* Alternst!v

~~nuclear energy- hy'iru ubMjr, $eothermal, '?rc. "v>^ finftr^y" .lot-: no; h.-iv-- ^r>y~~

strict academic Jet in 11ion. It excludes iwiurai v»s, m< ie^r ?r.<=?rg> -v"? K>-Jrc ouL of "alternativ.' .:r,ers> sour^*5:;" 'inci ii furttmr exc'r^ev ou.'^r"--; '.-..>»1 burning thflrra! sccions cat et coal use. Ifiitss'] ii in Tii.i-->rj .1.* .iivj uKiconvRniionai use of coai which reqijirft.v ne^ ic-cl'ir.oloi1.:- su..h *••> "'WM-iO'xm and "gasification* !f. a)?o includes S6l;»r t»ners>'. seot^-.rm.A' eaerr . -.ind r-"^ etc.

~~New energy is different trow conventional fif^rgy in rbai ^ner,:)' r ,Sl,.jr,;e3~~

( which *re certai'ilv impf.riani a^ such : <*.annof !uve '""f;h r.ignifi ..n.e 1.?.!•••••• they are accompanied b> the terhrioiogy tt. uti!)*•=? such w?sutir:e:".. ^-o- ilils point of view, t*e ft.av be >i!;la 10 include "finftrgv tenser.'ifi TI '-^.r,'. :'^>:1 ^> < enables efficient nsf of energy sources -.n thi- -.a

~~In sutwnary, "ni»h irur^;. tecnno^.r,!. Ac* ivpmer,;" -.^ci -- r-, \A^, r\/-.: ><, '.••"....:~~

~~I. The technology «I;K\'I f-nabier, u?& ini ".ons'imt''ion or' •tr.'-'s:. --.-*• --.-e*-. ».'•.!• h~~

~~otherwise are noi 'iss'tii'". by riuit'ifyin,, isi'.-m 1 makir- tu-? pel .•.'.,'<:: fra^ ' )•• less polluting ) without substantially changing the e*isf ;•«.<; *ncr?.; •.; T::.;..~~

~~system : for example, liquefaction and -jasification of CMI. ^r.d -. »hi,?e~~

~~production by bioma$s; etc.~~

~~2. The technology which arables uti 1 iiatir.r. ;'f ir.d;gep.: -- '-v^ . • .r •-..-, *:"~~

~~low energy density or with d-.ffioui ry i.-f oo;nr^i :;i!Iv via-> .c-..- ••..•-'!'.'"• -~~

~~for example, "olar, geer.fterma!. ^:nd, *.*c.~~

~~3. The technology which *:>" icierab conv»r's ?r•••i.?r> -!•-••..-).;;• o~-.-::--- ,S. . ..• .;,~~

~~forms amenable to effective fin^l consumption- for e>.j-"p!.r, r»e' V' :,-4-:"'-.~~

~~engine, superconductivity, etc.~~

~~4. The technology which efficient^ stores eiectririty ari ho->\ *•*. •:.;)?;:~~

~~time lag between $;ippl> .^nd dsmaud, thu, enabling eff:"i*?nt ,'per.r.i'r; c,r on'"g-~~

~~tonversinn facili:ies and improving avai ] abi! i ty factor; 'or QM'\ •!«. he-a pom,-,~~

~~ne*« types of eel is- etc.~~

As I mentioned 3'. the outset, ore of the important or^ac*.ive<:, of Jar-an's sn»rg> poiicy is to promote use of alternative energy ;:>urce$ '.o petfoieij^-Sfii? ne*. energy -levs!opnent is one of the imprirtani items ;; achieve th-s ob.'-i-.tive.

~~The first oil crisis gave a special momemtum 'o this .vapory of .-.r r i s. I f.ies.~~

"New energy technology development" project called "Surr.'iirv ?roj«»r."." o^d "o^r-;;, cons«rvation cechnology dev/elopment" project cdileci "*!O«JDI ighi Pr^j ••"-:* i.era introduced as national projects in 1974 and 197ft respec..ivear

Approximately 13 year"! have passed sincf then. During this pgr-lo^ jfi research projects have gradual 1> moved from fundamenta' "-e.-^a'ch !;-1..ir.ia - development s'.age. and then Co demonstr^tiun dt^^is. Dating t.he co'.rs: .f development, they have teen subject to c.ho.CA anc review uhlci" r^suUed in ohan,:->

~~in emphasis and modification of methodologies. Brochure;- in English c" "Sunshir-^-~~

~~Project" and "Moonlight Project* havs hean distributed :or the -eftverc:- b>~~

~~participants.~~

~~government y<; foi Uicb~~).•:. r :-. •: r .-.o -,t •. . »~~~~

~~500 billion yen ( 3.8 billion dollars '. Such Bovernraer.t exp.mdi to,-? '^'-Ivr.1;~~

~~has been matched ir>> subst.5fit.iai Axp^ndi^.m- b> private sec(or. r,or.\>i~~~

~~shar* of "new energy" in t:»tal ennrgy supply in Japan i*its about 1.^ % in i;37~~

~~which is hoped for growing to about 5 % (25 *»i] lien k! ^r 100,000 C.D ,n tar** •:?~~

~~oil aquivalent ) by the year 2,000 which roughly corresponds to 10 7, -.'" rh" •J%-n~~

~~oil consumption.~~

~~On the "energy conservation" front, thers has bfien a •;~~

~~We may be aoie to derive &om conclusions by looking at f.he contt-nr. yf S'!rt:;.rn~~nt prenature to make judgement on the ool.com* of Msc.h enflt^vourr., be it s-iccess ••.•• failure.~~~~

It is particularly imponant not to iet nomentuti of r\rM ori'.rgy *-:v<-;op.ite.T. 'i--; energy conservation weaker.ed or iost no^ic!istending th^ prwvai"in? .^pr^i'vf oil price. Energy issues ^r.d the need to take measures tJ-e-<(•;• wil'. b- «:tii •

~~: ;: J periMnentiy, Thus believe it is incumbent upon us to exr-rt r-^rs -:ci i i.'. sustained efforts with our eyes i.onstantjy on r~~

SJMMARY--US If. Kenneth Davis U.S.-Japan Energy Policy Consul tat ici-.s 18 October 198$ Mauna Ken, Hawaii Introduction The presentations were ?en«raiiy interesting ar.4 constructive -par?:r^ in stimulating thinking of U.S. participants. The U.S. side would like to see sore emphasis or. discussions, par-:-irjlsrly informal comments and discussion. Demand Side There was a surprising increase in total energy use and especially electricity in the last two years in both Japan and the U.S. This was driven by increased economic activity in both countries ( and others as well )—-resulting, at least in part, from lowtr crude oil prires which directly affect oil use and indirectly stimulate the overall economies. The longer term improvement in energy efficiency < conservation ) has been substantial—largely driven by higher real energy prices. While continued improvements in energy efficiency are to be expected they are aot likely to be a aajor solution to the future energy problems of the U.S. or Japan. The increasing demand tor energy by the Developing Countries is sign:fcant but retarded by high energy prices, problems in financing o* energy production and utilization facilities, and the need for education and technology transfer. Supply Side Relatively little concern was expressed by either side about crude ail supplies—although isports are large f and growing rapidly in the U.S. ) and come, in a substantial part, from the Middle East suppliers. There was little concern about higher future oil prices froa OPEC/OAPEC cartel actions. There was a sharp difference of opinion on the U.S. suit- rejaidir.s the desirability of an oil import tax or a gasoline tax—but g«n*:ai agreement that such taxes were most unlikely in the near future. It was surprising that there was no discussion about the .uajortanctf of the yalue of the U.S. dollar in oil pricing aor about th« inpact o.f possible substantially lower oil prices. The U.S. expects to see increased use of natural gas particularly fr- power generation and c.ea

SUMMARY—US Coal continues to be a aajor and growing energy source in the '!.Z *.-.d of growing iaportance in Japan. It was noted that the use of coai is expected :o increase sarxedly _TS the Asian developing countries. Environmental Concerns The discussion of coal leads, of ccurse, to a discussion of the rat.idly increasing public cancerr.s about the envir^aceut. particularly the consequences of the combustion of fossil fusls. These concerns v;H have a major effect in tke future whether or not they are entirely 7ilid These concerns include the effect of COa, methane and fluorcarbons in generating the "greeahouse effect", the role of SOt and NO* in producing acid depositions ( "acid rain" ), and the role various atmospheric contaaisants in reducing the tropospheric ozone layer. It was noted that the measures required for energy projects and use to become environmentally acceptable were often costly both in direct costs and in the cost of the delays to obtain approvals. It was stressed that the greatly increased concern about the "greenhouse effect" in the U.S. because of a hot dry summer was not logical in view of the cold and wet cliaate in Japan and many other parts of the world at the sane tine. There was no discussion about liquid or solid waste environmental problems with tht important exception of high level nuclear wastes which continue to be a public opinion problem. It was noted that almost all atmospheric e.tvironmeaal problems are international in scope, worldwide to bilateral, and require international action for their resolution. Nuclear Energy Judging froa the amount of tiae devoted to it, Nuclear Energy has becone the Number 1 subject for these discussions instead of oil. It was agreed that nuclear power was absolutely essential for meeting future energy needs—and was benign from the environoental perspective. The Japanese side stressed the need for U.S. leadership in nuclear matters. It waa noted that the reason for the lack of orders for new nuclear never plants in tht U.S. since 1973 was due to the lack of need for the utilities to order new lajor generating facilities since thsri---ar.d not due to adverse public opinion or anti-nuclear activities--although these factors wtre important in the completion of some of the nuclear plants or. order and would be of great importance with respect to ordets of new nuclear plants when needed. There is a growing realisation, that ne* generating facilities are r.eeded—-and urgently in sone *ectior:s of the U.S. It was pointed out that t:.e real barriers to ordering new nuclear ?ljn:s in the U.S. were tht» new jrra.-igeoent3 with the state regulacoiy -osai^sicu to assure t.ha utilities that their investments could be recovered »nd *h improvements in nuclsd-r licensing by the NSC which has yet to receive t> confidence of the utility industry. 20 October ?age j

~~SUHHARY—US~~

~~Public Opinion It was noted that a:iTj,-aucieai/ai»fci--jtovt:h aovemers's are b«3CO3~~

~~Toyo*ki Ikuta, President The Institute of Energy icor.crr.ici, .'»p»r.~~

A variety of themes were discussed at tht Hawaiian ConfererwM, ranging frcn general overview*, energy policies and international cooperation to specific issue* related to energy. Substantive views were exchanged, asking t*« conference a remarkably successful event.

Speaking of the outlook for world energy supply and demand, oil is expected to continue playing * leading role as the 'marker energy." In this connection, I believe a general consensus was formed among participants that the supply and demand of oil and its price will have s great Impact on those cf other energy sources from a long-term perspective. As for the short-term outlook for oil supply, demand and price, however, there were a diversity of opinions voiced at the conference about the assessment of individual problems and the prospects for solving them.

In my commentary of yesterday, 1 introduced a parable of stairwtys and landings, and X feJt honored that someone made * re/trence to thai parable in today's speech. When I talk about the diversity of opinions, that diversity is in regard to how spacious the landing :n question is cr how steep is the gradient of stairs we are climbing. We ill Agreed on a basic understanding that we now stand zr. A landing and *!'l a»ccnd a at&irc*«e — there *tr* r.e critically different viewf on that fact,

The landing we stand is neither as narrow as nobody car. stand r.cr as spacious as a golf course. Likewise, the staircase we are climbing is neither to *tetp at to be newly verticil nor s& flit ti * *1de corridor. 0<-r

It It ettential, at «everal participants pointed out, to *ork cu* & long-ie-rr, energy policy directed to'*ard the 21st century. We can nev#r exaggerate the significance of the Japun-U.S, cooperative program presently underway in this field, and I wish '.o take this opportunity to pay my reipecti to the Atlantic Council, which if now preparing to eake a propofaJ on energy policies for the two countries, with Mr. C. J. Silai acting at chairman,

Next, I with to give nay own view* briefly about individual eubiecit and points at itiue. Flrtt of all, let ne take up the iatue of Japan -1'. S. cooperation in the Paeifie region, at a number of opinion* were expressed about problems related to it. Listening to that debite, ! wondered if a bett ertrgy *nix could be worked out on a country-by-country basi* — to build up a tort of matrix for the Pacific region at a whole. 1 would be very happy :« t** thit question purtued in the future, including a itudy of the b««t way to utilite the ererg7 rctourcet availabie in the U.S.A., Auttralit and China for the Pacific region.

Secondly, debattt on the environmental itaue included frequ*nt referer.ceff tc the greenhouee effect due to the etnittion of carbon dlo»rid« ir. lncr«a«lng quantities, and to acid rain. ! quite agree with the view that these matters will become one of the mott important itemt for discussion. 1: «hsv:d b« pointed out here that Japan laga far hehind the U.S.A. and Europe, whert these Broblemt have been attracting great public attention for ystrs. *ap*r. should learn * gr*at many things on this subject from th« U.S./, Ai for energy source by source, electricity ihculd be taker, u? first. !r. v-:e^ of the /act that demand for electric power h**» shewn §;$.•*{£! car*, growth recently in both Japan and the U.S.A., the two countries •ho-M «nd«avor to tolv* vsrioue problems acco.-nptnying the Increase in power der^-.a which bc:>-. of thetn face. These problems include! i) development of new py*ir sources to cop* with demand growth in the future; i\) streamlining of pewer tranamiteior. and distribution tytxtxti and Hi) the choice between large-»?ale, ccntra!ix*d power generation «r.d ssnall-ac^e, dieperted power generation.

Very valuable di*cu»flon» were held en nuclear power. Jt gave ae great joy that lte Importance aa an indi«p«n*able energy source in future energy policJe* was reconfirmed in a number of discussion*, The task we face today i# to diaeuaa this subject thoroughly and to cooperate with each other In finding ways to revive nuclear power in the future.

Next, about oil. Detailed comments will not be repetted here, since the problem of crude oil was pointed out earlitr. Although Japanese and U.S. oil industry representative* made their respective presentations, It was a pity that we did not have sufficient time for discussion in full, In prticuiar on the downstream sector.

As for coal, aU participants agreed that demand win continue firing in the future, However, it w*-j also reeognixed that eiivlrcrnreritii! problerr.s w;U accompany increas«d consumption of coal, thus providing muh roorr: ior studies and cooperation with regard to :he use of coal, aimed it bclsterir.g its adaptability to env-iror.&ental protection. Natural gag it certainly playing a vita! role ae an alternative tr^rgy source to oil in the Ufht of its vast world reserves and of its r«iative!y srr.»I; environmental Impact due to its being a clean energy source. Nevertheicss, the discussion disclosed that there is a considerable difference bet*#sr. Japan and the U.S. with regard to the limitations arising from different wethods of Its utilisation. For Japan, it it essential to make realistic studies concerning the conditions under which LN'C Is imported and the extent to which utilization of LNG is feasible.

Lastlyi I wish to make reference to new energies, especially renewable energy sources. In the future, at LDCs with large population like China and India promote their modernisation and energy demand in these countries soar* as a result, a worldwide shortage of energy resources or their exhaustion will occur, It was feared. In this connection, there was an opinion that stress is needed on developing these energy sources from a long-term perspective. In my own opinion, it is more important to continue steady, strenuous efforts to develop these energies than to press for an immediate success.