Musings From the Oil Patch – August 7, 2007

• Hurricanes and Global Warming
• Russia Plants Flag in the Arctic Claiming the Region
• GlobalSantaFe/RIG Deal: Catalyst for More Consolidation?
• Our Road Trip Message: Infrastructure and Trucks
• Wind Farms as Tourist Attractions?

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

Hurricanes and Global Warming

 

Last week marked the point when hurricane forecasters revisit their earlier forecasts for Atlantic tropical storm season activity.  The early general consensus for this year’s season called for an active storm year, but not quite as active as 2005.  The development of two tropical storms this spring, ahead of the official start of the hurricane season, had forecasters feeling confident about their ‘above average’ hurricane forecasts.  However, there were no further storms until last week, although mid August traditionally marks the start of the peak tropical storm activity period. 

 

The first forecaster to revise its projection was WSI Corp. who said it was reducing its forecast storm activity.  They said this year’s hurricane season would be “less severe than forecast due to cooler-than-expected water temperatures in the tropical Atlantic.”  WSI lowered its tropical storm forecast by one to 14, its hurricane forecast to six from eight, and its major hurricane forecast to three from four.  These forecasts compare against the annual average number of tropical storms, hurricanes and major hurricanes of 9.6, 5.9 and 2.3, respectively.

 

On Friday, the hurricane forecasters at the Colorado State University (CSU) also reduced their projection for the balance of this season.  They are now projecting 15 tropical storms, down two from their earlier spring forecasts, with an estimate of eight hurricanes and four of them major hurricanes, down by one for each category.  The CSU forecasters still believe the 2007 tropical storm season will be “more active than the average 1950-2000 season.”  They attributed the reduced forecast to the fact that sea surface temperatures have cooled across the tropical Atlantic in recent weeks, partly due to several dust outbreaks from Africa.  They also expect either a cool neutral or weak La Niña condition to be present during the remaining hurricane season.

 

Exhibit 1. Storm Activity in Each Period Is Higher Than Before

Source: Holland and Webster

 

Late in July, a new study on the frequency of Atlantic hurricanes was issued, suggesting that global warming is the primary cause for the increase in recent activity.  The study, by Greg Holland of the National Center for Atmospheric Research, and Peter Webster of the Georgia Institute of Technology, concludes that warmer sea surface temperatures (SSTs) and altered wind patterns associated with global climate change are fueling much of the increase.

 

The study is peer-reviewed and is to be published in the upcoming issue of the journal Philosophical Transactions of the Royal Society A on Climate Change and Urban Areas.  According to the authors, since 1905 there have been three relatively stable periods of tropical storms and hurricanes separated by sharp transitions.  Each period has witnessed a 50% increase in storms and hurricanes than during the previous one.  The authors state that there is a 100-year trend leading to related increases of over 0.7o C in SSTs and over 100% in tropical storms and hurricanes.  They conclude that these trends are substantially influenced by greenhouse warming.

 

The first period identified was between 1900 and 1930 when there was an average of six Atlantic tropical storms, of which four were hurricanes and two were tropical storms.  From 1930 to 1995, the annual average rose to 10 total storms, consisting of five hurricanes and five tropical storms.  In the final study period, from 1995 to 2005, the annual average number of storms increased to 15, of which eight were hurricanes and seven were tropical storms. 

 

Messrs. Holland and Webster caution that the latest period has not yet stabilized, which means that the average hurricane season may be more active in future years.  However, as the authors warn, it is not possible at this time to predict the level at which the frequency and intensity of storms will stabilize.

 

The study bases its conclusion on the fact that there has been a close correlation over the last century with SSTs that have risen by about 1.0o F in the eastern Atlantic since 1905.  The changes in SSTs took place in the years prior to the sharp increases in storm frequency, with a SST rise of approximately 0.4o F leading up to 1930 and a similar rise in 1970, with the balance of the increase leading up to 1995 and continuing even after.  The authors note that other studies indicate that most of the rise in Atlantic SSTs can be attributed to global warming. 

 

This research is part of a series of new reports driven by the unusually active hurricane seasons of 2004 and 2005.  The research is attempting to understand whether the greater number of storms and intense storms are correlated with natural cycles, global warming or some other cause.  Of course, these more active storm years have helped in the war of words and images over the role of global warming in altering our climate.  In their report, Messrs. Holland and Webster do acknowledge that there have been changes in the amount and quality of tropical storm information, but they do not accept that these trends could influence their conclusion.    

 

Exhibit 2. Increased Observation Data May Bias Conclusions

Source: Dr. Gray

 

To observe storms in the Atlantic more systematically, meteorologists began relying on data from aircraft flights that started in 1944-5 and satellites about 1960, along with the National Hurricane Center employing changes to its analyses practices in the 1970s.  The transitions in hurricane activity noted by the authors occurred around 1930, 1962 and 1995, which may or may not reflect these data collection and analysis changes. 

 

Exhibit 3. Major and Minor Hurricane Cycle

Source: Holland and Webster

 

The authors also note that there is superimposed on their three cycles a marked out-of-phase oscillation between the proportion of major and minor hurricanes, with two-tenths amplitude, which occurs irrespective of the change in total hurricane numbers.  Their research suggests that this cycle appears to be closely related to SSTs in the Gulf of Mexico, whereas the primary storm cycle changes are closely related to eastern Atlantic SSTs.

 

All the research efforts to tie the increase in Atlantic tropical storm activity to global warming and the impact of humans on warming is generating alternative studies by the proponents of natural cycles as the principle cause.   The leading critic of the global warming link to the increased intensity in tropical storm activity is William Gray, professor emeritus in the Department of Atmospheric Science at Colorado State University, and probably the leading hurricane forecaster.  He recently authored an op-ed article in The Wall Street Journal and delivered a presentation at the Lexington Institute Insurance Seminar.  His fundamental challenge to those on the other side of the issue lies in their lack of meteorological experience and their attempt to rely on theory to appeal to the general media.  In both his recent presentation and op-ed article, Dr. Gray points out the lack of observational experience of the new study authors and how their research is keyed specifically to the storms in 2004 and 2005 with a presentation aimed at the media. 

 

According to Dr. Gray, “One reason may be that the advocates of warming tend to be climate modelers with little observational experience.  Many of the modelers are not fully aware of how the real atmosphere and ocean function.  They rely more on theory than on observation.”  This means they are not aware of, or interested in, alternative explanations of the possible cause of the increased number of tropical storms. 

 

Exhibit 4. Global Warming Is Less a Factor in Tropical Storms

Source: Dr. Gray

 

Dr. Gray’s work suggests that the belief of certain climate scientists, journalists and activists that there is a direct link between the post-1995 upswing in Atlantic hurricanes and global warming brought on by human-induced greenhouse gas increases is unsupported by long-term Atlantic storm and global observations.  He points out that in the most recent 50-year period, 1957-2006, 83 hurricanes hit the United States, 34 of them major storms.  In contrast, during the 50-year period from 1900-1949, 101 hurricanes (22% more than the later period) made U.S. landfall, including 39 (15% more) major hurricanes, despite the later period being hotter. 

 

He goes on to challenge the linkage of increasing carbon dioxide in the atmosphere with increases in the number of hurricanes.  It fails when two other multi-decade periods: 1925-1965 and 1966-2006, are examined.  In the 41 years from 1925-1965, there were 39 U.S. land-falling major hurricanes.  In the 1966-2006 period there were 22 such storms – only 56% as many.  Even though global mean temperatures have risen by an estimated 0.4o C and CO2 by 20%, the number of major hurricanes hitting the U.S. declined.

 

 

 

 

 

Exhibit 5. More CO2 Yet Fewer Hurricanes Per Year

Source: Dr. Gray

 

If global warming is not the issue, then what is responsible for the recent increase in tropical storm and hurricane activity?  Dr. Gray and his colleagues at Colorado State University attribute the increased hurricane activity to the acceleration in the speed of water circulating in the Atlantic Ocean.  The circulation began to strengthen in 1995 – at exactly the same time that Atlantic hurricane activity showed a large upswing.

 

As Dr. Gray explains, most people do not realize it, but the Atlantic Ocean is land-locked except on its far southern boundary.  Due to significantly higher amounts of surface evaporation than precipitation, the Atlantic has the highest salinity of any of the global oceans.  Saline water has a higher density than does fresh water.  The Atlantic’s higher salinity causes it to have a continuous northward flow of upper-ocean water that moves into the Atlantic’s polar regions, where it cools and sinks due to its high density.  After

 

Exhibit 6. Atlantic THC May Be Primary Storm Driver

Source: Dr. Gray

 

sinking to deep levels, the water then moves southward, and returns to the Atlantic’s southern, i.e., warmer, fringes, where it mixes again.  This south-to-north upper-level water motion, and compensating north-to-south deep-level water motion, is called the ther-mohaline circulation (THC).

 

The strength of the Atlantic’s THC shows distinct variations over time due to naturally occurring salinity variations.  When the THC is strong, the upper-ocean water becomes warmer than normal.  At the same time, atmospheric conditions change and more hurricanes form.  Likewise, when the THC is weaker than average, the opposite occurs.  The pattern and number of hurricane and tropical storm formations have mirrored the strength and weakness of the THC. 

 

Exhibit 7. Publicity Followed Active 2004 and 2005 Years

Source: Dr. Gray

 

Dr. Gray has been critical in interviews, writings and presentations of the activists and climate scientists who have created a false sense that global warming is the only explanation of the increase in Atlantic tropical storm and hurricane activity.  He has been amused by the lack of commentary from these people about the absence of a significant number of tropical storms and hurricanes last year since, based on their analysis and rhetoric, there should have been a high number.  The low number of tropical storms so far this year is also puzzling to the global warming school of thought.  However, this hurricane season isn’t over, yet, and it only takes one devastating hurricane to make people fear these storms.  But as a recent survey by Harvard University of 5,000 coastal residents living in Southern states showed, if government officials called for an evacuation this year, 31% of respondents would not leave.  That is up from 23% last year.  Fewer storms and the passage of time since hurricanes Katrina and Rita in 2005 may be making people more complacent.  Let’s hope that complacency doesn’t create future problems.

 

Russia Plants Flag in the Arctic Claiming the Region

 

Employing 21st Century technology, Russian officials, acting like explorers of the past, planted a titanium flag on the floor of the Arctic Ocean claiming a portion of that region for their country.  A top Canadian official, Foreign Minister Peter MacKay, made a very strong statement to Canada’s television station CTV in response to the Russian action.  He said, “Look, this isn’t the 15th century.  You can’t go around the world and plant flags and say, ‘We’re claiming this territory.’”  According to Mr. MacKay, “it’s basically just a show by Russia.” 

 

A spokesman for Canada’s foreign affairs department added, “Canada’s sovereignty over the lands and waters of the Canadian Arctic is longstanding, well established and based on historic title.”  The United Nations’ Law of the Sea Convention establishes that no country owns the North Pole.  The five countries that border the Arctic – Russia, Canada, Denmark (Greenland), Norway and the United States – are allowed to extend the 200-mile “economic zones” from their coasts, but this zone can be extended if a nation can prove that the structure of the Arctic shelf is the same as the country’s territory.

 

Exhibit 8. Russia’s New Arctic Claim

Source: UN

 

On August 2, two Russian mini-submarines successfully descended to the floor of the Arctic Ocean, some 4,261 meters (13,980 feet) under the water and planted a titanium version of the nation’s flag claiming a 463,222-square mile, oil-rich triangular area stretching from the North Pole to waters above east Siberia and Russia’s Chukotka Peninsula.  This exercise came after a six-week voyage of a nuclear icebreaker leading a research vessel, during which Russian scientists conveniently found that the Lomonosov Ridge, a 1,240-mile underwater mountain ridge that crosses the polar region and connects Russia and Canada, was an extension of the Russian continental shelf.  This expedition was the second by Russia since spring. 

 

Exhibit 9. One of Two Russian Subs

Source: BBC

 

Moscow has exerted claims to the polar region since at least the days of the Bolsheviks, and argued in 2002 that the geological data backed up this claim in an application to the U.N. committee that administers the Law of the Sea.  The U.N. rejected Moscow’s application, citing a lack of evidence.  The Russians are preparing another application utilizing the data they are collecting on this expedition that they plan to file in 2009. 

 

Valerie Kaminsky, director of the All-Russian Oceanic Scientific Research Institute, which carried out the survey and planted the flag, says he has “sensational photographic evidence” proving Russia’s claim.  According to Artur Chilingarov, a famous Arctic and Antarctic explorer and deputy speaker of the lower house of Russia’s parliament, who is leading the expedition, “The Mir-1 successfully descended to the ocean floor at 12:08, Moscow time, to a depth of 4,261 meters. The touchdown was soft, yellowish soil is seen around; no deepwater creatures are in sight.”  A second mini-sub, Mir-2, touched down at a depth of 4,302 meters (14,115 feet).  Moscow newspapers promptly published maps of the Arctic with the entire zone colored in Russian colors. 

 

Thorkild Meedom of Denmark’s Ministry of Science, Technology and Innovation, said that Canadian and Danish scientists on two icebreakers are now conducting mapping studies of the north polar area.  “We’re going step by step and mapping as conditions permit.  You have to keep in mind that it is an extremely difficult region and very hard to collect data.”

 

A problem for the United States is that it is not a party to the Law of the Sea treaty, having failed to ratify it since 1994.  President George W. Bush has urged approval of the treaty, as have several important senators.  Concerns with the treaty relate to the view that the U.S. would be conceding too much power to the United Nations. 

 

Currently, the U.S. is considering an $8.7 billion budget reauthorization bill for the U.S. Coast Guard that includes $100 million to maintain and operate three existing polar icebreakers, including two heavy “polar class” ships – Polar Sea and Polar Star – that are close to the end of their useful lives.  There is also authority for plans to build two new icebreaker vessels.   

 

As we wrote in our last Musings, the Canadian government, too, has become more aggressive in moving to protect its interest in the Arctic Ocean, to secure both the potential for natural resources and for an open-water, year-round Northwest sea passage for ships, should global warming provide an ice-free environment at some time in the future.  Canada is moving to construct a fleet of polar ice breakers that would patrol its Arctic region and provide it a greater sovereignty claim over the area.

 

The international scramble over claims to the Arctic resources has reached a new level and is partly driven by the growing concern about a peaking in world oil supplies and the implications for future economic growth.   As Anatoly Opekunov, deputy director at the Russian Institute for Ocean Geology and Mineral Resource, put it, “Experts say that after 2016, oil production will drop tremendously.  Every country, including Russia and the U.S., is thinking about this.”

 

Interestingly, a Russian scientist, quoted in a EURSOC article, said that Russia should be cautious in putting too much faith in its Arctic claim.  “Canada could make exactly the same claim.  The Canadians could say that the Lomonosov Ridge is part of the Canadian shelf, which means Russia should in fact belong to Canada, together with the whole of Eurasia.”  One could ask: If Russia could rightly be claimed by Canada, why wouldn’t the reverse be true?  There is an interesting scenario: Russia controlling Canada.

 

GlobalSantaFe/Rig Deal: Catalyst for More Consolidation?

 

On July 23, the energy business was stunned when the managements of offshore contract drillers GlobalSantaFe (GSF-NYSE) and Transocean (RIG-NYSE) announced an agreement to merge and follow on with a $15 billion dividend to shareholders reflected through a 30% share buyback.  The fact that the transaction is accretive to the companies, both share prices rose following the announcement.  While the transaction was presented as a merger of equals, the fact that Transocean shareholders wind up with roughly two-thirds of the ownership and GlobalSantaFe shareholders get a third when it is complete, it looks more like an acquisition of GSF by RIG. 

 

While there are a number of issues about this transaction that merit discussion, we found the second stage of the transaction both interesting and significant.  The combined company’s drilling backlog is $33 billion, stretching into 2010.  However, the combined company has only three new drilling rigs under construction, which given the large number of rigs under construction suggests that the new RIG will lose market share going forward.  Both companies had been maintaining conservative balance sheets that will now be leveraged following this transaction.

 

In response to a question during the conference call to discuss the transaction, RIG CEO Bob Long said that his company had not elected to engage in a balance sheet leveraging transaction before now because it wanted to retain the flexibility to do a significant financial transaction such as they were now undertaking.  Since the combined balance sheet and drilling backlog will now support a greater degree of leverage, this is the time to engage in that financial restructuring transaction. 

 

Mr. Long also indicated that new RIG’s debt would be established at a level that is slightly below the cash to be generated from the backlog.  He further said that debt reduction would be the focus for the next several years as the backlog is executed.  While this strategy conveys a sense of conservativism, it also suggests the potential for future transactions.  Why?  Acquisitions of other contract drillers could produce a similar scenario to what the MLPs have been doing so profitably for their shareholders for the past few years.  New RIG could buy one of the new startup offshore deepwater drillers with a significant contract backlog and not too much debt, add that backlog to RIG’s current backlog, and then buy back more shares as another dividend to shareholders.  This strategy, beyond competing merger moves in the industry, could be a catalyst for further consolidation of the offshore drilling industry.

 

Exhibit 10. Valuation of Drillers Attractive For Deals

Source: Whiskey & Gunpowder

 

But there are other reasons to think that this sector of the oilfield service industry is ripe for consolidation, beyond competitors trying to build matching scale.  The primary reason is the attractive pricing of contract driller stocks, especially after the most recent market correction.  Another reason is the long-term attractiveness of the business.  Lastly, one of our friendly financial newsletters, which has been a strong advocate of energy stocks and offshore drillers in particular, recently wrote to point out how cheap the drillers’ stocks are based on multiples of earnings and cash flows, especially in relation to their attractiveness to potential private equity buyers. 

 

At this point, given the recently unsettled stock and debt markets, we are not sure where private equity buyers for offshore drillers stand in either their ability or confidence about executing such a transaction.  That doesn’t mean that these deals are out of the question, but they certainly are not the ‘slam dunk’ that everyone assumed they were a few weeks ago. 

 

Longer term, the increasing concern about the ability of the world’s oil markets to satisfy the growing global oil demand suggests that the oil industry’s first response to this tightening condition will be a stepped up drilling effort.  At the current time, offshore oil supplies about one-third of global supply, which should rise in the future.  There are certainly a number of attractive offshore regions that have not been fully explored so the prospect for more drilling is high. 

 

Exhibit 11. Offshore Oil Is Important for Global Oil Supply

Source: Whiskey & Gunpowder

 

When the outlook for future oil supplies is examined, a growing offshore drilling rig fleet may become vital, not only to maintain the height of the production graph (Exhibit 11), but also to try to flatten the 40-year downtrend suggested by the low volume of recent discoveries.  The key issue is to try to understand whether following the stepped up drilling effort there will be a period when the oil industry gives up on this active pace and concentrates on other strategies and alternative fuel sources.  Trying to answer that question will be a focus of our research efforts in the future. 

 

Our Road Trip Message: Infrastructure and Trucks

 

We just completed our annual drive between Houston and our summer home in Charlestown, Rhode Island.  We followed our usual routine of leaving about mid-day on Thursday and arriving early afternoon on Saturday – essentially a two and a half day drive covering the roughly 1,850 miles.  We usually do two things while driving: listen to books on CDs and think about the implications of what we see and experience during the trip.  This year, just before leaving we rushed to get an audio copy of the new Harry Potter book, which we thoroughly enjoyed.  We have listened to every one of the seven volumes of Harry Potter as we have made our annual drives. 

 

Our trip involved traveling over many sections of interstate roadways that are under construction.  It seemed that no matter where we drove, there was construction.   Texas, Louisiana, Tennessee and Pennsylvania all have major infrastructure reconstruction projects underway on the highways we traveled, and we can attest to the disruption and traffic delays.  We were fortunate that we traveled some of these roads at off-times, so the impact on our travel time (and nerves) was limited.  The worst driving stretches occurred in the rain as we drove the Texas and Louisiana highways, and later the Pennsylvania highways going over the Pocono Mountains into New York State where we then cross the Hudson River into western Connecticut.  This latter stretch of road was extremely challenging as it is only two lanes wide, mountainous, heavily traveled by trucks, and we drove it in rain, fog and the dark of night between 11 pm and 1 am in the morning. 

 

As we drove these roads, we were amazed at the number of orange barrels and portable concrete barriers that were being used.  For the manufacturers of these items, business must be good.  Vehicles and trucks seem to regularly destroy a number of those barrels, creating a steady market for new barrels.  The problem is for the manufactures of concrete barriers because those seem to be indestructible. 

 

Based on our drive, it seems there are a number of miles of road that are candidates for future reconstruction, suggesting we will deal with construction on our drive for a number of years.  There was one stretch of I-59 in Alabama that we thought was very rough.  We were following a bright silver tank truck that was bouncing up and down going over the rough road.  We were wondering what the truck was hauling.  If it was milk, which these shiny tank trucks are often carrying, then the truck might deliver butter due to all that churning. 

 

As we drove through all this road reconstruction, we kept thinking about the magnitude of the infrastructure rebuilding effort that has been underway in this country.  However, it remains difficult to comprehend the magnitude of infrastructure work remaining to be rebuilt in this country.  What is more amazing, however, is to consider the amount of underground utility and energy infrastructure that needs to be revamped. 

 

This point was driven home by the recent steam pipe explosion in mid-town Manhattan.  At the evening rush hour on Wednesday, July 18, a steam pipe at 41st Street and Lexington Avenue ruptured sending an initial blast of steam higher than the nearby 77-story Chrysler Building.  The blast created a hole in the street and spewed steam, mud and asphalt around a large area near the Grand Central Station.  Because the pipe was wrapped in protective insulation, there was a safety concern as it was believed the insulation contained asbestos. 

 

The steam pipe blast highlights the growing challenge facing municipalities that have minimized maintenance spending and investment in new infrastructure over the years.  The 24-inch steam pipe that ruptured was installed in 1924 and formed part of an underground network of main and service pipes that delivered steam for heat and air conditioning to thousands of customers including the Empire State Building, Rockefeller Center and the United Nations.  The hole created by the blast ripped out other utility installations including gas, water and electricity lines, 

 

The explosion killed a lady pedestrian who suffered a heart attack.  A total of 40 people were hurt including two seriously.  The most seriously injured people included a 21-year old male tow-truck driver and his female customer who he was giving a ride home.  The blast lifted the tow-truck into the air and dumped it in the hole and subjected the two passengers to 200-degree steam.  They escaped from the truck, but the driver suffered third degree burns over 80% of his body.  He still remains in critical condition in a medically induced coma.  The female passenger was burned over 30% of her body.

 

Economically, the area around the blast site was frozen.  Some 125 stores and a number of office towers were shut down for the balance of the work week costing businesses untold amounts of money.  Employees were allowed back into their offices briefly to remove papers and computers in order to be able to work remotely.  The city cleaned up the area by early the following week, but many of the office towers still have to replace blown out windows and repair other damage.

 

As we thought about the infrastructure issue, we wondered about the costs associated with the steam pipe explosion – the cost to replace the damaged infrastructure, the economic cost to the businesses hurt by the associated shut down, the value of the life lost and the costs for the injured.  These associated costs can easily dwarf the direct cost of fixing, or replacing, energy and utility infrastructure.

 

As we were writing this story, the news of the collapse of the bridge over the Mississippi River in Minneapolis broke in which initially seven people died and numerous people were hurt, and about 30 were missing.  The American Society of Civil Engineers recently released a study on the U.S. infrastructure.  They said that 27% of the country’s 571,000 bridges were “dilapidated or obsolete” and that the country needs to spend $1.6 trillion over the next five years to correct this situation.   There’s a lot of construction ahead for us.

 

Beyond the infrastructure issue, the other issue we confronted on our trip was the trucks on the road.  While we have written about trucks in previous reports on our travels, we found the number encountered this year to be an interesting contrast from previous trips.  There were regions where truck traffic was amazingly light (Mississippi, Alabama and Georgia) while it was incredibly heavy in other areas (Virginia, Pennsylvania and New York).  It seemed that the pattern of truck traffic we encountered reflects the way the economy is performing.  If you watch national economic statistics, one month they reflect a strong economy and the next month they show weakness.  At other times, we get positive numbers from one industry statistic and then another measure of the health of the same industry reflects weakness.  This pattern makes it fun, or frustrating, to watch the stock market “experts” discuss the bull and bear scenarios suggested by cherry-picking the statistics that support each case.  But in the “real” world, the truck traffic would suggest that this pattern of conflicting economic statistics may be an true reflection of the health of a schizophrenic economy.  In other words, the economy’s strength or weakness depends on where you are and the business you are in.

 

This strange economic picture was further re-enforced when we got on I-84 that traverses the northern half of Connecticut.  From there, we head south toward the shore and our home in Rhode Island.  Traffic on that route, one we have traveled frequently, was amazingly light.  And this was on a Saturday that was incredibly beautiful, but with slightly higher than normal humidity.  In other words, it was a great beach day; but there was virtually no beach traffic.  Why?  Unfortunately we have no answer, other than possibly the price of gasoline. 

 

Our car requires premium gasoline.  Other than a midnight stop in New Paltz, New York at a 24-hour Exxon, where we paid $3.199 per gallon, we never paid more than $2.95.  When we arrived in Westerly, Rhode Island and headed toward Charlestown, premium gasoline was priced at $3.399 a gallon, the highest price we ever saw.  We know that the summer home rental market this year is more active – more homes are up for rent – than in the past.  We haven’t had a chance to check out too many of our usual indicators of economic health in this area, but I am suspicious that the health, or lack thereof, of the economy in New England may be the explanation for the lighter traffic, and especially the reduced truck traffic that one usually associates with strong consumer and business activity.  We’ll keep watching for other indicators and will report anything we learn.

 

 

Wind Farms as Tourist Attractions?

 

An article in the Portland Press Herald and Maine Sunday Telegram discussed the recent 40+ person environmental group’s excursion to Mars Hill, the northern Maine town (north of the terminus of I-95 at the Canadian border) where a 28-unit wind farm on a mountain just west of the state’s border with Canada in located.  The turbines are 260-feet tall with 115-foot blades.  At capacity, these turbines will crank out enough power for the needs of 45,000 average Maine homes.  Some of the people on this tour hiked up the mountain while others rode.  The group met with officials from UPC Wind Management of Newton, Massachusetts, the developer of the wind farm, and held discussions with town officials and business owners about the impact of the power project.  The group also met with engineering contractor Reed & Reed.

 

This wasn’t the first tourist visit to the wind farm, and another is scheduled during the fall foliage season.  According to the town manager, there have been several schools that have sent busloads to the site and more trips are planned. 

 

The Mars Hill wind farm started generating power in January.  The Maine Land Use Regulation Commission is currently considering applications for three new wind power projects in the state.  The

 

Exhibit 12. Boundary Regions of Maine Attract Wind Farms

Source: State of Maine

Natural Resources Council (NRC) and Maine Audubon association announced in July that they are endorsing UPC’s plan for an even larger wind farm; a $100-million, 38-turbine project for Stetson Mountain in Washington County on Maine’s eastern coastal border. 

 

The two environmental groups are also supporting TransCanada’s (TRP-NYSE) proposal to put 44 turbines atop Kibby Mountain in northern Franklin County.  In a split, however, Audubon opposes, while NRC supports, Maine Mountain Power LLC’s proposal for an 18-turbine project on Black Nubble Mountain in western Maine.

 

But not everyone in Maine believes that wind power projects are good things to do, let alone that they will become tourist attractions.  In a letter to The Standard-Times editor from a Farmington, Maine citizen, the following point was made.  “Tourism is important to Maine, and visitors come to relax and escape the city life and enjoy the cool air and majestic views.  Tourists don’t want to hear the whirling of wind turbine blades or see a wind farm across a mountain ridge line.”

 

The letter writer went on to discuss the Mars Hill project, his view of its negative impact on the community and his preferred solution to the environmental challenge of alternative energy.  He wrote:

 

“There is a wind farm already in place at Mars Hill, Maine.  Mars Hill is a northern Maine town with a declining population, but the local government benefits from the wind farm in tax revenues.  Unfortunately, the residents who once had prime real estate because of their mountain views have seen their property values decrease.  And it also appears that most people who are searching for property in the area do not care to look at over two dozen wind turbines in the distance.

 

“Mars Hill is a realistic situation which many towns desiring to pursue alternate energy sources will have to face in coming years, and many lessons can be learned from their experiences.”

 

He went on to say, “In my opinion, any new building permit should require roofs to face the best direction and angle for the sun so everyone could place solar panels on their roofs.”  He believes that since the price for solar panels has declined and net metering (the ability to feed electricity back into the grid system) is available, this should be the preferred solution.  We haven’t checked, but we wonder how many days a year of sunlight Maine receives.  So far, solar panels are the prime focus for alternate electricity in the Southwest region of the country where the sun is strong and predominates during the year.  But not everyone thinks that solar panels are attractive or the preferred solution. 

 

In Texas, where sunlight is strong and predominate in many parts of the state (not the Gulf Coast in recent weeks), wind power is growing in importance to the electric power industry.  Royal Dutch Shell PLC (RDC.A-NYSE) and TXU Corp. (TXU-NYSE) announced that they will work together to develop what may become the world’s biggest wind power project.  The 3,000-megawatt project is planned for the Texas Panhandle in an area designated as a competitive renewable energy zone by the Public Utility Commission of Texas.  According to the American Wind Energy Association, this project could power 900,000 average U.S. homes. 

 

The bottom line seems to be that even with environmentally-friendly alternate power projects, not everyone is agreed to their desirability.  This appears to be just a broadening of the NIMBY (not-in-my-back-yard) mentality about energy projects that to date has largely been directed against oil and gas exploration and development projects.  It still seems that those regions of the country where power is in shortest supply, the NIMBY mentality is strongest.  Something will need to give if these regions are to avoid economic problems in the future.

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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.