Wednesday, April 02, 2008

Big Oil and Renewable Energy

After watching nearly three hours of yesterday's Congressional hearing on gas prices, I'm torn between my desire to emphasize the few positive aspects of the meeting or the serious contradictions it revealed. Let's start with the latter and try to end on a more uplifting note. The most obvious disconnect relates to the implicit and probably erroneous assumption by the chairman and many members of the House Select Committee on Energy Independence and Global Warming that lower fuel prices are actually consistent with either of the principal aims of the committee's charter. But while high gasoline prices provided the subtext, most of the discussion-- including Chairman Markey's Puritan-style shaming of ExxonMobil for its lack of investment in alternative energy--revolved around the tension between the need to continue providing conventional energy, while renewable energy ramps up. That was exemplified by Rep. Walden's important question, "How do we do both?"

In his remarks, Rep. Markey (D-MA) issued a challenge to oil companies to invest 10% of their profits in renewable energy, with the veiled threat that if they didn't, then losing $18 billion per year in tax benefits might not be the worst outcome they face. Absent from this exhortation, however, was any recognition that some forms of renewable energy are not as beneficial as others, either in terms of reducing greenhouse gas emissions or in making a substantially positive net contribution to the country's energy balance. The committee seemed to be saying that biofuels are the obvious answer, and that any oil company not investing large sums in them is cheating consumers. While that might provide useful soundbites for some House Members' reelection campaigns this fall, this line of argument has largely been superseded by events.

Although the net impact of renewable energy remains modest, compared to the energy we derive from fossil fuels, the recent dramatic growth of biofuels has positioned them as a key element of current and future liquid fuel volumes, which no industry supply and demand forecast can afford to ignore. With one exception, the companies whose executives testified yesterday are already significant participants in this sector, with investments in biofuel production, next-generation biofuel R&D, and, as a result of fuel specifications and renewable fuel mandates, as some of the largest blenders of biofuels in the world. It remains to be seen, however, whether any of these companies will ultimately come out on top in the renewable energy marketplace, which is dominated by a host of new entrants. This is a classic case of the Innovator's Dilemma, with the major oil companies' renewable energy businesses having to compete for financial and human resources and management attention with the giant upstream and refining segments that are still the engines of oil company economic value, and will be for years to come.

When asked their highest priorities for addressing today's high energy prices and our reliance on imported oil--a situation that Chevron's Vice Chairman, Peter Robertson, characterized as "unsustainable"--all of the execs cited the urgent need for gaining access to oil and gas resources that the Congress and various states have placed off limits. (Disclosure: I own Chevron stock.) The execs stopped just short of saying that, if the Congress is serious about bringing down energy prices, it could have the largest impact by opening up the 85% of the outer continental shelf waters that are presently off-limits for drilling, rather than hammering on oil companies to invest in renewables. That is certainly born out by the size of the potential offshore opportunity, which could easily add another 1-2 million barrels per day to slipping US oil production, and by the enormous differences in physical and financial scale between conventional and renewable energy projects. ExxonMobil isn't wrong to suggest it can make more impact by sticking to its knitting in this regard, though I continue to believe they will eventually regret not taking a position in renewables now--a defensible strategic choice that has been a PR disaster for them.

The financial realities of this were explained in greater detail by Mr. Robertson in a blogger teleconference (podcast and transcript available shortly) following the hearing, arranged by API, in which he cited 40 global oil and gas projects in which Chevron is engaged globally, each greater than a billion dollars, Chevron's share, and each expected to provide substantial, profitable production. At the current scale of renewables, there are still relatively few billion-dollar projects of the kind that companies of this size must pursue, in order to have a measurable impact on their results and on shareholder value. It is still uncertain whether the billions that companies such as Shell, Chevron, ConocoPhillips and BP are investing in renewables will yield results on that scale.

I also noticed a surprising omission in yesterday's proceedings. While both the committee and the witnesses mentioned the enormous potential of Canada's oil sands for reducing US dependence on unstable overseas suppliers, the prospect that imports of oil sands syncrude might be blocked by US environmental regulations was only referenced obliquely by Mr. Simon of ExxonMobil. As I noted recently, this issue could have severe supply repercussions in the Midwest, where much of the Canadian oil we import is consumed, as well as for the overall US oil import mix. I'd call that a key missed opportunity on the part of the companies.

So with the committee telling the oil companies to help consumers by investing in renewables, and the oil execs asking Congress to help consumers by lifting restrictions on off-limits oil and gas resources, what was constructive? Well, there was a very encouraging discussion about energy efficiency and its vital contribution to reducing emissions and saving money. This is surely common ground on which the industry and government could cooperate more. The companies also heard some sage advice from Rep. Candice Miller (R-MI) that, regardless of the economic justification of their profits and prices, they face significant consumer and regulatory backlash if they aren't seen to "do the right thing with these profits." I think they ignore that at their peril and ours, because the likely regulatory response would harm the industry and be counterproductive for the entire country. Perhaps most revealingly, though, and in sharp contrast to a similar hearing involving the CEOs of these companies several years ago--and to an entirely out-of-context clip from yesterday's event that aired on last night's NBC Evening News--there was little disagreement about the fundamental drivers of high oil prices, and the degree to which the US is integrated into global energy markets. In that respect, at least, our national conversation about energy has progressed in useful ways since 2005.

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