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The Wheels Come Off the Biodiesel Wagon

Domestic Biodiesel Production Plummets

One of my Top 10 Energy Stories of 2009 involved the actions taken by the EU against U.S. biodiesel producers. U.S. tax dollars had been generously subsidizing biodiesel that was being exported out of the U.S. European producers couldn’t compete against the subsidized imports, so the EU effectively cut off the imports by imposing five-year tariffs on U.S. biodiesel.

This was a big blow to U.S. biodiesel producers, and was one of the factors leading to a disastrous 2009 for U.S. biodiesel production. How disastrous was 2009? Per the National Biodiesel Board (NBB), here are the statistics from the past 6 years of biodiesel production:

2004: 25 million gallons

2005: 75 million gallons

2006: 250 million gallons

2007: 450 million gallons

2008: 700 million gallons

2009: 300-350 million gallons (estimate)

The NBB also reports that domestic biodiesel capacity is now operating at only 15%. There have been a number of stories in the past few days covering these developments:

Bad start to 2010 after ‘rough year’ for entire biofuel industry

A federal tax credit that provided makers of biodiesel $1 for every gallon expired Friday. As a result, some U.S. producers say they will shut down without the government subsidy.

A one-year extension of the biodiesel tax credit was included in a bill that was approved by the U.S. House recently, but it never made it through the Senate.

Politics and Energy Policy

I have often complained about the chaos that political leaders cause with inconsistency on energy policy. I will get into the wisdom of this biodiesel tax credit in a moment, but government policy makers need to send clear, long-term signals so energy producers can plan. This has long been a problem for planning energy projects. Wind and solar developers have lived with this uncertainty for years. It seemed like at the end of every year, there was a tax credit that may or may not be extended. The uncertainty often froze project developers, and created unnecessary delays.

The same has long been true in the oil and gas industry. One of the reasons that it has been difficult to get a gas pipeline built in Alaska was government refusal to commit to long-term tax rates. Imagine that you are contemplating spending $26 billion on a gas pipeline, but the government can’t tell you what your tax rate is going to be. If my state income tax doubles, I can move to another state. But it isn’t like you can pick that pipeline up and move it, so it is important that you know that the government can’t double the tax rate in the event of a budget shortfall.

A different kind of government interference – a tendency to attempt to pick technology winners – resulted in cancellation of what I believe was a promising 2nd generation renewable diesel process. I documented the saga in several posts, but the gist was that because an oil company was involved – my former employer ConocoPhillips – Congress voted to specifically deny the biodiesel tax credit for a process that was both more efficient and more cost-effective than conventional biodiesel production.

By killing the credit, COP was placed at a $42/bbl disadvantage relative to biodiesel producers who received the credit, and thus COP decided to cancel the project. I documented that sorry saga here. I also explained the differences between ‘green diesel’ and biodiesel here.

Where to Now?

So where to go from here? We now have a classic dilemma created by the government. Through government fiat, an industry was created. Investments were made and infrastructure was put in place. The problem is that the particular industry that sprang up had little hope of ever really competing without the subsidy. The reasons are alluded to in the link above:

“By the time you buy the feedstock and the chemicals to produce the fuel, you have more money in it than you get for the fuel without the tax credit,” Francis said. “We won’t be producing any without the tax credit.”

I have long believed that there is no future for 1st generation biodiesel. I wrote in an August 2007 essay: “I have said it before, and I reiterate: Biodiesel’s days are numbered.” Note that the year after I wrote that the U.S. biodiesel industry had their best year ever. But the handwriting was on the wall for very fundamental reasons, and the prediction I made in 2007 is playing out now.

There are multiple problems that will make it difficult for biodiesel to ever compete without subsidies. In a nutshell the key problem is that the feedstock costs are linked to fossil fuel prices. The feedstock is generally a vegetable oil and methanol – an alcohol typically produced from natural gas. A second big problem is that biodiesel is an inferior fuel to hydrocarbon diesel (especially in cold weather). Further, the by-product of the biodiesel process is glycerin, which has limited value (especially at the volumes produced when biodiesel production is ramped up).

But this story is worse than simply a fuel that can’t compete. As evidenced by the opposition of the NBB to the extension of the tax credit for COP’s 2nd generation process, 1st generation biodiesel isn’t even a bridge to 2nd generation biodiesel – it is a barrier. Not only is biodiesel chemically different, but 1st generation producers have pulled out the stops to protect themselves against 2nd generation competition. So now we have a 1st generation industry that was already in trouble even with the subsidies that it was receiving, and a 2nd generation industry that could have been much further along were it not for 1st generation interference (which was aided by Congress).

If instead of picking technology winners, Congress had simply raised fossil fuel taxes, we wouldn’t be in this dilemma. With the high level of embedded fossil fuels, biodiesel would have been unable to compete and an industry with no future would not have been created by the government. Green diesel, on the other hand, would start to look a lot better because of the lower level of fossil fuel inputs (particularly for gasification), and we might find plants starting up to produce green diesel from both hydrocracking vegetable oils (the COP process I described) and gasification of biomass (e.g., the Choren process).

What I expect to happen is that Congress will eventually extend the credit, and it will be applied retroactively. But there are no guarantees, so producers are once again left with uncertainty. What should happen – in my opinion – is announcement of a phaseout schedule. I wouldn’t simply eliminate the tax credit cold turkey. That would be a blow to producers who invested on good faith that government support would be continued. But they also need to receive a message that this tax credit will be phased out over the next 3-5 years. At that point, prospective investors will be fairly warned that projects whose economics hinge on continued government subsidies are to be avoided.

This, by the way, is the sort of metric I try to apply to projects. I am looking for projects that can be viable without government support and can operate with low/no fossil fuel inputs. The first item means that governments have much less ability to wreck my project by withholding support, and the latter means that the project should become more attractive in the higher oil price environment that I expect.

That doesn’t mean that initial government support isn’t often helpful, but unless the underlying economics are sound then government support is a crutch I will never be able to throw away. In my opinion this is the case for most U.S. biodiesel producers, which helps explain why industry capacity is presently at 15%.

Disclosures

I want to make two very clear disclosures. First is that as noted, I worked for ConocoPhillips, and I was very pleased at the efforts we were making to commercialize green diesel. The fact that the government caused the project to be aborted by favoring one technology over another was a bitter pill to swallow. Again, I favor projects that are viable without government subsidies, but in this particular case the competing projects did get the subsidies.

Second, as I announced previously I now work for the company that owns the majority of Choren. I came to work for this company because I believe gasification has a long-term future, and I had written favorable articles long before this job opportunity arose. I have, however, had some suggest potential bias toward green diesel because of my link to Choren. What I say to those who might feel that way is the bias toward green diesel was because of my assessment of the technology. That is what led to my link to Choren, not vice-versa.

January 4, 2010 Posted by | ConocoPhillips, energy policy, green diesel, politics, renewable diesel, subsidies | Comments Off on The Wheels Come Off the Biodiesel Wagon

Energy Potpourri

I am at the 2009 Gasification Technologies Conference this week, with a pretty full schedule. But there are three stories that I wanted to quickly hit. One is a follow-up on the previous cellulosic ethanol post, one is about Paul Sankey’s new report on peak demand, and the last is on a technology that ExxonMobil has reported on here at the conference that I felt was quite interesting. There will probably be no more new posts from me until the weekend. I only got away with this one because I decided to write instead of network (which I hate to do anyway) during free periods today.

When Technologies Are Mandated

I don’t care too much for mandates. I think they are so much worse than subsidies, because with a mandate you are really saying that it doesn’t matter how much it costs, you don’t want to know how much it costs – just do it.

If the government thought it was a good idea to blend bio-butanol into the gas supply, they could offer a $0.50/gallon subsidy to do so. If that doesn’t result in butanol entering the fuel supply, then that’s a pretty good indication that butanol is at more than a $0.50/gal disadvantage to gasoline. But imagine instead that it is mandated. The costs could go very high in that case, but gasoline blenders would still have to pay up. We may find out that the cost to fuel suppliers was $8.00/gal. Had it been a subsidy instead – and it needed to go to $4 or $5/gal to make it economical – it would have never passed because the costs would be more transparent.

Thus, I was not too enthusiastic about the cellulosic ethanol mandates we got as part of the 2007 RFS. In 2010, for instance, it is mandated that 100 million gallons of advanced biofuels will be blended into the fuel supply. Cellulosic ethanol has been the technology that has been favored, but I have warned about costs that are going to be very high. Instead of a mandate, suppose we put a $1/gal subsidy in for cellulosic ethanol. Then instead of relying on people promising that they can make cellulosic ethanol for $1/gal if they can just get grants, mandates, and loan guarantees – you put the burden on the producer. Here is a $1/gal subsidy for you. Build the plant, make your $1/gal ethanol, and collect the subsidy.

Not surprisingly we are now getting news that despite throwing a lot of money at it, the 2010 levels of cellulosic ethanol are going to fall far short of the mandate – as I have been saying all along. They are going to need more money to meet future mandates – highlighting the problems I have with mandates. From the NYT:

Biofuels Producers Warn They Are Going to Fall Far Short of Federal Mandates

“The current economic climate almost makes the RFS a moot point for the time being,” said Matt Carr, policy director for the Biotechnology Industry Organization.

His organization estimated last month that 2010 volumes will, optimistically, reach 12 million gallons, far short of the 100-million-gallon mandate that year.

Range Fuels had gotten an initial $76 million from the DOE, then an $80 loan guarantee from the USDA. They also got $100 million in private equity. (I predict some folks are going to lose some money – including taxpayers). But that still wasn’t enough, so they went back to the DOE for more money. This time, the DOE said no:

The Department of Energy’s loan guarantee program, producers say, has been particularly flawed. No advanced biofuel makers, aside from a partnership between BP PLC and Verenium Corp., have so far won approvals.

“We received a ‘Sorry, Charlie’ letter,” said Bill Schafer, a senior vice president of Range Fuels Inc., which is now building a cellulosic facility in Soperton, Ga., slated for completion early next year.

He said that under the program, biofuels companies must compete directly against solar, wind and even compressed natural gas — all energy technologies that, unlike advanced biofuels, have already been built at commercial scale.

So there you have it. The DOE seems to be losing some of the earlier enthusiasm for cellulosic ethanol. Range Fuels is here at the conference, by the way. I should probably say hi.

Again, this highlights the risk of mandates. Costs can spiral out of control. The ultimate cost can’t be easily predicted. Instead of assuming that technology can be mandated if enough money is thrown at it, we would all have been better off had there merely been subsidies offered. In that case, if this is truly not economically viable, the taxpayer may not have to foot the bill for millions of dollars for failed or stalled plants.

Printing Money

One of the reasons I invest in oil companies is that I think oil prices will continue to spike higher in the future. Because of the recession, we currently find ourselves with excess production capacity. But it looks to me like that excess production capacity will be eroded in the future, which will once again put pressure on prices. Oil companies will again reap very big profits by supplying a dwindling resource. (Whether governments will aggressively move to confiscate these profits is another question entirely).

There is another view that the oil companies will die out as oil depletes, and therefore oil stocks are very risky investments in the longer term. I don’t subscribe to this view because I believe the oil companies will possess enough cash to enter into any future energy business that looks lucrative. If we are supplying 90% of the cars with liquid fuels derived from coal in 20 years, I suspect it will be the oil companies producing it. In fact, most major oil companies – ExxonMobil, Shell, BP, ConocoPhillips – have active programs in this area. It is a naïve view to think that the oil industry as a whole will fail to anticipate the changing markets. That’s why I always think it is humorous that people feel the ethanol industry is a threat. If the oil industry thought it was a threat, there is nothing keeping them from getting involved.

Paul Sankey of Deutsche Bank just put forth both views in a new report. As I have mentioned previously, I think Sankey is an analyst who really understands the industry. And I agree with his first comments. I just don’t think he is right about the second point.

Don’t Fill Up on ConocoPhillips

That one is a somewhat misleading title because he is recommending ConocoPhillips (which I do own):

DESPITE NUMEROUS SIGNS that the global economy is still struggling, just about everyone following energy predicts at least one more spike in oil prices in coming years.

It’s just that scenario that prompted Deutsche Bank analyst Paul Sankey to publish today a 61-page opus to clients in which he upgraded shares of ConocoPhillips (COP) to “Buy” from “Hold” and raised his price target to $55 from $40.

Sankey’s thesis — and he’s not alone — is that Conoco will benefit in such a scenario by being able to sit back and milk profits from its existing reserves of oil with minimal new investment, thus leading to generous cash flows.

In brief, Sankey sees global demand surging again with economic rejuvenation, leading to a spike in oil of $175 per barrel in 2016, after which developments in global fuel efficiency, specifically electric cars, will cause demand for crude to fall off precipitously, until oil comes back into equilibrium with supply at $100 per barrel in 2030.

Sankey spells out why he is long-term bearish on the oil companies:

Peak Oil: The End Of the Oil Age is Near, Deutsche Bank Says

Deutsche Bank expects the electric car to become a truly “disruptive technology” which takes off around the world, sending demand for gasoline into an “inexorable and accelerating decline.”

In 2020, the bank expects electric and hybrid vehicles to account for 25% of new car sales—in both the U.S. and China. “We expect [electric propulsion] will reverse the dynamics of world oil demand, and spell the end of the oil age,” the bank writes.

But won’t cheaper oil in the future just lead to a revival in oil demand? That’s what’s happened in every other cycle. Au contraire, says the bank: Just as the explosion of digital cameras made the cost of film irrelevant, the growth of electric cars will make the price of oil (and gasoline) all but irrelevant for transportation.

He could be right, but I am betting against it. But I may find that in 20 years ConocoPhillips’ core business is something entirely different than it is today.

ExxonMobil’s MTG Technology

One of the more interesting presentations for me at the gasification conference has been ExxonMobil’s work on a different kind of coal-to-liquids (CTL) technology. Conventional CTL would involve gasification of the coal to syngas, followed by a Fischer Tropsch reaction that converts the gas into liquid fuels such as diesel. Exxon has a different process, in which they gasify the coal, but then they turn it into methanol. As I have said before, methanol can be made quite efficiently, and I think it’s a shame that it wasn’t allowed to compete with ethanol on an equal footing. But the technology doesn’t stop at methanol. The methanol is dehydrated to di-methyl-ether (DME, also a nice fuel). The DME is then passed over a catalyst and converted to gasoline in yields of around 90%. The technology is called methanol-to-gasoline (MTG).

The process has been around for a while, but hasn’t gotten much attention. In the 80’s and 90’s, they ran a 14,500 bbl/day plant in New Zealand. As far as synthetic fuel facilities go, that’s a big plant with an impressive track record of operation. The on-stream reliability of the plant was over 95% during its operation. (Following the oil price collapse in the 90’s, the plant stopped upgrading the methanol, and just made methanol the end product).

The advantage of the process is that capital costs are reportedly lower than FT, and the product is gasoline – in high demand in the U.S. The disadvantage is that the process produces relatively little diesel and jet fuel. The military and various airlines are highly interested in FT because of its ability to supply these important fuels.

Exxon reports that a new plant, based on 2nd generation technology with better heat integration and process efficiency, has been built in Shanxi, China. At 2,500 bbl/day, the facility is smaller than the earlier New Zealand facility, but Exxon has licensed MTG technology to a pair of companies in the U.S. DKRW announced in 2007 that they would utilize MTG in a 15,000 bbl/day facility in Medicine Bow, WY. Synthesis Energy Systems announced in September 2008 that they would license MTG for their global CTL projects.

While Exxon seems to be more focused on coal to gasoline, there is no reason this process couldn’t be used to turn natural gas or biomass into gasoline (GTL and BTL). This technology could be complementary to FT technology, providing gasoline while FT supplies the liquid fuels needed for airlines, marine applications, long-haul trucking, and the military.

During the Q&A, though, one guy asked “If this is so great, why aren’t you building these plants yourselves?” The answer was that they weren’t experts, and only wanted to license.

October 6, 2009 Posted by | btl, cellulosic ethanol, ConocoPhillips, COP, ExxonMobil, Paul Sankey, range fuels, XOM | 115 Comments

Bloggers Go to Billings

I should have Part 2 of the series of answering readers’ questions posted by tomorrow, but until then I was just sent the following link, which was of great personal interest to me:

A Green Refinery?

The gist is that last year the American Petroleum Institute flew a group of bloggers up to the ConocoPhillips refinery in Billings, Montana where I used to work to give them a perspective of life in a refinery. A video diary of the trip was recently posted to the link above. An excerpt from the link:

The refinery has twice been awarded EnergyStar designation by the EPA for its comparatively efficient production processes. It also established a Citizen’s Advisory Council to maintain an open dialogue between the community and ConocoPhillips. This council has been instrumental in tracking the plant’s social, economic, and environmental performance.

It was kind of funny to see my old managers there lecturing on how a refinery works, and what makes the Billings Refinery unique. (Yes, Tim Seidel looks unusually young to be a manager in a refinery, but he is very talented).

Here were some of the essays that bloggers wrote following the trip:

How Much at What Pressure and Temperature?

Semi-coherent and random thoughts about the Billings trip

Refined Refinery? ConocoPhillips in Billings, MT

I do have one comment on some of the write-ups I have seen. There seems to be some misinformation that the refinery was either built for, or relies upon the Alberta tar sands for feedstock. First, that certainly wasn’t why the refinery was built, as it was there long before tar sands became an industry. Second, unless things have changed in the 2.5 years since I left, the refinery actually utilizes little or no syncrude from tar sands. It is a refinery designed for heavy, sour oil, and as such is not ideal for the syncrude coming out of the tar sands.

Anyway, just thought this might be of some interest. More answers to readers’ questions tomorrow.

August 3, 2009 Posted by | American Petroleum Institute, api, Billings, ConocoPhillips, oil refineries, refining | 9 Comments

Mulva on Replacing Oil

My former CEO Jim Mulva spoke today at the National Summit in Detroit, and had some newsworthy comments. Bloomberg reported on his talk:

Conoco Chief Says Replacing Oil May Take a Century

June 16 (Bloomberg) — ConocoPhillips, the third-largest U.S. oil company, said it may take a century for the nation to replace fossil fuels with alternative energy sources.

I don’t know of too many people who think we have a century’s worth of oil left. Natural gas and coal? I also seriously doubt we have that much of either of those, especially allowing for economic growth. What I think this means – in any case – is that we have some potentially difficult times in front of us. However, Mulva went on to give his prescription for preempting some of those difficulties:

The country will need to develop its own oil and natural- gas deposits and continue importing petroleum while developing alternative supplies in the decades ahead, ConocoPhillips Chief Executive Officer Jim Mulva said today at the National Summit economic conference in Detroit. At the same time, he said, the nation will need to address climate change.

On the issue of climate change, Mulva thinks legislation is likely, but doesn’t want to see U.S. producers punished while foreign producers are left unscathed:

The U.S. needs policy that encourages investments in all types of energy and avoids hurting the economy by making the nation less competitive than countries with cheaper energy, Mulva said. Proposed climate legislation in Congress threatens to drive U.S. refiners out of business by imposing higher carbon costs on domestic fuel than on imports, he said.

That last bit is very important. If we do get climate legislation, we need to make sure that we aren’t providing a competitive advantage to countries who don’t care about emissions – while putting our domestic producers out of business. This was a major theme in Jeff Rubin’s book Why Your World Is About to Get a Whole Lot Smaller. Rubin argued that if we put a price on carbon emissions in the U.S. we can apply a carbon tariff on imports to level the playing field. Rubin argues that this will encourage efficiency from foreign producers of all things that are energy intensive, and it will ensure that the legislation doesn’t put U.S. firms out of business. (I reviewed Rubin’s book here).

Mulva went on to suggest that oil prices had gotten ahead of themselves. That story from Reuters:

Conoco CEO: oil prices ahead of fundamentals

“We have felt that an oil price between $70 and $80 (a barrel) is a good balance to promote investment, continue to replace reserves and keep production up, as well as a balance with respect to the cost to the consumer,” he told Reuters.

But Mulva also acknowledged the price run-up — expectations of a recovery drove crude prices to $73 a barrel last week, more than double their winter lows — was “stronger than we would have expected” and was “a little bit ahead of the actual supply and demand situation and inventory levels.”

I think “expectations” is the key word here. We do seem to have a little bit of a glut of oil (and natural gas) right now. In that respect, prices seem to be too high. But take this story from Fortune, where a majority of analysts believe that prices long-term are headed much higher:

Why oil is on the rise again

NEW YORK (Fortune) — Ask a group of oil analysts about the recent surge in crude costs and here’s the consensus answer you’ll get: Prices have run up too far, too fast and they aren’t supported by the fundamentals.

Ask them about where prices will be two years from now, however, and the majority will offer this prediction: A lot higher.

So if I am an investor – and I think oil prices will be “a lot higher” in two years – I am going to invest in oil and/or oil company stocks regardless of what the supply/demand situation looks like today. And when enough people do that, you have pressure on oil prices today, which is why I think we are back to $70 oil.

Full Disclosure:
I own shares of ConocoPhillips and Petrobras.

June 16, 2009 Posted by | carbon tax, climate change, ConocoPhillips, COP, global warming, investing, Jeff Rubin, Jim Mulva | 11 Comments

Venezuela’s Slide Continues

At this point, you have to wonder who in their right mind will ever do business in Venezuela again as long as Chavez is in power. The risk that Chavez will steal your property is simply too great. During his administration, Chavez has seized phone companies, electric utilities, private real estate (just this week he ordered seizure of a private shopping mall), oil field investments, mines, steel plants, food processing plants, farms, (shades of Mugabe) and cement plants – to name a few.

Now this week he has stolen the assets of oil field services companies:

Venezuela Seen Paying Price for Chavez Expropriation of Oil Contractors

In the wake of the seizure of foreign and domestic oil service companies and assets by armed troops following the orders of Venezuelan President Hugo Chavez, experts began to count the cost to Venezuela — which holds the Western Hemisphere’s largest oil reserves — in lost oil production, lost jobs, lost foreign investment and lost foreign expertise.

This one is ironic, because he was “forced” to seize these assets based on his miscalculations on his previous thefts. Let me explain. In 2007, when oil prices were rising, the heavy oil investments of ExxonMobil and ConocoPhillips (Full disclosure: My former employer) finally began to pay off. It is very expensive to extract and process the heavy oil from the Orinoco Belt in Venezuela. It requires a lot of capital investment and significant expertise, but it also doesn’t pay off until oil prices rise. But when oil prices did rise and Chavez saw the goose start to lay golden eggs, he decided to seize the goose for himself. The problem is that Chavez doesn’t know how to care for a goose, so what has happened in the wake of these seizures should come as no surprise.

It was bad enough that oil production has fallen sharply under the Chavez regime. The reasons for that are simple enough, and have been covered here before. In a nutshell, the issue is this: It takes a lot of capital to maintain the heavy oil business, and Chavez was siphoning off profits to pay for his social programs. Now some (extreme-leftist) people might think that’s just great, but the only reason any money was there to siphon off was due to the high investments to begin with. By not reinvesting back into the business, Chavez set the stage for the plunging oil production we see now – but now the goose is on life-support so there will no longer be money for those social programs.

Much higher oil prices for a while dampened the blow of falling production, but once oil prices started to fall, plunging revenues became a real problem. You would think he would have saved some money for a rainy day, but he is just like that irresponsible person who spends their entire paycheck every week, no matter how much money they make. Although I guess you don’t have to save for a rainy day if you are willing to just rob a bank when the rainy day comes.

But first, he had the bright idea to invite Western oil companies back in to invest again. Surely they can let bygones be bygones? Apparently not, because there doesn’t seem to be a rush to come back in. After all, does anyone doubt that Chavez will steal the investments as soon as prices/production turn back up?

This all leaves Chavez in a bind. He hasn’t made the investments that he needs to make, and nobody else is doing it for him. Production and prices are falling, and he has social programs to pay for. Debt started to pile up with oil services companies, and Chavez demanded lower prices from them. Given that he simply has no money for investment, he does what he always does. Threaten and then steal when he doesn’t get what he wants:

Venezuela’s Oil Production Squeezed by Chavez’s Heavy Hand

Chavez’s government and seized the assets of 60 foreign and domestic oil service companies after conflict erupted over nearly $14 billion in debt owed by the country’s state-owned energy company, Petroleos de Venezuela (PDVSA).

Irate over a growing backlog of invoices, many of the companies threatened to halt operations – something PDVSA and Chavez can ill-afford. The company accounts for about half of Venezuela’s revenue, and is largely responsible for funding and administering the social programs that Chavez has employed to court popular support.

PDVSA brought in more than $120 billion in revenue in 2008, but this year, it will likely make just $50 billion. With its back against the wall, PDVSA is demanding that service companies accept a 40% cut in their bills. Last Friday, the government began expropriating equipment and projects from foreign oil service firms that refused to renegotiate their debt. At least 12 drilling rigs, more than 30 oil terminals, and about 300 boats were seized, the according to The Financial Times.

But the brash gesture will also bring negative consequences that could significantly jeopardize the nation’s oil production, which is already in decline.

“PDVSA has to invest in the business,” James L. Williams, heads of oil consultancy WTRG Economics told BusinessWeek. “You have to feed a cow if you expect it to give milk.”

Hey, this is about geese and golden eggs, not cows and milk. But, point taken. The fact is that Chavez continues Venezuela’s slide toward becoming Zimbabwe. One wonders if he truly lacks the ability to plan, or was just too stupid to see the consequences of this road he has chosen to go down. The only thing that can save him at this point will be for oil prices to go up. Ironically, that’s the same thing I would like to see happen, but if we are lucky Chavez will be ousted before prices get much higher. Then again, if production continues to fall it won’t matter how high prices go; they won’t be able to offset the drops in production.

Chavez is now rattling sabers with Coca-Cola, so don’t be surprised if they go down next. Seriously, I don’t know why we don’t just seize Citgo as a response, auction off the refineries, and then pay damages to those whose assets have been expropriated. Chavez has said he doesn’t want to operate in the U.S., so we should extend a helping hand. It is the least we could do.

May 16, 2009 Posted by | Citgo, ConocoPhillips, ExxonMobil, Hugo Chavez, PDVSA, Venezuela | 76 Comments

Congress Kills a Biofuel Project

If we are to seriously encourage a move to biofuels, incentives are going to be required because the economics of biofuels just can’t compete with petroleum (regardless of what Vinod Khosla thinks). Eventually depletion will cause petroleum to become very expensive, and then the economics of certain biofuels (especially those with the best energy returns) are going to start looking a lot better. But if depletion occurs quickly, we are going to wish that we had provided encouragement for all sorts of alternatives. Of course not all alternatives are created equally, and there are often unintended consequences to deal with. But overall, Congress and now two administrations in a row have shown overwhelming support for incentivizing biofuel production. There is, however, one glaring exception.

I have posed the question before of whether it ever makes sense to offer subsidies to oil companies. I would argue that it does if you want oil companies to do something that economics would otherwise argue against. As an example, let’s say in the name of energy security that Congress thought it was a good idea for oil companies to invest in solar. The oil companies wouldn’t be interested if production costs are higher than the price they expect to get for the panels. The only way Congress would convince them that they should do this is by offering an incentive to do so. Oil companies are not going to otherwise make decisions that are counter to the bottom line (unless of course they are mandated to do it, and that’s another matter altogether).

Such is the case with renewable diesel. Broadly speaking, there are two different kinds of renewable diesel. Biodiesel is normally produced by reacting methanol with animal fats or vegetable oil. (See the process description at Wikipedia). The product is actually an alkyl ester. More simply put, the product contains oxygen, and is structurally different from petroleum diesel. The structural differences can cause some problems in cold weather, and this limits the amount of biodiesel that can be blended into petroleum diesel.

The second kind of diesel is green diesel, which is chemically equivalent to petroleum diesel. This product contains no oxygen, and can be blended in any proportion with petroleum diesel. It can be made via gasification from any biomass (see the Choren process) or by hydrocracking the same fats and oils that you use to produce biodiesel. Besides the structural differences in the product, biodiesel results in a glycerin by-product whereas green diesel results in a propane by-product. (All of this is explained in more detail in my Renewable Diesel Primer).

In 2007, ConocoPhillips (Full disclosure: This is my former employer) and Tyson Foods announced a partnership in which COP would hydrocrack waste animal fats and oils provided by Tyson to make green diesel. Costs of production were around $40/bbl higher than for producing conventional diesel, but COP was able to take advantage of the $1/gal tax credit that Congress had put in place for renewable diesel to bring the costs down to parity with petroleum. Whereas corn farmers love our ethanol policy, ranchers were happy with this announcement because it afforded them an opportunity to participate in the biofuels market. Tyson Foods was also happy to have another outlet for their oils, as this would take some of the sting out of higher corn prices which had cut into their bottom line.

The fact that an oil company would benefit from “their” tax credit sent the biofuel lobby into a tizzy. They asked why an oil company should be allowed a tax credit for doing this. My answer was the same one I have earlier: To get them to do something that wouldn’t otherwise make economic sense. We can have a different debate on the wisdom of the incentive itself (i.e., unintended consequences), but if the goal is to incentivize the production of biofuels, you shouldn’t selectively decide who gets the tax credit. The 1st generation biodiesel industry wanted special treatment (a $1/gallon subsidy advantage over anyone else who might like to compete against them) and they cranked up the lobbying machine.

Democrats were particularly outraged, with Lloyd Doggett of Texas suggesting that oil companies benefiting from this tax credit was a case of legislative abuse. (Especially ironic that he is going after a Texas company, mostly to the benefit of companies operating outside of Texas). They promised to correct this by making sure only targeted companies (i.e., anyone but oil companies) could take advantage of the credit. While ConocoPhillips explained that this project would simply not be profitable without the credit, the Senate called them on it and voted to kill the tax credit. The assumption is that they either thought oil companies would subsidize a money-loser from some of their more profitable divisions, or they simply didn’t want oil companies to produce biofuel. The first assumption is naive, and the second implies that this isn’t about energy security at all, but about favoring special interests.

Yesterday, COP followed through by announcing that they were indeed going to idle the project. This is certainly a victory for less efficient 1st generation biodiesel producers, and it should also be a warning to those who think 1st generation corn ethanol is going to naturally lead to 2nd generation cellulosic ethanol. Besides the technical challenges in getting cellulosic to work commercially, cellulosic producers are going to run up against those same vested interests who wish to see the status quo maintained, and who will lobby to prevent anyone from taking away their market share.

I will repeat what someone wrote to me when Congress first announced their intentions to deny the credit: “It ain’t about the fuel… it’s about a piece of the pie.”

May 14, 2009 Posted by | biodiesel, ConocoPhillips, green diesel, Tyson Foods | 49 Comments

The 2009 EIA Energy Conference: Day 2

Energy and the Media

This was the panel I had been asked to participate in. My fellow panelists were Steven Mufson (one of my favorite mainstream energy reporters), from the Washington Post; Eric Pooley from Harvard, (the former managing editor of Fortune); and Barbara Hagenbaugh from USA Today. The panel was moderated by John Anderson of Resources for the Future.

I can only imagine that a number of people looked at the lineup, looked at my inclusion, and thought “What’s that guy doing up there?” So here’s the background on that. When I was working at the ConocoPhillips Refinery in Billings, Montana, we followed the weekly release of the EIA’s Weekly Petroleum Status Report very closely. We included this information in a weekly supply/demand report, and it helped us to make decisions on how to run the refinery for the upcoming week.

When I started my blog, I began to follow and report on the weekly inventory release, which happens on Wednesday mornings and is followed in the afternoon by This Week in Petroleum. Kyle Saunders (Professor Goose) at The Oil Drum liked the weekly reports and asked me to bring them over to The Oil Drum. This all helped drive more traffic to the EIA website, and helped more people come to appreciate the value of the EIA data.

Doug MacIntyre, at that time the primary author of This Week In Petroleum, started commenting occasionally on my blog, and was quick to answer any questions that readers had. Over time I corresponded with several people at the EIA, and they invited me up to the conference last year. The timing didn’t work out last year as I was in the Netherlands, but this year’s conference was doable. So that’s how I ended up on a panel with the mainstream media.

The panel consisted of use all sitting around a table and taking questions from John, and eventually the audience. I will mostly report on what I said, because it was pretty difficult to take notes while sitting around the table.

The first question was on the price run-up last summer, and whether the media coverage was adequate. We all had somewhat different answers on this, but I took the opportunity to point out that the weekly inventory data can be an important predictor of prices. The plunging gasoline inventory data was the basis of my predictions for $3 and $4 gasoline in the Spring of 2007 and 2008 respectively (which we did in fact see). The other thing I pointed out about this issue is that Google searches on “rising oil/gas prices” probably drive more first-time traffic to my blog than anything else. (Searches for the “water car” are also quite popular).

Next John asked about phony, or false balance in reporting. Before the panel, I had asked readers at my blog and at The Oil Drum for suggestions on topics to cover, and false balance was mentioned by several readers. An example one reader gave was “Scientists report that the earth is round – Flat Earth Institute objects…” So how much credibility do you afford different sides of the debate?

The others on the panel agreed that this was a problem. I made two observations. One, it isn’t always easy to figure out which side is the Flat Earth Institute. I spend a lot of time trying to figure that out at times, especially over newly announced technologies. Second, the good reporters do a lot of research when they are reporting on a story so they can determine who is credible. I noted that Steve Mufson had interviewed me by phone in 2005, and all that came from that hour-long interview was a partial quote in the story. At the time I was annoyed, but later on I came to understand that Mufson was just doing a lot of homework to get the story. Most of his questions were designed to figure out if I knew what I was talking about. The people you have to watch are the ones who call for just a quote.

As an example of false balance, I talked about Brazilian ethanol. Dan Rather and Frank Sesno have both been guilty on their Brazilian ethanol reporting. In hindsight, perhaps their reporting wasn’t false balance so much as completely unbalanced, and lacking any semblance of critical reporting. They both essentially reported the Brazilian ethanol story as “They did it. We can be just like them.” I went on to explain a bit more about the truth of Brazil’s energy independence miracle, which I will update in an upcoming essay (but is also covered in my ASPO presentation from last September (Biofuels: Facts and Fallacies).

There was more discussion about scale (e.g., biofuel versus petroleum usage) and the role bloggers are playing now with respect to reporting news (some specialist bloggers can provide a technical analysis that the mainstream media may lack; on the other hand they don’t always write to journalistic standards). I know I am forgetting some topics, but ultimately John started to take questions.

There were some good questions, but also some instances where the questioner simply wanted to make a point. Morgan Downey asked what energy books I liked. I told him that I was about 250 pages into his book, Oil 101, and that it was a fantastic book. I also mentioned Twilight in the Desert as an influential book on me. I noted that while I had some issues with Twilight, I thought it did a great job of driving home the importance of Saudi Arabia in the world oil picture, and just how important it is that we understand what’s going on there. Finally, I mentioned Gusher of Lies as a book I had really enjoyed.

I was asked about peak oil and the notion that we are running out of oil. I took the opportunity to clarify that peak oil does not mean we are running out of oil – but the media often misconstrues the issue in this manner. I said that we would still have oil in 100 years. Peak oil means that we can’t get it out of the ground fast enough to meet demand, and that if the production peak is near that we are facing some difficult years. (Other than this question and my answer, there was scarce mention of peak oil during the conference).

A representative from (I believe) the California Independent Petroleum Association got up and made a statement that he felt that despite the important role the industry plays, they are being demonized and singled out for punitive taxes. I responded that I could empathize; that one of my greatest concerns is that we will discourage domestic oil and gas production, and then biofuels fail to deliver per expectations. In that case I think we become even more dependent upon OPEC.

Fellow panelist Eric Pooley disagreed and said we need even stronger incentives for moving away from oil. That really misses the point I was making, though. You can have the strongest incentives in the world, but they can’t assure that technology breakthroughs will occur. So while you are promoting one industry at the expense of another, very successful industry that plays a critical role in the world, what is the contingency plan if the incentives don’t pay off?

I was asked about how I come up with ideas for what to write. I said that I browse the news headlines on energy every morning, and that I have Google news alerts on topics like “energy”, “oil prices”, and “peak oil.” If something strikes me as particularly interesting – or particularly wrong – then I may write something about it.

After the panel, a number of people came up and introduced themselves. Some thanked me for speaking up on behalf of the oil and gas industry. One audience member asked me why I don’t write more about “the global warming scam.” As I said to him “I am not touching that with a 10-foot pole.” He asked why, and I said 1). I am not an expert; 2). Discussions over the issue always seem to degenerate into name-calling. I will repeat my position on this. Coming from a science background, I have a healthy respect for scientific consensus in areas where I don’t have specific expertise. On the other hand, the issue has become so polarized that people who do try to discuss the science are frequently shouted down and called names. I don’t endorse those sorts of tactics, no matter how correct you think you might be.

Investing in Oil and Natural Gas – Opportunities and Barriers

Once again, there were two sessions going on simultaneously that I wanted to see. I had to miss Greenhouse Gas Emissions: What’s Next? But I have been a big fan of Deutsche Bank‘s Paul Sankey for several years, and I wasn’t about to miss his panel. Sankey has testified before Congress several times on the oil and gas markets, and I often feel like he is the only one there who knows what he is talking about. (I formerly summarized one of his appearances in Gouging is an Idiotic Explanation). Joining Sankey on the panel were Susan Farrell of PFC Energy, John Felmy of the American Petroleum Institute, and Michelle Foss of the University of Texas. The moderator was Bruce Bawks of the EIA.

The panel agreed that $50 was about the average break even price for oil production today, suggesting that prices are unlikely to fall below that level for long. Farrell commented that worldwide expenditures on exploration and production amounted to $500 billion in 2008. She also noted that oil companies have been unable to arrest the decline rate; that it is in fact increasing. I believe it was also Farrell who suggested that in 2010 the haves would acquire more of the ‘have-nots.’ Someone on the panel stated that the global supply crunch still exists.

I think it was Felmy who said that even if we make a large scale move to hybrids or electric vehicles, 50% of the world’s lithium reserves are in Bolivia. So we may end up trading Chavez for Evo Morales. I don’t know; I think I would make that trade.

As always, Sankey made a lot of interesting comments. He said that while the banks might make a lot of money in a cap and trade system, intellectually it didn’t seem like a good idea to him. He said he preferred a direct carbon tax. He said that we are setting up a slingshot for prices right now, but “2010 could be a bloodbath.” He also said that the overall policy imperative of the new administration seems to be “anything but oil”, but he believes that “attacking the oil and gas industry will be incredibly harmful to the U.S. economy.”

Other Sankey zingers:

“Alaska would rate as one of the ‘countries’ most hostile to the oil industry.”

“I am not sure there is any equity in any bank in the U.S.”

“If we stopped producing gold tomorrow, we have 100 years of supply in inventory. If we stopped producing oil tomorrow, we have 55 days in inventory.”

Finally, someone on the panel (I think it was Sankey) recommended the book Oil on the Brain as providing great insight into the industry. The author, Lisa Margonelli, had a pretty average view of the industry until she delved deeply into the supply chain, traveling to Iran, Nigeria, Chad, and Venezuela. I have not read the book, but will put it on my reading list.

Thus ends my recollections of the conference. As I said in the previous entry, this is not so much a detailed account of everything as it is just my own observations and things that stuck with me as interesting, odd, etc. If you spot something that you think is in error, please let me know. For me, this was an interesting experience, and one that I was glad to be a part of. In conclusion, I want to thank the good people at the EIA for inviting me.

Previous Entries

Energy Secretary Steven Chu’s comments

The 2009 EIA Energy Conference: Day 1

April 14, 2009 Posted by | American Petroleum Institute, api, ConocoPhillips, COP, EIA, Energy Information Administration, Paul Sankey, Peak Oil, twip | 62 Comments

The 2009 EIA Energy Conference: Day 2

Energy and the Media

This was the panel I had been asked to participate in. My fellow panelists were Steven Mufson (one of my favorite mainstream energy reporters), from the Washington Post; Eric Pooley from Harvard, (the former managing editor of Fortune); and Barbara Hagenbaugh from USA Today. The panel was moderated by John Anderson of Resources for the Future.

I can only imagine that a number of people looked at the lineup, looked at my inclusion, and thought “What’s that guy doing up there?” So here’s the background on that. When I was working at the ConocoPhillips Refinery in Billings, Montana, we followed the weekly release of the EIA’s Weekly Petroleum Status Report very closely. We included this information in a weekly supply/demand report, and it helped us to make decisions on how to run the refinery for the upcoming week.

When I started my blog, I began to follow and report on the weekly inventory release, which happens on Wednesday mornings and is followed in the afternoon by This Week in Petroleum. Kyle Saunders (Professor Goose) at The Oil Drum liked the weekly reports and asked me to bring them over to The Oil Drum. This all helped drive more traffic to the EIA website, and helped more people come to appreciate the value of the EIA data.

Doug MacIntyre, at that time the primary author of This Week In Petroleum, started commenting occasionally on my blog, and was quick to answer any questions that readers had. Over time I corresponded with several people at the EIA, and they invited me up to the conference last year. The timing didn’t work out last year as I was in the Netherlands, but this year’s conference was doable. So that’s how I ended up on a panel with the mainstream media.

The panel consisted of use all sitting around a table and taking questions from John, and eventually the audience. I will mostly report on what I said, because it was pretty difficult to take notes while sitting around the table.

The first question was on the price run-up last summer, and whether the media coverage was adequate. We all had somewhat different answers on this, but I took the opportunity to point out that the weekly inventory data can be an important predictor of prices. The plunging gasoline inventory data was the basis of my predictions for $3 and $4 gasoline in the Spring of 2007 and 2008 respectively (which we did in fact see). The other thing I pointed out about this issue is that Google searches on “rising oil/gas prices” probably drive more first-time traffic to my blog than anything else. (Searches for the “water car” are also quite popular).

Next John asked about phony, or false balance in reporting. Before the panel, I had asked readers at my blog and at The Oil Drum for suggestions on topics to cover, and false balance was mentioned by several readers. An example one reader gave was “Scientists report that the earth is round – Flat Earth Institute objects…” So how much credibility do you afford different sides of the debate?

The others on the panel agreed that this was a problem. I made two observations. One, it isn’t always easy to figure out which side is the Flat Earth Institute. I spend a lot of time trying to figure that out at times, especially over newly announced technologies. Second, the good reporters do a lot of research when they are reporting on a story so they can determine who is credible. I noted that Steve Mufson had interviewed me by phone in 2005, and all that came from that hour-long interview was a partial quote in the story. At the time I was annoyed, but later on I came to understand that Mufson was just doing a lot of homework to get the story. Most of his questions were designed to figure out if I knew what I was talking about. The people you have to watch are the ones who call for just a quote.

As an example of false balance, I talked about Brazilian ethanol. Dan Rather and Frank Sesno have both been guilty on their Brazilian ethanol reporting. In hindsight, perhaps their reporting wasn’t false balance so much as completely unbalanced, and lacking any semblance of critical reporting. They both essentially reported the Brazilian ethanol story as “They did it. We can be just like them.” I went on to explain a bit more about the truth of Brazil’s energy independence miracle, which I will update in an upcoming essay (but is also covered in my ASPO presentation from last September (Biofuels: Facts and Fallacies).

There was more discussion about scale (e.g., biofuel versus petroleum usage) and the role bloggers are playing now with respect to reporting news (some specialist bloggers can provide a technical analysis that the mainstream media may lack; on the other hand they don’t always write to journalistic standards). I know I am forgetting some topics, but ultimately John started to take questions.

There were some good questions, but also some instances where the questioner simply wanted to make a point. Morgan Downey asked what energy books I liked. I told him that I was about 250 pages into his book, Oil 101, and that it was a fantastic book. I also mentioned Twilight in the Desert as an influential book on me. I noted that while I had some issues with Twilight, I thought it did a great job of driving home the importance of Saudi Arabia in the world oil picture, and just how important it is that we understand what’s going on there. Finally, I mentioned Gusher of Lies as a book I had really enjoyed.

I was asked about peak oil and the notion that we are running out of oil. I took the opportunity to clarify that peak oil does not mean we are running out of oil – but the media often misconstrues the issue in this manner. I said that we would still have oil in 100 years. Peak oil means that we can’t get it out of the ground fast enough to meet demand, and that if the production peak is near that we are facing some difficult years. (Other than this question and my answer, there was scarce mention of peak oil during the conference).

A representative from (I believe) the California Independent Petroleum Association got up and made a statement that he felt that despite the important role the industry plays, they are being demonized and singled out for punitive taxes. I responded that I could empathize; that one of my greatest concerns is that we will discourage domestic oil and gas production, and then biofuels fail to deliver per expectations. In that case I think we become even more dependent upon OPEC.

Fellow panelist Eric Pooley disagreed and said we need even stronger incentives for moving away from oil. That really misses the point I was making, though. You can have the strongest incentives in the world, but they can’t assure that technology breakthroughs will occur. So while you are promoting one industry at the expense of another, very successful industry that plays a critical role in the world, what is the contingency plan if the incentives don’t pay off?

I was asked about how I come up with ideas for what to write. I said that I browse the news headlines on energy every morning, and that I have Google news alerts on topics like “energy”, “oil prices”, and “peak oil.” If something strikes me as particularly interesting – or particularly wrong – then I may write something about it.

After the panel, a number of people came up and introduced themselves. Some thanked me for speaking up on behalf of the oil and gas industry. One audience member asked me why I don’t write more about “the global warming scam.” As I said to him “I am not touching that with a 10-foot pole.” He asked why, and I said 1). I am not an expert; 2). Discussions over the issue always seem to degenerate into name-calling. I will repeat my position on this. Coming from a science background, I have a healthy respect for scientific consensus in areas where I don’t have specific expertise. On the other hand, the issue has become so polarized that people who do try to discuss the science are frequently shouted down and called names. I don’t endorse those sorts of tactics, no matter how correct you think you might be.

Investing in Oil and Natural Gas – Opportunities and Barriers

Once again, there were two sessions going on simultaneously that I wanted to see. I had to miss Greenhouse Gas Emissions: What’s Next? But I have been a big fan of Deutsche Bank‘s Paul Sankey for several years, and I wasn’t about to miss his panel. Sankey has testified before Congress several times on the oil and gas markets, and I often feel like he is the only one there who knows what he is talking about. (I formerly summarized one of his appearances in Gouging is an Idiotic Explanation). Joining Sankey on the panel were Susan Farrell of PFC Energy, John Felmy of the American Petroleum Institute, and Michelle Foss of the University of Texas. The moderator was Bruce Bawks of the EIA.

The panel agreed that $50 was about the average break even price for oil production today, suggesting that prices are unlikely to fall below that level for long. Farrell commented that worldwide expenditures on exploration and production amounted to $500 billion in 2008. She also noted that oil companies have been unable to arrest the decline rate; that it is in fact increasing. I believe it was also Farrell who suggested that in 2010 the haves would acquire more of the ‘have-nots.’ Someone on the panel stated that the global supply crunch still exists.

I think it was Felmy who said that even if we make a large scale move to hybrids or electric vehicles, 50% of the world’s lithium reserves are in Bolivia. So we may end up trading Chavez for Evo Morales. I don’t know; I think I would make that trade.

As always, Sankey made a lot of interesting comments. He said that while the banks might make a lot of money in a cap and trade system, intellectually it didn’t seem like a good idea to him. He said he preferred a direct carbon tax. He said that we are setting up a slingshot for prices right now, but “2010 could be a bloodbath.” He also said that the overall policy imperative of the new administration seems to be “anything but oil”, but he believes that “attacking the oil and gas industry will be incredibly harmful to the U.S. economy.”

Other Sankey zingers:

“Alaska would rate as one of the ‘countries’ most hostile to the oil industry.”

“I am not sure there is any equity in any bank in the U.S.”

“If we stopped producing gold tomorrow, we have 100 years of supply in inventory. If we stopped producing oil tomorrow, we have 55 days in inventory.”

Finally, someone on the panel (I think it was Sankey) recommended the book Oil on the Brain as providing great insight into the industry. The author, Lisa Margonelli, had a pretty average view of the industry until she delved deeply into the supply chain, traveling to Iran, Nigeria, Chad, and Venezuela. I have not read the book, but will put it on my reading list.

Thus ends my recollections of the conference. As I said in the previous entry, this is not so much a detailed account of everything as it is just my own observations and things that stuck with me as interesting, odd, etc. If you spot something that you think is in error, please let me know. For me, this was an interesting experience, and one that I was glad to be a part of. In conclusion, I want to thank the good people at the EIA for inviting me.

Previous Entries

Energy Secretary Steven Chu’s comments

The 2009 EIA Energy Conference: Day 1

April 14, 2009 Posted by | American Petroleum Institute, api, ConocoPhillips, COP, EIA, Energy Information Administration, Paul Sankey, Peak Oil, twip | 37 Comments

Fortune Says Oil Stocks are a Bargain

I certainly can’t disagree with this:

Betting on big oil’s comeback

The article first argues that oil prices are unlikely to stay low for too long:

“Right now, the upsides in the oil sector far exceed the downside risks,” says Fadel Gheit, an analyst at Oppenheimer & Co. “I am absolutely convinced that oil prices will rise.”

After last year’s $100 free-fall rocked expectations, that kind of confidence is surprising. But Gheit is not alone; a strong consensus is growing for a price rebound. While crude isn’t likely to rocket back to the sky-high levels of 2008, even bearish analysts admit that oil can’t stay below $50 for long.

Those are of course my sentiments as well. I believe that long-term oil prices are going to see robust growth. Short-term it may run up to $150 and back down to $35, but my metric is always to ask where oil prices will be in 5 or 10 years. I believe they will be more than double where they are now, so I am leaving oil company stocks in my portfolio for the long haul, even if prices fall to $20 for a while.

They spoke favorably of the two oil stocks in my portfolio:

Other large stocks stand ready for a rebound. ConocoPhillips (COP, Fortune 500), whose shares have fallen 57% over the last year, has a price to earnings ratio of 9 versus Exxon’s 13. The company has a large amount of refining exposure, which hurt its bottom line in 2008 because of rising oil prices and slowing consumption.

Maran says that ConocoPhillips was unfairly penalized because of its partnership with Lukoil and its expulsion from Venezuela. Investors are worried about political risk – an overreaction, he says, and one that’s likely to change if more countries invite foreign companies in to revive their flailing economies.

Another big producer analysts say is undervalued is Petrobras (PBR), which discovered a series of mega-fields off of the Brazilian coast two years ago. Goldman’s Murti recently wrote that Petrobras “may be the best positioned major oil company in the world for the next oil price upcycle.”

It’s still unclear how much the company’s offshore find is worth, but Don Coxe, a longtime oil guru who now runs Coxe Advisors, likes what he sees. “Petrobras is a special story, and investors want to be a part of it,” he says. “They could find $25 billion worth of oil down there.”

ConocoPhillips has been a wild ride. Fortunately, I was in very early, so I am still ahead even after the steep fall. Petrobras has been all positive. In early December, it looked to me like an absolute steal based on their reserves (see Loading Up on PBR). Despite the rocky road for stocks in general lately, PBR has been the gem in my portfolio: Up as much as 70% since I bought it.

While I have taken losses just like most people, PBR has been moderated the rest of my portfolio. And as oil prices rise back to the $60 range, I expect PBR will be double what it is now, and COP will be up 30-40% over today’s price.

March 8, 2009 Posted by | ConocoPhillips, COP, investing, PBR, Petrobras | Comments Off on Fortune Says Oil Stocks are a Bargain

Fortune Says Oil Stocks are a Bargain

I certainly can’t disagree with this:

Betting on big oil’s comeback

The article first argues that oil prices are unlikely to stay low for too long:

“Right now, the upsides in the oil sector far exceed the downside risks,” says Fadel Gheit, an analyst at Oppenheimer & Co. “I am absolutely convinced that oil prices will rise.”

After last year’s $100 free-fall rocked expectations, that kind of confidence is surprising. But Gheit is not alone; a strong consensus is growing for a price rebound. While crude isn’t likely to rocket back to the sky-high levels of 2008, even bearish analysts admit that oil can’t stay below $50 for long.

Those are of course my sentiments as well. I believe that long-term oil prices are going to see robust growth. Short-term it may run up to $150 and back down to $35, but my metric is always to ask where oil prices will be in 5 or 10 years. I believe they will be more than double where they are now, so I am leaving oil company stocks in my portfolio for the long haul, even if prices fall to $20 for a while.

They spoke favorably of the two oil stocks in my portfolio:

Other large stocks stand ready for a rebound. ConocoPhillips (COP, Fortune 500), whose shares have fallen 57% over the last year, has a price to earnings ratio of 9 versus Exxon’s 13. The company has a large amount of refining exposure, which hurt its bottom line in 2008 because of rising oil prices and slowing consumption.

Maran says that ConocoPhillips was unfairly penalized because of its partnership with Lukoil and its expulsion from Venezuela. Investors are worried about political risk – an overreaction, he says, and one that’s likely to change if more countries invite foreign companies in to revive their flailing economies.

Another big producer analysts say is undervalued is Petrobras (PBR), which discovered a series of mega-fields off of the Brazilian coast two years ago. Goldman’s Murti recently wrote that Petrobras “may be the best positioned major oil company in the world for the next oil price upcycle.”

It’s still unclear how much the company’s offshore find is worth, but Don Coxe, a longtime oil guru who now runs Coxe Advisors, likes what he sees. “Petrobras is a special story, and investors want to be a part of it,” he says. “They could find $25 billion worth of oil down there.”

ConocoPhillips has been a wild ride. Fortunately, I was in very early, so I am still ahead even after the steep fall. Petrobras has been all positive. In early December, it looked to me like an absolute steal based on their reserves (see Loading Up on PBR). Despite the rocky road for stocks in general lately, PBR has been the gem in my portfolio: Up as much as 70% since I bought it.

While I have taken losses just like most people, PBR has moderated the rest of my portfolio. And as oil prices rise back to the $60 range, I expect PBR will be double what it is now, and COP will be up 30-40% over today’s price.

March 8, 2009 Posted by | ConocoPhillips, COP, investing, PBR, Petrobras | 6 Comments