Energy & Economic Summit 2012

Reception and Dinner

Frederick Kempe
President and CEO, the Atlantic Council

Daniel Poneman
Deputy Secretary, U.S. Department of Energy 

Swissôtel, The Bosphorus
Istanbul, Turkey

Thursday, November 15, 2012

Transcript by
Federal News Service
Washington, D.C.

MR. : Ladies and gentlemen, if I could have your attention. Please take your seats. Ladies and gentlemen, good evening and welcome to this first dinner of the Atlantic Council Energy and Economic Summit of 2012. We’re delighted to welcome all of you here. It’s great to see that there’s a lot of good conversation going on. That’s a great thing for an event like this.

My sole function tonight is to tell you what our program is. And the most important part of our program is the first part, which is the eating part. Food will be served momentarily. We will work through the dinner. And after dinner Fred Kempe, our president and CEO, and Dan Poneman, deputy U.S. secretary of energy, will take the stage and we’ll proceed with the formal part of our program.

In the meantime, please go back to all the conversations that I’ve just interrupted. Thank you. (Laughter, applause.)

FREDERICK KEMPE: I’m sorry to interrupt your dinners. Your Excellencies, distinguished guests, ladies and gentlemen, welcome to our last event of the first day of the Atlantic Council’s Energy and Economic Summit.

We’ve got a real treat ahead of us. Our speaker tonight, the Deputy Secretary of the U.S. Department of Energy Dan Poneman, really holds one of the most important jobs in the U.S. government. The range of things he’s responsible for, the number of things he has to oversee, is mind-boggling. Most chief executives in the world would blanch at what he’s got to deal with.

He’s a widely published author. He served on federal advisory boards relating to proliferation and other matters. He was nominated by President Obama to be deputy secretary of energy on April 20th, 2009, and also serves as the chief operating officer of the department.

From 1993 to ’96, Dan Poneman served as special assistant to the president and the senior director for nonproliferation and export controls in the National Security Council. He participated in all sorts of negotiations and all sorts of critical issues with the governments of Africa, Asia, Europe, Latin America, former Soviet Union. This is a true global citizen operating at the top of his game at the top of the government.

I do want to say something personal here. The U.S. government has a number of incredibly decent people working every day to improve the state of the world and look after our national interests, but few have done it as long and as effectively as Dan Poneman: A.B. and J.D. degrees with honors from Harvard, MLit in politics from Oxford University. But those are just credentials. What he brings to his job is a commitment to work. He doesn’t need to take credit for what he gets done. And every day he comes in and does that work.

One news item from tonight, just to let you know that things do happen even as we’re sitting here – and we’ll talk about this tomorrow – the Turkish government has recognized the Syrian National Coalition.

Foreign Minister Davutoglu, who had to turn down a speaking engagement here at this event for the reasons of what’s going on right now, has called upon Muslim nations everywhere to support and recognize this fledgling opposition, and has said that Turkey has the will and capability to defend its borders. He gave these statements at the Organization of Islamic Cooperation in Djibouti. And he called the formation of this opposition “an important achievement.”

Tomorrow night we’ll discuss these issues with two national security advisors of the United States, former National Security Advisor Steve Hadley and Dr. Zbigniew Brzezinski. So you see this is all going on.

We’re in the midst of history. We’re certainly in the midst of energy history, economic history. Dan Poneman, as I said, is one of the most important actors in the U.S. government acting on all these things. It’s a great honor to bring him to the stage.

And then, after his comments, I’ll engage him here on these two nice sofas, Dan, where we’ll have a conversation. Some of you have given me questions to pose to Deputy Secretary of Energy Poneman, which we’ll do during a discussion after his comments.

Deputy Secretary Poneman, please. (Applause.)

DANIEL PONEMAN: Thank you, Fred. You know, I’m torn, because there is a very dear friend of many of us here this room who is not with us anymore, Arnie Kanter, and Arnie used to say, “Problems have solutions but dilemmas have horns.”

So I have a dilemma here because I’m sitting between two distinguished Americans, Fred Kempe and Dr. Brzezinski, and they say, don’t read that speech. (Laughter.) You’ll bore everyone. And just wing it. And so I’m forced to choose a horn of the dilemma, and I’m not going to read the speech. I’m sorry to disappoint at least one of you, but I will talk about the importance of this session.

Before I do, I just want to acknowledge the leadership – the thought leadership of the Atlantic Council, and what an important forum it has provided. I remember I’d been going to the Atlantic Council for a long time at 915 17th Street, and the pictures of Ernest Bevin and Jean Monnet and the people who really – genuinely the fathers of Europe and the Atlantic relationship – obviously Harry Truman and so forth. But I have to say that under the leadership of Fred Kempe and his board, the Atlantic Council has really come into its own.

And I’d like to acknowledge here also – and I hope I don’t offend by leaving out a tremendous collection of great Americans here – also Dr. Brzezinski, Steve Hadley, our former national security advisors; two great ambassadors to Turkey, Jim Jeffrey and Frank Ricciardone. We’re honored by the presence of the Deputy Prime Minister Kelimbetov of Kazakhstan, Bob Blake and many others. And it’s a tribute to the leadership – the thought leadership of the Atlantic Council.

It has been an honor and a privilege to serve in the U.S. Department of Energy for the last four years. And I think when we go through history, we see that energy really is part of the warp and woof of history to its earliest days. And we’re better to focus and to have a summit on energy here in Turkey, in so many ways the cradle of civilization, where everything merges in terms of the trading paths between Asia and Europe, where you have the crossroads culturally, politically, the strong and deep security relationships that are so important to all of us.

Really the history of the world is the history of energy, and we have seen human conflict and human progress all clocked by harnessing the power of fire. If you look throughout history and you see, the fate of wars have turned on the quest for energy: Hitler on his way to Azerbaijan seeking oil, falling short at Stalingrad; the history of the industrial revolution having not only shaped the growth of an American economy, but shaped the outcomes of several wars.

And so it is not a surprise, nor is it a coincidence, that when we think about energy we think about the relationships here in this region. It’s not a coincidence that when President Obama first traveled as president, he came here to Turkey to discuss the critical issues that face us both. And indeed my first issue that I dealt with in my international travels was also here in Turkey and in travels that took me to everywhere from Baku to Aktau to Attero (sp) to Almaty to Ankara. And so we think about energy in terms of shaping our future and in terms of shaping the prosperity and the growth of our respective economies.

This is something that we President Obama has understood very clearly from the beginning of his administration. And in that respect, I think that he has been very clear in defining an energy strategy that comprehends every aspect of our future, and one that I think ties us very much to the countries represented here at this conference. It’s an all-of-the-above strategy. It’s a strategy in which the hydrocarbon wealth of the world has undergone remarkable transformations in recent years. And let’s just pause about that for a moment.

We have witnessed, from very modest beginnings, an absolute revolution in gas markets. In 1978 people were not really thinking about natural gas as a long-term energy solution to our nation’s problems. And at that time the Department of Energy invested very modestly – $130 million over the course of about 14 years, from 1978 to 1992 – in two technologies that the private sector at that point showed very little interest in: horizontal drilling and hydraulic fracturing.

And from that modest beginning we saw the transformation that we have now experienced to tremendous benefit for all of us. Since 2002, United States natural gas has increased from 2 percent to over 35 percent out of a 22-trillion cubic foot annual natural gas economy, our benefit from natural gas out of shale deposits. We are now the leading producer of natural gas in the world. It is producing thousands and tens of thousands of jobs in the United States of America. It is bringing manufacturing back in the petrochemical industry.

And this is a benefit that is not confined to the United States of America. We see around the world tremendous resources in China, in Latin America and South Africa. And that’s something that promises great progress not only in terms of reducing climate change impacts because of the much lower greenhouse gas emissions that come from natural gas compared to coal, but also promises the great prospects of fuel switching and the transformation of our nation’s transportation fleet.

Equally impressive, and a story that is just now being told, is the story of our hydrocarbons in the oil phase. In just a few short years we’ve have a remarkable transformation there as well. In 2008 we imported on the order of 57 percent of our oil needs in the United States of America. We’re now down to 42 percent. Our production in oil has gone up to levels not seen since 1995.

And, incredibly, the United States of America has become a net exporter of oil products for the first time since 1949. The president has been very clear on his commitment to the continued responsible development of our oil and gas resources, and we’ll continue to proceed down that path.

Equally importantly, our commitment to coal is clear. The president has invested heavily – billions of dollars – in clean coal technology. We’ve invested in carbon capture and sequestration. We have explored the possibilities to use re-injection of carbon into our oil fields to further enhance our recovery.

But the president has been equally clear that the fact of the windfall of a tremendous increase in our hydrocarbon production on the back of this improvement in our technology does not excuse us from both the opportunity, and frankly the obligation, to transform our nation’s energy economy to seek the investments in clean energy technologies and improved battery performance and better wind turbine technology that are going to help introduce a lower carbon future to our nation.

And in so doing, through a tremendous increase in investment in clean energy technologies, assisted by the investment by the U.S. Congress through the American Reinvestment and Recovery Act on the order of $30 billion of direct investments leveraging on the order of $90 billion of investment, we’re seeing some of the largest wind farms, solar farms in the world be built in the United States of America.

We’re watching the levelized cost of electricity come down as the scale of our investment goes up to the point where we can now see, as a realistic prospect, that the president’s pledge in his State of the Union address to double our power production from clean sources to 80 percent by 2035 actually comes into prospect as a realistic vision.

And in terms of our all-of-the-above strategy, let us not forget also the role that nuclear energy has to play. Already the country draws one-fifth of our power from nuclear energy, and that’s 70 percent of our carbon-free power.

All of us around the world have learned a lot and have studied deeply the lessons that have been taught from the Fukushima disaster in Japan. But you will see that you still have over a dozen countries around the world building over 60 nuclear power plants, because they understand that when it comes to transforming our nation’s energy economy in a manner that minimizes the introduction of carbon into the atmosphere, nuclear power still remains a very important part of our energy future.

Now, so far I have just been talking about the United States, but the president has been equally clear that, really, we have to deal with this a global challenge and a global problem. We have deep cooperation around the world on all fronts of our all-of-the-above energy strategy. And let me just take, as an example, since we’re here in Istanbul, Turkey.

We have just finished in Turkey a very important study in terms of our near-zero carbon growth policy. We have companies that have worked together between Turkey and the United States in the industrial zone of Izmir. And we have taken the best practices out of that study and, working with some of the best companies in terms of energy efficiency technology in the United States, we will be getting together here in January back in Turkey to propagate the best practices learned among those companies among the other more than 200 industrial zones here in Turkey.

In Turkey also we have had a continuing dialogue in recognizing the pivotal role that this county plays in bringing the hydrocarbon resources from the East to the countries in Europe that have the demand that need to be satisfied through a variety of mechanisms. And we were talking today about the Southern Corridor and the importance that that has to play. I have to acknowledge the continuing role of Ambassador Morningstar in helping us to achieve that vision.

It is a story that is told really around the world. We’ve worked with China, with India, with Kazakhstan, with countries in South America – Argentina and Brazil – throughout Europe in Poland, France and the U.K. We have introduced cooperation in development of smart grids. All of us face the challenges of introducing new mechanisms to bring intermittent sources of energy such as solar and wind to an increasingly informed consumer public through smart metering.

And we have to understand, at every moment when we improve the modernization of our grid, that we are perhaps introducing vulnerabilities as well, because the smarter our grid is, the more it is dependent on cyber technology. And the more that it is dependent on computers and SCADAs and so forth, the more it is vulnerable to the possibility of cyberattack.

And so our cooperation has to extend not only to the introduction of modernized grid sensors and phasors, but also to the protection of that grid against not only natural disasters, as we’ve witnessed here very recently in the very devastating destruction that we faced in Hurricane Sandy, but also in terms of the possibility of those who wish us ill using the power of technology to interfere with the prosperity of our nations that we are able to manifest through our modernized electrical grid.

So it’s a challenging environment out there. We look forward to seeing increased prosperity. We look forward to using the power of innovation and advanced manufacturing to pivot from the endowments that we have enjoyed for many decades now in oil, in gas and coal, into wind and solar and geothermal.

We look forward to the opportunities that are presented by advancing technology in the electrification of our vehicular fleet, in the exciting prospects that the global revolution in shale gas and other unconventional sources of gas present, not only for stationary sources of power generation but also in terms of improving our options in terms of transportation, whether we’re talking about personal vehicles or long-haul trucking or in terms of mass transit.

And if we can continue, through the kinds of discussions that are fostered here at the Atlantic Council, bringing together the best minds in academia, the best ideas out of industry and the best leadership out of government, the prospect indeed that we face together is a bright one. But we must also recognize that – as I think my good friend Jim Jeffery has often said – that energy can be the glue that brings many of us together, but if we’re not careful it can be the accelerant that breaks us apart.

And so we must continue to be wise and responsible stewards of these resources. We have to recognize that with the opportunity that it presents all of us for global growth come responsibilities to assure that we manage the resource responsibly and well and wisely, and that we use it as a force that will help bring the prosperity and security that we all seek and avoid many of the dangers that we have sought to avoid through the good work of places like the Atlantic Council and many others.

Then I think that all of us could face a very bright and prosperous future, and one that I hope we’ll be able to celebrate with the Atlantic Council for many, many years to come. Thank you. (Applause.)

MR. KEMPE: Thanks very much. Thanks very much, Dan. And thanks very much for casting aside your speech. If you would like to enter it into the record – (laughter) – we’re happy to allow that to happen on the Atlantic Council website as well, which I think would be also interesting.

Because of the difficulty of doing Q&A in this large audience tonight, I’ve actually gathered quite a few questions from people. And we’ll start with them and we’ll go around and see how far we get with the time that we’ve got allotted to us.

It’s really quite an honor to have someone here who’s played a role in developing and implementing U.S. policy on global energy issues, peaceful nuclear cooperation, missile technology controls, space launch activities, sanctions determinations, chemical and biological weapons, conventional arms transfer possibilities.

What you have to do in a given week or a given day is just really kind of overwhelming, and not to mention the fact that part time, on occasion, you are also a guitarist in a rock band that is called the Coalition of the Willing. This is a true story. And one of the players in this band is the former Ambassador to the U.S. Simonyi, Andras Simonyi, and our current ambassador – excuse me, deputy secretary general to NATO, a drummer by the name of Alexander Vershbow. So just to let people know what a renaissance man you are.

But my first question is going to be on one of the most difficult issues you’re dealing with, the Obama administration is going to have to deal with in its first weeks and months, which is Iran. Put most simply, where are we going and how is the U.S. going to stop Iran from getting a nuclear weapon?

MR. PONEMAN: The president has been very clear on this subject as recently as yesterday that Iran must not be allowed to obtain nuclear weapons. There is a window for diplomacy. The president has made very clear that Iran faces a choice.

We are of course doing everything we can to, through international cooperation, impose punishing sanctions on Iran for its failure to comply with its international obligations; to make clear at the same time that there is a place in the world for peaceful nuclear cooperation with Iran, provided that it does comply fully with its international obligations.

That’s what our diplomacy is directed for. There is still a window for diplomacy to allow this to occur, but it’s imperative that Iran understand that this is the choice that it faces and that the sanctions that have been imposed will increase and impose still greater penalties on their leaders for failing to comply with their international obligations. And hopefully that will bring them to the point of recognizing the importance of doing just that.

MR. KEMPE: How do you measure – just to drill down on this a little bit, how do you measure whether or not the sanctions, from your standpoint – from your standpoint at the Department of Energy and as part of the U.S. government, how do you measure whether these sanctions are having success? And then how do you calibrate them with your understanding of the global energy market?

MR. PONEMAN: There are a growing body of statistics that you see coming out of the International Energy Agency and many other sources that monitor global movements in oil. And by all of those data, the indications are that Iran’s exports have declined markedly. At the same time, through very impressive increase in production out of a number of very important producers, we have been able to see the forces of supply and demand remain sufficiently in balance that you’ve not had the price spike that would otherwise compensate for Iran’s loss of exports.

So our calculation is that the effect has been very substantial on Iran. At the same time, again, it’s been clear in terms of the effect on their domestic economy and their currency that they are suffering substantially from the imposition of sanctions, the denial of access to banking services and so forth. And so it appears to be very clear from a quite wide variety of sources that the effect of these sanctions has been punishing.

MR. KEMPE: Let’s shift a little bit to one of the big conversations that we didn’t expect would be the conversation last year when we started planning for this summit, but in the corridors, et cetera, unconventional gas – you know, you and I are both close enough to the age that we remember “The Graduate” and Dustin Hoffman, and the advice to Dustin Hoffman to go into plastics. And I think unconventional gas is probably the “plastics” of our energy age.

So how real is this as a geopolitical game-changer for Europe and for the United States? There’s so much buzz about it here. You know, you see the real figures. You see the real impediments environmentally and otherwise. Are people overestimating this or is this really a moment in history that we’re going to remember, a geopolitical inflection point from countries that had all this oil to countries like the United States, like some countries in Europe, like Argentina, others, who have – China – who have this amazing store of this kind of unconventional gas and tide oil?

MR. PONEMAN: Yeah, it’s not theoretical. As I mentioned, in the United States alone we’ve gone from 2 percent to 35 percent of our net national annual production from unconventional gas sources.

MR. KEMPE: Two percent from our national energy production?

MR. PONEMAN: Two percent of our natural gas production 10 years ago came from shale and unconventional type gas deposits. Now we’re over 35 percent.

MR. KEMPE: Now 35 percent from 10 years –

MR. PONEMAN: Out of 22 (trillion) or 23 trillion cubic feet per year annual gas economy. So there’s nothing theoretical about it.

We still don’t know a lot in terms of great precision. However, our Energy Information Administration took a global survey and found very significant resources in many other countries – over 800 trillion cubic feet in China, something like 485 trillion cubic feet in South Africa, over 700 trillion cubic feet in Argentina, and many places besides, including in Central Europe.

But I think the real –

MR. KEMPE: New energy powers that we never thought of as energy powers.

MR. PONEMAN: Well, in the sense that these come out of source rock that was never seen as a prodigious source of natural gas. And I’ll come back to that in a second. But the critical thing about it is the following: that we need to be able to develop the resource in a manner that still maintains public confidence.

And the president asked Secretary Chu to take a close look at this, and Secretary Chu convened his Secretary of Energy Advisory Board and put together a subcommittee that looked very carefully at all the governance issues, the concerns that have been voiced about the use of water in the recovery of shale gas, about the air and water environmental impacts, about fugitive methane emissions, about the integrity of casements and protection of the aquifer and so forth.

And while it’s clear that these issues can be successfully addressed, it’s equally clear that it has to be addressed in a manner that is sufficiently transparent to the public that we are able to preserve public confidence. There are already moratoria that have been put in place in some European countries. For a period of time there was a moratorium in place in South Africa as well.

And so it’s very important that both from the perspective of the industry and its own self-governance, as well as to whatever superstructure of state and federal regulatory authorities that any particular country may have, that this is done in a manner that questions that have been raised in terms of the components of fracking fluids in terms of all of the questions that have been raised about the protection of the aquifer are done in a manner that protects public confidence.

Because it is possible that even though the resource is extensive, that if we don’t develop it responsibly, that the continued use of that resource will be questioned. And that’s not in any of our interests. So that’s why we have been working very closely with countries around the world to have a very clear set of open communications to talk about the sharing of best practices, and that’s going to continue to be very important if we are going to be able to continue to benefit from this extraordinary increase in our global energy resources.

MR. KEMPE: And this may be a little bit out of your portfolio, but game changer in the European relationship – West European relationship with Russia?

MR. PONEMAN: Well, look, the United States has been very clear for a long, long time that we favor free and diverse access to energy from all sources all over the world. For many, many years that discussion was very much centered on the question of pipelines. And we still continue to favor the propagation of pipelines in as many directions as is possible to assure that the nations of the world maintain access to the energy supplies they need to promote their own country’s prosperity.

And moving East, moving West – and clearly Turkey has and will continue to have a central role in that. At the same time, it turns out that Providence has endowed more nations with shale gas resources than previously had been appreciated. Clearly that’s going to have an effect on the economics of global access to gas.

But in our judgment, so long as the countries are able to obtain, whether from pipelines or from accessing their own shale gas resources, the energy that they need to make their economies grow and to create good jobs for their people, we are happy to see that development continue so long as in either case is done in a responsible manner that is respectful of the environment and the need for the people to get the energy that they need to drive their businesses and drive their economies.

MR. KEMPE: Thank you. Let me make a shift to renewables. All of the above.

All of the above – and forgive me; maybe I’m just too much of a cynic – just sounds a little bit to me like I’m going to satisfy all political constituencies here. The market doesn’t believe in an all-of-the-above. The market believes in what is going to be most profitable, what is going to be most sensible, et cetera.

If you have gas coming in in these quantities at these prices, people fear that it’s going to take investment and interest away from renewables. What’s your answer to that?

MR. PONEMAN: The input of energy into production is always going to be a critical determinant as to the profitability of any activity. And so whether it’s via efficiency or renewable technologies or resource to conventional hydrocarbons, any way you can minimize that is going to be beneficial. And therefore, there is nothing political or insubstantial about finding any set of energy solutions that will address those problems.

When it comes to renewables and clean sources of energy, there are a lot of things that drive the country in that direction sheerly out of considerations of competitiveness, for example the propagation of new energy standards for appliance efficiency around the world.

It’s not just in the United States; it’s in many other standards through the Clean Energy Ministerial and our super-efficiency appliance initiatives that – light bulbs, refrigeration. All of these standards drive innovation to reduce the consumption of energy, not in a manner that’s sentimental in the least but in a manner that actually reduces the cost of requirements that economies around the world will continue to have.

And what has happened is, if you look historically at things like lighting and refrigeration, is that the increase of standards that might be driven by environmental considerations has had the effect of lowering both the costs of these advanced energy technologies and their overall reduction of greenhouse gas emissions.

So whether it’s though clean energy standards or new appliance efficiency standards, you are going to, I think, continue to find ways in which, in a sheer economically driven analysis, you’re going to find profitable investments to be made there.

One additional point: As many of these technologies have matured, we have found that there are technological advances that will continue to reduce their costs, in part because of the scale at which they’re deployed. So, for example, under the U.S. American Recovery and Reinvestment Act, we have invested on the order of 30-plus billion dollars, directly leveraging on the order of $90 billion in some of the biggest wind farms, the biggest solar farms in the world.

When you get the scale of these investments up high enough, the marginal cost of the capital that is required to invest in them goes down. And as you do that, then more and more renewable energies become more competitive than they otherwise would have been.

That’s the direction that we want to see the economy go in eventually so that we are able, by reducing the cost of capital for some of these renewable technologies, to bring them down to the point where they’re actually competitive at a levelized cost of electricity standard against some of the conventional forms of energy.

Once that happens, then renewable forms of energy can compete very effectively against conventional forms of energy, and then we’ll get both the benefits of economical energy to drive our economies, but also the benefits of reduced climate emissions that the president made clear we’re going to continue to focus on.

MR. KEMPE: Wow, what a fascinating answer. Let me drill down on that just a little bit more.

For those in the audience who are not American, first of all you’re very lucky you didn’t have to go through our endless campaign over the last whatever months, but we’ve had a real debate in the United States about the role of government, and you’re just talking now about the role of government in innovation.

Talk about that a little bit, because I know you’ve thought about it a lot, Dan. As you’re looking at energy innovation, what is the role of government? What is the role of the private sector? What is the way that government can be most effective?

A lot of businesspeople out here, a lot of investors, a lot of people running companies in these industries. Talk to us a little bit – and if you can give one or two examples also of where you see the role of government, where you see the role of the private sector, and how they interact with each other in creating the maximum benefit of innovation in this industry.

MR. PONEMAN: Well, first let me be very clear that in terms of the engine for innovation in the United States of America, it is I think impossible to exaggerate the faith we place in private initiative.

And I’m often reminded of an unbelievable letter I remember seeing at an exhibit at the Smithsonian a few years ago. And it was a letter written about 1897 or 1898 from a guy who, with his brother, ran a bicycle shop in Dayton, Ohio. And he was writing, I think, to the librarian of Congress.

And he said: Dear sir, I am seeking to explore the principles of flight and the possibilities of heavier-than-air machines to break the bonds of gravity. If you could kindly refer me to some books on this topic I would be happy to remit the price. You know, yours very truly, Wilber Wright. And this was, like, five years before Kitty Hawk.

And so in terms of power of private initiative, that is something that has been and will remain pivotal. All that having been said, the role of the U.S. government for many, many decades now has been one of seeking those areas of technology that cannot reasonably be expected to produce early returns and to invest in those areas with a view to providing a basis in expanding technology that could support subsequent investments.

For me, the most prodigious example is the one I gave in my remarks – $137 million the U.S. government put in these very, at that point, preliminary technologies – horizontal drilling and hydraulic fracturing – that 20, 30 years later have given rise to tremendous benefits in terms of the shale gas revolution.

Even now, as we are looking at the effects of that revolution, let me give one more example. In going out to Arkansas and visiting the Fayetteville Gas Shale, I went to a compressed natural gas station, and you could fill up your car for compressed natural gas at a price of $1.10 gas gallon equivalent at a time when my local filling station was charging me $4 a gallon.

That kind of price deferential can drive innovation. So our organization that we set up a few years ago, ARPA-E, the Advanced Research Project Agency for Energy, which was modeled on the Defense Advance Research Project Agency that was set up after Sputnik, invested in 30 projects to look at ways in which you could shrink the size and weight of the tanks for compressed natural gas vehicles. Nowadays they’re requiring the order of 3,600 pounds per square inch, which is like a big scuba tank.

If you could shrink that down through use of lighter tensile materials, if you could improve the absorbent materials that could pack more molecules in so that you would not need that big heavy tank, if you could find a way to go to the individual homes and get a more efficient pump to fill up the CNG vehicles, all of a sudden you could take a now huge gas resource and find a way to translate it from not just 2 percent of the vehicle fleet, because it’s confined basically to places that have a built-in infrastructure for forklifts and a small fleet-like arrangement, to something that could propagate across the whole light-duty vehicle fleet.

If you do that, you could end up having 60 percent of the market available from natural gas vehicles, which would find a home for all of these prodigious resources of gas that we’re finding, reduce climate emissions, and find a cheaper way for people to drive around.

So these are the kinds of things where we’re trying to see around the next corner, and whether it’s through the hub that we’ve put into place for battery technologies and building efficiency or through the Frontier Research Centers that we’ve put, 46 of them, around, where researchers can try to make some of these breakthroughs, these are the kind of things that are going to potentially provide the breakthroughs that are going to provide step function reductions in the cost of our energy and help propel the next wave of innovation and economic growth.

MR. KEMPE: We had a small dinner last night for the sort of leaders council of this forum where we talked a little bit about the next big thing. Is that the next big thing? Is a natural gas-driven vehicle globally – which could be huge – huge for the car industry, huge for the gas industry, devastating for the oil industry. Is that the next big thing?

If you’re looking 10 years out and you’re looking out on the streets, the cluttered, crowded, unnavigable streets of Istanbul, what will we see that’s different? What’s the next big thing in energy?

MR. PONEMAN: Well, of course the answer is we don’t know. And I think the challenge here is to establish the conditions that will allow the next best thing to be discovered. It could be what I’ve described in terms of the transformation of our vehicle fleet in that direction.

We could find breakthroughs in battery technology either at the level of grid-level storage or in terms of automobiles that could provide a step function improvement in electrification of our fleet.

I think the important thing to do is to set in place the conditions that, A, are permissive of the discovery of the next great thing through modest investments, not in which governments are picking winners and losers but in which governments are providing a wide array of testing environments that will permit exploration of a wide variety of technologies, and they will in turn allow innovators and the markets to discover what the next best thing is.

I think the critical thing is to get the investment from the public sector in very, very early where at the level of even pure science, material science and so forth, we can make those fundamental breakthroughs in physics and material sciences and so forth that then enable people who have got their wherewithal through access to private capital and some applicable ideas to take the intellectual property and convert it into something exciting and useful.

At the end of the day, it’s going to be the force of the marketplace, supply and demand, and the testing places provided by new technologies that are forced to go out into the world to make their own way that’s going to decide what’s the next big thing.

MR. KEMPE: Thank you. So last two questions – and thank you all, because we’re really gathering the questions from your interests.

The Wall Street Journal reported – and I know you’ve worked on this. I know you’ve spent time in Kurdistan with Iraq. The Wall Street Journal reported last month that Iraq’s oil output is in track to more than double in the next decade – this is neighbor of Turkey, Iraq – supplying almost half the growth in world oil supply, from what we know right now, and then making the country a driver of future crude prices.

What implications does this trend have for Iraq? Where does Iraqi Kurdistan fit into that and their production? What’s your view on that?

MR. PONEMAN: For well over the past year, Fred, as the United States was looking at the evolution of its role as we wound down our military involvement in Iraq, Vice President Biden led a process to make sure that we would continue to be good partners in a strategic framework with Iraq as it continued to evolve into a stable, prosperous democratic nation.

And here I just have to once again acknowledge the tremendous leadership that Ambassador Jim Jeffrey provided during that very important period. It’s actually been an extraordinary story, and I hope he’ll forgive me for telling a story that Jim Jeffery told me, which is this is hard stuff day by day.

And as we went from ministry to ministry in talking about meeting the challenges of restoring the onshore infrastructure that was needed to take these very impressive southern oil fields and bring them back to market, going through the KAAOT and the ABOT terminals out at sea, which we flew over to see how they were still stacking up the tankers coming in to get the product of the southern oil fields. Day to day it’s a very hard challenge to watch and to overcome, but year by year you see extraordinary progress.

I just met a couple of days ago with the minister of oil from Iraq, and he told me that they’re up to 3.3 million barrels of oil per day. This, I think, promises a great deal of stability and prosperity for that country and we want to keep working with them as they seek to develop those very important resources. But equally clear is that in preserving the future of a unified and prosperous Iraq, that the resources of the north also are seeking their way to market.

We’re going to continue working with the people in Iraq, in all parts of Iraq, with the central government, with the regional governments, in trying to assure that under the terms of their constitution, that the prodigious resources that have been very important not only in their own development of their own economy but in terms of the global economy for oil and gas and capturing the gas that is coming out of the southern fields as well and bringing them to sources for power generation in Iraq for re-injection into the fields for Iraq and ultimately for exports to other neighboring countries that need that gas, that that’s a process that we continue to encourage and to work very closely with our partners throughout Iraq in helping to bring it to realization.

MR. KEMPE: Thank you very much for that.

Final question: nuclear energy. Turkey seems to be moving forward. I just got back from the UAE where they’re going to work on four new plants. President Obama’s all-of-the-above energy strategy includes nuclear. Germany is getting out of it. What’s the worldwide potential? What’s the U.S. potential? How do you see nuclear in the mix?

MR. PONEMAN: Well, still as we speak here, Fred, the United States has 104 operating reactors. It’s 20 percent of our overall electricity. We continue to see nuclear energy as a very important part of our energy future. This is a decision that many countries around the world are making.

Clearly the Fukushima experience has appropriately brought many of us together to talk about best practices. We got together just a couple of months after Fukushima in Vienna at the International Atomic Energy Agency to share best practices. But I believe that it does not fundamentally alter the equation in the sense that if you’re looking for large sources of baseload electricity that do not emit carbon, nuclear is still a very important part of that equation.

We still have to make sure, as we pursue the nuclear opportunity, that we keep the same issues in mind that have always been dominant in driving our international posture on nuclear. Number one, we have to make sure that safety comes first. This is something that’s nothing new about it, but it’s a lesson that’s continuously reinforced, and Fukushima is only the last reminder, but, frankly, we did not need reminding.

But I think all of us will continue to make sure that in terms of standby power arrangements, in terms of making sure that your spent fuel ponds are designed in such a way that you have adequate cooling water available, that you have passive systems available to keep them safe – I think you’re going to continue to see the studies that we have done in terms of looking at the back end of the fuel cycle, most recently through the blue ribbon commission that the great Atlantic Council leader Brent Scowcroft co-chaired with former Congressman Lee Hamilton – that we think very responsibly about how to steward the used fuel that comes out of those reactors and find appropriate long-term storage and disposal mechanisms.

And finally, and critically importantly, that as we continue to pursue the nuclear option, we do it in a manner that minimizes the risks of the proliferation of nuclear weapons. Nuclear technology has been and will remain a very important source of carbon-free electricity, but it is absolutely essential that, as we do so, we never lose sight of those very critical imperatives that we do it safely with a view to the stewardship of the materials that come out of that in a manner that does not lead either to the proliferation of the technologies or of the materials that could lead our adversaries or terrorists to make improper use of them.

And if we continue to be as focused on that as we have been, I think we will continue to be able to take the benefits of the responsible use of nuclear energy and have that be a very important part of our low-carbon future.

MR. KEMPE: Mr. Deputy Secretary, before I close this evening I just want to say a couple of things.

This is a terrific chance to have heard from one of our most brilliant and committed public servants. And on behalf of everyone here, I just want to thank you for your service, not only to the United States but for all of our well being on this set of crucial issues. Thank you very much. (Applause.)

MR. PONEMAN: Thank you.

MR. KEMPE: We will do a transcript of this conversation because I think we got into some really fascinating issues in a deep way, so that you can find them. I’m not sure how quickly we’ll get it up onto our website.

Tomorrow morning we are going to resume with a special breakfast briefing on the International Energy Agency’s World Energy Outlook Report that has got so much news this week. IEA chief economist, Fatih Birol, is going to offer commentary. Breakfast itself is 7:45 a.m. We will start promptly at 8:00 a.m. That’s why we’re ending, by Turkish standards, somewhat early tonight.

We’re also going to have with us BP’s chief economist, Christof Rühl. So that will be very fascinating. Then our concurrent sessions begin at 9:00 a.m. The first session will focus on the results of the U.S. elections and what they mean for U.S. foreign policy.

We’ve never had a session on the United States at this Energy and Economic Forum in Europe and in this region, but by popular demand we’re doing that tomorrow. And then the parallel session will be on East Mediterranean gas.

So with that I’m pleased to bring this session to a close. Please thank me – please join me in thanking Deputy Secretary Poneman. What a fascinating conversation this was. Thank you. (Applause.)


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