Tuesday, November 30, 2004

Turning Back the Clock?
Someone who had slept through the last fifteen years and woke up now to read the headlines out of Russia might be forgiven for thinking the USSR was still in place. The disputed election in Ukraine and President Putin's recent announcement concerning a new generation of ICBMs provide an interesting context to the unfolding Yukos endgame. Despite this, I still think we should avoid reading too much into these events, or at least their implications for the energy industry. The Financial Times appears to share this view. (subscription required.)

About all one can say with certainty is that if we thought Russia would emerge as a democratic, market-oriented counterweight to OPEC, that now looks naive. Oil and gas have been the engines of recent Russian economic success, and are fueling its inevitable reassertion of power and influence on the world stage. Russia may never again be as important as it was during the Cold War, but neither does it seem likely to be as marginal as it was in the 1990s, when pundits frequently compared it to the Netherlands.

It is also worth recalling that the late Soviet Union was an important and fairly reliable supplier of energy to the West, even during periods of high political tension and saber rattling. So even as it clamps down on freedom of the press and meddles in the affairs of its near neighbors, Vladimir Putin's Russia will remain an important trading partner, particularly for the EU. It also contains some of the best prospects for dramatic new oil and gas finds outside the Persian Gulf, and accessing some of them will require international capital and technology.

The deeper question is not where Russia is headed, but how comfortable we are with this. Are we as enthusiastic about Russian oil and gas as an alternative to greater reliance on autocratic Middle Eastern countries, now that Russia is reverting to being an autocratic Eurasian country? If not, then we had better gear up our other alternatives quickly, including demand management, more renewables and some options that have been unpalatable for environmental reasons, such as new nuclear power plants and drilling in the Arctic National Wildlife Refuge and offshore Florida and California.

Monday, November 29, 2004

Another Wrinkle on Hydrogen
Most of the planning for a future hydrogen economy revolves around the replacement of oil-based transportation fuels with hydrogen generated by cleaner energy sources. This would then be consumed in fuel cells--either vehicular or stationary--thus providing further efficiency gains due to the higher energy recovery of these devices compared to internal combustion engines. But a new development in hydrogen production, utilizing high-temperature nuclear reactors and ceramic separation technology, might provide a way to use hydrogen to leverage existing natural gas supplies.

Large quantities of hydrogen are already produced from natural gas within oil refineries and chemical plants. This hydrogen never appears in the market, because it is consumed in the production of reformulated gasoline, low-sulfur diesel, or ammonia-based fertilizer. The total quantity of natural gas involved is roughly a billion cubic feet per day in the US alone, or about 1.5% of our total consumption.

Hydrogen generated by a few centrally-located nuclear reactors in Texas, Louisiana and New Jersey, could supply a large portion of the demand for "process hydrogen" and free up a commensurate amount of natural gas for use in homes or in power generation, backing out dirtier fuels. This strategy would only work for hydrogen produced from an emissions-free source, such as nuclear, because of the large energy losses involved in making the hydrogen.

The advantages of such an approach would include the creation of a large hydrogen supply base prior to the introduction of hydrogen-fueled cars, thus helping to break some of the chicken-and-egg dependency of a hydrogen-based transportation system. It could also help to mitigate the growing gap between natural gas supplies and potential demand.

Ultimately, the feasibility of this scheme would hinge on whether it would be easier to build high-temperature nuclear reactors for hydrogen production, or to overcome the obstacles to creating a network of LNG receiving terminals, as well as on the relative economics involved.

Friday, November 19, 2004

Thanksgiving Vacation
This will be the last new posting until Monday, November 28. My family and I will be celebrating Thanksgiving with friends in the Southwest.

Today I ran across an article that describes a new technique for storing hydrogen at roughly room temperature and normal pressure. Practical storage is the sine qua non of a potential hydrogen economy, so anything that shows promise in this area is good news for hydrogen in general. In particular, I'm no fan of high-pressure storage on vehicles, no matter how well-designed the container. Nature abhors a vacuum, and to a gas at 10,000 psi, everything around it is a vacuum. In a future blog I will go into more detail on the other promising alternatives of the moment, including metal hydrides and nanotubes.

Before signing off the for the week, here are links to some past blogs that you might find interesting, if you didn't see them the first time around. (you'll have to scroll down in the linked monthly archive to the date indicated):

The oil markets have done their job:
Have We Really Forgotten? (August 9)

Climate change as a business risk:
What Can We Agree On? (July 27)

Hybrids may be a US and Japanese phenomenon:
Where Are the European Hybrid Cars? (June 28)

Has our air gotten cleaner or dirtier?
Clean Air (April 21)

This also seems like a good time to solicit your ideas about pertinent topics for the future. As this blog nears its first anniversary, what have I neglected to discuss, or what I have spent too much time covering? You can provide this feedback either by clicking on the "comments" link below this posting, or by email mailto:gsws@optonline.net.

Have an enjoyable Thanksgiving!

Thursday, November 18, 2004

Oil Ecology - Continued
Yesterday’s blog covered one aspect of the changing global “ecology” of oil, the relationship between the majors and independents. Another important change concerns the evolving role of national oil companies, particularly those in large consuming countries, as they seek to diversify their supplies and bolster energy security. The majors have dealt with these companies for decades, often as partners but increasingly as competitors for projects. However, in the last few years new issues have given the national oil companies a potential edge in gaining access to undeveloped resources.

Human rights, sustainable development, and global environmental issues have all emerged as risks to manage, but also as factors that may determine with which countries the global oil companies can do business. All of these issues are squarely in the radar screens of socially conscious investors, who represent a sizable force in the markets, and exercise growing influence on company policies. As this article from the Financial Times points out, China and India, both of which have significant concerns about energy security, have a very different approach to of the issues cited above. This gives them access to resources that are untouchable by the majors.

Consider the impact of shareholder initiatives and lawsuits in constraining the US majors from investing in countries such as Burma. The Chinese National Oil Company and ONGC of India face no such scrutiny. So while US companies have ultimately sold their stakes in pariah states, or come in for withering criticism and pressure, CNPC and ONGC have crafted major investment strategies focused on them.

I am not suggesting that the international oil companies should be free to pursue opportunities without regard to political, social and environmental issues. These concerns are becoming much more important to global capital, and scorning them will have long-term, detrimental effects on shareholder value. Rather, the majors and their investors need to take cognizance of how the emergence of a class of players without the same constraints changes the competitive landscape and limits some opportunities.

Wednesday, November 17, 2004

A Changing Oil Ecology
Most of us grew up with a pretty clear perception of the difference between the small, independent oil companies and the giant, multi-national oil majors: the former took risks the latter didn't want to take on. While that may still be true in some instances, a decade or more of evolution and selection--natural and otherwise--have changed both the size and nature of the various niches in the industry's ecology. As this article on the UK North Sea from the Economist (subscription may be required) illustrates nicely, small companies are increasingly focusing where the rewards are too small for the majors, while the majors seek opportunities more material to their scale, often with higher risk.

This shift is the natural consequence of a period of mergers and fierce cost competition, and it has implications for global energy supply, as well as for the firms that provide it. The majors must constantly assess the relationship between sustaining and growing their production, and the need to deliver high returns to their shareholders. The extremely tight oil markets we are experiencing now are at least partly the result of this deference to capital markets, rather than to oil markets.

But there are other implications for the smaller companies. They are having to become as international as their larger brethren, and in the process must manage a whole range of political risks and cultural sensitivities--along with issues such as sustainable development and climate change--that would have been rare in the earlier heyday of the independents. They have also benefited from the maturation of producing technologies that were previously the exclusive province of the majors, such as 3-d seismic and enhanced recovery.

Several years ago, majors were busily snapping up the small-fry, and there were real questions about the future role of independents in the industry. Perhaps there should now be some questions about the majors. Many of the more mature fields--some with quite a bit of oil left to produce--are in the hands of independents, while the largest and best opportunities remain the exclusive province of national oil companies such as Saudi Aramco.

Finding and developing enough oil each year to maintain their reserves will become an increasingly difficult challenge for the majors, as demonstrated by recent figures from Wood Mackenzie (subscription required) showing that the exploration efforts of the 10 largest oil companies failed to recover their costs over the last three years. In the meantime, the future looks bright for those independents that specialize in making lemonade out of the majors' lemons.

Tuesday, November 16, 2004

Yucca Mountain vs. Buying Time
The proposed long-term nuclear waste storage site at Yucca Mountain, Nevada has been delayed by a combination of technical problems and localized opposition affecting both the site itself and the transportation of waste from hundreds of reactors and other locations to the site. (See my blog of August 12.) With the distortions of election-year rhetoric behind us, it's worth pondering the questions posed in a fascinating article in MIT's Technology Review, which suggests that delay might actually be the best strategy for dealing with our nuclear waste.

Waiting is always an alternative in any project, but it's often the least preferred, particularly when net-present-value economics are driving the decision, and the value of distant cash-flows is thus heavily discounted. NPV doesn't account for the value of information gained by waiting, nor does it consider the possibility that a much more valuable option may emerge after a few years. The best way of approaching this sort of decision is using the techniques of "real options", which explicitly value all possible future outcomes.

As I read the MIT article, it seemed to me that the author was describing a real-options approach to nuclear waste. Future "branchings" include not just the proposed facility in Nevada, but also the potential of new waste-disposal alternatives, better technology for reprocessing waste, and ways to improve the safety of sites such as Yucca. Including their potential in the calculation just might alter our choice today. Another key consideration is that deferring a permanent decision by 50 or 100 years will reduce the radioactivity--and thus both the hazards and storage challenges--of current waste.

The article didn't delve very far into any mitigating or offsetting concerns related to delay, beyond having to secure 60 temporary storage sites in lieu of one permanent site. However, delay adds to the scale of the subsequent problem, as existing reactors continue to generate waste. It also provides many more opportunities over time for disastrous security problems, including some that we simply cannot imagine today, because they would arise from new technology and techniques that develop in the interim.

Finally, and perhaps most insidiously, the absence of a permanent nuclear waste storage option would weigh heavily on any debate about the viability of new-generation nuclear plants as a high-capacity, zero-greenhouse-gas emission energy option. Without a plan for waste, new nukes are dead on arrival.

So when is delay not merely procrastination? Only if it is the result of considering all the benefits and costs of waiting and determining that time is truly on our side, something that has appeared counter-intuitive until now.

Monday, November 15, 2004

Doing the NIMBY Shuffle
In the past 11 months that I've been blogging, I've devoted much space to the problem of reconciling our energy needs with the desires of communities to have all energy infrastructure built somewhere else. Receiving terminals for Liquefied Natural Gas (LNG) get particular attention, because--barring the opening of off-limits areas to drilling--they provide the best chance for expanded use of the most environmentally sound fuel available globally in large quantities. I can now take perverse pleasure in reporting that such a facility has been proposed for my back yard.

The Broadwater Energy LNG facility would consist of a floating storage and regasification plant in Long Island Sound, with a capacity of 1 billion cubic feet per day of gas (about 1.5% of US demand), roughly equidistant from Long Island and the Connecticut coastline. This project has already come in for criticism from both the New York and Connecticut sides of the Sound.

Broadwater is only one of many LNG plants that have been proposed and opposed around the country. The sites generally provide either access to existing gas pipeline infrastructure, or, as in the case of Broadwater, proximity to large gas markets. The Northeast was short of gas last winter, with significant amounts of LNG imported through the existing Cabot facility near Boston. But as the market grows, even more gas will be needed and sources of additional pipeline gas are scarce, even if more pipelines could be built.

Opponents of Broadwater need to understand very clearly that there is no magic solution if we want natural gas to be there when we want it. We will either need more gas from this country, or more imported gas. Without LNG or new pipelines, we will eventually face the choice between turning off power plants or cutting off gas deliveries to homes and businesses. That's a truly dismal prospect, and it is completely unnecessary, if we can finally stop approaching projects like Broadwater from a purely self-centered, parochial perspective.

That doesn't mean Broadwater should get a free pass on safety and the environment, but it is clear that no LNG facility imaginable could ever satisfy all the opposition we're seeing. Now, you can choose to believe in a world in which projects like this aren't needed because we will all wake up and become much more frugal with energy, but the consequences of that fantasy will inevitably be higher consumption of dirtier fuels--with more greenhouse gas emissions--because we insisted on impossible standards and avoided the real-world tradeoffs required to ensure an adequate supply of natural gas.

Friday, November 12, 2004

Where Next for Oil Prices?
We've been living with oil at or near $50 long enough now that it has seeped into the collective consciousness and colored our views of the future. Psychologists refer to this phenomenon as an "availability bias." But as the end of the year approaches, expectations for oil prices for next year are beginning to diverge. The Energy Information Agency of the US Department of Energy has just issued a forecast of oil prices (based on West Texas Intermediate crude) in the mid- to high-$40s per barrel for next year, while the chief economist of Total has suggested it could fall back into the $30s.

The problem with forecasting prices now is that the range of possible outcomes has grown so large. With the world's excess oil capacity having been eroded to a whisker by a combination of booming demand and an array of supply problems and disruptions, the only safe prediction would seem to be for high volatility. Further disruptions could send prices soaring to record levels, while the gradual restoration of production in the Gulf of Mexico (post-hurricane repairs), Nigeria (easing unrest), Venezuela (continued recovery from the national strike) and Iraq (post-elections) should ease supply pressures. Add to this uncertainty about a Chinese economy that should start to slow in the wake of interest rate hikes by the central government. Taken together, this means we could see oil as high as $60 or $70 next year, or as low as the mid- to low-$30s. This range is so wide as to be meaningless for forecasting purposes.

As always, I have more confidence in scenarios than forecasts. Thus, one scenario might be the result of easing local tensions and promotion of supply from existing and new projects, coupled with healthy global economic growth. This would support Total's forecast, leading to gradually easing prices that might end the year near $30, much as we began 2003. Or we could see a repeat of 2004, with one supply disruption after another and unexpectedly robust growth in demand for petroleum products. Such a scenario would see prices more like the EIA forecast, with short-lived spikes into true record territory.

Fundamentally, it boils down to whether the trend is toward clearing up the numerous problems that have hampered supply, or drawing them out and adding new problems. My bet right now would be on the former, but I would have said the same for most of this year.

Thursday, November 11, 2004

Veterans' Day (Armistice Day/Remembrance Day)
Since this is one of the few occasions when I get to observe November 11 as a holiday, I'll keep today's blog brief.

Yesterday I read that the Cape Wind project off Nantucket (see my blog of March 17 and a related posting on May 6) has passed a significant milestone, with the issuance of an apparently positive environmental impact report by the Army Corps of Engineers. The report will remain in draft form during a 60-day period for public comment.

No one should expect this to be the last word on the subject, as numerous opponents--including some influential public figures--are lined up to block the project. And perhaps, as opponents insist, it should be blocked, for aesthetic reasons; perhaps this is a case of wind power being good, but not good everywhere. However, if that is so, then exactly which other backyard (or viewscape) should defer to the public's need for more energy to run our lifestyles? Opposition without meaningful alternatives looks an awful lot like cynical self-interest.

Wednesday, November 10, 2004

Is a "Mild Hybrid" an Oxymoron?
Much of the buzz about hybrid cars has come from one hot model, the Toyota Prius, now in its second, improved version and selling like hotcakes. Ford is introducing a hybrid Escape (small SUV), and Honda has several hybrid models, but no one can say these cars are really mass market yet. The introduction of a "mild hybrid" pickup truck could change that, but is it worth the extra cost and complexity?

Environmentalists and those concerned about energy security get excited about hybrids because of their potential to improve fuel economy dramatically. In the case of the Prius, this improvement amounts to at least 50% better fuel economy than a comparable Camry (admittedly a somewhat bigger car.) But with sales of 50,000 Priuses per year, how much impact can you have on the fuel economy of a 200 million car fleet?

This is where the "mild hybrid" comes in. Unlike the full hybrids, such as the Prius, it does not have a separate electric drivetrain. Rather, it saves up some of the energy of braking in a 42 Volt battery and uses it to run accessories and to enable shutting off the engine at stoplights and restarting it instantly when the driver depresses the accelerator. The net result, at least in the case of the Chevrolet Silverado hybrid pickup, is a gas savings of about 10%, on a model that has sold about 500,000 units per year (in non-hybrid form), at a cost premium about half that of the true hybrids.

The question then is whether the "mild hybrid" technology, which is simpler and less expensive than full hybridization, and can thus enter the vehicle fleet more quickly and in much larger numbers than the Prius, is a useful adjunct to full hybrids or will undermine the whole concept by disappointing owners with its modest benefits. Only consumers can answer, as they determine whether modest fuel savings plus the cachet of a hybrid are worth the extra cost. GM won't be the only carmaker watching the outcome.

Tuesday, November 09, 2004

Oil for Food Won't Disappear
A couple of weeks ago the Wall Street Journal ran an editorial on the investigation of the UN's Iraq Oil for Food program that I thought neatly summed up the current state of affairs. I didn't cite it then, because it also contained a strongly partisan component that I didn't fit with my decision not to endorse a presidential candidate. With the election over, that is no longer a concern.

After filtering out a bit of hyperbole and the comments about Mr. Annan--which verge on the personal--I believe the Journal correctly assesses the scale and importance of this scandal. As I've indicated before, I believe there is a strong case that the corruption in the Oil for Food program--and the influence that went along with it--goes beyond a simple financial scandal, because of the way it undermined the effectiveness of the international sanctions against Iraq, thus contributing to the incredibly messy scenario in which we now find ourselves.

If the war in Iraq had truly ended when President Bush declared major hostilities over, without the ensuing guerrilla campaign, the Oil for Food scandal might have been swept under the carpet in the interest of getting the new Iraq off to a good start. But given the protracted conflict in which we are locked, I doubt that the US Congress will let up on this issue or allow the Volcker investigation to lose traction, until all the facts come out.

As the casualty list mounts in the days to come, I hope the architects of this chicanery lose some sleep at the prospect of embarrassing revelations to come.

Monday, November 08, 2004

Who Gets the Gas?
Russian energy has grown in importance in the last few years, particularly in light of the country's tremendous performance in increasing its oil production, and its potential to do more. But Russian gas, backed by enormous reserves, should have a larger long term impact on the market than its oil. One country that stands to benefit from this is Japan, which desires to diversify its energy supplies and currently relies heavily on natural gas from Indonesia. But now China, with its rapid growth and insatiable appetite for raw materials, may snatch (subscription required) a plum that Japan had been counting on: the new gas reserves on Sakhalin Island, north of Japan.

ExxonMobil recently indicated that it was considering other options for its Sakhalin-1 project, which had previously been slated for a new pipeline to Japan. An LNG project or a pipeline to northern China may look at least as attractive, financially and strategically. But are there even better options no one seems to be considering?

The inevitable shift of the Asian gas industry toward Russia will create opportunities for a clever and sensible rebalancing of existing Asian gas markets. In this instance, might it make sense for Sakhalin gas to be committed to China contractually, but delivered to Japan in exchange for LNG already contracted to the latter? After all, Sakhalin sits just to the north of Hokkaido, the northernmost of Japan's major islands, while the rapidly growing cities of southern China are closer to Indonesian LNG plants than to Russian gas. Such exchanges are commonplace in the world of oil, but much less so for natural gas, with its longer contractual terms and higher infrastructure costs.

As natural gas grows in importance as a primary fuel for the region's economies, the development of a functioning gas spot market and a network of long-term logistical exchanges should follow as a natural outgrowth and an indication that gas has matured and outgrown its junior-partner status relative to oil.

Friday, November 05, 2004

Ah, Those Subsidies
Periodically I'll run across an article on renewable energy, whether solar, or wind, or something more exotic, in which the author will downplay the importance of government subsidies in making them more competitive with traditional energy by citing the "hidden subsidies" that fossil fuels enjoy. They then go on to assert that if fossil fuels had to carry the full burden of those hidden subsidies, renewables would either compete now, or be on the verge of being fully competitive. This kind of thinking holds back the development of renewable energy, rather than advancing it.

Let's start by considering what might be included in such subsidies. Given current events, some sort of security subsidy seems like an obvious and important component. A lot of oil comes from a part of the world where the US has to maintain a big military presence to ensure continued access, the Middle East. By comparison, renewables are mostly homegrown, so they impose no such burden.

The other major category of subsidy usually cited is environmental. The use of fossil fuels emits oxides of sulfur and nitrogen into the atmosphere, along with a bit of heavy metals and gobs of carbon dioxide. In addition to the high cost of mitigating these at the source, which is paid directly by the producer or user, this pollution imposes costs on society via effects such as smog, acid rain, and their consequences.

All of this can be estimated and quantified, and a number of academic studies have done so. The resulting value of the "hidden subsidies" for fossil fuels ranges from fractions of a cent to roughly 12 cents per gallon. (This figure could be even higher, depending on how much of the annual defense budget you want to attribute to oil security.) Even if you quibble with some of the methodologies in question, it's pretty obvious that the figure isn't zero, and that economic decisions about our energy systems ought to take this into account.

But if we're going to look at the full economic cost of using fossil fuels, we should also consider the offsetting penalties built into the current system. Most of these penalties come in the form of taxes, and they are significant.

Consider the taxes on road fuels. In the US these include both federal and state excise taxes, and state sales taxes. In theory the revenue from these taxes is meant to fund highways and roads, though in reality it often disappears into general funds. Federal tax collections from road fuels totaled $32.4 billion in 2001. States collect anywhere from 8 cents to 26 cents per gallon (yielding another $30.3 billion in 2001), plus sales taxes, which go up with rising fuel prices. So even in the US, with much lower fuel taxes than Europe, we're in roughly the same ballpark as some aggressive estimates of the hidden subsidies.

So what is the point of all this? I assure you it's not just another argument for the status quo, although I suppose some might see it that way. After all, gasoline is cheaper than bottled water, and it will be a while before any practical alternative can make the same claim. My point is that the whole argument about hidden subsidies is a red herring, because the case is highly debatable, at best.

If we decide that it is worthwhile to subsidize alternative and renewable energy, then we should just get on with it, rather than rationalizing that the competitive bar is kept higher than it might otherwise be, because of some sneaky subsidy for fossil fuels. You're not going to displace fossil fuels on economics alone, no matter how many "externalities" you include; what is needed is something that is at least as practical and convenient, but that also supports our other, non-economic values.

Thursday, November 04, 2004

Next Steps
With the election behind us, the world must now accept a US government with a renewed (or in many respects, initial) mandate and recognize that there is no more "waiting for John Kerry." We should use that to our advantage, as an opportunity to refresh moribund relationships, and an obvious place to start is with the US-EU partnership, as Tony Blair suggested yesterday. I see no better way to begin such a rapprochement than for the US to re-engage the Kyoto process on climate change.

Global warming may lack the urgency of Iraq or the economic impact of trade relations, but it is something that Europe takes very seriously, at both the EU and national levels. In addition, much of the EU's current policy in this area relies on market-based approaches originally advanced by the US, and for which major American corporations are now gearing up.

The Administration's previous dismissal of Kyoto burned political capital in Brussels, Paris and Berlin that might have proved valuable later in the UN Security Council, possibly even forestalling conflict in Iraq. This is water under the bridge, but rejoining the global conversation on climate change now in a serious way would signal a welcome new direction for US foreign policy.

Nor would that necessarily require ratifying the present Kyoto Treaty, which is probably not politically feasible under any president, Republican or Democratic. Kyoto is, after all, only a starting point on a long journey, and discussions on its successor will be even more important and challenging, since they will need to bring in both the US and the large, rapidly growing economies of the developing world, in order to be meaningful.

At this point you may be wondering what I'm smoking, and I admit I'm suggesting a fairly optimistic scenario. But there is a long history of US presidents doing surprising things when they feel comfortable with their base of support, as George W. Bush now must. If he's looking for an olive branch to hold out to Europe, climate change would be a great choice.

Wednesday, November 03, 2004

Waiting for An Outcome
Election Day +1
Well, in spite of an impressive showing by President Bush in winning the first absolute majority in the popular vote since his father's election in 1988, it is not yet clear (as of 9:00 AM EST) who will win the Electoral College. With most of the country focused on the cliffhangers in Ohio and farther west, smaller news items are likely to get missed today. I spotted one in the Wall Street Journal that shouldn't be overlooked, because of its potential to affect oil prices.

On page 2 the Journal reports (subscription required) that Saudi Arabia has ordered enough new drilling rigs to increase their total by 70% and move towards a target of doubling the number of active rigs, to 60. This is solid evidence to support the Saudi's assertion that they intend to increase both oil production and sustainable production capacity by a meaningful amount. Whether these rigs are used to tap previously undeveloped fields or to rejuvenate the legacy supergiant fields, the result should help reverse the negative trends about which a number of outside observers have speculated.

While it might take a couple of years for the full impact of this move to begin to show in actual output, it constitutes an important earnest of intent, after a great deal of rhetoric that the market has frankly discounted. Many other things will affect oil prices and prices at the pump over the next two years, but this is at least one welcome piece of news offering some eventual relief.

Tuesday, November 02, 2004

Election Day and the Future of Oil Companies
In yesterday's blog, I posted a comparison of President Bush's and Senator Kerry's proposals for energy. I'm not sure how many voters will focus on energy as a pivotal issue in this election, given the prominence of Iraq, terrorism, and the economy. But I'm sure the major oil companies will be watching with great interest.

Last week's Economist looked (subscription or fee required) at the profits and reinvestment rates of the world's largest publicly traded oil firms and joined the chorus suggesting they are not reinvesting enough in finding and developing new oil reserves. The author also saw the prospect that these companies will be precluded from pursuing the best oil opportunities, which are in the Persian Gulf, and will instead accelerate their shift towards becoming "energy companies", focused largely on natural gas. So while several years ago some of these firms talked aspirationally about the larger energy picture--including my old company, Texaco--this may now become a necessity, as prodigious upstream earnings must either be plowed back into new resource opportunities or returned to shareholders.

A win by Bush today (or in the protracted, post-election day process we may be facing) may give the industry at least the hope of a shot at some of the off-limits oil reserves in the US, particularly in Alaska. A Kerry win would put paid to that notion and add additional impetus for the shift overseas and into gas. Although that would bode ill for any prospect of mitigating a precipitous decline in US oil production over the next 10 years, it would merely reinforce the position of gas as the key fuel of the future, at least the next two decades.

Monday, November 01, 2004

Energy Policies - Head to Head
Friday I indicated that I would devote today's blog to a review of John Kerry's energy proposals. On further reflection, it made more sense to do a head-to-head comparison between President Bush and Senator Kerry on key energy initiatives. The result shows a remarkable degree of overlap in some areas, and strong divergence in others.

In a nutshell, beyond both men supporting various measures to increase the use of renewable energy, ethanol and biodiesel; to expand research into hydrogen and its associated technology; and to reward consumers for buying more fuel-efficient cars. President Bush emphasizes expanded production of conventional energy (oil, gas and nuclear) in the US--including the Alaska National Wildlife Refuge, which Senator Kerry explicitly rules out--while the Senator promotes higher targets for automobile fuel efficiency (without directly saying he would reform the CAFE system or remove the SUV loophole) and a clear target for the country to get 20% of its energy from renewable sources by 2020.

I was a bit surprised, though, when I studied the energy portions of the Kerry/Edwards official website. Much of the impressive background detail that I found on the Kerry website back in February was gone. In its place is a lot of negative discussion of the President's energy policies, including this highly partisan "head-to-head comparison", along with bold claims about "energy independence", a mythical notion if there ever was one. I find the shift disturbing, because I thought the earlier material was refreshing, well thought out, and generally conveyed a more positive and practical program. The end result is closer to the superficiality I saw when I examined Senator Edwards' energy proposals during the primaries.

My own side-by-side policy comparison of the two candidates' energy proposals appears below. Despite the overlaps, I think it demonstrates a clear choice of emphasis between the two men, with the President leaning toward supply-side solutions, and the challenger to demand-side measures. If you've read my previous postings on energy security, you know I believe that serious work is needed on both sides of the balance, in order to prevent our current energy position from deteriorating further. Some other commentators have found both campaigns' proposals inadequate.

I should also point out that in the table below, an overlap does not mean identical programs or funding levels, merely an area in which both candidates have articulated something meaningful. (Also please pardon the formatting; I was unable to insert the table I created in Excel.)

Increase oil exploration, including ANWR-------X
Alaska natural gas pipeline-------------------------X----------X
Promote LNG-----------------------------------------X
Facilitate new refinery construction---------------X
Nuclear power----------------------------------------X
Electricity reliability---------------------------------X
Energy-efficient homes------------------------------X----------X
Energy-efficient communities----------------------X
Fuel economy incentives (hybrids)----------------X----------X
Car fuel economy targets----------------------------------------X
Clean Coal technology------------------------------X-----------X
Clean Coal retrofit funding-------------------------------------X
Hydrogen R&D---------------------------------------X-----------X
Renewable energy tax credits----------------------X-----------X
20% renewable energy goal-------------------------------------X