Tuesday, September 25, 2007

Global Energy Overview

I’m back in Connecticut this week, attending the annual Pacesetters Energy Conference of John S. Herold, Inc., which sponsors this blog. The conference brings together the oil & gas and investment communities, focusing on the major trends in the energy industry and their financial consequences. This year it is taking place against a backdrop of relevant events nearby, as the UN meets in New York and the President convenes an international conference on climate change in D.C. The UN session includes the visit of Iran’s President Ahmadinejad, the walking personification of political risk. It’s going to be an interesting week.

The opening panel of the conference provided some interesting statistics on the publicly-traded energy companies that Herold tracks. The industry spent $400 billion in “upstream” capital investments last year, apparently constituting the seventh consecutive increase and exceeding the total cash flow of the sector for the first time since the 1990s—when that cash flow was much lower. But because of limited access to resources around the world—a theme I’ve touched on many times—aggregate oil reserves have increased only modestly, and much of that has come from the Canadian oil sands. And the combination of weaker natural gas prices and rising costs are putting pressure on the industry’s profit margins—not something you expect to hear with oil at $80/barrel.

These are serious issues, to be sure, but in his videotaped message at the start of the conference Ron Mobed, the President and COO of IHS Energy, which recently acquired Herold, mentioned the “environmental and climate change concerns that are currently the biggest drivers of change in operating practices in the industry today.” Given the magnitude of the other challenges, such as political risk and access to resources, I thought this statement was remarkable.

Thursday morning I will be moderating a panel discussion on alternative energy, with participation from a major oil company, an ethanol technology startup, a large consultancy, a coal processor, and the US Department of Agriculture. Alternative energy is going to play an increasingly important role in connecting the energy industry to climate change. Not only is it a principal avenue for reducing emissions, both globally and for the industry’s own operations, but it could prove essential for making the product slate of energy companies compatible with a world of constrained carbon emissions and effectively constrained hydrocarbon production.

My postings for the remainder of the week will include some of the key insights from the conference, along with my comments on any noteworthy developments from NY and DC.

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