Friday, May 25, 2007

Fuel vs. Biofuel

Yesterday's New York Times carried an interesting article examining the conflict between biofuels and conventional fuels from a different angle. This isn't about resistance to E85, or the growing food vs. fuel problem manifesting at grocery stores around the world. Rather, it's a simple question of competing future fuel supplies that domestic refinery owners must factor into their expansion plans. As the article explains, industry analysts and company officials are starting to express concern that expanding biofuels production, driven by a new federal standard, will put a cap on plans to increase refinery capacity.

I raised this issue in an energy blogger conference call hosted by the American Petroleum Institute last week, and I've been thinking about it ever since. Ethanol production in the US last year stood at 4.9 billion gallons. 15 billion gallons per year--still well short of the President's target of 35 billion gallons--is a reasonable expectation for 2012, but it's also the magic level at which the combination of corn supply curves and the ability to blend ethanol into conventional gasoline hit natural limits, using current technology. In five years the output of any refinery expansions begun this year or next would be competing with an extra 10+ billion gallons/year of biofuel. That incremental ethanol is the equivalent of 460,000 barrels per day (bpd) of gasoline, adjusted for energy content.

A company planning a refinery expansion would have to consider the future market in which its project would operate, when estimating its financial returns. Between now and 2012, the US gasoline market could expand by 570,000 bpd, if it grew at a typical 1%/year over the 2006 average. However, mandated ethanol expansion would leave only 110,000 bpd of that market growth for refinery expansions to cover. At an average gasoline yield of 55%, that equates to 200,000 bpd of integrated refining capacity, or roughly one new refinery. Bear in mind that the industry has been talking about adding the equivalent of six new refineries over that period.

There's another piece of the market that our hypothetical company project manager couldn't ignore: imports. Gasoline imports have ranged from as little as about 600,000 bpd to as much as 1.6 million bpd in the last three years, averaging 1.1 million last year. Even on the minimum side of that range, there's plenty of scope for backing out imports with new US capacity. To proceed on that basis, however, a US refiner would have to feel confident in bringing an expansion on-stream at a combined capital and operating cost lower than that for a new offshore refinery, adjusted for freight. Given the higher construction, permitting and labor costs in the US, compared to, say, the Middle East, that looks like a risky bet. Even if the expansion would compete with an existing refinery in Europe, rather than a start-up elsewhere, it's still a shaky proposition, because of the difference between incremental and full-cost economics. And if higher gas prices finally slowed the growth of the US gasoline market, the whole thing looks like a loser.

The expansion of US ethanol blending to 15 billion gallons or more over the next five years has a direct impact on the headroom for refinery capacity additions. No one should expect oil companies to make multi-billion dollar investments that don't offer the prospect of attractive returns, especially considering the risks that go along with these facilities. Nor could canceling previously announced projects be fairly characterized as keeping supply off the market, since these companies are not regulated utilities, which get a guaranteed return on new capacity. Unless I've missed something significant, any supply-based price relief for gasoline may have to come from ethanol producers, rather than new refining capacity not already in the works.

Please note: Energy Outlook will be on vacation next week, with regular postings resuming on June 4.

Thursday, May 24, 2007

Advice from the Czar

In a counterpoint to yesterday's posting, it seems that although many 1970s energy notions are well past their sell-by dates, there are still some figures from that period who have useful advice to impart. While I was focused on "energy theater" in D.C., I missed seeing an eminently sensible op-ed in the NY Times on the requirements of effective energy policy. It was written by President Ford's energy advisor, Frank Zarb. Describing our problems with a level of objectivity that evokes nostalgia, he observed, "The basic elements of a responsible energy policy are not complicated, but the politics are horrendous." While the first portion of that sentence is bit of an over-simplification, its punchline is spot on.

I'm just old enough to remember news reports during the first energy crisis that began something like this: "In Washington today, Energy Czar Frank Zarb said..." I was always amused by the coincidence of an official with such an alliterative name and title. After President Ford died last year, Americans were able to reconsider his brief but challenging term of office from the vantage point of three decades. The pragmatism and frankness of his administration looked wise, rather than naive, after so many years of arguing about ideology. Mr. Zarb's comments on energy policy reflect that same kind of pragmatism, criticizing the mistakes of others in the mildest terms, and looking back to look ahead, rather than score points.

A glance at yesterday's weekly report from the Department of Energy reminds us how much the problem has evolved since Mr. Zarb ran one of its predecessor agencies. Not only does the US now import twice as much crude oil as we produce--that ratio was 1:3 back then--but we rely on foreign refiners to satisfy 12% of our gasoline demand (2006 average). If a new poll is right about the level of gasoline prices necessary to induce consumers to change their driving habits--$4.38/gallon--it will be extremely difficult to reverse these trends. Nor can our energy problems be solved in isolation from the local environmental concerns that were mostly evident in the 1970s and a global challenge that certainly wasn't. Ultimately, energy security is a much more appropriate target and mindset now than energy independence, which might have looked achievable in 1975.

Mr. Zarb is entirely correct that any effective US energy policy must employ coordinated efforts to increase supply and reduce demand, and that we cannot ignore some of our best options. That would mean simultaneously tackling the politics of fuel taxation, fuel economy, energy infrastructure, offshore drilling, nuclear power and nuclear waste--on a practical, rather than ideological basis. Are we really ready for that, or are we happier looking for scapegoats? The poll referenced above offers an answer: a third of Americans blame high gas prices on oil company greed, compared to only 15% who attribute them to supply and demand.

Wednesday, May 23, 2007

Short Memories

One of my ongoing themes here is that, despite high energy prices that now rival those of the last energy crisis, we are not experiencing the second coming of the 1970s. Unfortunately, we do seem fated to revisit every bad energy idea from that period, and today we have two on display. First, a columnist in the Washington Post proposes establishing a national oil company (NOC) to promote expanded supply, new refineries, and "hyper-competitive" pricing. Then later this morning the Joint Economic Committee of the Congress is holding a hearing on whether to pursue breaking up the largest US oil companies. At this rate, I'd better make room in my closet for the paisley shirts and leisure suits that must surely be on their way.

In his column Steven Pearlstein anticipates all sorts of oil industry opposition to the idea of a chartered national oil company set up to compete with them, and given all sorts of breaks on refinery siting and permitting and production from federal lands. Never mind that if the existing oil companies had been given those breaks when energy prices were low, we might not be in the present pickle. While I'm sure Mr. Pearlstein's plan would provoke the expected response from energy companies and trade associations, the biggest complaints ought to come from taxpayers and watchdog groups. This approach was tried all over the developed world in the 1970s, and with very few exceptions, it was given up as a bad idea. The successful NOCs are all in big net-producing countries, not net consumers. The history of Petro-Canada, founded in 1975 and 80% privatized in the early 1990s, illustrates this cycle. Mr. Pearlstein probably isn't serious, of course. His contrasting portrayal of a hypothetical NOC seems mainly intended to shame the publicly-traded oil firms for being profitable and rewarding their shareholders. But in today's climate, I wouldn't be surprised to see some legislator take up this mock cause.

Turning to today's Congressional hearing, it has become an article of faith in some quarters that the country's energy woes are the result of the industry consolidation that took place in the late nineties and early oughts. Smaller, more aggressive competitors would have apparently increased oil production and expanded their refineries at a faster pace, so that while global oil prices might now be high, at least refining margins would be lower, with consumers paying more like $2.40/gallon, instead of $3.22. But while you're unlikely to find an industry insider less enamored of merger mania than I am, this scenario flies in the face of the economic facts that drove those mergers in the first place.

From 1997-2001 I worked in Texaco's Corporate Planning & Economics Department. During that period, we experienced the disdain of investors for "old economy" industrial firms that needed capital to compete with the growing power of the NOCs in producing countries, which held more than 80% of the world's oil reserves. We just weren't New Economy enough. Then, to add insult to injury, the price of oil collapsed from the $20s to single digits, before recovering. The mergers triggered by these events weren't focused on market domination and pricing power: they were about ensuring the survival of an industry that had just come through a near-death experience.

One of the other concerns that occupied much of my time in that period was refineries. Simply put, they were dogs. Not only were US refineries consistently earning less than the cost of capital, but they were a constant drain on capital, because of wave after wave of environmental investments in reformulated gasoline and ever-lower sulfur diesel fuel, for which consumers didn't want to pay an extra penny. All that management wanted to do was to find ways to reduce our exposure to this awful sector, and that's exactly what we and the other majors did, through joint ventures and outright sales. Is it any wonder that, on the back end of such a cycle--when demand growth has outstripped domestic capacity and our reliance on gasoline imports from Europe and elsewhere has grown steadily--refining margins are finally enjoying a bonanza? If oil companies invested as much in new refining capacity as their critics would like--even if new greenfield facilities could get permits--the result would likely be another protracted cyclical bust. In the face of a 35 billion gallon/year alternative fuels mandate, that may just happen anyway.

I persist in my hope that enough of us actually learned something from the experience of the 1970s and the energy price cycles that followed that first energy crisis. If we want to ensure that the US has access to the oil and gas it will need during a lengthy transition away from fossil fuels, then what we need is not a national oil company, and certainly not a gaggle of smaller oil companies. Instead, we need a strong, dynamic energy sector, led by companies big enough to deal with the NOCs as equals and to take expensive risks on the frontiers of technology, whether in ultra-deepwater drilling or cellulosic ethanol. The times demand something much better than merely recycling the ill-considered notions of the past.

Tuesday, May 22, 2007

Those Darn Bureaucrats

Whenever I read a headline or subtitle along the lines of one that got my attention over the weekend, I assume there's more to the story than meets the eye. "Professor says Energy Department ‘egos’ blocking hydrogen breakthrough". Shocking, if true. A professor at Purdue University has developed a process for producing hydrogen from aluminum and water, thereby avoiding many of the obstacles that stand in the way of widespread adoption of hydrogen as a clean transportation fuel. He even seems to realize that economics might determine whether his system can replace gasoline, at least in terms of the relative costs of aluminum and petroleum products at the pump. Unfortunately, if he has considered larger issues, such as creating an entire infrastructure for delivering what would eventually be over a billion tons of aluminum per year to service stations, or whether there might be a better use for the zero-emission electricity necessary to recycle the resulting aluminum oxide back into metal and ship it around the country for re-use in making zero-emission hydrogen, it isn't apparent from this MSNBC article.

Professor Woodall is certainly correct that producing, storing and delivering large quantities of hydrogen are key challenges on the way to a hydrogen economy for transportation. However, he is hardly the first person to have considered using metals or alloys for storing or generating hydrogen or other energy carriers onboard vehicles. In combination with a hydrogen fuel cell, his system is comparable to the Zinc-air "fuel cell" or battery, which generates onboard electricity from metallic zinc pellets and then recycles them at a central location. That concept seems somewhat further advanced, but it is not yet commercial, either.

All these approaches run afoul of a problem common to hydrogen and other alternative fuels that are energy carriers, but not energy sources. The closed loop of aluminum metal/aluminum oxide/aluminum metal that Professor Woodall is proposing needs an external energy source. In fact, the laws of Thermodynamics require that the energy necessary to turn the oxide back into metal must be greater than the energy that can be captured from putting the resulting hydrogen into a fuel cell. In order for this system to work, we must have either large numbers of new, non-polluting power plants, or burn additional fuel in the spare off-peak capacity of existing coal or natural gas-fired power plants, with resulting emissions. It might still be worth doing, if the overall system efficiency--including the enormous energy cost of retrieving and transporting all that aluminum--and emissions were better than fueling cars with natural gas directly, or with ethanol derived in large part from natural gas and coal, or using the electricity to recharge the batteries of plug-in hybrids or EVs. It would not be worth doing if the hydrogen were burned in internal combustion engines, as I've explained previously.

What I find distinctly unhelpful here is the professor's apparent attitude. The world is full of engineers so convinced of the logic and beauty of their ideas, that they cannot grasp that there might be some perfectly good reason why the rest of the world doesn't see things their way. My wife can attest that I occasionally fall into that trap myself. But if there was ever a "better mousetrap" season for good energy ideas, this is it. Since the idea has been taken up by a startup company, their success, rather than the queue for DOE funding, ought to be the acid test of the practicality of the professor's invention. If aluminum pellets are a viable competitor for gasoline, savvy investors will figure that out before the rest of us even hear about it.

Monday, May 21, 2007

States' Rights

Today's Washington Post included a remarkable op-ed on climate change policy. The Republican governors of two states in which I resided for about 80% of my life are asking the federal government to lead on climate change or get out of their way. In their first sentence they use the word "malfeasance" in their assessment of inaction. This is strong stuff, indeed, particularly coming from members of President's own party. However, the ironies involved here are dwarfed by the prospect of fragmenting our response to this serious global problem into 50 little pieces, or even a few regional blocs or "coalitions of the willing." Climate policy is a poor application of the principle of states' rights.

The strongest arguments in the governors' op-ed rely on the facts and statistics of greenhouse gases, rather than the precedent of previous waivers for state action under the Clean Air Act. And those facts make it abundantly clear that we are dealing with a problem of global emissions, not local pollution. While I can appreciate their frustration with the time required for a federal response to emerge--and the emissions that are accumulating in the meantime--I don't believe we can create a cohesive approach to climate change one state-house at a time. Worse, this could lead to a truncated national response, in which federal leaders defer to the states, but the states never reach unanimity in their actions.

That doesn't mean the states are wrong about the urgency of action. We must have a comprehensive federal policy on climate change, at least, and preferably on energy and climate change, since the two are so connected. But the time when it was useful for states to experiment with local measures, the results of which could be weighed for inclusion in federal policy, is passing. We don't need regional cap-and-trade mechanisms to know that this is a leading option for the country as a whole to reduce its emissions. Nor do we need 10-state tailpipe rules to tell us that any federal response to climate change that ignores the contribution of personal transportation will fall short.

As I described last week, the Administration has served up an ambitious renewable-and-alternative fuel standard and a cabinet-agency planning process. The former is a solution to something--though not necessarily climate change--while the latter is being interpreted as foot dragging. The focus now shifts to the Congress, where legislation on climate change is making its way through committee. Although Governor Rell's and Governor Schwarzenegger's op-ed was addressed to the Executive Branch, it now falls to the Senate and House to address their concerns, while acting to prevent the balkanization of US climate change policy

Friday, May 18, 2007

Hastening Sequestration

A few weeks ago I expressed concern that practical carbon capture and sequestration (CCS) might not arrive in time to do much good, if the wave of new coal power plant construction crested while it was still being developed. That posting attracted some interesting feedback, and I've been thinking about this topic ever since. Although the components of this technology have been proven, and the whole concept is being demonstrated in several projects, it's still not widely viewed as ready for commercial deployment, though many generators seem interested. The more I thought about ways to speed up the process without just throwing more money at it, the more a refinement on one of my suggestions from three weeks ago resonated. A moratorium on new coal power plant construction--with some carefully crafted loopholes--might just give everyone the right incentives to accelerate the necessary R&D, while preparing new plants for add-on sequestration later.

The fundamental problem is that it's hard to envision a politically-viable energy future for the US in which our enormous coal reserves don't play a major role for at least the next two decades. However, the consequences of using that coal without sequestering the resulting CO2 emissions are very bad. So here's the basic idea: a ten-year moratorium on building new coal-fired power plants, except for those that either
  • capture and sequester at least 75% of their CO2 emissions from the first day of operation, or
  • are designed and built to deliver a high-purity, sequestration-ready CO2 stream with minimal retro-fitting.

Such a regulation would not eliminate all new coal plants, though it would raise their capital cost significantly. It would also make them more compatible with--and less vulnerable to--our pending responses to climate change. The first "offramp" would allow plant owners to proceed with CCS technology that may still require further development to become fully functional or economical, while still beating the next-best option of gas turbines on emissions. The second offramp would circumvent a primary concern of the recent MIT "Future of Coal" study, which indicated that once built, even integrated gasification/combined-cycle (IGCC) plants would require extensive and costly modifications to retro-fit CCS. A modified moratorium would provide a technology-neutral, non-prescriptive solution that allowed the industry wide latitude in meeting its baseload power generation needs using a domestic fuel, but without creating an overhang of emissions that we might never be able to work off.

Another feature of this idea is that it would automatically make renewable energy more competitive and conservation more attractive, without additional subsidies. Negawatts, green power, and gas-fired generation would have a more level playing field with coal, which must still be part of our future energy mix. Lighting a fire under the companies working to get carbon capture and sequestration ready for the big time might even alleviate some investor concerns about coal's viability and make coal power more attractive in the long term.

Thursday, May 17, 2007

100% Hybrids?

In a brief story on Toyota's plans for future hybrid cars, a company official indicated that the cost of producing hybrids was coming down rapidly, so that by the time sales reach 1 million units per year, they would be as profitable as Toyota's non-hybrids. He went even further, suggesting that by 2020 all of Toyota's cars could be hybrids. That sounds very aggressive, but it's not really surprising. Toyota made a large investment in developing the hybrid technology, and now it's exercising the valuable option that created as their main strategy for dealing with high energy prices and higher fuel economy standards in the US and EU. At 2.5 million vehicles per year and growing, Toyota alone could make hybrids sufficiently mainstream to have a major impact on overall fuel fleet fuel economy and emissions. If this expectation can be met, it sets a very high bar for US carmakers, including Chrysler, which is back on life support.

However you read these sorts of comments, whether as a forecast or as competitive positioning, it suggests a very interesting future for the US car market. Toyota, which could shortly end up as the annual global sales leader, having outsold GM in the first quarter, is staking out its turf as the hybrid car company, built around the Hybrid Synergy Drive technology of the Prius. GM, on the other hand, is trying various hybrid configurations, including the "two-mode hybrid" on which it has partnered with Chrysler, a "mild hybrid" in pickup trucks, and its plug-in hybrid Chevy Volt prototype. Mercedes and VW will be pushing their advanced diesels, and I can't understand why Ford and GM haven't yet introduced their European diesels here. I don't know if these are the technologies that the folks crafting the revamped Corporate Average Fuel Economy Standards are counting on to deliver the 4% per year improvement in gas mileage they envision, but if all these more economical drivetrains together accounted for half the US market, we'd see the fleet mpg numbers start creeping upward again for the first time in many years.

I remember traveling with my colleagues in the late 1990s to present Texaco's corporate scenarios to a variety of company and public audiences. Part of our message on advanced technology vehicles emphasized the degree of consumer choice that was coming, after a hundred years of monopoly of one basic powertrain--a gasoline engine with power transmitted to the drive wheels mechanically. A decade later, we finally seem to be on the threshold of what we envisioned then, with consumers potentially being able to choose the same car with a conventional gasoline engine, diesel, or several levels of hybrid. We wanted to call this vision "Cool Green Wheels", but settled on "Multiple Choice Energy". Both seem apt, now.

Wednesday, May 16, 2007

Tortoise and Hare

Kudos to Tom Friedman for being one of the few public voices reminding us (NY Times Select required) that our policy on Iraq is inevitably connected to our energy policy, and not via some conspiratorial notion of "Blood for Oil." A robust energy policy promoting conservation and alternatives might just be the best Plan B we could devise--in the medium to long run. But when he suggests to us and to aspiring Presidential candidates that there is any energy plan we can put in place this year that could have a big impact next year, he undermines the seriousness of his argument and of this issue. I may hold heretical views on gasoline pricing, but I confess I'm not creative enough to imagine a government policy that could put a noticeable dent in petroleum demand within a year, without exacting an unacceptably high economic toll.

I like round numbers, and here's a good one: one million barrels per day. That's the magnitude of change in the relationship between global oil supply and demand that I believe would be necessary to shift the price of oil by enough to get the attention of OPEC, over and above normal seasonal and random fluctuations. One million barrels per day (bpd) equates to 4.8% of the 21 million bpd of petroleum products that the US consumed over the last 12 months, on average. A million doesn't sound like such a big number, in our world of commonplace billions, until you realize that the entire contribution of our primary alternative fuel program, ethanol, might grow enough to reach 450,000 bpd this year. Adjusting for ethanol's lower energy content, that's the equivalent of about 300,000 bpd of oil. Doubling that--something we might be able to do in a year on a crash basis--would reduce petroleum consumption by a net 400,000 bpd vs. 2006. And that's ignoring what it would do to the prices of food and natural gas.

Mr. Friedman's energy advisor, Dr. Verleger, suggests a higher gasoline tax, and I'm finally coming around to that idea. But consider the magnitude of tax that would be necessary to cut gasoline consumption by 600,000 bpd, 6% of current demand, to get to that million. If a $1.00/gallon increase in the national average gasoline price between 2003 and 2006 wasn't sufficient to prevent gasoline demand from growing by 4.5% over the same period, then I wonder how large a tax would be required to reduce demand by 6% within a year or two. I can't imagine Congress or the White House approving something that large, short of a national emergency.

Now, you may conclude that my choice of a million barrels per day is arbitrary, though having spent my career watching the price of oil--and a good part of that time actually trading the stuff--I'm skeptical that much less than that would move a global market which has grown to 84 million barrels per day. You might also argue that a tax that consumers knew would be in place forever would have a different effect than a gradual price increase that no one was sure would last. Probably so, though I still think it would take more than 50 cents/gallon to convince our foreign suppliers that thirty years of rhetoric about energy independence are finally producing action. That doesn't mean we shouldn't try such policies; we just ought to be realistic about what they can achieve, and how quickly.

I'd honestly be happier if I were wrong about this, and that three years of high energy prices--combined with growing worries about climate change--have prepared the way sufficiently, and all that's necessary now is a little extra nudge to transform behavior ingrained over generations, turning us into a nation of energy misers. But there's so much inertia built into our capital stock and our lifestyles. I'm afraid that solving this problem is going to require a rare combination of commitment and patience. Any candidate telling me this can be accomplished quickly--without a lot of pain--is not going to win my vote.

Tuesday, May 15, 2007

The Other Shoe

When the Supreme Court recently ruled that the Environmental Protection Agency had the authority and obligation to regulate greenhouse gas emissions under the Clean Air Act, it put the climate change issue squarely back in the Administration's lap. Yesterday the President issued his response. He is proposing legislation to implement the 35 billion gallon renewable/alternative fuel standard (RFS) introduced in the State of the Union address, along with tightening gas mileage standards for cars by 4% per year. He has also charged the EPA and the Departments of Transportation, Agriculture and Energy with cooperating on new rules to reduce greenhouse gas emissions and oil consumption, with a 2008 deadline.

Presumably this higher RFS target will be administered under the same mechanism recently established to implement the 7.5 billion gallon per year (BGY) target that became law as part in the Energy Policy Act of 2005. My initial reaction to that program was fairly negative, particularly since we are already on track to exceed that goal within a year or so, without a new bureaucracy for tradable Renewable Identification Numbers on biofuels blended into gasoline or diesel. Now I suspect that the architects of this system had the higher target in mind all along.

If you've been reading my blog for a while, you know that I have a strong bias toward energy policies that set goals without prescribing the specific means of attaining them. Reducing gasoline consumption by 20% by 2017 is a reasonable stretch objective--though still a couple of steps removed from an emissions target--but linking it to a mandate for alternative fuels could produce gains that are largely illusory, at least in terms of greenhouse gas emissions and our overall energy consumption. It implicitly places an enormous bet on cellulosic ethanol becoming practical and economical on a large scale, since domestic corn ethanol production seems likely to top out somewhere between 12-20 BGY, based on land constraints and agricultural market ripple effects.

If highly efficient ethanol from biomass, rather than food crops, doesn't materialize shortly, the energy and environmental benefits of a large biofuels mandate would be limited. Even if corn ethanol could supply all the incremental volume required, this would only reduce greenhouse gas emissions on our total 2017 gasoline consumption by about 3%, because it takes 1.3 gallons of ethanol to replace the energy in a gallon of gasoline, with greenhouse gas emissions that may be only 12-18% lower than those from gasoline. At the same time, producing an additional 30 BGY of corn ethanol would cause the US to import roughly an extra 5 billion cubic feet per day of natural gas, or 8% of our current consumption, to generate the fertilizer and fuel used to make corn ethanol. And if synfuels from coal-to-liquids are included under the alternative fuel target, emissions would actually go up, unless the synfuel plants are required to sequester their CO2 output.

Whether any of this is the best way to go about reducing emissions and oil imports, or whether the 35 billion gallon biofuel goal is even attainable, is about to become irrelevant. Once this mechanism goes into effect, refiners must sell the requisite quantities of alternative fuel or buy credits from another firm that exceeded its quota. Consumers will be paying more for fuel that may reduce our oil imports, but might not reduce total energy consumption or greenhouse gas emissions by very much. The fuels market in this country is about to change in profound ways, as will everything connected to it, and the knock-on effects are likely to surprise us in ways that go beyond the price of tortillas in Mexico.

Monday, May 14, 2007

Renewables and Water

An email from a friend triggered a line of thought that fits with many comments here about how best to fit renewable power into an energy system that doesn't match its characteristics very well. In a response to last Friday's posting (which was featured in the Wall Street Journal's Energy Roundup blog) she mentioned attending a conference and hearing a proposal to use nuclear power to provide fresh water. This idea has been around for decades, and it has been implemented in a few places. As fresh water becomes increasingly scarce in many parts of the world, nuclear desalination could become attractive. But electricity is fungible, and it seems like a shame to waste hundreds or thousands of Megawatts of reliable, baseload power on an application that doesn't require either quality, at least not to the same degree as commercial and residential customers do. This seems like a perfect application for wind or solar power.

One of the perennial arguments against renewables is their intermittency or cyclicality. Adding energy storage to smooth this out--even low-cost pumped storage--affects project economics that still generally require subsidies to match the returns from conventional energy. Several of my readers have pointed out that widely dispersed wind farms are less variable in aggregate than individually, and large grids can accommodate reasonable quantities of intermittent power without requiring storage. Fair enough, but that will only take you so far, as countries with a high concentration of wind power in a small area, such as Denmark, have learned. This is one reason you see people talking about using wind to generate hydrogen, which can be accumulated non-ratably and dispensed as needed.

Desalination seems like another, even more useful way to avoid having to match the demanding standards of the power grid. We've been storing water for millennia, and there's nothing that says that the production from a desalination plant must feed directly into the water main, without spending some time in a tank or reservoir that would naturally buffer the unpredictable generation from a facility run by wind turbines. In fact, a developer could add power storage to the mix as well, by pumping the potable water uphill and using it to generate power at times of peak demand. And unlike reactors, which come in pretty large size increments, wind and solar are essentially infinitely scalable. This isn't an argument against nuclear power, which looks like an increasingly important option in a carbon-constrained world. It's just my sense that there are better uses for the steady, high-quality power output from a reactor.

Wind and solar power are now growing rapidly, from a very small base. But mightn't they grow even faster, if, instead of forcing their output to match our established usage patterns, clever developers channeled some of their efforts into applications for which the drawbacks of current renewable energy technology don't matter?

Friday, May 11, 2007

The Usual Suspects

"Major Strasser has been shot. Round up the usual suspects."
- Captain Louis Renault (Claude Rains), "Casablanca"

Gasoline prices have been rising steadily since the middle of February, and so, with perfect predictability, the Congress is again discussing measures to deter "gouging" and tax the "windfall profits" of the oil industry. Rather than reciting my well-worn arguments about how counter-productive that would be, in addressing the serious, long-term energy problems we face, I would like to consider whether they--or we--should really wish the price of gasoline were much lower. Many of the same Senators and Representatives desiring to punish oil companies for periodically charging consumers so much for gasoline support legislation that would raise US gasoline prices permanently, as part of an overdue effort to bring our greenhouse gas emissions to heel.

It's understandable that consumers are complaining, since for many years we've enjoyed lower fuel prices than most of the developed world, because the US doesn't tax gasoline as heavily as other countries do. But even though gas prices are now setting records in nominal-dollar terms and again approaching the inflation-adjusted high water mark of the early 1980s, they are still relatively affordable in terms of the purchasing power of all but the poorest Americans. That's a pretty abstract concept, however, when you've just paid $50 to fill up your tank. I can only imagine the quantity of mail that Senators and Representatives have been receiving on this subject.

When the new Congress arrived in January, they brought with them a heightened focus on two important issues with a direct bearing on this subject: climate change and energy security. If they are serious about addressing these problems, then the country can't go on consuming increasing quantities of fossil fuels, year after year, creating serious consequences for the environment, our balance of trade and domestic security. And while a great deal of attention is being directed to increasing fuel economy standards and promoting alternative fuels, I would venture to say that most of our leaders also understand the basic relationship between price and demand. Simply put, we cannot get a handle on greenhouse gas emissions and oil imports without halting the year-on-year growth of demand for petroleum products. And that can't happen if those products revert to being as cheap as they have been. For the first time in many years, gasoline demand in California stopped growing last year, suggesting that the target gasoline price level for achieving zero growth nationally lies somewhere between $3.00 and $3.50/gallon.

At the same time, many of those decrying today's high gas prices also support legislation to cap US greenhouse gas emissions and institute a national trading system that would put a monetary value on these emissions for the first time. Imposing this measure on the petroleum industry, whether at the producer or consumer level, would inevitably increase gasoline prices. If prices for tradable emissions credits in the European markets where this has been instituted are any indication, the increase could range from $0.10-0.30/gallon.

Rather than pursuing populist assaults on Big Oil--some of the large profits of which are the result of the constraints imposed on the domestic refining industry for the last 30 years--the Congress and the President should join in telling the public that the days of cheap gasoline are over. We need to hear how serious the problems of climate change and energy security are, and that we are responsible for the energy we consume and the vehicles we choose. That would be much harder than issuing subpoenas to the oil company CEOs and threatening them with huge fines and jail time, but it is a necessary precondition of building a national consensus on energy and the environment. If we expect our leaders to level with us about the progress of the war, should we ask any less of them on energy?

Thursday, May 10, 2007

Climate Insecurity

Last Friday NPR's Science Friday featured an interview with Peter Schwartz, Chairman of the Global Business Network (GBN), on a subject he has been examining for several years: the potential for climate change to create new security challenges affecting the government and military. Peter is a genuine polymath, and he always seems to be at the leading edge of the Next Big Thing. His report for the Pentagon three years ago on the possibility of sudden climate change received national attention, and GBN has just issued a new study that provides a novel approach for gauging where and how climate change is likely to cause trouble. Contrary to an op-ed in today's Wall Street Journal, the security implications of climate change deserve much wider attention, and I recommend the GBN reports highly, along with the podcast of Friday's interview.

I have known Peter Schwartz since 1997, when he guided our strategy team in creating Texaco's corporate scenarios on the long-term future of energy. That effort put climate change on my personal radar screen for the first time. I was struck by several of his comments in the Science Friday interview. While dismissing Hurricane Katrina as a direct indicator of climate change, he highlighted what it revealed about the scale of potential future disasters and the challenges those would create for security agencies such as the Coast Guard. He also described how climate change could create more disruptions of the kind we've already seen in Somalia and Darfur. Another interesting take-away from the podcast concerned the effects of climate change on a large country like the US. While they might be offsetting over the long haul, with some regions gaining and others losing, the high rate of change could create a widespread lose/lose scenario over the short term. Anyone watching the bizarre national mix of drought, fire and flood this week can imagine what that could mean.

Generals, admirals and futurists aren't the only ones worried about the security implications of climate change. The UK government recently used its rotating leadership of the UN Security Council to broach the issue there, stirring up a turf battle over whether this matter even belongs within the purview of the Security Council, instead of the General Assembly. This is ironic, considering that the entire Kyoto process is under the aegis of the UN.

Thinking about the potential security challenges of climate change doesn't even require agreement that the process is driven by man-made emissions or that any particular prescription for mitigating its progress would be appropriate or effective. All that's necessary is the recognition that the planet is warming, which now seems irrefutable. And because of the residence times of the greenhouse gases that are already in the atmosphere, along with the enormous inertia of the agricultural, industrial and energy systems involved, we will inevitably be dealing with the economic and geopolitical consequences, no matter how quickly or decisively we reduce our emissions. The Presidential candidates of both parties would do well to pay attention to this, given the ways it could affect the world in which they will govern.

Wednesday, May 09, 2007

Contrasting Subsidies

I see that Wal-Mart is installing solar panels at selected stores in sunny California and Hawaii. In the process, it will take advantage of sufficient state and federal incentives for solar power so they will "achieve savings over their current utility rates immediately". Given the high capital cost per kW of current photovoltaic technology, those subsidies will have to offset at least half the installed cost of solar panels, because you can bet that Wal-Mart has already negotiated the most preferential rates for conventional power with its local utilities. Good on them for capitalizing on a way to use green energy to lower their costs, but how does this differ from domestic oil and gas subsidies that are routinely labeled as "corporate welfare"? Our attitudes about energy are highly conflicted, and if we're not careful, we'll end up with a robust green energy sector supplying a small fraction of our total energy needs, while becoming even more reliant on foreign suppliers for the fossil fuels that will still supply the majority of our energy needs for another couple of decades.

This isn't a rant against subsidies for solar and other new energy technologies. It makes sense to help these power sources become competitive by advancing their technology and growing to a scale at which their costs come down to a comparable level with conventional energy. This approach provides benefits for both energy security and greenhouse gas management. But in our enthusiasm for all things green, we can't lose sight of the fossil fuels that still comprise 86% of our total energy supply, and especially the domestic oil and gas that, without new technology and access to reserves that are presently off-limits, will continue to decline, while our imports grow from worrying to truly alarming levels. Ethanol can't replace all the oil we import, and wind and solar power won't be big enough for many years to substitute for the natural gas we need to make fertilizer and heat our homes, or provide on-demand power in many regions.

The obvious distinction is the enormous profitability of the fossil fuel sector. It's hard to justify any subsidy that, even indirectly, benefits Super-majors earning billions of dollars per quarter, compared to the skimpy profits (if any) earned by alternative energy firms. But Wal-mart is hardly a struggling small business, and spending tax dollars to make them more profitable--even as it makes them greener--seems no more or less defensible than forgoing tax revenues--in the form of royalty relief granted when oil prices were low--to encourage oil companies to drill in US waters, rather than in another hemisphere.

A couple of weeks ago, one of my postings attracted a comment saying, "someone sounds a little drill happy / anti environment to me ", and I suppose this one might draw more of the same. But from my perspective, the sooner we can shed the "romance of green" and start dealing with energy in a consistent way, on the basis of its economic, environmental and engineering attributes, the more effective we can be in dealing with our two conjoined problems of energy and climate change. That means treating domestic oil and, in particular, natural gas as valuable components of energy security, and far from the worst contributors to climate change.

Tuesday, May 08, 2007

Boycott Season

A friend recently forwarded an email that invited him to participate in a May 15 national protest of high gasoline prices. It urged him to forgo filling up that day, in order to send a signal to the oil companies to reduce their prices. The organizers claimed that a previous boycott in 1997 forced gas prices down "30 cents a gallon overnight." We seem to get this sort of thing every year at about this time, linked, no doubt, to the demonstrated seasonality of gasoline prices. Snopes, the urban legends website, does a nice job of poking holes in the organizers' logic, and MSNBC has researched the non-existent 1997 price drop. Rather than piling on, as I normally would, it occurred to me to ponder whether some other action might have a similar effect to what people expect from this boycott, aside from the obvious step of driving less.

While Snopes and MSNBC are correct that a one-day protest does nothing to change demand, they forget that the demand that oil companies see isn't the consumption of individual cars, but the restocking requests they receive from their retailers and distributors. Although a one-day change in refueling habits wouldn't alter those, a persistent shift would. The 243 million cars on the road in the US have a combined fuel capacity of about 87 million barrels, assuming 15 gallon tanks, on average. That's a sizable fraction of the 200 million or so barrels of gasoline in industry inventories at any point in time. In fact, the recent price increase correlates nicely with a gasoline inventory draw of 30 million barrels since February.

If we all reduced our personal gasoline inventory by just 1 gallon, which could be done by waiting until the gas gauge was closer to empty to refuel, we could put 5 million barrels back into commercial inventories. The restored inventory cushion would help cool off the market and dampen speculation. That should translate into lower pump prices within a few weeks.

There is no mystery to any of this: gasoline prices respond to changes in supply and demand. Consumers can't affect the former, but we are the latter. Anything we can do to improve our fuel economy and reduce our consumption will help, incrementally. If a family has two cars, and if they haven't already shifted as much of their driving as possible to the more economical vehicle, they can cut their bills and put another dent in demand. Inflating tires properly and driving closer to the posted speed limit also cuts demand. There's less spleen-venting satisfaction in these steps, of course, but they will save money twice. They are also a lot more appropriate than taking out our frustration on the local gas station, which is generally a small business, not a multi-national corporation.

Monday, May 07, 2007

Asking the Right Questions

Delaware needs more power, and it is considering a wide array of options for providing it, including a large offshore wind power project. What makes this situation unique is that, while high-profile offshore wind farms have been proposed--and opposed--near Cape Cod and Long Island, it is rare that the choice of wind versus coal or gas-fired power is so explicit and direct. This tradeoff usually happens at a more nebulous regional level, where it is much harder to attribute directly to the decision on whether to permit a specific wind farm. Based on the front page article in today's Washington Post, it sounds like Delaware's officials are asking the right questions.

The three primary options under consideration are apparently a 200-turbine wind farm, a gas-fired power plant, and a 600 MW coal-fired plant that might incorporate sequestration of its carbon dioxide emissions. As a result, the state must examine the nature of its power needs, whether for baseload electricity that a coal plant could best supply, or for mid-load power that either wind or gas could provide. They must also decide how to address the greenhouse gas consequences of generating more electricity. They can choose a relatively low-carbon fuel like gas, wind with zero emissions, or a promising but unproven technology for capturing and storing the larger emissions from coal. At the same time, the utility could come up with a demand-side option that would create enough efficiency gains to obviate the need for any more power. For the latter to win, however, it would have to be much better defined that the fuzzy notions of conservation that are often raised in opposition to wind farms and other energy projects.

Unsurprisingly, the citizens of Rehoboth Beach, a resort community popular with DC-area residents, are worried about whether tourists would consider a cluster of wind turbines--near the typical limits of visibility--unsightly. Some , at least, seem willing to consider the possibility that a wind farm might actually attract more tourism. That is a pleasant change from the vitriolic debate that has plagued the Cape Wind project near Nantucket.

However Delaware's choice is resolved, the issues being considered make it a microcosm of the energy choices that the whole country faces over the next several decades. It would be helpful to the national debate to have a framework that similarly puts all of the options on the same plate, so that the tradeoffs become explicit, instead of remaining murky and divorced from accountability.

Friday, May 04, 2007

A Mixed Legacy

Major oil companies are rarely home to "celebrity CEOs." BP's John Browne was the exception, and it's ironic that his departure--already in the works after a couple of years of bad results on safety--was hastened by the intense media scrutiny that celebrity status now attracts. Most of the articles about Lord Browne that I've read in the last several days have focused on two areas in which his decisions as CEO of BP put a lasting imprint on the oil and gas industry and the world beyond it: industry consolidation and climate change. I can't resist a few thoughts on both topics, which have had a significant impact on my own career.

Although not everyone sees the outcome as a good thing, Lord Browne generally gets credit for starting the wave of oil industry consolidation that began in the late 1990s. The timeline of major mergers supports this notion, with BP having announced its acquisition of Amoco in August 1998, a year before Exxon and Mobil agreed to merge. BP's acquisition of ARCO followed in 2000, creating the present company. Meanwhile, France's Total acquired first Petrofina of Belgium in 1999 and then Elf Acquitaine in 2000. 2001 saw the last changes on this scale, when Chevron merged with Texaco and Conoco with Phillips. Lord Browne's role fits neatly into a "great man" view of this history. However, for those who see leaders arising in response to events, we can't forget the pressures created by the collapse of oil prices in the late 1990s, following the Asian Economic Crisis. Shrinking oil company cash flows set the stage for consolidation, as did the realignment of the US downstream market, when Shell and Texaco joint-ventured their refining and marketing operations early in 1998.

The value of these mergers remains debatable, as does their "industrial logic." While the merged companies are clearly stronger financially, how much of that is attributable to the transactions, and how much to global market conditions beyond their control? Are the merged entities replacing more of their reserves than their predecessors could have, independently? We will never know, though Mobil, Texaco and Amoco were certainly large enough on their own to have continued participating in world-scale projects, while the productivity of tens of thousands of employees lost to "synergies" might have been helpful to an industry struggling to keep pace with the growth of energy demand. And while I don't subscribe to the idea that these mergers reduced competition by enough to harm consumers, the retail market concentration in many regions is at levels that would have been unthinkable in the 1980s. All in all, the legacy of these mergers is a mixed bag, and I don't just say that because one of them effectively ended my 22-year career at Texaco.

In contrast, I regard Lord Browne's impact on matters such as climate change and alternative energy as generally positive. He was a pioneer in recognizing the importance of these challenges and speaking out about them. Mark Moody-Stuart of Shell may have been saying many of the same things in the late '90s, but for those of us working in US major oil companies, it was different hearing it from BP, which had an operating philosophy closer to ours. Without John Browne's high profile on such issues, it would have been harder for others to break out of the pack. And while BP has not always lived up to the expectations set by its aspiration to move "Beyond Petroleum", we can't discount the subtle effect of that subversive little tagline.

It's too early to say how much Browne's legacy will be tainted by the safety problems that surfaced late in his tenure. They serve as an important reminder to leaders in any organization that big strategies are not sufficient for lasting success, without an equal attention to the details of their consequences. As John Browne departs, no one can say he was cautious or run-of-the-mill. I suspect it will be some time before we see another oil company CEO in his mold.

Thursday, May 03, 2007

Good Offsets and Bad Offsets

It is becoming increasingly evident that a variety of prominent media outlets, with views on climate change that range from deep skeptic to true believer, are broadly unconvinced of the merits of consumer-level greenhouse gas emissions offsets. The latest shots across this nascent sector's bow were fired by the New York Times and the Financial Times, joining earlier articles from the NYT and Newsweek. Because of the absence of a common ideology, I have to conclude that journalists are finding their way to this position with the help of experts who have an ax to grind against the concept and its practitioners. The exception to this is those who have turned up genuine cases of fraud and deceptive practices. In any case, the debate must leave consumers with serious doubts about the benefit of spending good money to reduce their climate footprint this way.

First, let me state that I have no dog in this fight. Although I've periodically mentioned a particular marketer of offsets, TerraPass, my only interest in their business is as a satisfied customer. With regard to offsets in general, all I have at stake is my sincere--and I believe well-informed--conviction that they create a useful means for harvesting some inexpensive first steps toward dealing with climate change, which I regard as a very serious problem.

Objections to the practice seem to fall into three main categories:
  • Offsets are illusory, providing no meaningful reduction in actual emissions, and thus have no impact on climate change.
  • Offsets make it easier for consumers to ignore and perpetuate the real emissions that result from their actions and choices.
  • The sector is new and unregulated, so you can't tell if you are paying a fair price for offsets, or if your money is going into a black hole, buying emissions reductions that would happen anyway or funding a clever scam.
I have the most sympathy for the third point, which is the main subject of the Financial Times' investigative report on offsets. Anyone buying emissions offsets needs to do enough research into the vendor's bona fides and track record to ensure that they are doing real things in the real world that are truly "additional" to the status quo. The second argument has some merit, too, but it ignores what I see as a likelier outcome: that as a consequence of their efforts in selling offsets, these marketers are raising consumers' awareness and providing measurement tools, the use of which will result in direct emissions reductions over and above any offset transactions.

As to the first argument, in many cases it reflects more on those making it than on the subject at hand. The comparison of offsets to papal indulgences, cited in the NY Times article, smacks of a puritanical strain of environmentalism that can't encompass any contribution from human ingenuity or market economics. For these folks, less is more, especially when it's your less. It must be galling to them that the exact equivalent of the annual CO2 output of a typical American car can be eliminated for about 1% of the cost of operating it, instead of through a draconian hike in fuel taxes or a radical vehicle redesign. And that's precisely why their arguments are misplaced: climate change is fundamentally different from any other environmental issue we've ever dealt with, and unless we approach it with minds that are open to novel solutions, our efforts to slow its progress will be much less effective than they might be. The world will be both poorer and warmer, if the critics of offsets have their way. Expect to hear a lot more about this issue in the years ahead.

Wednesday, May 02, 2007

Fuel Economy Policies

A column in today's Wall St. Journal takes on proposed increases in the Corporate Average Fuel Economy standards (CAFE) but unfortunately fails to offer a better alternative. The author, Mr. Jenkins, regards CAFE as anti-Detroit, anti-consumer, and ultimately poor policy. He may be right about the latter, but at the heart of his critique is the question of whether doing nothing about automotive efficiency--other than waiting for better technology--remains an option. If you believe that climate change is a serious concern, then you end up with a slate of policy choices, none of which seems likely to appeal to Mr. Jenkins' previously-expressed skepticism on the subject. The right question to be asking here is how CAFE stacks up to the other options for reducing the greenhouse gas emissions from transportation.

Last week's Economist (subscription required) offers some worrying insights. Apparently the high level of European fuel taxation, which yields prices for gasoline and diesel fuel that are roughly double what we pay here, has not created sufficient incentives for Europeans to buy cars that are frugal enough to meet the EU's emissions reduction targets. The EU is looking to congestion charges, higher registration fees for gas guzzlers, and even bigger fuel taxes, under the rubric of shifting the tax burden from labor to pollution. European vehicles already average much better gas mileage than US cars, so the hurdle for further reductions is higher. But it should give all of us pause that the equivalent of a $3 gas tax hasn't delivered the 40+ mpg that California is targeting in its proposed state CAFE.

We also can't forget that a reasonable protection for commercial vehicles in the original 1970s CAFE framework became the well-known "SUV loophole", which has boosted US oil consumption by more than the 6 billion gallons per year that ethanol will supply this year. The true impact of new CAFE standards on consumers and US car manufacturers will depend heavily on how "light trucks", "flexible fuel vehicles" and advanced technologies like plug-in hybrids are treated. Nor is it apparent that Americans would pay as much attention to a ramped-up CAFE standard as they did in the 1970s. As illustrated in this chart from the Agoraphilia blog, the gasoline price increases of the last several years have not been very dramatic in terms of purchasing power for most Americans, other than those with the lowest incomes. For the portion of the population that buys most new cars, effective fuel prices--and thus fuel economy worries--are still much lower than they were in the last energy crisis.

CAFE is only one of many policy options for addressing climate change, and it's one of the weaker ones, because it only affects the mix of cars that is offered for sale, not what consumers actually choose. Even if the political environment were right for tackling one of the tougher options, such as a carbon tax on fuel, the European experience suggests that the results might not be as dramatic as policy makers would expect. Until we have a comprehensive framework for greenhouse gas emissions, in which vehicle fuel economy is only one aspect of a broader approach on transportation emissions, higher CAFE standards are at best a symbolic step. If they are indeed a given, as appears likely, then let us hope that they are at least crafted to minimize unintended consequences along the "SUV loophole" line. Otherwise, they could further distort the market for alternative fuels and create lock-in for a marginal improvement like ethanol.

Tuesday, May 01, 2007

Replacing Venezuela

When Venezuela takes control today of the Orinoco oil fields largely developed at the expense of American oil companies, it is sending a clear signal that it is time for us to diversify our supplies. This event doesn't come as a surprise, but as yet another milestone on the path that President Chavez began when he turned the country's formerly independent national oil company, PdVSA, into an instrument of state policy. This coerced transfer of ownership ends a long period in which Venezuela was an important bulwark of US energy security. While we will continue to receive Venezuelan oil for years, because of its proximity to and suitability for US Gulf Coast refineries, we can no longer count on them to be there in a pinch, or to honor contractual commitments made in good faith. But where do we find another Venezuela, in resource terms?

A recent op-ed in the Wall St. Journal explained that the essence of energy security lies not in self-sufficiency--which hasn't been practical since the 1950s--but in a diverse supply base. Some might look to ethanol to fill the gap, but even at its expected production rate of 6 billion gallons this year, ethanol provides less volume than the oil we import from Algeria and contributes the energy equivalent of just one medium-sized offshore oil platform. For the near term, only more oil--or the conservation that has yet to materialize--can replace lost oil. As important as it has been in bolstering our diversity of supply for the last several decades, it is fortunate that Venezuela only supplies about 10% of our crude oil imports, making its gradual shift toward supplying its Latin American neighbors and China in preference to us a challenge, but not a crisis.

With resource owners such as Russia enjoying the negotiating power that high oil prices bring, many of the companies being displaced from Venezuela are looking to Canada's oil sands, where Statoil has just acquired a $2 billion stake. There aren't many other opportunities at this scale that aren't controlled by national companies. Although technically quite different from Venezuela's heavy oil reserves, the oil sands require the kind of process-intensive techniques at which the international oil majors excel. A dependable legal system makes them even more attractive. Oil sands production is growing fast enough eventually to offset any lost supplies from Venezuela, though at an environmental cost that includes large quantities of greenhouse gas emissions.

The situation in Venezuela illustrates some important lessons about the role of publicly-traded oil companies and the challenges they face. Although earning disconcertingly large profits at the moment, these firms face daunting risks and deteriorating terms in the countries where most of their future production lies. Russia's recent "renegotiation" with Shell over the Sakhalin LNG project looks little different from what Sr. Chavez has just done to ExxonMobil, Chevron and ConocoPhillips. At the same time, the direct country-to-country ties that are emerging as a threat to the prevailing commercial model of oil development carry their own risks. If the web of petroleum links between the US and Venezuela were at the government-to-government level, rather than between large international oil companies and PdVSA, would we now be looking at a complete cutoff of supply, rather than a partial nationalization?

Given all the geopolitical risks and environmental challenges that are piling up around the world, we need large, financially-sound US-based energy companies that can find and develop oil and gas under a variety of geological and political conditions, in a large number of countries. Whether we like it or not, these companies will provide the main sources of our energy security for years to come, until alternative energy eventually grows large enough to displace them from this function.