Deloitte conference speakers call for wider energy, environmental debate

The national energy and environmental debate will need to widen significantly if it intends to create necessary dramatic changes, speakers at a leading energy conference said on May 19 and 20.

The national energy and environmental debate will need to widen significantly if it intends to create necessary dramatic changes, speakers at a leading energy conference said on May 19 and 20.

"We are at a crucial moment in energy and environmental reform. The fact that our national economy hasn't cratered with oil prices at $130/bbl is a tribute to its resilience. But we need to start addressing the actual issues," said Thomas F. McLarty III, the former chairman of Arkla Inc., an integrated natural gas company, and a federal official in several capacities during Bill Clinton's administration.

"Sadly, the current energy debate is dominated by extremists on the right and the left. What's needed is more participation by those in the middle. Clearly, a bipartisan solution is needed although it won't please everyone if it's achieved," he said in an address to the 2008 Deloitte Energy Conference.

That solution won't be achieved unless voters convince politicians that they won't accept simplistic answers, other speakers said. "First-time voters are talking about issues together instead of separately. They realize that you can't address the environment without discussing energy and the economy," said Joseph A. Stanislaw, who co-founded Cambridge Energy Research Associates in 1983 and now serves as an independent senior advisor on energy and resources for Deloitte LLP, the conference's sponsor.

"But we will not get to tomorrow if the political structure doesn't look beyond the next election. The longer it takes to respond, the more I fear it will impose a draconian solution," he warned.

Similarities and a difference

Several aspects of the current situation, such as faith in new technologies and fear that the world is running out of oil, are similar to characteristics of the 1970s energy crises, Stanislaw told reporters during a May 19 briefing with other Deloitte specialists. The major difference now is that worldwide demand has not started to decline in response to higher prices, although it has flattened domestically, he said.

"Mutual distrust exists in the world now. We should be heading toward mutual interdependence. Working together on climate change may help us get there," he suggested.

He said in his speech that businesses should consider efforts to address global climate change an opportunity instead of a threat. "The climate change and energy security issues are creating the economic opportunity of our lifetime. The investments of the next two decades will dwarf what was spent in the entire 20th century," Stanislaw said.

More than $200 trillion may need to be spent by 2030, suggested Reid Detchon, executive director for energy and climate change at the United Nations Foundation in Washington. The next US president plans to reduce US carbon emissions by 60-80% whether it's Sen. Hillary R. Clinton (D-N.Y.), Barrack Obama (D-Ill.) or John McCain (R-Ariz.), he said in a May 19 address at the conference.

"No matter who's elected, we're going to a push on cap and trade. It's not clear whether we're going to see it in 2009 or 2010 because of the next major international conference in Copenhagen. If the next administration wants to show it can move decisively and go there with a done deal, it will happen in 2009. But if it wants some room to negotiate, it may decide to wait until 2010," Detchon said.

Climate change decisions

Federal Energy Regulatory Commission Chairman Joseph T. Kelliher said that he found it interesting that McCain was talking more about global climate change currently than his two Democratic rivals for the presidency. "But we should recognize that dealing with climate change is not an environmental policy. It's an energy policy. The question is not whether but when decisions will be made. If they aren't well thought out, the economic consequences will be severe," he told conference participants.

Many people and groups will need to adopt new attitudes, other speakers suggested. "A lot of them are concerned with competition we see from India and China. They see it as a threat. But it's also an economic opportunity because they represent important new markets," Detchon said.

"There's a perception that industry is not working in the public interest. It may not be fair, but it's there. Heavy industry needs to do more. We're not capturing enough steam and using it to produce power that can be used internally or sold into the electrical grid," McLarty said.

"For a company like ours, the rules are changing. If we're not careful, they'll change to the detriment of our shareholders," said General Electric Co. Vice Chairman John G. Rice. Companies and countries both are looking for the next major technology, he said in remarks during the conference's general session. "The investments we're making now are in technologies that can help our customers improve the efficiency of their installed [equipment] base," he said.

In the near term, he considers coal and nuclear power the best possibilities to meet growing electrical demand although time may be running out for nuclear since 100 US reactors will need to be replaced by 2040. "It's critically important that we figure our how to burn coal in an environmentally responsible way. Coal gasification can help us do that, although there's still a question about its 25% premium over pulverized coal," Rice said. GE bought a coal gasification process several years ago from what was then Chevron Texaco Corp. and has been working with Bechtel Corp. to design a standard plant, he said.

'Coherent and clear'

Over a longer period, alternative and renewable energy resources will need to play a growing role, he continued. "To that end, we are designing a boiler that can burn any kind of biofuel. Fortunately, some environmental groups have come to recognize that big companies can be part of the solution. But the US will need to draw equally from government, business and non-government organizations to create an energy and environmental policy that is coherent and clear," he said.

Rice noted that GE moved into wind power when it bought Enron Corp.'s operations when the Houston diversified energy company went into bankruptcy. The business has become profitable but probably would not have if European countries hadn't offered major subsidies during the 1990s, he continued. Solar power today is where wind power was 10 years ago, he said.

But government incentives will need to last longer than a year or two, according to Clint Stretch, managing principal for tax policy in Deloitte Tax LLP's Washington office. "We've gone through this nonsense of credits expiring. If you're a business executive, you'd be out of your mind to invest under these circumstances," he said during the press briefing.

"The investment community is very plugged into the uncertainty about how carbon will be regulated. Energy investment decisions far exceed politicians' views. They involve two or three election cycles at least," observed James A. Slutz, acting principal deputy assistant US energy secretary and director of the US Department of Energy's fossil energy office, at the conference's May 20 session dealing with oil and gas.

Stretch said that budget gridlock has made federal tax policies fall behind so politicians are responding by finding someone to blame. Record high crude oil prices have increased oil companies' profits, making them an easy and obvious target, but the Deloitte national tax specialist does not expect this "policy of shifting responsibility to work because President [George W.] Bush will veto any tax increase in a minute." He also anticipates that the US Senate will cut the House's six-year alternative and renewable energy tax incentives to one year. "We'll apply some Band-Aids and forward the tax question to a much larger arena," he said.

'Best immediate opportunity'

Branko Terzik, energy and resources regulatory policy leader at Deloitte Services LP in McLean, Va., said that a recent survey of public attitudes which the company commissioned found apprehension when coal entered alternative energy discussions. "Carbon sequestration is very far away. A utility can't call a manufacturer and order a system yet. That leaves energy efficiency as the best immediate opportunity," he told reporters at the press briefing.

Alternative and renewable energy research projects need tax credits to proceed, he continued. It also will take time for manufacturers and consumers to fully react to higher energy prices, he said. "People don't use energy. Their devices do. It will take time for more efficient models to come into the fleet, but it will happen. Automakers are beginning to react. Hyundai announced this week that it doesn't plan to build a US plant to produce V8 trucks that it previously announced," Terzik said.

"By addressing climate change and energy security together, it will accelerate instead of limit economic growth. But we'll have to think about it differently," Stanislaw said in his speech.

Gregory E. Aliff, vice chairman for US energy and resources leader at Deloitte LLP, is anticipating "high prices, followed by higher prices, followed by an inevitable consumer backlash." Producers and regulators understand the situation, he said during the press briefing, but consumers "don't see the train coming at them regardless of the alternatives because none of the alternatives are free."

McLarty was more optimistic. "I think the people are ahead of the politicians. They're ready for clear, sensible policies and ready to move ahead," he maintained.

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