Friday, January 30, 2004

Or Has It Moved to the Boardroom?
Citigroup made a remarkable announcement the other day. After a campaign of advertising and boycotts organized by the Rainforest Action Network--not exactly your typical, mainstream environmental group, as typified by the Sierra Club or Environmental Defense--Citi has signed on to a RAN agenda that would restrict funding for projects in environmentally sensitive areas around the world, as well reporting the greenhouse gas emissions of projects in which they become involved.

While governments argue about the Kyoto Treaty, which will be a dead letter unless Russia signs on shortly, NGOs are applying pressure on companies where it hurts: with their customers, stockholders and bankers. This could result in a new kind of environmental "regulation" that is even more restrictive than those generated by governments, because the writ of these groups spans the entire globe. Even if you agree with their principles, you have to be concerned at the power being accreted by groups that are unelected and lack any accountability beyond themselves.

The bottom line is not that companies can or should try to stop these groups. Rather, their impact needs to be factored into project economics, business plans, and M&A valuations.

Finally, a colleague pointed out that many of the anti-globalization protesters missing from Davos this year were probably attending a competing conference, the World Social Forum in Mumbai, India.

Thursday, January 29, 2004

Is Anti-Globalization Dead?
Tom Friedman's column in the New York Times is always interesting and frequently insightful. Today Mr. Friedman summarizes this year's Davos Conference. As one of the major outcomes, he observes that the forces opposing globalization have faded, as India and China remodel it into a version that suits them. However, if you include within the body of "Anti-Globalizationists" the proliferating non-governmental groups seeking to restrain capitalism in general and the perceived misdeeds of corporations in particular, then I suggest that energy companies and their investors would be wise not to take Mr. Friedman too literally, this time.

The recent lawsuit brought againt Unocal under the Alien Tort Claims Act for their association with the junta in Burma/Myanmar, along with the Belize dam construction appeal petition before Britain's Privy Council, are only two example of the kind of scrutiny that energy projects around the world will face. Even if the crowds of protesters that have beset the G-8 Summits and World Bank meetings dissipate, the world order has changed and "business as usual" isn't, any more.

Wednesday, January 28, 2004

Oil vs. Gas in Russia
Today's Wall St. Journal and Financial Times carry stories about the likely unraveling of the merger between Yukos and Sibneft, two very large Russian oil firms, with the Journal also mentioning the persistent interest of several international oil majors in acquiring all or part of the latter. Clearly Russia's oil reserves are a big prize, given the ongoing struggle by the post-merger "Supermajors" to replace the reserves their enormous production drains each year. This interest must also reflect a general assessment that the risks of doing business in Russia are becoming more manageable, Yukos's current problems notwithstanding. There is also a common perception that the technology the Supermajors would bring can do a lot to boost production, improve environmental conditions, and locate new reserves in underexplored parts of Russia.

In an interesting counterpoint, yesterday's WSJ reported that Lukoil, one of Russia's largest oil companies and its most active outside the country has been awarded a major stake in a natural gas exploration deal with Saudi Arabia. This is ironic, considering that Russia is the Saudi Arabia of gas, with the bulk of it controlled by Gazprom, the vast Russian gas monopoly.

So here we have the Supermajors queueing up to get into Russia, because they can't persuade the Saudis to let them have a crack at finding new (and presumably much cheaper) reserves in the Kingdom, while the Russians are moving into Saudi to find gas that their own legal and industry structure won't let them go after at home. A nice example of how odd and perplexing the energy business can sometimes be.

Tuesday, January 27, 2004

Kyoto Cuts Oil Production?
Today's FT reports a remarkable and very tangible potential outcome of reducing emissions of greenhouse gases. Several EU members, including the UK, have introduced either carbon taxes or "cap-and-trade" mechanisms to force specific emissions reductions by industry. Apparently, as applied to the UK oil industry, they could have the effect of raising production costs on oil platforms in the North Sea and driving older, less prolific platforms into early retirement.

What's remarkable about this story is not that North Sea production might fall off faster than anticipated, for reasons other than geology. Rather it's an illustration of just how seriously the EU and many of its member countries take greenhouse gases. If they are willing to hobble an area that has been a crown jewel of the UK's economy for 20 years, what is to say that Kyoto won't become the next big trade issue between the US and EU?

Monday, January 26, 2004

Kyoto Spin?
Last week's edition of NOW with Bill Moyers on PBS featured coverage of the COP-9 meeting in Milan, part of the overall Kyoto climate change treaty process. NOW's report presented a picture of a monolithic energy industry, skulking behind the scenes to delay, obfuscate, and otherwise impede the world's response to global warming. Where were the interviews with companies such as BP, Sunoco, Cinergy and PG&E that have signed on to the Pew Center's voluntary reductions or joined the Chicago Climate Exchange, to trade CO2 emissions credits? You'd think from this program that every energy company in the world is conspiring to stop the Kyoto Treaty, and that every right-minded person is supporting it wholeheartedly. This kind of narrow-minded oversimplification serves no one and is not up to the sort of journalistic standards to which PBS aspires.

From the other side of the fence (more or less), we get this from former Energy Secretary Schlesinger in the L.A. Times (free registration required). While citing the lack of a clear linkage between global warming and anthropogenic causes, he acknowledges the value of not waiting before we undertake any action at all.

There are in fact a host of low-cost emission-reduction strategies that could begin to make a dent in the rate of increase of the concentration of greenhouse gases in the atmosphere, at a much lower price tag than the $300 billion he refers to. For more on the subject, see my inaugural post of the year, in archives.

Friday, January 23, 2004

The Next North Sea?
US energy policy seems to lack a fundamental vision for what our federal energy funding should be buying us. I suggest that the goal should be to expand our energy options to keep our reliance on hydrocarbons from the Middle East from growing much further than it has. When we experienced our first energy crisis in the 1970s, this goal seemed clear. We lost sight of it when new non-OPEC supplies, from places like Alaska, the North Sea, the Gulf of Mexico and West Africa bailed us out. But we should have always seen that the bailout was only temporary.

Now the North Slope is deep in decline, producing less than half what it did in 1988. The North Sea is entering decline, and Gulf of Mexico production is only propped up by new deepwater technology. Today it's Russia and the Caspian Sea region that appear as the bright hopes for keeping OPEC at bay for the next 20 years or so. But sooner or later the geological fact of the heavy concentration of oil reserves in the Middle East will become destiny, and there won't be another North Sea or Caspian waiting in the wings.

So let's not waste the next two decades that Russia and the Caspian can give us. It will take that long to make the transition to ways to produce and use energy that will make us less dependent, whether it's hydrogen, renewables (not alcohol--see Monday's post) or something more exotic.

But we can't just rely on foreign producers to limit the power of OPEC; we need to slow the decline of our own production, to preserve some leverage in the oil markets. It won't be easy. We have to begin with the inescapable truth that the US--at least the "lower 48"--is the most heavily explored and produced petroleum region in the world. Since Col. Drake's first well in PA in 1857, we have produced 80-90% of the oil that current technology can exploit. That amounts to about 200 billion barrels of oil, putting the US in a very exclusive club indeed; we were the world's Saudi Arabia before oil was ever found in the Kingdom.

While those days are past, it is hardly pointless--as some suggest--to try to find more oil here and to bring on production from areas currently off limits (e.g. offshore Florida.) Despite great improvements in oilfield technology, we still need new volumes to offset the severe decline from oilfields that have been producing for 20 or 30 years. Lifting environmental and land use restrictions on access to such reserves could also be linked directly to more funding for alternatives to oil, or to higher efficiency standards for cars.

The biggest challenge to slowing the decline of US oil production is that the oil industry sees much more attractive opportunities elsewhere, and has shed thousands of excellent jobs in the US in pursuit of a major geographical realignment of focus. Just watch the excitement Libya will generate once we drop sanctions.

Can we make investment in smaller, riskier US oil opportunities attractive, again? Tax breaks, accelerated depreciation, environmental offsets, and a host of other low-cost options could help enormously, but all would require a revised "sniff test" concerning "corporate welfare." That won't be easy in the current political climate, but the results could be extremely helpful while we wait for the Hydrogen Economy.

Thursday, January 22, 2004

Missing H2?
Several colleagues have remarked that in his State of the Union Address, the President made no reference to Hydrogen, something he has pushed in previous speeches. While it might not quickly resolve our concerns about energy security and excessive dependence on the Middle East , an aggressive and wisely managed hydrogen program could generate jobs, economic growth and renewed competitive advantage for the US. The latter would be particularly beneficial at a time when so much of the traditional economy seems to be at risk of "offshoring."

So was the omission deliberate, inadvertent, or simply the result of a speech already overcrowded with issues and programs? In any case, the real issue is not hydrogen, per se, but how federal energy spending should strike the balance between creating new options around promising avenues such as hydrogen, and fine-tuning the existing energy networks of electricity and oil & gas.

There is surely a need to put more emphasis on electric reliability, though it's not clear that this requires large amounts of technology, unless it is in the area of storage. We've seen how a badly planned and executed deregulation can destroy not only reliability but also market integrity, but we haven't seen a national initiative to streamline markets while providing practical and "trader-proof" safeguards. Nor have we seen the right incentives for businesses and communities to reduce their dependence on the grid via distributed power, i.e. small, local generators using a variety of new and old tech. That could also do a great deal for economic growth and jobs in the US.

Without critiquing each and every program, I share the concern of many that we ought to be getting a lot more future alternatives for our federal energy dollars. Tomorrow I'll talk about some practical things we could be doing to enhance the conventional oil and gas side of this picture, at relatively low cost.

Wednesday, January 21, 2004

LNG Safety and Supply
Unfortunately the explosion at the oil and gas facilities at Skikda, Algeria on Monday provides a current example of some of the possibilities I raised yesterday. There has been no suggestion of sabotage or terrorism, with a number of reports blaming poor maintenance, but the result is still a significant disruption in the LNG market and possibly in the gas markets of the EU. Algeria's state hydrocarbon company, Sonatrach, accounts for roughly 20% of Europe's gas imports from Skikda and a larger compex at Bethioua. It also supplies high quality diesel and jet fuel from the refinery adjacent to the Skikda LNG complex.

The scale of the impact will depend on how many of the LNG "trains", or parallel processing plants, have been damaged, how long they will be out of action, and on how quickly the undamaged units can be back on stream. This incident could limit natural gas supplies in the Mediterranean for months and push up European gas prices for some time.

It will be interesting to see how the market responds to this accident, and whether it helps foster the creation of a real spot market for LNG, which has been traded on very different terms from crude oil. Because of the massive invesments required on both sides, suppliers and customers typically enter into contracts for 20 years or more. And unlike oil, with its extremely liquid spot market, LNG cargoes typically only traded outside of these long-term contracts on a sporadic basis. That has been changing gradually, particularly as the US has increased its imports, but it is a far cry from the responsiveness of the oil market to a comparable supply problem, as we saw when Venezuelan production was shut in last year during last year's strike.

Tuesday, January 20, 2004

LNG Security
Last week’s post on the pros and cons of liquefied natural gas prompted one reader to raise the following questions:

> what is the impact of terrorist threats on the development of LNG resources, terminals ...?
> how does the focus on domestic security (physical vs energy)
impact the development of such resources?

I’ll attempt a first pass answer, hopefully without handing the wrong folks any new ideas in the process. I would appreciate any thoughts from those who know more about this subject than I do.

There are two distinctly different aspects of security to consider. The first relates to security of the supply chain, or conversely to its vulnerability to disruption. An LNG terminal and a domestic natural gas supply source (i.e. wells, pipelines, pumps, etc.) both rely on a local distribution system, so the vulnerabilities to disruption only differ as you move back up the chain.

For example, an LNG terminal is itself vulnerable, being a fixed installation of known location with access from both land and water. The tanker delivering LNG to the terminal is also vulnerable, particularly when either discharging cargo or loading at its home port. Working backward, the loading facilities and the liquefaction plant in the country of origin could be disrupted, as could the fields producing the gas feeding the liquefaction plant. (We saw this in Indonesia a couple of years ago, due to a regional uprising.)

The domestic resource, by contrast, has the same vulnerabilities that most of our other energy networks do: long stretches of pipeline and facilities in remote and presumably unpatrolled territory. A determined terrorist could create a minor disruption lasting days or even weeks. But the impact of this disruption would be at least partially mitigated through network flexibility and other sources, or through market-based responses.

By comparison, the LNG supply chain is also vulnerable to disruption, particularly if the liquefaction plant and loading port are in a less-developed country. In that respect LNG has many of the same vulnerabilities as the domestic US source, but in a higher risk environment. However, as global LNG trade grows and supplier flexibility increases, a missed cargo or two could be made up from another location, so the impact of a disruption might not be very large, unless it were permanent.

The simililarties between the two alternatives part company in their potential for the second kind of security problem, namely a catastrophic incident caused by terrorists. Domestic gas pipelines don’t lend themselves very well to this kind of thing, no matter how vulnerable they might seem to disruption. An LNG tanker is a different category of target, with much greater potential for mayhem, as has been pointed out by many of the local groups opposing planned LNG terminals around the country.

I suspect that reality would be somewhat different from the nightmare scenarios these groups envision, and that causing an LNG tanker to explode while docked in a populated area would be much more difficult than it appears. But this is a classic low-risk, high-consequences situation, and there is something about human nature that tends to inflate the amount of worry we should otherwise assign to them.

It’s hard to draw a solid answer from the above comments, but on balance I would have to give the security nod to the domestic gas source, considering its somewhat more secure supply chain and the lower risk—in terms of outcome if not of likelihood—to public safety.

This finally leads to my reader’s second question. If we accept that one of the many advantages of expanding domestic gas resources in preference to building more import capability (i.e. LNG terminals) is greater physical security, then there’s a strong case to be made for government policy that breaks down the environmental, permitting, and NIMBY barriers to developing these domestic resources, not as matter of energy policy, but as part of Homeland Security. I have yet to hear someone articulate that case publicly, amidst the current lovefest for LNG.

Monday, January 19, 2004

Alternative Energy?
When you ask people to name a successful alternative energy program that has saved oil and improved US energy security, chances are that ethanol will be near the top of their list. This week the Economist cites yet another study that shoots holes in the benefits of ethanol. (You may need a subscription to get this story.)

I'm always fascinated by this discussion, since I did my Master's thesis on the subject of ethanol in gasoline (a.k.a gasohol) over 20 years ago. My conclusion then has apparently held up pretty well: ethanol as a fuel is essentially just a farm subsidy program that actually makes our energy situation worse. After two decades worth of efficiency improvements and better technology, the picture has, if anything gotten worse, because scientists are doing a better job of analyzing all of the inputs that go into ethanol. The net result is that it apparently costs somewhere between 29% and 34% MORE in energy inputs than you get back in fuel.

Although there are avenues of R&D that might someday improve this dramatically, notably the fermentation of cellulosic biomass (e.g. non-crops), the vast majority of the ethanol that we are subsidizing today--and that nearly every Presidential candidate wants to subsidize more of in the future--is the crop-based, high-cost, low-efficiency variety.

There are essentially three arguments in favor of ethanol:
1. It saves energy.
2. It is good for the environment.
3. It reduces our imports of foreign oil and our improves our trade balance.

The first has been comprehensively demolished by more studies than I could cite on this page, the ones referenced by the Economist being only the latest to do so.

The second is, to the surprise of many, on equally shaky ground. The addition of ethanol is intended to reduce vehicle emissions of carbon monoxide by increasing the oxygen available in the combustion process. MTBE has been added for the same reason, but it is on its way out and being replaced by even more ethanol. Unfortunately, the science behind this only seems to apply to the oldest cars on the road. If you have a modern engine, it doesn't need oxygen in the fuel to complete combustion. This happens with the help of computer controls and better catalytic converters.

The final argument still has some validity. Although the current ethanol process is inherently energy inefficient, that doesn't mean that it uses more petroleum products than it displaces. The fertilizer input is derived from ammonia made from natural gas. The process heat for the distillation plant could come from a variety of sources, but it would typically be natural gas fired. The electricity for the plant, and for pumping the water used in irrigation comes chiefly from coal in the Midwestern states that produce the most ethanol. Finally, the diesel fuel used in cultivation and harvesting come from oil (unless it's biodiesel, another heavily subsidized fuel.)

Without doing detailed calculations, it appears that ethanol saves oil, but mostly at the expense of natural gas, which isn't exactly cheap or plentiful at the moment (see my comments last week on LNG.)

What all of this means is that ethanol requires high subsidies, provides dubious environmental and oil-saving benefits, and consumes energy, rather than saving it. Despite all of these shortcomings, it features prominently in the energy proposals of almost every major Presidential candidate, not to mention having been supported by every sitting President since Gerald Ford. It is a classic example of bad but well-intended energy policy--and some very effective lobbying--and it looks like we are stuck with it until the arrival of the hydrogen economy or something even more innovative.

Thursday, January 15, 2004

More LNG
Further to yesterday's comments on liquified natural gas, a colleague reminded me that there is a wealth of information on natural gas available from the National Petroleum Council, an industry group providing advice to the Secretary of Energy (and not just in this Administration.) In particular, their 2003 and 1999 Natural Gas studies cover imports, infrastructure and access issues, and a variety of supply/demand scenarios. In the recommendations of the 2003 study they state, "Increased access to US resources (excluding designated wilderness areas and national parks) could save consumers $300 billion in natural gas costs over the next 20 years."

Wednesday, January 14, 2004

Is LNG the Answer?
Mitsubishi is apparently going to build a terminal to receive liquified natural gas (LNG) in Southern California. A quick look at recent prices for US gas makes it easy to see why this might be attractive. In fact, there's been quite a PR push lately, touting LNG as a way to reduce and stabilize prices and improve reliability of supply. It all sounds wonderful, and we're pretty much stuck increasing our imports, since the US must be running low on natural gas, just as we are on crude oil, right?

While LNG needs to be part of the future energy mix of this country to a greater degree than it has been, it's not at all clear that it has to grow to 15% of our supply, as some forecasts suggest. The US natural gas situation is actually very different from the sad state of our oil reserves, from which we've probably already pumped out 80 or 90% of the original oil that we could get with current technology. In contrast, the DOE reports proved natural gas reserves of 186 trillion cubic feet, some 13% larger than they were in 1992. In fact, they are the second largest outside the middle east.

As is usually the case for natural gas, the issue is not so much one of resources but of infrastructure and investment, complicated by restrictions on access. The US is not short of gas, but rather the US gas industry has been starved of investment dollars for the infrastructure needed to bring more gas to market. This is an oversimplification, but it would be very interesting to see what could be done to bring more domestic gas to market if the investment that is being targeted for the all the LNG terminals under discussion were redirected to revitalizing the domestic infrastructure instead.

Why should any of this matter? Won't the market simply sort out which projects should be built, based on the most attractive returns?

The incentive to rethink the rush to LNG comes from taking another look at long-term US natural gas prices. Although prices are high today (over $6/million BTUs), and forecast to be high as far as the eye can see, and while LNG should be able to come in well below this, perhaps at $4/million BTUs or less, it is still double the typical historical price of about $2. As a result, LNG can cap the current market below the peaks we've experienced in the last two years, but it can't do anything to address the problems of global competitiveness that our industries built on $2 gas are facing. That includes fertilizer and chemical plants, as well as energy-intensive industries that were counting on cheap electricity generated by cheap gas.

Becoming dependent on LNG imports will probably spell the end (or offshoring) for any of these industries that manage to survive the current high prices, by ensuring that prices never return to their historical level.

Tuesday, January 13, 2004

Reserves vs. Stock Prices
The current flap over Royal Dutch/Shell's restatement of oil and gas reserves highlights one of the central paradoxes of the oil and gas business. While neither the company nor most analysts see the elimination of roughly 20% of Shell's stated reserves as having an impact on earnings in the next couple of years, the market has responded by sharply devaluing the company's stock.

This may seem odd, considering that oil company stocks have not appreciated in line with the increases in oil and gas prices over the last couple of years. So if future reserves (and the future production, earnings and cash flow they would generate) don't count for much in stock prices when energy prices go up, why do they suddenly matter so much when they are restated?

Despite all the assets the major oil companies have tied up in service stations, refineries, tankers, pipelines, and other plant and equipment so necessary to extract full value from the oil and gas in the ground, it is the exploration and production side of the business that is both the core competency and primary long-term earnings engine (if not necessarily cash engine) of these companies. Anything that casts doubt on this competency puts a big cloud over the whole company, regardless of whether it has a short-term earnings impact. I don't think the market is over-reacting here, despite my general sense that Shell is a solid, well-run company.

Monday, January 12, 2004

China's Cars
Sunday's NYT commentary is only the latest article to point out the sudden leap in car ownership and car aspirations among China's growing middle class. Much of this is purely economic; the former "Asian Tigers" such as Korea and Thailand experienced much the same phenomenon when per capita incomes reached a critical threshhold.

What makes this different, as is true of nearly anything concerning China, is the scale involved. Carmakers may salivate over a potential market in China that could sop up the global industry overcapacity, but as long as China prefers cars built at home, even if by joint ventures with foreign firms, that wish may never be fulfilled.

The energy implications of China's turn to cars are more profound. Clearly it will have an impact on the regional and global demand for oil and refined products; how could it not? But the implications for automotive technology are more interesting. One of the great impediments to a quantum change in technology (think fuel cell cars) or to dramatic fuel economy improvements (think hybrids) having a rapid impact on the US or Europe is the relatively slow turnover of our car fleets. The average age of cars in the US has been rising steadily since the 1970s and the fleet turnover time was in excess of 14 years the last time I looked.

China, on the other hand, will likely double the size of its car fleet several times over the next decade or so, with mostly new cars. What would be the impact if many of those cars were hybrids or some other new technology? How rapidly could manufacturers move down the cost curve and become competitive, not just within China but globally?

In some ways this resembles the situation carmakers faced in the US 100 years ago: a big, untapped market with largely unknown preferences and a wide range of possible choices. I don't think it's an exaggeration to say that the car choices made by Chinese consumers--and the Chinese government--will change the kinds of cars sold in the rest of the world in a surprisingly short time.

Friday, January 09, 2004

How Much Oil? is carrying a story entitled "Plan Now for a World without Oil". (Subscription required to access.) They cite evidence of the decline in North Sea production and studies showing that total OPEC production could cap out at 40-45 million barrels per day in 2020.

Decline rates and the shape of the total global oil recovery curve (Google on Hubbert Curve for some background) are very controversial. Some experts believe the peak of world oil production is just around the corner; others see it decades away, if it exists at all. This topic is worth a lot more exploration, and I'll be posting a longer discussion on it in the weeks ahead. Suffice to say that if true, this should provide additional incentive for accelerating renewables. It should also put a different light on the value of the oil in the Alaska National Wildlife Refuge, and on ensuring free and open access to Iraq's vast untapped reserves.

Unfortunately, the way the commodities markets work, we are unlikely to get a price signal of an impending peak and subsequent decline until it's too late to bring on any alternatives that weren't already in the works.

Thursday, January 08, 2004

Access to Oil
It appears that several US companies will be getting contracts to develop new and existing oil fields as a result of the war in Iraq. The surprise is that the contracts will be with Libya, not Iraq.

Although Libya's reserves are much smaller than Iraq's, they are larger than those of either Nigeria or Mexico, and they are in close proximity to the major markets of Italy, France and the rest of the Mediterranean. Libya currently produces about 1.4 million barrels of oil per day, but this level has stagnated for some time, despite identified new oilfields. US investment and expertise can make a real difference--without any of the risks and bottlenecks we face in Iraq--once sanctions are lifted. That should happen soon, given Libya's new stance on WMD and its cooperation in the War on Terrorism.

This may not seem like a big deal, but it has to be viewed in the context of the steadily increasing global demand for oil, which is expected to increase by 40% over the next 20 years. One of the strategic goals of the war in Iraq was almost certainly the elimination of political barriers to developing key oil resources that will be needed to meet future demand, without relying solely on Saudi Arabia and the other Gulf states. The opening of Libya is a pleasant and probably unexpected consequence, though the big prize of open international access to Iraq's 100 billion barrels of reserves remains to be realized.

Tuesday, January 06, 2004

Hybrid Car Show
The Big Three are proclaiming 2004 as the Year of the Car, with numerous new passenger car models (as opposed to SUVs and trucks) having their debut in Detroit. It is also increasingly the year of the Hybrid.

But even as the fuel-saving technology begins to show up in cars that the mass market might actually want to buy, here's a sign that at least one company really understands the potential of adding electric motors to the powertrain. Mercedes' hybrid S-class show car and its proposed Vision Grand Sport Tourer demonstrate that you can build a hybrid that not only saves gas and is easy on the environment, but that really revs up performance. Nothing beats an electric motor for torque off the line.

The car industry will have to sell a heck of a lot of hybrids to reverse the dip in fuel economy caused by the SUV boom. Putting hybrid powertrains in vehicles that excite their owners, instead of boring them to death, will be critical to building some serious momentum behind this trend.

Monday, January 05, 2004

Energy Blog Manifesto

What you’ll find in this blog is an insider’s perspective on the changing world of energy. There has been a lot of breathless reporting lately about new fuels or energy devices and how rapidly they will transform our lives and clean up the planet. At the same time, many industry experts seem reluctant to question that the status quo can continue indefinitely, or that it should. I hope to provide a useful, if eclectic, guide to navigating the gulf between these viewpoints, based on my experience of over 20 years in the energy business and on scenario-based possibility thinking.

For those with an interest in energy, and particularly those facing decisions about investments in energy-intensive equipment or purchases of long-term supplies of fuel or electricity, the world must seem fairly confusing at the moment. Some key questions you should consider include:
· Does the US have an energy security problem, or not?
· How much oil is left, and will its price remain stable over the next decade?
· Are we on the verge of an energy technology breakthrough?
· Is the hydrogen economy inevitable, and how long would the transition take?
· Has the Enron scandal permanently damaged the credibility of energy trading?
· How does renewable energy really compare to more traditional sources?

I’ll be covering these and a variety of other topics in the weeks ahead, in the form of articles, opinion pieces, and with your help, some energetic discussion. After all, a blog should be a two-way street if it’s going to stay relevant.

Finally, here are a few thoughts to stir the pot a bit and give you a better sense of my perspective:

Is Climate Change For Real?
The notion that the science of climate change is still uncertain and that action now would be premature looks more and more curmudgeonly with each new year.

Although I retain a healthy skepticism that the scientific community can truly be 100% impartial and objective in its “overwhelming consensus” when dealing with something that has become such a large and lucrative source of funding for research—or that consensus is even the right standard—I believe there is ample evidence that something odd is going on with the climate.

This is bigger than a few years of strange weather and could affect us all in unpredictable ways in the future. Smart people are starting to talk about “Global Weirding” instead of “Global Warming”, and that strikes me as more realistic and likelier: in effect, a decade’s worth of bizarre weather events every year around the globe.

Cause and effect is harder to pin down. Emissions of carbon dioxide and other “greenhouse gases” are accumulating in the atmosphere in lock step with the historical rise in temperature that we can observe. But did the former cause the latter? This may sound like the tobacco company defense of “but we don’t know that cigarettes caused this particular person’s cancer.” In fact, it may never be provable that the extensive use of hydrocarbons—coal, oil, and natural gas—over the last century or so has altered the climate. But even if the evidence is only circumstantial and correlative, the potential consequences of ignoring this issue loom too large simply to plead for more time for study before acting.

The grabber for business is that the response to climate change will alter a basic economic assumption that you have never had to think about before. When you start up your car or your blast furnace, you’ve always been able to do so without being charged for the right to let carbon dioxide go out the tailpipe or up the stack. Within our lifetimes, and probably within the next decade, the price of such carbon emissions will become greater than zero.

This is fundamentally different from current restrictions on traditional air and water pollutants, because CO2 is not a pollutant, but rather the main byproduct of the combustion of hydrocarbons, which supply over 80% of all our energy needs.

The exciting part of this problem is that the solutions could create a lot of attractive business opportunities. For example, one of the best ways to reduce greenhouse gas emissions is through trading. In essence, someone whose emissions would be very expensive to reduce pays someone else to make these cuts for him, at a lower cost. The result is good for both the climate and the economy. This kind of trading would work even better than the market for sulfur pollution credits, to which it is often compared, because it truly doesn’t matter where in the world you reduce greenhouse gas emissions. A ton of CO2 saved in Brazil is exactly the same in its impact as a ton reduced in Boston.

A small but growing number of companies has already agreed to this kind of scheme, some through one-on-one transactions, others by participating in mechanisms such as the Chicago Climate Exchange. There are still a lot of uncertainties here, but we’re talking about a new financial market that’s just getting started, and the price of reductions is very low. And this is starting to happen without a US signature on to the Kyoto Protocol. Just look at what Europe is up to!

This issue won’t go away, and it’s likely to become much more significant for American businesses the next time there’s a Democrat in the White House, whenever that might be.