- Wind Power Is Bond Between Texas And Rhode Island
- Is Canada’s "Dirty" Fuel Headed for Non-U.S. Use?
- Is A Dismal Energy Outlook Baked Into Our Future?
- Westerly’s First Peak Oil Task Force Meeting a Success
- Texans’ Transportation Views Are Out of Step With Country
Note: Musings from the Oil Patch reflects an eclectic collection of stories and analyses dealing with issues and developments within the energy industry that I feel have potentially significant implications for executives operating oilfield service companies. The newsletter currently anticipates a semi-monthly publishing schedule, but periodically the event and news flow may dictate a more frequent schedule. As always, I welcome your comments and observations. Allen Brooks
Wind Power Is Bond Between Texas And Rhode Island
We have found that the largest and smallest states within the continental
For
This spring, the American Wind Energy Association (AWEA) released its 2007 rankings for installed wind power generating capacity showing
followed by
The AWEA rankings showed that there are 34 states in the country that have installed wind power generating capacity. Of the six New England states,
May 30, 2008, at 2:30 pm was the deadline for companies to submit responses to
The governor’s office has said the state will select the winning proposal based on the total cost to
The “preferred site” for the wind farm is off the south and western shores of Block Island, about ten miles off the
Just how fast
One last attempt to derail the
Blue H’s project would be located about 32 miles southeast of Block Island and somewhat closer to
Blue H also plans to use a two blade turbine rather than the customary three blades. A two-bladed turbine converts the energy of the wind into power more efficiently and spins more quickly than three-bladed turbines. Faster rotation offers two benefits. The 30-to-35 revolutions-per-minute frequency, which is twice that of three-bladed turbines, is less susceptible to interference from the back-and-forth swing of the platform under wave action. In addition, the faster rotation means less torque, and allows for the entire structure to be built lighter. However, these two-bladed turbines make much more noise, a reason that the wind industry does not use them on land or in near-shore areas.
Blue H has a prototype of the floating platform in the water off the east coast of
The one thing the Blue H proposal has is significant political support. Blue H was encouraged to come to the
The development of offshore wind resources is very attractive, even though it is likely to be more costly than onshore and coastal-water wind farms. There are a series of reasons why offshore wind power is attractive: better wind resources; improved aesthetics; increased power transmission options; and avoiding turbine size constraints encountered onshore. Offsetting these benefits are the technical challenges of operating turbines in rougher water conditions and the high cost of offshore construction.
According to research done by the Massachusetts Institute of Technology (MIT) and the U.S. Department of Energy (DOE), the further offshore the stronger and steadier are the winds. This means turbines could be designed to be more efficient at converting the wind’s power. Offshore sites are closer to the
Offshore construction costs could be lowered by building facilities in ports and floating them out to the wind farm sites. This eliminates the problems of road limitations of the size of turbine blades that can be transported onshore. The technology challenges involve how best to anchor the floating structures to provide greater stability within the typical wave action and maximizing the power output while minimizing the risk of damage due to strong winds and high wave action.
Another way offshore construction costs could be reduced would be to employ offshore oil industry technology to turbine structures. Offshore Wind Power Systems of Texas is working to transfer the jacking technology employed on offshore jackup drilling rigs to offshore turbine structures. The wind forces turbines are subject to are greater than the wind forces the derricks of offshore drilling rigs encounter, but the issue of wind force and structural strength are similar. Moreover, the ability of jacking up and down and moving turbines would allow wind farms to adjust their design after learning more about wind patterns. Theoretically, if prevailing wind patterns shifted seasonally, for example, the platforms could be jacked down and repositioned to maximize their efficiency. Conceivably, the units could be moved into port for repairs and maintenance, depending upon the distance and moving cost, rather than doing the work offshore. It strikes us that offshore oilfield technology could play a meaningful role in addressing the technical challenges of deepwater wind power facilities and their cost.
When one examines a map of the population concentration in the
If one looks closely at the DOE wind resource potential map, one of the highest potential areas is the coast line of
Exhibit 1. Population Is Concentrated On The Coasts
Source: NASA
Exhibit 2. Wind Power Has Significant Potential Offshore
Source:
Gov. King went on to say, “In 1998, energy – all energy: cars, home heating and electricity – was 4 percent of the average
Exhibit 3. Subsidy Lapses Impact Pace of New Wind Capacity Installed
Source: American Wind Energy Association
One fly in the ointment for alternative energy resources, and especially wind, is the government subsidies. Those subsidies are always at the whim of Congress and as Exhibit 3 shows, every time the production credit for renewable energy sources such as wind expires, there is a sharp falloff in installed wind power capacity the following year. Stability of credits, whether economically justified or not at the moment, is imperative if the wind industry in the
Is Canada ’s “Dirty” Fuel Headed for Non-U.S. Use?
One of the great miracles of the global energy industry over the past 50 years has been the successful development of the Canadian oil sands resource as a major source of new oil supply. The existence of this resource has been known for decades, but making the mining, or in situ, extraction process economic has been a struggle.
The energy needed to extract the bitumen from the sand grains has always been the primary problem in making this oil profitable for its owners. That problem has been solved in recent years with the huge run-up in global oil prices.
While the economics of oil sands have improved, the challenges for the industry have continued to evolve due to growing concern about the environmental issues of extracting, refining and shipping the synthetic oil produced. This environmental challenge has become a lot worse in the past several weeks as the leading mayors of the
At the 76th annual meeting of the U.S. Conference of Mayors held June 20-24 in
The significance of the mayors’ resolution, however, is being magnified north of the border because of comments from presumptive Democratic presidential candidate Senator Barack Obama (D-IL) that he wants to break the
During Sen. Obama’s White House campaign, he has proposed steps to reduce greenhouse-gas emissions by 180 million tons by 2020. He has also promised to invest $150 billion in developing alternative energy and cut
Last year, Canadian oil supplied 18% of
What is most interesting about this battle is that the environmentalists are not challenging the use of heavy oil from
The impact of this environmental battle, coupled with the royalty changes in Alberta, the high cost of developing new production and the labor shortages, has led to lowered projections of future oil sands output. According to the latest projection from the Canadian Association of Petroleum Producers (CAPP), oil sands output is projected to increase from 1.2 million barrels per day (b/d) in 2007 to 3.5 million b/d in 2020 under their moderate growth case and to 4.1 million b/d under their aggressive growth scenario. These new forecasts are 200,000 b/d and 350,000 b/d lower, respectively, from CAPP’s 2007 forecasts.
The one thing we do know is that regardless of the mayors’ resolution and the attitude of other politicians, the oil sands output will be consumed. The recent investment in an oil sands project by Chinese interests raises the possibility that oil sands output will flow increasingly to the west coast for shipment to
Exhibit 4. The Anti-Oil Sands Resolution of the Mayors’ Conference
Resolution No. 57
Submitted By:
The Honorable Kitty Piercy
Mayor of
The Honorable Gavin Newsom
Mayor of
The Honorable Marty Blum
Mayor of
The Honorable T. M. Franklin Cownie
Mayor of Des Moines
HIGH-CARBON FUELS
1. WHEREAS, The U.S. Conference of Mayors has previously adopted strong policy resolutions calling for cities, communities, and the federal government to take actions to reduce global warming pollution; and
2. WHEREAS, The
3. WHEREAS, the production and burning of conventional fuel such as gasoline, and diesel by motor vehicles, contributes to air pollution, and increased carbon dioxide emissions that have been linked to global climate change; and
4. WHEREAS, the health of the planet, including its oceans, wildlands, rivers, air, and climate, faces increasing threats from our continued dependence on fossil fuels; and
5. WHEREAS, The
6. WHEREAS, the production of fuels derived from unconventional sources, such as tar sands, liquid coal, and oil shale, emits even greater amounts of global warming pollution than conventional petroleum sources; and
7. WHEREAS, the production of tar sands oil from Canada emits approximately three times the carbon dioxide pollution per barrel as does conventional oil production and significantly damages Canada’s Boreal forest ecosystem–the world’s largest carbon storehouse; and
8. WHEREAS, the continued production and purchase of these higher-carbon unconventional or synthetic fuels slows the
9. NOW, THEREFORE, BE IT RESOLVED, that the
10. BE IT FURTHER RESOLVED, that the
11. BE IT FURTHER RESOLVED, that the
12. BE IT FURTHER RESOLVED, that the
Project Cost: Unknown
Source: The United States Mayors Conference web site
Is A Dismal Energy Outlook Baked Into Our Future?
As financial columnist Byron King recently wrote in discussing the energy challenges facing this country and its next president, “Energy is not just ‘another issue.’ It’s not as if a politician could ‘do energy’ and then move onto other important items on the agenda – like appointing your friends federal judges and handing your political donors prestigious ambassadorships.” He went on to say, “Energy will be the defining issue of the next president’s term of office. This is already baked into the cake. Nothing will change it, short of a major war. And even fighting a major war will be controlled by the energy issue…”
Energy prices have doubled over the past year and the hunt for scapegoats is well underway. If we can’t blame the price hike on the oil companies or the gasoline and heating oil distributors then how about we blame it on the speculators? So just what is speculation and what role do these people play in the oil pricing marketplace? To listen to Congressional comments and the testimony of witnesses called before the various Congressional committees, the speculators have seized control of oil pricing and are driving it upward. While this is happening, the oil companies are supposedly standing on the sidelines secretly cheering them on.
Just as we have written before, Congress would like to repeal the laws of supply and demand when it comes to energy. The solutions offered by the proposed bills being discussed by Congress make one wonder where these “bright” people get their ideas. There have been a series of hearings into the role that speculators play in boosting oil prices. One of the main players in these sessions has been Michael Masters of Masters Capital Management fund who argues that better regulation of the commodities market would drive speculators out of the game and cut global oil prices to $65 to $75 per barrel in a matter of 30 days. He was supported in that view by other oil analysts and energy finance specialists, although they did acknowledge that underlying supply and demand trends were largely responsible for rising oil prices. In their view, the actions of oil speculators make the market more volatile.
It is interesting, according to sources we have tapped, that the top holdings in the Masters Capital Management fund at the time Mr. Masters testified on Capitol Hill were airline stocks. Can one think of a sector that has been more devastated by the rise in global oil prices? If legislation were enacted that accomplished what Mr. Masters suggested would be the outcome, it is hard not to expect that airline stocks would stage a huge rally making the Masters Capital Management fund substantial profits. We wonder whether Mr. Masters volunteered this information before stating his views.
The investigations and hearings focused on the role of speculators – who are being identified as anyone who does not take physical delivery of oil. That includes pension funds, and investment banks and other financial players. What is interesting is that speculators play a role in helping to develop market pricing information. As Hilary Till of Premia Capital Management put it, “As an experienced futures trader, I have learned that price is a messenger of current and future supply and demand conditions. When there is a strong rally in price, one has a signal that there is an impending scarcity and that price is searching for the level to bring on new supply or, unfortunately, ration demand. Right now this is not a popular message.”
In response to the growth in non-industry participation in the futures market, congressional focus has been to develop legislation that will severely restrict the participation of these investors or outright ban their participation. Congressman John Dingell (D-MI) introduced a bill that would boost the margin requirements for financial speculators to 50% of the value of their contracts, prevent pension funds from investing in commodities and prohibit investment banks from owning any energy assets. This is more than an issue of poor legislation; it’s similar to using a sledgehammer to swat a fly. Mr. Dingell’s legislation would have the impact of altering accepted investment theory dealing with diversification of assets to maximize return potential and to reduce risk. It has been the publication of numerous investment studies on asset diversification several years ago that began this wave of pension money moving into commodities investments including petroleum. For many professional money managers, the use of investments in commodities used and traded worldwide has allowed them to protect their portfolios from erosion by the debasement of the American dollar by the excessive printing of money by the Federal Reserve.
Exhibit 5. Money Supply Growth Has Mirrored Oil Price Rise
Source: Agorafinancial.com
The chart in Exhibit 5 is the evidence that many investors point to as proof that the rapid increase in liquidity in
the rise in global crude oil prices. The use of commodities such as oil and rice and various minerals as repositories for pension assets has enabled the pension funds to protect their value and even make money that has offset declines in other financial assets such as stocks, bonds and real estate.
The recent Medium-Term Oil Market Report issued by the International Energy Agency (IEA) in early July pointed out that there has been a significant growth in investor money buying into oil and other commodities as an inflation hedge and to balance asset portfolios in recent years. They suggest that investors have boosted their commitments from $15 billion in 2003 to $260 billion now, but the IEA does not see this money having a material impact on oil pricing, even though there has been some past experiences where investors’ speculative money flows did contribute to oil price increases. The IEA believes that the fact that global oil demand continues to grow at a healthy rate and supply increases have failed to keep up is the primary reason for the worldwide oil price rise. The chart in Exhibit 6 reflects this underlying belief as recent rapid growth in oil demand from developing economies –
Exhibit 6. Developing Economies Pressure Global Oil Supplies
Source: Agorafinancial.com
Another analysis we read relied on a government study prepared in 2006 that showed a significant portion of the world oil price could be attributed to the actions of speculators in the commodities pits. The June 2006 staff report of the United States Senate Permanent Subcommittee on Investigations of the Committee on Homeland Security and Government Affairs entitled, “The Role of Market Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on the Beat,” suggested that $25 of the then $60 a barrel oil price could be accounted for by speculative factors at work in the futures market. They cited work by an oil analyst that world oil inventory levels suggested that the market clearing price should have been closer to $25 a barrel rather than $60. By this same logic, the analysis concluded that today, speculators are accounting for $50 to $60 a barrel of the current $145 price.
One of the points of the 2006 analysis was that with speculators bidding up oil price futures, they were encouraging refiners to buy more oil even at the then current high price because the price of oil will likely go higher in the future. This view was supported by their analysis of the growth in world petroleum inventories during the two year period immediately prior to June 2006 that put inventories at the highest level they had been in the previous eight years, i.e., refiners were buying more expensive oil. We decided to see what the data that supported that analysis showed. In Exhibit 7, we plotted the monthly total crude oil and petroleum products stocks, excluding the oil in the Strategic Petroleum Reserve. We started with January 1986, a year that coincided with the collapse in world oil prices as the members of OPEC battled over market share and were overwhelmed by the power of
As demonstrated by the chart, the analysis of oil inventories and oil prices and the role speculators played in those oil prices included an extended period when oil inventories were climbing. That period is within the red circle. However, as oil prices have more than doubled since that time, inventories have actually declined. That would suggest that oil consumers are either not confident that oil prices will continue to rise, or actually believe they might decline in the future. Those beliefs would support consumers not adding to their inventories and actually working to reduce them. It is possible, however, that fundamental supply and demand factors – greater demand than supply – is working to reduce inventories as this is the balancing agent in markets that are out of balance between underlying supply and demand. Adding to and drawing down inventories is the standard method suppliers use to meet seasonal demand imbalances. As a result of the declining inventory trend since the report was issued (June 2006), one has to wonder whether its analysis has any relevance today?
As it becomes more and more apparent that Congress has no practical solution to high petroleum prices, consumers are reacting by conserving. But possibly more significant are the recent public opinion polls showing consumers becoming increasingly supportive of opening up the
Exhibit 7. 80’s Oil Inventories Backed Speculative Price View
Source: EIA; PPHB
A Rasmussen poll shows support for offshore drilling by a 70-19 margin. How these cross-currents of sentiment toward increased energy supply development and reduced fuel consumption patterns work out remains to be seen. We are confident that many of our assumptions about energy consumption in the future will prove wrong – it’s just that we can’t tell which ones will be wrong and in which way. This makes it difficult to hang one’s hat on any forecast of the future, which means the challenge for energy company managements and energy investors becomes that much more difficult.
Westerly’s First Peak Oil Task Force Meeting a Success
On June 25, the first meeting of the Westerly Peak Oil Task Force was attended by around 30 people. The panel, created by the Westerly Town Council, entitled its first meeting, “The Crisis in High Energy Prices: A Community Conversation.” According to the press report about the meeting, the leaders of the panel presented some interesting data about energy costs and solicited ideas for local action to mitigate their impact.
According to the panel leaders, in 2004, in
Based on the above facts, the panelists said
we’re all going to freeze and starve.” The ideas offered up by the attendees and panelists included a community garden, local transportation system, “green” building codes, bike paths, an electric trolley and a co-op with local oil delivery companies. Since the task force is charged with identifying the town’s vulnerabilities when it comes to peak oil, or energy scarcity, its first meeting was designed to highlight the issues that might be confronting citizens, including the impact on low-income residents and employees in local manufacturing businesses that might be the victims of business curtailments. To get people focused on these issues, it aired 15 minutes of the documentary called “The End of Suburbia” that focused on
It is interesting that a recent poll of 500 registered voters in
Texans’ Transportation Views Are Out of Step With Country
In our last issue of Musings we wrote about the changes being forced on airline passengers due to rising jet fuel prices and the shifting attitudes of American drivers to high gasoline prices. These results are displayed in Exhibit 8. We were intrigued to see a new poll conducted by the Texas Lyceum on the state’s transportation policy and its infrastructure. The poll was taken of 1,000 adults, split evenly between males and females, and was conducted by phone over the June 12-20 period. This is the second annual poll conducted by the organization and the results will be used in its upcoming annual conference scheduled for October.
If we compare the response of Texans to the question of what are you doing or thinking of doing to deal with high gasoline prices, we find a noticeable difference with the results of the April survey of 43,000 drivers about what they had done as we reported on last issue. That survey, published by The New York Times, showed that Americans were reacting to high prices, and probably being squeezed by financial conditions, by canceling vacations and carpooling – 12% of respondents each. In the
Exhibit 8. How Drivers Deal With High Gas Prices
Source: NPD Group, The New York Times
Exhibit 9. Texans Appear More Willing to Change
Source:
We were struck by the fact that more than a third of Texas respondents were planning to eventually move to someplace where the commute to work isn’t as far as they do now. Of course as the saying goes, ‘talking the talk and walking the walk’ may be very different things. But the high response of Texans to this question suggests that the health of the state’s economy is providing people the opportunity to seriously consider moving closer to work to reduce their commuting cost. The economy’s health may also explain some of the other high responses such as 66% of people who are thinking about buying a hybrid or more fuel-efficient automobile.
Another aspect of the Texas Lyceum survey we found interesting was locals’ attitudes toward the use of tolls and increased gasoline taxes to finance new road construction and maintenance of existing roads. In general, Texans are not supportive of the use of tolls on either new or existing highways or for the state to boost gasoline taxes to pay for transportation projects. The survey results for these questions are contained in the next few exhibits. (In all the following exhibits, the solid color represents ‘strong’ views while the gradient color represents ‘somewhat’ views.)
Exhibit 10. Texans Don’t Care For Tolls On Highways
Source:
Exhibit 11. There Is Less Support For Tolls on Currently Free Roads
Source:
Exhibit 12. Raising Gas Taxes Is Not Popular with Texans
Source:
One survey question that did surprise us was the attitude of Texans toward the use of cell phones while driving. Overwhelmingly people would support a total ban on their use, which was a little bit of a surprise. On the other hand, we know that many of the oil and oilfield service companies ban outright the use of cell phones by their employees when driving. These bans are the direct result of studies conducted by the companies and their insurance underwriters that show that cell phone usage is a direct contributor to vehicle accidents.
Exhibit 13. Texans Favor Banning Cell Phones In Vehicles
Source:
The bottom line of the Texas Lyceum poll results is that Texans are not keen on paying for highways outside of the traditional approach of gasoline taxes (the highway trust fund). This attitude is consistent with the attitude of most Americans toward the use of taxes and user fees to fund construction and repair of infrastructure. We suspect this attitude would hold if
Contact PPHB:
1900 St. James Place, Suite 125
Houston, Texas 77056
Main Tel: (713) 621-8100
Main Fax: (713) 621-8166
www.pphb.com
Parks Paton Hoepfl & Brown is an independent investment banking firm providing financial advisory services, including merger and acquisition and capital raising assistance, exclusively to clients in the energy service industry.