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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

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

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

What Manpower Shortage?

Much has been made of the manpower shortage in the oil industry. I have been interviewed about it, I have written about it, and I saw it first hand when I was working for ConocoPhillips in Aberdeen, Scotland. Recruiting people was very difficult, and contractors – especially process engineers – were commanding unbelievable salaries. I got so many calls from headhunters – including the companies mentioned in the story below – that I literally hated to pick up the phone for fear I was going to get tied up for 15 minutes.

Well, that was then. Since oil prices have fallen, ConocoPhillips has announced they are laying off 4% of the workforce, Schlumberger is laying off 5% of their North American workforce, and now contractors in the North Sea are rolling back salaries by 10%:

North Sea contractors facing a 10% pay cut

More than 1,000 North Sea contractors will see their pay cut by an average of 10% as oil companies feel the impact of lower crude prices.

The wage reductions affect only one oil service business, Wood Group Engineering (North Sea), but its rivals could follow suit as their oil company clients seek to reduce costs.

I worked with Production Services Network (PSN) when I was there, and the story mentioned them as well:

Among the other large North Sea oil service firms are PSN and AMEC.

Bob Keiller, chief executive of Aberdeen-based PSN, said: “We are looking at all ways to help our customers reduce costs.”

One of the reasons that I decided to join the oil industry in the first place was that I felt like it was a safe harbor in a world that would be facing big energy challenges in the near future. In fact, the energy sector has been mentioned as a place to find ‘recession-proof jobs.’ Some are about to discover that even so-called recession-proof jobs can be impacted by a recession.

Note: For the gardeners who read this blog, I just started a gardening journal this morning. It is basically just a journal of my gardening experiences in North Texas. I find it easier to do this via a blog than to keep a notebook. Anyway, feel free to stop by and share any tips you might have. The URL is My Gardening Blog, and I will update it quite often as gardening season gears up.

January 24, 2009 Posted by | COP, manpower, oil companies, Schlumberger | 34 Comments

Loading Up on PBR

A little over a month ago, as a result of the dramatic fall in the market capitalizations of oil companies, I opened up a brokerage account with Ameritrade to take advantage of the fire sale. Besides my ConocoPhillips (COP) stock, most of my investments are diversified in various mutual funds – often diversified into things I don’t know too much about. As I have said many times before, I am a long-term investor. Short-term volatility doesn’t impact me much; my time horizon when I buy a stock is 5-10 years out. Therefore, I see an opportunity.

Do I think oil prices will be hanging around $40 in 10 years? Absolutely not. I think the OPEC cuts will begin to bite, and they are going to be very slow to increase production again. I also think that non-OPEC production will peak soon, if it hasn’t already (and that is in fact a widely held view; the bigger question is whether worldwide production will peak – and I think it will). Right now the December 2009 WTI contract is trading above $52, so the market is expecting prices to go up from here.

So, if I am correct, and I think oil prices are headed back above $100 in the next few years, what is a long-term investor to do? If you can put up with the risk, you could buy oil futures. But I don’t like that kind of risk. Better I think is investing in energy companies, and oil field services companies. But which ones? If I didn’t already own COP, it would have been a no-brainer. The price to earnings ratio (PE) had fallen to below 4 – the lowest of any major oil company – and the dividend yield was right at 4%. It was being priced like a company in dire financial straights, when it was nothing of the sort. But I already own COP, and I don’t want to concentrate my holdings too much.

The other problem with the U.S. based oil companies is that their access to oil is drying up. So, how about a non-U.S. oil company sitting on a bunch of reserves? Saudi Aramco seems like a no-brainer, but I don’t believe there is any way to invest there. There are companies like Statoil (STO) in Norway, ENI (E) in Italy, and Petrobras (PBR) in Brazil. The one that really intrigues me is Petrobras. They are sitting on large reserves, and have made a number of new discoveries in recent years. Consumption in Brazil is very low relative to the U.S., and the EIA forecasts that they will become a net exporter in 2009. Production has been growing in recent years. Access is not a problem, since they still have room to grow even at home. I have also noted my opinion that in a post-peak world, Brazil is poised to continue to grow their energy production for many years.

I had missed the chance to buy PBR at $15 in November, and by the last week in November the price had bounced back to >$20. But with PBR trading at $21, I went ahead and put in a limit order at $17.50, hoping I hadn’t missed the bottom. On December 4th, that trade executed. The PE then was hovering around 5. (I had almost invested some on margin, but the margin rates were much too high for my liking).

Since then, the stock has risen by as much as 48%, until backing off somewhat last week. As I write this, my shares are up 34% in less than 3 weeks. Despite my long-term view, such a quick run-up has provided a great temptation to go ahead and sell. But short term capital gains are taxed at a much higher rate than are long term capital gains, so I plan to go ahead and hold for at least a year. In the interim, if shares fall again to $15, I will put more money down.

As a footnote, there was an investment that I carefully considered as an alternative: EWZ, which is a closed-end mutual fund that invests in Brazilian companies. The reason I considered this is that if you look at the low consumption in Brazil, combined with their oil reserves, you can make a very strong case that their economy has a lot of room to grow. But one of EWZ’s major holdings was Petrobras, so I figured I would just go directly with PBR, who stand to benefit quite a lot as Brazil’s economy grows.

December 23, 2008 Posted by | ConocoPhillips, COP, EWZ, investing, oil companies, PBR, Petrobras | 22 Comments