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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

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

Anything But Oil

The 2009 EIA Energy Conference is history, and I will write a summary as soon as can. One of the things I commented on today is that I am concerned about the path we are headed down on our domestic oil and gas industry – and if things don’t go according to plan it will mean more dependence on OPEC. A great line by Paul Sankey today (he had many) was that the policy imperative seems to be “Anything but oil.”

I really do understand the desire to move away from oil. A portion of my career has been devoted to developing replacements for petroleum. But as I said today, I am also a realist. Let’s suppose for a second that the following happens. Policies are put into place that hasten the downfall of our domestic oil and gas industry. Marginal wells become uneconomic and are shut in. According to Morgan Downey in Oil 101 there are 500,000 producing oil wells in the U.S., 80% of which produce 10 bpd or less. Yet those 10 bpd wells account for 20% of U.S. production. What happens if we put these marginal producers out of business?

Some of you will say “That would be great. That’s what we need to combat climate change.” OK, I respect that opinion. However, there is now a shortfall in production to deal with. We either reduce demand or we have to find something renewable to fill the void. Right now, I don’t see anything that can fill even a 10% shortfall in U.S. production in the next few years. So that means either higher prices or some incentives (paid for by higher taxes) will be needed to reduce demand (and I don’t think that’s a bad thing) or we will become even more dependent upon OPEC – the outcome that I think is most likely in this scenario.

Robert Bryce* – author of Gusher of Lies which was the other book I mentioned today – just wrote a provocative essay that touches upon this theme of declaring war on our domestic oil and gas industry. He notes that while it is seemingly a great idea to have Treasury Secretaries from Wall Street, being from the energy industry almost immediately disqualifies a person from being energy secretary:

Let Exxon Run the Energy Dept.

This is stunning. At the same time that the Treasury Department has begun looking like a wholly owned subsidiary of Goldman Sachs and the other Wall Street mega-firms that are too big to fail, the top leadership at the Department of Energy remains a bastion of anything-but-Big Oil. “It’s the mythology of the Beltway,” one Houston energy analyst told me recently. “You are hopelessly compromised if you are anywhere close to the oil industry.”

Bryce runs through the history of our Energy Secretaries:

A Nobel Prize-winning physicist, Chu has experience in energy-related issues, including his job as director of the Lawrence Berkeley National Laboratory, but he’s never been in the energy business.

Jimmy Carter named James Schlesinger—an apparatchik with no history in the energy sector—as the nation’s first Energy secretary.

Ronald Reagan claimed he was going to dismantle the Department of Energy. His pick for Energy secretary was James B. Edwards, a man who understood drilling—he was a dentist.

Bill Clinton’s choices for the top Energy spot were: Hazel O’Leary, a lawyer; Federico Pena, another lawyer; and finally Bill Richardson, a politico and diplomat.

George W. Bush’s choices to head the Department of Energy included Spencer Abraham, a lawyer who’d just lost his seat in the U.S. Senate, and Samuel Bodman, an engineer whose professional career was in investments and chemical production.

I understand that there are many who still think if we can only run Exxon out of town, we will live happily ever after in a low-carbon, renewable world. I would just warn against the law of unintended consequences, as it is quite possible that Chu’s pleas to OPEC to keep production flowing will take on a more urgent tone if we pursue the extinction of our domestic oil and gas industry.

* Incidentally, if you guessed based on his views on energy, you would probably incorrectly guess Bryce’s political leanings. And if you want to be disabused of the notion that he is involved in the oil industry, read the book he wrote called Cronies: Oil, The Bushes, And The Rise Of Texas, America’s Superstate.

April 9, 2009 Posted by | EIA, Morgan Downey, oil production, Paul Sankey, Robert Bryce | 99 Comments

Anything But Oil

The 2009 EIA Energy Conference is history, and I will write a summary as soon as can. One of the things I commented on today is that I am concerned about the path we are headed down on our domestic oil and gas industry – and if things don’t go according to plan it will mean more dependence on OPEC. A great line by Paul Sankey today (he had many) was that the policy imperative seems to be “Anything but oil.”

I really do understand the desire to move away from oil. A portion of my career has been devoted to developing replacements for petroleum. But as I said today, I am also a realist. Let’s suppose for a second that the following happens. Policies are put into place that hasten the downfall of our domestic oil and gas industry. Marginal wells become uneconomic and are shut in. According to Morgan Downey in Oil 101 there are 500,000 producing oil wells in the U.S., 80% of which produce 10 bpd or less. Yet those 10 bpd wells account for 20% of U.S. production. What happens if we put these marginal producers out of business?

Some of you will say “That would be great. That’s what we need to combat climate change.” OK, I respect that opinion. However, there is now a shortfall in production to deal with. We either reduce demand or we have to find something renewable to fill the void. Right now, I don’t see anything that can fill even a 10% shortfall in U.S. production in the next few years. So that means either higher prices or some incentives (paid for by higher taxes) will be needed to reduce demand (and I don’t think that’s a bad thing) or we will become even more dependent upon OPEC – the outcome that I think is most likely in this scenario.

Robert Bryce* – author of Gusher of Lies which was the other book I mentioned today – just wrote a provocative essay that touches upon this theme of declaring war on our domestic oil and gas industry. He notes that while it is seemingly a great idea to have Treasury Secretaries from Wall Street, being from the energy industry almost immediately disqualifies a person from being energy secretary:

Let Exxon Run the Energy Dept.

This is stunning. At the same time that the Treasury Department has begun looking like a wholly owned subsidiary of Goldman Sachs and the other Wall Street mega-firms that are too big to fail, the top leadership at the Department of Energy remains a bastion of anything-but-Big Oil. “It’s the mythology of the Beltway,” one Houston energy analyst told me recently. “You are hopelessly compromised if you are anywhere close to the oil industry.”

Bryce runs through the history of our Energy Secretaries:

A Nobel Prize-winning physicist, Chu has experience in energy-related issues, including his job as director of the Lawrence Berkeley National Laboratory, but he’s never been in the energy business.

Jimmy Carter named James Schlesinger—an apparatchik with no history in the energy sector—as the nation’s first Energy secretary.

Ronald Reagan claimed he was going to dismantle the Department of Energy. His pick for Energy secretary was James B. Edwards, a man who understood drilling—he was a dentist.

Bill Clinton’s choices for the top Energy spot were: Hazel O’Leary, a lawyer; Federico Pena, another lawyer; and finally Bill Richardson, a politico and diplomat.

George W. Bush’s choices to head the Department of Energy included Spencer Abraham, a lawyer who’d just lost his seat in the U.S. Senate, and Samuel Bodman, an engineer whose professional career was in investments and chemical production.

I understand that there are many who still think if we can only run Exxon out of town, we will live happily ever after in a low-carbon, renewable world. I would just warn against the law of unintended consequences, as it is quite possible that Chu’s pleas to OPEC to keep production flowing will take on a more urgent tone if we pursue the extinction of our domestic oil and gas industry.

* Incidentally, if you guessed based on his views on energy, you would probably incorrectly guess Bryce’s political leanings. And if you want to be disabused of the notion that he is involved in the oil industry, read the book he wrote called Cronies: Oil, The Bushes, And The Rise Of Texas, America’s Superstate.

April 9, 2009 Posted by | EIA, Morgan Downey, oil production, Paul Sankey, Robert Bryce | 157 Comments

2009 EIA Energy Conference

Sorry for the long gap in posts, but I haven’t had much Internet access this week. Now I am freshly arrived back in the U.S., so I thought I would just quickly touch base.

The 2009 EIA Energy Conference is scheduled for April 7th and 8th, and I have been invited to be on a panel session called Energy and the Media. Lots of familiar names will be speaking; at least familiar to me. I have mentioned Paul Sankey from Deutsche Bank here a couple of times. I have spoken with Steve Mufson from the Washington Post on energy issues, and he will be on the panel with me. Of course former TWIP author and friend of R-Squared Doug MacIntyre will be there, and I look forward to finally meeting him.

I can’t imagine that the RFA’s chief lobbyist Bob Dinneen is going to be happy that they have invited an “energy blogger” to participate, given that he finds us such an “unsavory lot.” Maybe he can set his ad hominems aside for long enough to answer some serious questions during his panel session Renewable Energy in the Transportation and Power Sectors. That may be asking a bit much from someone who is paid $300,000 a year to say nice things about the ethanol industry – and nasty things about those who are critical of ethanol policies.

Anyway, the conference is free, so if you happen to be in the area, be sure to drop by.

March 6, 2009 Posted by | Bob Dinneen, DOE, Doug MacIntyre, EIA, Paul Sankey | 15 Comments

Mega-Bear versus Super-Spike

Update: Never say never. Today, the prediction I made in 2005 that WTI would never again fall below $50 has fallen. Front month WTI as of this writing has dipped to $49.75. But it will never fall below $40. 🙂

——————-

In 2005, with oil trading in the $40’s and $50’s, Goldman Sachs raised some eyebrows when they predicted that we could soon be looking at a ‘super-spike’ and oil prices going as high as $105. As this scenario played out this year, the analyst who made that call – Arjun Murti – raised the ante and said that we could soon see oil at $200. The New York Times, in an article in which they dubbed him an ‘oracle of oil’, reported:

An Oracle of Oil Predicts $200-a-Barrel Crude

Arjun N. Murti remembers the pain of the oil shocks of the 1970s. But he is bracing for something far worse now: He foresees a “super spike” — a price surge that will soon drive crude oil to $200 a barrel.

Mr. Murti, 39, argues that the world’s seemingly unquenchable thirst for oil means prices will keep rising from here and stay above $100 into 2011. Others disagree, arguing that prices could abruptly tumble if speculators in the market rush for the exits.

There are some things to be said about predictions. If a person makes enough predictions, they are going to miss some – no matter how well they know their subject matter. On the other hand, when many people are making predictions, some will inevitably get it right for the wrong reasons.

Today I spotted a story in CNN that contrasted Mr. Murti’s prediction with that of Paul Sankey at Deutsche Bank:

Deutsche Bank ‘Mega-Bear’ Stomps Goldman’s Oil ‘Super-Spike’

I have a lot of respect for Paul Sankey. In my opinion he is very knowledgeable about the fundamentals of the oil markets. I commented on his 2007 testimony to the Senate Committee on Energy and Natural Resources on oil prices previously here. So where does Sankey think things are headed?

NEW YORK -(Dow Jones)- Oil prices could fall as low as $40 a barrel next spring as an overhang of new, efficient refineries come on line, an analyst at Deutsche Bank said Wednesday.

Calling it the “mega-bear” case for oil, analyst Paul Sankey said the combination of weak demand for gasoline and other products, coupled with the start-up of 2 million barrels a day of processing capacity at a new generation of refineries in India and China and expansion projects in the U.S. will combine to depress oil prices.

Sankey’s stance, while pessimistic, still anticipates slightly higher oil prices than the bank’s commodities analysts, who on Friday said that oil futures prices could fall further to $30 a barrel under their worst-case scenario.

While I don’t discount that Sankey could be right, I don’t think his reasoning in this case is sound. Added refining capacity does nothing to help add new crude supplies. New refinery capacity would primarily put downward pressure on gasoline and diesel prices. Of course if the added capacity is designed to primarily handle cheaper crudes that are heavier and more sour, then it would lessen demand for light, sweet crude and Sankey’s scenario could come to pass.

In some cases, those who get it right can be spectacularly wrong on their reasoning and may not really understand much about the fundamentals. I am not suggesting that Mr. Sankey or Mr. Murti fall into that category, but I have run across speculators who cited their conviction that Saudi production was on a steep decline as the reason they were betting on higher prices. For a while, it was difficult to argue with these people, as they could simply point to the oil price as vindication. In the short run, smart people can get it wrong and uninformed people can get it right. But those anomalies will tend to correct themselves in the long run.

Personally, I predicted in May of 2005 that we would never see oil prices drop below $50 again. While I have been correct for the past 3.5 years, when I checked prices last night after touching down from Europe I saw that I am coming increasingly close to being wrong on that account. Oil is now trading at $52 and change, so my prediction could be falsified any day now.

For me, the important thing is to understand why that prediction is on the verge of being falsified. Have I been one of the lucky who was right, but for the wrong reason? What I foresaw was continued tightening demand that kept upward pressure on oil prices. What actually happened played out like that at first, but then we saw a huge spike that ultimately crushed demand. I think without this summer’s huge spike that today we would be trading in the $70’s or $80’s as demand continued to creep ahead. So I think that even though my prediction may be falsified, the reasoning behind it is still sound.

In the long run, I still see the same thing. I believe we will revisit $100 oil within a couple of years (in my ‘steady growth’ model, I foresaw us first cracking $100 in 2009). While there will be great volatility as we are seeing now, I don’t believe we will return to years of oil prices at this level. I think that we are bottoming out, and 20 years from now we will see a whip-saw on the graph for 2008, but we will continue the same upward trend that has been in place since 2002.

November 20, 2008 Posted by | Goldman Sachs, investing, oil prices, Paul Sankey | 267 Comments