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Private-Public Partnerships Move to Improve Texas Energy and Environment

Apart from obvious biological costs of the Deepwater Horizon oil spill in 2010, there were heavy indirect costs associated with the spill which most economists will likely never be able to calculate accurately. These intangible costs include the heavy blow dealt on the Gulf’s tourism sector that year.

The mere cleanup costs of similar spills have been monumental:

Cleanup of Oil Spills

Note: These figures are projections based on the estimated average cost of cleaning up a single barrel of oil in today’s dollars. They do NOT include the cost to other industries, countries, outstanding damages to private property or the value of lost oil. In the case of Mexico in its 1979 Ixtoc I spill, these three external estimated costs totaled an astonishing $872 million. 

Unsurprisingly, British Petroleum estimates that over 30 percent of medium-term oil production will be offshore oil, hence risk management strategies are not only a foremost ethical parameter but a rational metric for increasing a company’s profitability. Bearing this end in mind, the University of Houston and Texas A&M at Corpus Christi are forming the Subsea Systems Institute and Texas OneGulf, and will enjoy close collaboration with NASA, Rice University, ExxonMobil, Halliburton and Sclumberger among others. The two research organizations — aided by the private sector — will pioneer deep-sea drilling technologies designed to protect the environment and private enterprises through safer and more cost-effective deep-sea drilling practices.

Our vision is to create an institute that is recognized around the world as the undisputed leader in transformative deepwater technology… We will create, test, and provide the technologies that industry will need in the next five to 10 years.

– Ramanan Krishnomoorti, Chief Energy Officer and Interim Vice President for Research and Technology Transfer at the University of Houston


Political Versus Market Energy Economics

With news of a consensus on its financing structure, details of a proposed natural gas pipeline called the Turkish Stream are expected to be finalized as early as June 18th. The pipeline, which is estimated by internal sources to cost over $2 billion, will originate in Russia, pass through Turkey and end in Greece. The move seems very strategic of Russia — one of the largest exporters of gas in the world — which has shown interest in the financial backing of Greece’s new leadership under leftist hardliners. Ironically, amidst a very public distaste regarding the European Union’s stance on repayment of Greek debts, the ailing state has expedited approval of the project, which would bottleneck Russian gas through the country, forcing many European countries to pay them transit fees.

The U.S. Department of State (DOS) warned that expanding Europe’s dependence on Russian gas would only increase political instability in the region and could reduce price competitiveness of natural gas in Europe, however members of Greece’s ruling party, Syriza, quickly rebuked the observations and labeled them as attempted blackmail. The DOS also claimed that Russia did not build the pipeline out of benevolence or even a desire for financial gain, but purely to snub the Trans-Adriatic Pipeline, an alternative Western-backed project which was also forecasted to bring needed gas resources from Azerbaijan to Europe through Greece. Members of the DOS even went so far as to say that Turkish Stream in itself is not an economic investment, and there are perhaps a few reasons to believe so:

  • The offshore portion of Turkish Stream completely circumvents other European countries in almost a comical fashion given the alternative price of simply building land-based pipelines through Ukraine… this costly act of political angst immediately made the marine portion of the pipeline $600 million more expensive;
  • According to the Energy Information Administration (EIA) Russian gas has been losing market share with almost every passing year for over ten years, while European demand for gas has fallen and stagnated, no doubt due to Europe’s lethargic growth numbers:

Nat Gas Prod and Consumption

  • Perhaps in an effort to shift infrastructure costs onto the European Union (EU), Russia has announced a “build it yourself” policy for all potential client nations hoping to have pipelines connecting them to Greece… while such a proclamation may seem efficient for them and strategically savvy, consider that many European countries such as Sweden now acquire less than 48 percent of their energy consumption needs from fossil fuels. In the meantime, Italy, Romania, Germany, Estonia and Bulgaria among many others are in the process of phasing out much of their gas use, and are actually years ahead of their target schedules for implementation of nuclear and renewable energies.

At the aggregate level, natural gas is an extremely profitable energy resource which is seeing double-digit growth across many different countries, mainly in the developing world. However, mature economies such as those in Europe have not characterized themselves as extremely profitable or high-growth markets, meaning that they are among the least likely areas to see attractive returns on expensive fossil energy infrastructure projects like Turkish Stream.


Tesla Becomes The Harbinger Of Doom For Utilities

It’s rare to see a new product which could fundamentally change the way average Americans live, today is certainly not that day. However, upon announcing the Powerwall  and Powerback, Tesla innovators shined the media’s light on the 800 pound gorilla which has been staring American utility companies squarely in the face: batteries. Tesla is by no means alone or a first-mover in the battery market, with the construction of similar manufacturing facilities underway by mega-giants such as BMW, Ford, Chrysler, Nissan, BYD in China and Bosch in Germany.

Tesla’s electrical storage system falls short of being accessible to middle-class Americans, with the standalone cost of a single 10kWh Powerwall being quoted by the company as being $3,500 while SolarCity — Tesla’s manufacturing partner — declared the amount to be the wholesale cost, giving revised estimates of up to $7,000 per system. SolarCity also estimates that two systems will be necessary to disconnect completely from the electrical grid, raising the sticker price to $14,000 for complete energy independence — solar panels not included! The Powerwall may be scalable to the point where it becomes more economic than using the electrical grid, but the vast majority of consumers will never be able to shell out that kind of money for it.

So why was this announcement important for utilities?

Customers. First and most apparent, utilities are losing customers. Tesla Energy already has over 38,000 pre-ordered Powerwall systems, and has said itself that it has an inability to satiate market demand even given its pending factory. With the fixed costs of acquiring renewable energy instruments still high, it is likely that all sources of energy generation, renewables included, will see their long-term profitability fall as customers hoard their energy and use it more efficiently.

Arbitrage. The most ethereal yet costly threat utility companies may face is that of increasingly user-friendly and transmissible energy storage devices. Creating energy storage devices for entire homes which are as easily tradable and mobile as the average alkaline battery is not the technology of today, but the very real possibility of tomorrow. The ability for consumers to buy and completely cut-out utility companies by selling or trading energy locally is becoming more material with each improvement in these storage systems.

Speculators. The Energy Information Administration (EIA) sites that natural gas prices can fluctuate over the course of a day, with normal price volatility that can range from just a few cents to over twenty cents per million British Thermal Units (Btu) over 24 hours. Prices are typically highest at peak hours of the night, when most people are still awake. Suddenly, with the arrival of innovations such as the Powerwall, significant amounts of energy can be gathered from the grid during low-cost periods and sold back during peak hours. Every single system suddenly becomes an investment vehicle for minimizing household costs or even making money off of electricity producers. Excellent news for Americans with expensive Powerwall systems, and yet, damning to the many poor and middle-class consumers who will likely see gas prices rise because of it.

To survive, electrical production companies need a way to outcompete battery manufacturers while updating much of America’s aged and unreliable transmission infrastructure… without this, or a significant decrease in the cost of batteries, the grid may become an expensive necessity only the poor and middle-income are relegated to.

Feeling the Heat — Oil Export Stalemate in Venezuela

Typically when a currency falls in value, investors flock to purchase that country’s assets and exports under the new exchange rate. The Venezuelan government however, is stuck producing nearly the same output. Why? Simply put, because of the South American country’s involvement in the Organization of the Petroleum Exporting Countries (OPEC) and its incredible reliance on oil, which is estimated by Reuters to be responsible for 96 percent of government revenue. Venezuela is in a position where it cannot produce more oil — to take advantage of break-even costs as low as $40 per barrel — or less, due to burgeoning global supply’s effect on prices.

Venezuelan oil production has not risen substantially in almost two decades:

Venezuelan Oil Production

This is not the byproduct of a lack of private interest in the country: exploration and extraction companies such as Chevron already operate within Venezuela and the Bolivarian government even claims grievances against ExxonMobil for resource theft by its international waters with Guyana. This is not because the country is attempting to use its reserves more sustainably — Venezuela has the largest deposit of proven oil reserves, and owns over 17 percent of the world’s oil, compared to the rest of Latin America, which collectively owns less than 5 percent. The combined lack of productivity and revenue is due to OPEC quotas, which have become a thorn in President Maduro’s side. This has effectively stunted Venezuela’s production capacity compared to its neighbors:

Proven Oil Reserves

Oil Production

Venezuela’s recent attempts to counter economic collapse and civil unrest have come in the form of two new deals:

  • Much like Nicaragua and Venezuela’s accord to trade coffee beans for crude oil, and Cuba and Venezuela’s deal to trade oil for teachers and doctors, Uruguay has now agreed to begin trading food for oil
  • India has joined China in becoming a key consumer of Venezuelan oil, with a long-term investment plan of $143.7 billion being put in place to develop infrastructure for oil production in Venezuela

Even if OPEC were to scale back production tomorrow, all of these attempts to harness and expand on the country’s competitive advantage are likely futile for Venezuela itself, as it has a fixed supply quota it cannot surpass. Additionally, because of that quota, strengthening oil trade with Asian countries has meant neglecting and making cutbacks with the rest of Central and South America. Supply shocks are already being felt in Petrocaribe, a trade bloc of Caribbean nations which rely heavily on Venezuelan crude.

Apart from simply diversifying their economy and liberalizing the market, it is becoming increasingly urgent that Venezuela corresponds with the needs of its people rather than the whims of OPEC. The ailing nation should reduce these regulatory barriers such that its production more accurately reflects growth in global oil demand, it is after all one of the few oil-rich nations that has yet to do so.


American Energy Renaissance Act — Why Oil and Gas Matter

The American Energy Renaissance Act of 2014 — a bill proposed by Senator and now presidential candidate, Ted Cruz — proposes many drastic changes to the status quo surrounding energy and environmental regulations, some of which include:

  • Giving only states the right to regulate hydraulic fracturing
  • Preventing the Environmental Protection Agency (EPA) from regulating carbon dioxide (CO2), methane, water vapor and nitrous oxide emissions
  • Repealing regulations on crude oil exports

Passage of the bill would be lauded by energy proponents, and while as a whole it would be no victory for traditional environmentalists, one of its provisions stands out, as it seeks to phase out engine-damaging ethanol fuel and create a higher standard for fuel economy. One can only truly understand the magnitude of improving fuel economy across the board by first looking at CO2 emissions by source:

Greenhouse Gas Emission

Transportation, which is second only to the electric power sector in terms of carbon dioxide emissions, could see significant long-term reduction in emissions while creating a surplus in disposable income for Americans and business owners. Notably, passage of the bill does not imply that American oil companies would be at a significant disadvantage due to the simple fact that it would open a whole new niche for American crude in the international economy.

Energy CO2 Emissions

Also striking is coal’s share of carbon dioxide emissions in the electric power industry — for coal’s actual share in energy generation as seen below, it seems almost unwarranted:

Electric Power Generation

Natural gas, while still not yet as widespread as coal, is very cost competitive, with liquid natural gas (LNG) at less than $10 per British thermal unit (Btu) while normal gas flirts with numbers around and below $5. Furthermore, if natural gas cannibalized market share from the coal sector — as is likely given the amount of continuing regulations on coal — it would help both the economy and the environment. Indeed, the Energy Information Administration asserts that for every million Btu generated, coal can release between 214 and 228 pounds of CO2 while natural gas creates almost half at 117 pounds per million Btu. While opponents of natural gas could cite its past price volatility, the past 5 years have been quite stable and the fracking boom is no reason to believe that the energy will be subject to much variance, at least not besides cyclical winter-heating and summer-cooling fluctuations, which coal can also be subject to. On the contrary, the market for coal is either becoming too expensive due to relentless regulation or disappearing altogether, especially abroad in developed countries.

The consumer free market response to any good or service in production is to demand quality proportional to whatever price level that consumer is willing and able to pay. With time, more countries are joining the ranks of developed nations who — like the U.S. — are characterizing themselves as more than willing to pay premiums on energy for better environmental quality. Additionally, natural gas has a history of matching or even beating domestic coal prices in the private sector, while mounting pressure on the public sector is slowly opening the international markets for both gas and oil.

Natural Gas Supply and Demand — A Structural Problem in the Northeast

The cost of residential heating and cooling in the Northeast is comparatively high, with no clear end in sight. Fracking regulations and outright bans are pushing whole industries out of densely populated municipalities as well as entire states such as New York, where the extraction methodology has met strong opposition at each level of government. Even the importation of natural gas from other states such as Pennsylvania — which remains very active in tapping Marcellus shale deposits — is becoming difficult, with neighborhood groups and city governments opposing pipelines and other forms of infrastructure to support burgeoning energy demand.

Vocal adversaries of gas withdrawals and transport site two reasons for supporting gas restrictions:

  • the danger to the environment through the practice of fracking and the construction of gas pipes
  • falling property value due to aesthetic degradation from pipelines around residential areas

Unfortunately these opponents still pay a hefty premium on limiting the availability of gas through higher residential heating and cooling prices. Below, northeastern states are compared to Texas, Louisiana, Wyoming, Colorado and Oklahoma, some of the top natural gas producing states.

Natural Gas Prices

Even despite more temperate summers, colder winters contribute to the fluctuating above-average heating costs faced by many residents in the Northeast. Placing restrictions on sources of heating is therefore likely to have a negative synergistic effect — at least financially — on many locals.

In conclusion, crowded regions that pine for their power needs to be met are ironically, unable to make concessions for it with $700 million projects such as the Constitution Pipeline between Pennsylvania and New York being put on hold. With virtually incomparable levels of population density, Southern and Midwestern states do not suffer from the congestion which limits gas transfer. Logically, New Englanders were found to be overpaying for gas by $3.58 per thousand cubic feet of gas by the Energy Information Administration. This amount may seem trivial, but for long-term residents and businesses, it represents a huge cost.

Energy Giants Mull Over a Huge Discovery in Russia

In late September 2014, ExxonMobil and Rosneft — Russia’s largest state-owned oil company — announced the find of a huge oil and gas reserve in the Kara Sea between Russia and the Arctic. So large in fact, International Business Times says, “deposits are estimated to be worth $900 billion and comparable in size to Saudi Arabia’s vast onshore deposits.” The operation was headed by the Arctic Research and Design Center for Offshore Developments, an organization created jointly by ExxonMobil and Rosneft to handle the logistical steps for specialized ice-platform drilling, adherence to environmental regulations and further research on yields for Arctic exploration.

Apart from throwing another wrench into the peak oil argument, the claim is a sign that controversial Arctic exploration and drilling could be immensely profitable.

In the wake of immense possible gain, the two energy titans’ hands have been tied by politics and conflict. ExxonMobil was forced to abandon a $700 billion exploration project — of which they own 33 percent — due to the escalating tension amid the U.S. and Russian administrations. As a result, the Exxon-led project has come to a standstill, depriving Russia of possible buffer against its rapidly shrinking oil and gas fields. Is if this weren’t enough of a damper on public-private relations, ExxonMobil’s CEO, Rex Tillerson, returned to Russia to personally address the future of the wells and the company’s grievances against the Russian government, which include over-taxing Exxon during its discovery and drilling operations.

Rosneft had hoped to continue exploration activities and begin expanding into other sectors of the Arctic Ocean, as the potential to find reserves of unprecedented scale still remains very high. Sadly, it is becoming more and more apparent that for years to come, American participation and the profitability of these ventures, will remain largely dependent on Washington and Moscow’s relationship.

Hundreds of Frac Restrictions Quietly Sweep Across America

Hydraulic fracturing or “fracking” is a well completion technique that is the key to America’s shale boom. Because of hydraulic fracturing, the U.S. has become the world’s top natural gas producer and has gained the capability to become the world’s top oil producer. The shale boom has generated a great majority of jobs created since the recession, and created great wealth for the states where shale deposits are found.

Despite the benefits of energy production, hydraulic fracturing bans and draconian regulations have become more and more common at both the state and local level. To date, greater than 400 municipalities around the country have passed frac restrictions according to Food and Water Watch, an environmental group that tracks anti-fracturing activism. The trend appears to be increasing nationally.

The significance of local bans is little discussed in the energy sector, and underreported, at least from a macro perspective. While the press widely reported that the state of New York passed a statewide moratorium on hydraulic fracturing, few noted that the State was already home to greater than 200 municipal bans on fracking before the state imposed a statewide restriction. Restated, greater than 200 New York communities debated the question of whether to permit hydraulic fracturing and concluded that restricting production and wealth generation was the best policy.

Some industry observer dismiss frac bans as inconsequential because they often pass in areas that have little or no frac activity anyway, such as in the case of the statewide ban in Vermont. “The market will adjust,” is the common mantra among producers. One should note, however, that frac restrictions are concentrated on the West and East coasts, where many of the nation’s rich shale deposits lie, such as the Marcellus (NY) and Monterey (CA). Likewise, the public opinion that is formed in the cities and towns will likely factor into future action at the state level, as we have seen in New York and as we are likely to see in California and Colorado.

Can energy producers rely on the states to override local bans to protect their activity? In Texas, probably yes. In California and Colorado, it is much less certain. If public opinion can be our guide, the outlook is not so good. Countrywide, in November of 2014, only 41% of Americans polled favored the increased use of fracking while 47% were opposed. By contrast less, just one year before, there was more support (48%) than opposition (38%) to the drilling technique. Some surmise that the unpopularity of fracking is limited to the coasts, but the Pew poll of 2014 shows that the most dramatic shift in opinion is seen in the Midwest where support for hydraulic fracturing dropped a breathtaking 16 points from 55% to 39% from 2013 to 2014.

San Benito County, California — one of over twenty localities which have banned fracking activity in the state — is currently locked in a legal battle with Citadel Exploration, an energy  company which claims that only the state of California itself (as opposed to municipalities) has the ability to ban fracking. Even if Citadel Exploration prevails, should proponents of fracking feel that California production investments are safe? Barely a year ago, the Californian state Senate nearly enacted a moratorium to ban fracking temporarily.  With a final count of 18-16 against the ban, the state only lacked two votes for a majority pass. The same trend has been seen in other states, like New York and New Jersey where the temporary period of inactivity in the gas sector is followed by more outcries from environmentalist groups, and the subsequent drafting of more final, permanent restrictions on hydraulic fracturing.

The cost of these bans is high, especially given the sheer quantity of untapped or undiscovered natural resources. California, Pennsylvania and Colorado are three possible battlegrounds to watch in the future, all of which contain high concentrations of gas resources and formidable past opposition either in their local communities or their state legislatures. The cost of completely eliminating the production of these resources is outlined by the sheer quantity they withdraw for sale on a monthly basis.  Based on the graph below, at an average cost of $2.69 per million cubic feet (mcf), the states of CA, PA, and CO would lose almost $1,611,300 in monthly production revenue for natural gas alone, without even considering oil.

Natural Gas Withdrawals

The list of counties which have banned fracking is growing on a monthly basis. In addition to state regulations, local government hydraulic fracturing restrictions now number in the hundreds, and are concentrated in CA and along the Eastern Seaboard. Policymakers must adopt an emphasis on balancing socially responsible results with protecting the rights and revenue generating capacities of the industry to insure continued job creation and economic growth.


Oil and Gas v. Green Jobs

On February 24th, President Obama vetoed the Keystone Pipeline, citing that such a project is “not in the national interest” ― and instead the President has been a vocal proponent of creating green jobs in alternative energies. However, it is vital to analyze the quality and effect of these jobs. When comparing the jobs created by the oil and gas industry to the emerging green energy industry, what considerations should be made?

The first and most simple is salaries:

Oil Gas vs Green jobs

It doesn’t take a scientist to see that typically, members of the oil and gas industry are paid much more than their counterparts in green-collar jobs. It’s extremely important to note that above “Oil & Gas Financial Analyst,” jobs are no longer directly comparable, because they’re more specialized blue-collar jobs.

Ironically, apart from being paid less than other jobs in oil and gas, every single blue-collar job in the green energy sector required an undergraduate degree (except for “Wind Turbine Service Technician,” which only required work experience or specialized certifications). From a purely financial point of view, it’s a significant investment with a lower return. Oil and gas lend greater support to unskilled, blue-collar workers. What is this higher pay in oil and gas attributed to? Is the oil and gas industry simply more lucrative? Conventional wisdom may lend itself to this idea, but there is also another component in the equation.

Industry reports from the Bureau of Labor Statistics (BLS) seem to point to a high risk premium that is implicitly included in the pay for oil and gas workers. The Survey of Occupational Injuries and Illnesses by BLS shows that workers in the oil, gas and mining industry have a probability of nonfatal injuries that can be as high as 36 percent, particularly in smaller companies. This statistic, translates into a higher than average probability of injury, disability, chronic illness and death for workers within the sector. Employees in the oil and gas industry also report lower levels of job satisfaction. From a quantitative perspective, the decision to be for or against nonrenewable energy is clear. From a qualitative perspective, we should at least give this question pause.

Upheaval — Natural Gas Growth Could Redefine Decades

Over the past few years, natural gas growth has been an energy investor’s fallback strategy. With a historically positive growth in almost every company’s stock and unperturbed fundamentals — promoted by technological advances — it is highly unlikely that such an industry trend is cyclical.

Some of gas’ most representative stocks (as deemed by the New York Stock Exchange) for companies such as Sempra Energy, Intergys Energy Group Inc. and AGL Resources Inc. were reformatted and indexed by the NCPA:

Gas Index

An unusually warm winter reduced energy demand and put a damper of gas prices, which suppressed growth towards the end of the graph in 2014. However, projections made by the Energy Information Administration (EIA) show that the sector will continue to expand at a stable rate throughout 2015 — supporting the theory that the market growth is due to a structural change.

In the case of the United States, this may be our golden age of natural gas. The U.S. is ready to be a net gas exporter by the end of this year, Market Realist proclaims “Some of the higher production in the Eagle Ford Shale in South Texas will be set to export to meet the growing demand from Mexico’s electric power sector.” On the other side of the Pacific, the same kinds of environmental laws that brought American coal to heel, such as the Clean Air Act (CAA), have come into effect as of January in China. The most prominent of which are the Chinese Air Pollution Prevention and Control Law’s amendments, which were made in response to deteriorating atmospheric quality over the country and the recent environmental initiatives taken between the United States and China. Thus, coal’s rising costs have instigated a shift in demand, one that will start favoring gas — this is a trend that could soon be seen globally.

But where do we stand as gas producers, and why does that matter?

world gas production

wold gas reserves

The United States is by no means the owner of the world’s largest natural gas reserves, however from the EIA’s datasets, one can intuitively see that for its reserves, the U.S. has an overwhelmingly dominant production capacity — meaning we have the most resources to extract and process gas. Should private and public players move to ease trade barriers between the countries, this is an advantage that the U.S. is unlikely to lose for years given China and other BRIC countries’ surging energy demands. Specifically, China’s policy changes have provided a niche for emerging American liquefied natural gas (LNG) vendors to seek partnership. We will not have a production advantage over other countries forever, and as the chart Known Natural Gas Reserves Across the World shows, a failure to capitalize on this opportunity would be a serious blow to American leadership and competitiveness on environmental, energy security and economic fronts.