Wednesday, November 09, 2005

Grilling the Chiefs

The heads of the largest US oil and gas companies, including the US subsidiary of Shell, will testify before the US Senate today (9:30 AM, C-SPAN3.) Energy markets have given the economy an E-ticket ride for the last year-and-a-half, and these conditions have produced remarkable profits at Exxon, Chevron, ConocoPhillips, etc. Under the circumstances, no one should be surprised to see energy CEOs hauled before Congress, but other than attempting to shame them for making lots of money while the rest of the country struggles to pay its fuel bills, what can we really learn?

The premise of the hearing appears to have been set by Senator Domenici, the chair of the Energy Committee, who said, “Oil companies have failed to tell us and show us what they are doing with these profits that justify them.” Fair enough, though I'm not aware of any restriction that companies may earn only those profits they can "justify"; it would certainly be news to Yahoo and Google, and to a number of large banks. The Congress could be kept pretty busy interviewing executives of companies earning more than, say, a 5% net margin on sales. (The big oils are currently making about 7-10%.)

If this is going to be more than an opportunity for Senators to show their constituencies that they are seriously concerned about our energy woes, they will need to ask more insightful questions than, "What are you doing with all the money?" Here are a few suggestions, by category:

  • Are there any significant domestic reserves of oil and natural gas that would be economical to produce, but to which you do not have access? Where are they, and what prevents your bringing them to market?
  • How can the Congress and the Government assist the industry in obtaining access to world-class energy reserves in countries that currently limit their access to monopoly state oil and gas enterprises?
  • Many of your companies currently return as much cash to stockholders as you invest in finding and developing new oil and gas fields. Please explain all of the factors governing these decisions, including the influence of institutional investors and equity analysts.

Natural Gas:

  • Four years ago, natural gas was touted as a cheap, plentiful and environmentally sound fuel. Why has supply failed to keep up with the growth in demand, resulting in the quadrupling of natural gas prices?
  • How much natural gas is available internationally, and what investment and permits would be required in order to import an additional 5 billion cubic feet per day of gas into the US? How soon could this natural gas be available, and what impact would it have on domestic natural gas prices?

Refining & Marketing:

  • Please explain to consumers how the products refined from crude oil reach local gas stations, including the use of location exchanges and "time trades", and describe your involvement in this "value chain."
  • Major oil companies have sold or shut down a number of US refineries in the last 10 years. Please explain the factors involved in these decisions, and comment on the relative attractiveness of building new, "grass roots" refining capacity now.
  • Several Senators and Congressmen have proposed the development of "strategic product reserves", in which gasoline and heating oil could be stockpiled for use in the event of a supply disruption or natural disaster, such as the recent hurricanes. How would these stockpiles affect existing mechanisms for meeting seasonal fluctuations in demand? What prevents the industry from holding large enough commercial inventories to meet emergency needs?

Alternative Energy:

  • Please describe the economics and technological readiness of alternative energy technologies, including both unconventional hydrocarbons and renewable resources, with particular emphasis on those capable of producing liquid fuels that could be distributed through existing infrastructure.
  • How much investment would be required, and how quickly could facilities be brought on-stream to produce one million barrels per day from these sources? 10 million barrels per day?

You'll note that none of these questions addresses efficiency or any other demand-side concerns. Frankly, I'm not sure the companies that supply these fuels have any deeper insights into how and why we use their products than the rest of us do, and they could spend the next month just answering the above in sufficient detail. Meanwhile, I'll be watching today with high interest--if low expectations--to hear something that might surprise me, from either side of the discussion.

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