- U.K. Embraces Offshore Wind, But Will Citizens Be Happy?
- Driving From Semi-Closed Rhody To Mostly-Open Texas
- Real Estate Prices And Climate Change – No Clear Link
- The Race To Match Oil Patch Bankruptcy Records In 2020
Musings From the Oil Patch
October 20, 2020
Allen Brooks
Managing Director
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
U.K. Embraces Offshore Wind, But Will Citizens Be Happy? (Top)
On October 6, U.K. Prime Minister Boris Johnson delivered his keynote speech at the virtual Conservative Party Conference. In the speech, the Prime Minister discussed both his and the nation’s recovery from Covid-19, and the need to not just return to pre-Covid-19 conditions, but to build a better economy and society. From building 48 new hospitals, recruiting 50,000 new nurses and 20,000 new police officers, while also beefing up the country’s ports by 2030, the most dramatic announcement was about plans to convert the nation’s power system to electricity generated from offshore wind. As pointed out by some critics, the pledge for offshore wind generation was firmly imbedded in the Party’s election platform of last year.
In laying out the plan, the Prime Minister referenced British nautical history, and he had other wind-related references. He said:
“And there is one area where we are progressing with gale force speed; and that is the green economy, the green industrial revolution that in the next ten years will create hundreds of thousands if not millions of jobs.
“I can today announce that the UK government has decided to become the world leader in low cost clean power generation – cheaper than coal, cheaper than gas; and we believe that in ten years-time offshore wind will be powering every home in the country, with our target rising from 30 gigawatts to 40 gigawatts.
“You heard me right. Your kettle, your washing machine, your cooker, your heating, your plug-in electric vehicle – the whole lot of them will get their juice cleanly and without guilt from the breezes that blow around these islands.
“We will invest £160m in ports and factories across the country, to manufacture the next generation of turbines.
“And we will not only build fixed arrays in the sea; we will build windmills that float on the sea – enough to deliver one gigawatt of energy by 2030, 15 times floating windmills, fifteen times as much as the rest of the world put together.
“Far out in the deepest waters we will harvest the gusts, and by upgrading infrastructure in such places as Teesside and Humber and Scotland and Wales we will increase an offshore wind capacity that is already the biggest in the world.
“As Saudi Arabia is to oil, the UK is to wind – a place of almost limitless resource, but in the case of wind without the carbon emissions, without the damage to the environment.
“I remember how some people used to sneer at wind power, twenty years ago, and say that it wouldn’t pull the skin off a rice pudding.
“They forgot the history of this country. It was offshore wind that puffed the sails of Drake and Raleigh and Nelson, and propelled this country to commercial greatness.
“This investment in offshore wind alone will help to create 60,000 jobs in this country – and help us to get to net zero carbon emissions by 2050.
“Imagine that future – with high-skilled, green-collar jobs in wind, in solar, in nuclear, in hydrogen and in carbon capture and storage. Retrofitting homes, ground source heat pumps.”
In mentioning the clean energy industries that would power job creation, the Prime Minister cited one energy source that is not receiving much, if any, attention ‒ nuclear. There is actually a lot happening with nuclear that is worthy of study, but that’s for another day. In the meantime, we will focus on offshore wind and what Mr. Johnson’s plan may mean for U.K. ratepayers, and it may not be good.
Professor Gordon Hughes, professor of economics at the University of Edinburgh, advised the World Bank on energy and environmental policy and has spent the last 18 months looking at the audited accounts of the capital and operating costs for 350 of the larger onshore and offshore wind farms (> 10 megawatts of generating capacity) built in the U.K. between 2002 and 2019. It is the largest study of its kind to date and will be published shortly by the charity Renewable Energy Foundation. The study will be in two volumes with the first dedicated to analyzing the wind farms of Denmark, and the second to U.K. wind farms.
Preliminary results of the U.K. analysis were presented in a paper Prof. Hughes published in August and demonstrated that offshore wind farm costs had not declined as much as claimed. The study’s conclusions were used to refute the analysis that the low power costs for the most recent U.K. offshore wind license awards were really speculative bets placed by developers that future wind power prices would rise, allowing them to reject the current price agreements with little financial repercussion, in order to capitalize on the higher-priced electricity deals. This strategy is further supported by the realization of there being virtually no penalty for failing to build the licensed wind farms.
Prof. Hughes told a reporter for The Telegraph newspaper that based on his data, the average capital costs per megawatt (MW) of capacity have doubled since 2008. His analysis of accounts also found that the typical operating costs per MW have quadrupled over the same period. As a result of increasing costs and lower yields as the turbines age, the revenues earned may be less than the operating costs after the expiration of contracts guaranteeing above-market prices.
What Prof. Hughes says his data shows is that actual capital costs per MW of generating capacity to build new offshore wind farms increased substantially from 2002 to about 2015, after which they appear to have remained fairly constant. Capital costs will rise if, and when, wind farms require turbines to be located on floating structures. Prof. Hughes cautions that reports of falling costs for building new offshore wind farms by the mid-2020s are likely unreliable, as well as being incomplete. Final costs tend to be significantly higher, so he gives little credence to forecasts of lower future costs.
Wind turbine manufacturers and wind farm developers appear to be relying on an increase in load factors (a measure of the generator’s energy productivity) via (i) an increase in hub heights to take advantage of higher wind speeds, and (ii) changes in the engineering balance between blade area and generator capacity to improve financial projections. However, the reliability of new turbine generations has led to a more rapid decline in performance with age, so that the ultimate effect on average performance over the lifetime of new turbines is not clear. This trend has boosted the maintenance cost, while also leading to reduced performance. When the wind farms are all floating and located further from shore, maintenance will become much more challenging, potentially leading to reduced output, while also becoming more expensive.
Exhibit 1. Wind Turbine Performance Helped By Size
Source: The Telegraph
The Telegraph article referenced figures suggesting that U.K. taxpayers may be facing an incremental £27 ($34.9) billion per year in costs for this offshore wind effort in the form of subsidies to operators of standby power generating plants to provide electricity when the wind doesn’t blow and to wind farm operators when they produce too much wind that is not needed. There also will be costs to bailout failed offshore wind projects and potentially to protect electricity buyers from escalating power prices.
Some recent data from the financial results of several wind farms are eye-opening. Kincardine Floating Windfarm, the largest offshore floating wind farm in the world, and located off the coast of Scotland, has just announced its annual results. With a capacity of 50 MW, the windfarm is tiny, but when it was first announced in 2013, it came with a £250 ($323) million price tag, making its generating capacity eight times the price of a gas plant, while potentially running only half as much.
The wind farm is hopeful of being finished and will start up before the end of 2020. It has been delayed by Covid-19 issues. Unfortunately, its cost has risen. First to £350 ($452) million, and it is now reported that management thinks the final bill could end up at £500 ($646) million. That would amount to £10 ($13) million/MW, or nearly seventeen times the cost of a gas turbine MW.
Looking at the financial performance of the U.K.’s most efficient offshore wind farm, Kentish Flats, located just outside the Thames estuary, north of Whitstable, one is troubled by the implications for consumers. The wind farm is owned by Swedish conglomerate Vattenfall, and has low operating costs because it is situated in shallow waters.
Kentish Flats is not a new wind farm. In fact, it was one of the U.K.’s first offshore wind farms, commissioned in 2005. Management estimated that the useful life of their wind turbines is 20 years, so the wind farm may close within the next few years. It is probably no coincidence that 20 years is also the period for which the operators can claim subsidies. Just how generous subsidies are is seen from the wind farm’s 2017 results. In that year, it made a profit before tax of £11 ($14) million, but as the notes to the accounts reveal, it also received £11.4 ($14.7) million in subsidies. A further £0.5 ($0.65) million of grants from the U.K. government are being written off each year. In other words, without the subsidies and grants, Kentish Flats would have lost £1 ($1.29) million. Remember, this is the U.K.’s lowest-cost offshore windfarm.
We learn from its 2018 financial results that Kentish Flats is selling electricity at prices well above market. Between 2017 and 2018, electricity prices rose from £95 ($123) to £122 ($158)/MWh. One would have thought that the wind farm would have been quite profitable. According the researcher Andrew Montford, that change was largely reversed last year, and the wind farm only managed to break even before subsidies.
Since the wind farm was built 15 years ago, the cost of building and operating an offshore wind farm in the U.K. has soared, as reported by Prof. Hughes. Reportedly, all wind farms commissioned since 2010 have cost more than double the cost of Kentish Flats. Yet, without its subsidies, Kentish Flats is marginally profitable at best. If it were unable to sell its power output at above market prices, it would be a money-loser.
To better assess the offshore wind challenge, we looked to the most recent levelized cost of electricity (LCOE) prepared by the investment bank Lazard. We have compared the figures for gas combined cycle (GCC) generation versus offshore wind. We have also scaled the offshore wind up to the same power output as the GCC, by assuming a linear relationship.
Exhibit 2. Offshore Wind Is A Very Expensive Option
Source: Lazard, PPHB
On that basis, the LCOE for offshore wind would be $164/MW, or nearly 2.5 times the high LCOE for GCC, or 3.7 times the low LCOE figure. Will ratepayers be willing to pay that much more for their clean power, or will they demand a different solution? The problem is that by the time this cost increase becomes evident to ratepayers, or possibly to taxpayers who could be footing the bill, it may be too late to correct the policy course. Failure to prepare a true cost-benefit analysis before embarking on this path could be devastating for U.K. citizens and the country’s economy. Digging out of this policy hole may be impossible. On the other hand, if a mandate to follow this clean energy path is inflicted on every other country, all countries will be equally disadvantaged. Under such a scenario, those countries that are early adaptors may come out better-off by having a competitive advantage, at least for a short while. Those countries that don’t go down the offshore wind power path may wind up with lower energy costs, giving them a true competitive advantage. They may be the ultimate winners. Is this why climate change has become a crisis?
No sooner had we finished this article that we learned National Grid, the U.K.’s primary power provider, announced that there was a risk of blackouts due to a drop in wind-generated power and outages at a couple of nuclear and natural gas plants. National Grid is estimating that wind’s share of power may drop as low as 9% on Saturday and 10.5% on Sunday (last weekend), before climbing back up to 51% on Monday. At peak, wind has supplied as much as 60% of total power. This variability demonstrates how challenging it will be for managing the grid, and why back-up power sources and storage will become much more important.
On Friday, the National Grid Electricity System Operator tweeted: “Unusually low wind output coinciding with a number of generator outages means the cushion of space capacity we operate the system with has been reduced. We’re exploring measures and actions to make sure there is enough generation available to increase our buffer capacity.”
This is the second warning from the grid operator in a month. In mid-September it warned that its power reserve buffer had fallen below 500MW and that it might need to call on more power plants to help prevent a blackout. This notice was later withdrawn.
On the other side of the equation, earlier this year during the national lockdown, the grid was inundated with extra power. That forced National Grid to pay £50 ($65) million on the second May Bank Holiday weekend (May 25th) to get power producers to switch off their wind and solar farms. The company spent almost £1 ($1.3) billion for emergency back-up power to prevent blackouts during the first half of the year. It also paid EDF Energy to cut by 50% the amount of power generated at its Sizewell B nuclear plant.
The National Grid warning prompted Tom Greatrex, chief executive of the Nuclear Industry Association in the U.K., to say that the latest warning “underscores the urgency of investing in new nuclear capacity, to secure reliable, always-on, emissions-free power, alongside other zero-carbon sources.” We suspect his plea landed on deaf ears. With the agenda laid out by Prime Minister Johnson, ignoring increased nuclear power investment may be a classic missed opportunity for a stable, low-cost energy future for the U.K.
Driving From Semi-Closed Rhody To Mostly-Open Texas (Top)
It was time to get organized and plan our drive back to Houston from our summer home (hide-out) in Rhode Island. Doctors’ appointments dictated we leave on Thursday, October 8. As we contemplated heading home, the National Hurricane Center in Miami issued its first advisory for Potential Tropical Cyclone Twenty-Six at 5 pm Sunday, October 4. Our alarm bells went off.
The advisory announced a disturbance that had formed over the Central Caribbean, which was expected to become a tropical storm and strengthen further over the Northwest Caribbean Sea. Talk began about the storm eventually becoming a hurricane, crossing Mexico’s Yucatan Peninsula and into the Gulf of Mexico and targeting the Louisiana coast as a Category 2 or 3 hurricane.
We knew we needed to closely watch the storm’s development as it might make us alter our travel plans, heading west further north than on the Gulf Coast. Unfortunately, we were scheduled to get our front door replaced on Wednesday, something we had ordered in May, only to find out how much the door manufacturing plant’s output was impacted by Covid-19 and the housing boom that erupted across America, stressing all construction suppliers.
As Tropical Storm Delta (all the 2020 storm names had been exhausted, forcing the use of Greek letter designations) made its way toward Cancun, the projections showed the storm track taking it to a direct hit on Lake Charles, the target of Hurricane Laura six weeks earlier. If Delta hit Lake Charles, it would be similar to Hurricanes Frances and Jeanne that targeted Florida’s East Coast in 2004. Frances came ashore as a Category 2 hurricane near Sewall’s Point. Jeanne made landfall three weeks later as a Category 3 hurricane near Stuart.
Exhibit 3. Two Hurricanes Land In Florida In 2004
Source: clickorlando.com
Delta’s projected course was amazingly similar to Laura’s path, and it certainly had residents in the area, who were still struggling to recover from the earlier storm, on edge. There was only one thing for us to do, which was to watch the weather news and advisories, while considering alternative routes home. Once before we had been forced to abandon our normal route. That was in the aftermath of Hurricane Katrina in 2005, which paralyzed New Orleans and the Mississippi coastal region.
Exhibit 4. Two Hurricanes Targeted Lake Charles
Source: clickorlando.com
After going out for a last Rhode Island dinner, we loaded the car Wednesday evening, during a brief rain storm. Fortunately, the next morning brought sunny weather. We quickly learned what happens when you install a new front door. The weatherstripping was so tight, you really had to slam the door to enable the electronic security lock to operate. As we discovered right outside our neighborhood, the lock hadn’t locked. We had been having connectivity issues with the security system, but decided to return and make sure the door had locked and that we were not getting a false message. We finally secured the door and it locked properly, so we were 20 minutes behind schedule.
Surprisingly, the traffic was light going south on I-95. Equally surprising was that the traffic heading north was heavy, especially with trucks. We made good time driving through Connecticut. We observed a huge back up on the northbound side at the Darien/Stamford line, as a highway maintenance crew had one lane closed. That was when the large number of trucks heading north became clearly evident.
We also watched the trend in gasoline prices in the service plazas along the route through Connecticut. They reflected the cost of living increase that becomes evident the closer one gets to Fairfield County and New York City. Regular gasoline prices for the four service plazas open on the south side of the highway were as follows: $2.249, $2.239, $2.439 and $2.459. No surprise.
We had been reading about the slowing of the economy, but based on the truck traffic we saw in Connecticut, New York, New Jersey and Pennsylvania, that narrative seemed inconsistent with our reality. In fact, my wife commented that she had never seen so many trucks. At one point in Pennsylvania, as we reached the top of a rise while traveling alongside numerous trucks, we saw the most amazing sight. This was a three-lane highway, in which trucks and buses are banned from the most inside lane. As we crested the rise and began heading down into a valley, we saw the two right lanes solid with 18-wheelers all the way down and then up to the next rise. That was approximately 1.5 miles of visible road. As we were driving past the trucks, my wife said we should have been counting them. We have never seen such a long line of trucks in all our trips.
As we drove through Maryland, West Virginia and into Virginia, the truck traffic remained heavy. It began to thin out as we reached the middle of Virginia. We were intrigued that all the truck weigh stations were open in Pennsylvania and Virginia, and all the trucks were forced to enter. Often times these stations are closed, but we assume the governments are desperate for any source of revenue.
The Pennsylvania and Virginia truck stops were pretty full all day. By late afternoon, they were about 80% full and overflowing by 10 pm. We noticed that at one Virginia rest area, the state had painted parking lines for trucks along both shoulders of the entrance and exit ramps. We assume they had determined that official parking spaces would maximize the number of trucks that could use the rest area, rather than relying on the truck drivers to figure out the spacing. Truck parking shortages are another indication of how the new hours-of-work restrictions are impacting the behavior of over-the-road truckers.
Exhibit 5. Travel Jam Coming Out Of New Orleans
Source: theconversation.com
The truck traffic was not as heavy as we turned west and drove across Tennessee from Knoxville to Memphis. The truck traffic was fairly light through Arkansas, also. We wondered whether this was due to truckers not wanting to venture too far south and into the area exposed to the weather from Hurricane Delta, especially as we were only hours away from Hurricane Delta making landfall. It was also Friday afternoon, so some drivers may have already reached destinations and were no longer on the road. By taking this northern route, we knew we were avoiding the scenes of huge traffic backups on I-10 as people escaped the impending hurricane. Thursday night, the weather channel had pictures of the Louisiana traffic jams.
Eating is always an interesting experience on our trips. We traditionally stop at McDonald’s, not only because the food service is quick, but one can always count on the bathrooms being clean, and it provides a nice break from being inside the car for so many hours. However, in Pennsylvania, Covid-19 policies ban eating in at fast-food restaurants. Only drive-throughs are available. Therefore, we opted to stop at a Cracker Barrel, remembering from our May drive to Rhode Island that they allowed dining inside. In fact, all their billboards have been redone with the message: Dine-in, Curbside or Delivery.
We pulled into the Cracker Barrel in Hamburg at 12:45 pm, only to find a 25-minute wait. After we signed up, we received a text message from the restaurant about the wait time. When it expired, we were texted to come in. That evening in Christiansburg, Virginia, the wait for a table was 30 minutes. When told how long, we hopped back in the car and went to fill it up, and then returned to complete our wait. We noticed a Help Wanted sign as we drove into the restaurant, suggesting either that rehiring workers was complicated by the extra unemployment insurance payments many of them are receiving, or people don’t want to work in the hospitality industry with its potential Covid-19 risk.
According to the hostess who sat us, the restaurant’s capacity is restricted by adherence to the 6-foot social distancing requirement for table placement. That restriction limits the capacity to half the number of tables, which was evident from the areas where tables had been removed. Several tables had been set up outside, but no one was using them at dinner. Not all the tables were being used, but the restaurant was set up for roughly 50% of its normal seating capacity. We are guessing that the wait may have had more to do with staffing shortages and not seating.
Our hotel on Thursday night was a repeat of our trip north in May. We stayed at the Hampton Inn in Bristol, Tennessee. After making our reservation on the Hilton app, we called and asked to be assigned to a room that had not been used recently. We were assigned a room on the 5th floor, just as in May, and on the end of the hotel closest to the highway (noisier), but not down the corridor quite as far as the room last May. We commented when we pulled into the parking lot that things looked a lot busier than in May, as there were many more cars at this hotel, as well as at the two neighboring hotels. Travel was clearly higher than in May.
Friday morning before leaving, we had a conversation with the lady manning the front desk at the hotel. In May, we were the 13th guest, but now we were among 56. With 91 rooms, the hotel has seen its occupancy rate improved from 14% to 62%. We were told that the prior three weekends had been race weekends at the nearby Bristol Motor Speedway, so the hotel had been completely booked.
We questioned the lady about the night clerk’s comment that he had been running out of rooms when we called to reserve an unused room. She told us it was because they had too few housekeepers – one was sick, another on vacation and something happened to a third one, so they only had two cleaning workers. A nice touch is that each cleaned room is sealed with a sticker detailing the cleaning that had been done.
The breakfast-to-go meal bag had a nice assortment of prepackaged food, which we ate when we were in the one and only traffic jam we experienced in the two-day drive. That was in Knoxville and it was due to an earlier accident, but as we idled, it gave us time to eat without risking an accident ourselves.
After discussing our experience and the details about the hotel’s situation from our May visit with the front desk lady, she acknowledged that not everyone had been rehired, yet. As a result, she commented that it remained a struggle to balance work shifts when people took vacations. But, as she commented, “We’ve been blessed” when referring to how the hotel and its workers have fared. We were certainly glad to see the hotel experiencing better times.
Friday was a very long day, although it started out pretty well. Other than the accident-related slowdown, the traffic moved well. With fewer trucks, there weren’t the large truck caravans to slow down the highway, although there was the occasional truck that decided to pass and tied up the fast lane for miles. That is when the “crazies” always make their move by passing on the right and then cutting right back into the traffic flow forcing everyone behind to have to slow or hit the brakes. We even saw a truck driver pass another on the right!
Our biggest challenge was navigating the navigation system. We wanted to change our route at Knoxville to take us across Tennessee to Memphis, then to Little Rock and on to Texarkana and down through East Texas (Marshall, Livingston, Cleveland, etc.) to Houston. For some reason, the navigation system continued to recalculate our route through Dallas. No offense Big D, but we had no reason to swing that wide to avoid the storm. In fact, other than a few stretches with showers, we didn’t hit as much rain as we anticipated.
Because we were going to be driving for about 1,100+ miles, we only went through a McDonald’s drive through at lunch for shakes to minimize the lost-time. Fortunately, we gained an hour due to the time zone change, but it still meant we didn’t get home until 1 am Saturday morning.
In East Texas, we passed a truck stop along US-59 around 10 pm, and there were still parking spots open. Again, we wondered if the storm had kept truck traffic down, or whether it was the impending weekend that got truckers home? Local police were out in force in the small towns we went through, especially with the rapid speed limit drops. On the entire trip, we saw only a handful of highway patrol cars, but almost always they were on the other side. There were two Tennessee State Police officers on a highway overpass on our side of the highway heading into Knoxville with a speed gun. A little further on there was a police car on the side of the road having pulled a driver over. Given the morning traffic rush, we can’t imagine what that driver was doing.
A couple of final observations. We saw only one Tesla on the road. It was, surprisingly, heading into Little Rock. We watched for political signs, as a judgement about the upcoming election. The overwhelming number were Trump signs, including numerous billboards – some sponsored by law enforcement or veteran organizations. We saw electronic Trump billboards (one for Joe Biden). We saw a trailer parked in a field adjacent to the highway painted with Vote for Trump and Keep America Strong. Surprisingly, the only political signs we saw in Pennsylvania were for Trump. We are not sure that this sampling is representative of anything about what will happen on November 3rd. We can say that the Trump supporters in Rhode Island – a notoriously strong Democratic state – were much more visible this summer than in 2016. In fact, there was a Trump rally about six weeks earlier at a state park in Providence. The Rhode Island State Police said in all the years that rallies have been held there, they have never seen as many people turn out as did for that rally.
Finally, throughout the trip, it seemed that the American economy was coming back – although not evenly. When we rolled into Texas and then reached Marshall, we pulled into a Whataburger and were surprised to see the dining room open for service. We were happy to be back to where life seems closer to normal that what we had been living with in Rhode Island this summer.
Real Estate Prices And Climate Change – No Clear Link (Top)
Last week, The New York Times carried an article in its Business section about Florida coastal home sales and prices falling due to buyer recognition of the potential risk from rising tides due to climate change. The online story carried the headline: “Florida Sees Signals of a Climate-Driven Housing Crisis.” The headline was the typical NYT overly dramatic presentation of anything having to do with climate change. The article was based on a study led by Professor Benjamin Keyes of the Wharton School of Finance at the University of Pennsylvania and published by the National Bureau of Economic Research.
The article began with a focus on the recent experience of real estate sales in Bal Harbour, a tiny community on the northernmost tip of Miami Beach. Single-family homes there sell for an average of $3.6 million, epitomizing the high-end Florida waterfront real estate market. According to the reporter, and presumably based on data in the paper (it is behind a paywall), the number of annual real estate sales fell by half between 2013 and 2018. This decline was attributed to “fewer people wanted to buy.” The reporter then points out that between 2018 and 2020, the average sales price declined by 7.6%, according to the real estate data company, Zillow. What we don’t know is what happened to the supply of homes for sale? The use of home sales data since 2018 begs other questions: 1) What happened to selling prices from 2013 to 2018? And, 2) Was the 2020 data taken during the height of the economic shutdown due to Covid-19? The first answer is likely that sales prices rose. The second answer is quite likely sales were impacted by fear of the virus. These answers, if correct, cast a potentially quite different shadow on the story the reporter was wanting to tell.
Reportedly, the sales and selling price declines are happening all across the low-lying areas of Florida, weakening one of the strongest real estate markets nationally. Professor Keyes’ assessment is that “The downturn started in 2013, and no one noticed. It means coastal housing is in greater distress than we thought.”
To assess the question of whether we are witnessing the start of a climate change-driven housing collapse, the researchers examined 1.4 million real estate transactions over a 20-year period. The sales were segregated into areas where 70% of the land is less than six feet above sea level and areas where only 10% of the land was in that flood-risk zone. The results of the sales data are presented in Exhibit 6.
Exhibit 6. Climate Change Impacts Florida Home Sales
Source: NBER
As the chart shows, the average number of home sales peaked in 2005 for both the high-risk and low-risk areas. It was the same year the nation experienced the most active tropical storm year until now, and it included the infamous Hurricane Katrina that devastated the Mississippi Gulf Coast and inundated New Orleans. More importantly, the prior year saw Florida hit with multiple hurricanes. The 2004 tropical storm forecast called for a very active season. The season experienced 15 named storms, including nine hurricanes, making it the most active year since 1996. Four of the hurricanes targeted Florida, all within a span of six weeks and collectively impacting every square inch of the state. Florida temporarily dropped the name “Sunshine State,” for the title “Plywood State.”
The sales decline extended until the start of the 2008-2009 recession, at which point sales began to rise. After falling slightly faster during the decline, high-risk sales recovered stronger than low-risk sales until both measures returned to the average number of sales per year. Since 2013, high-risk sales have fallen below the annual average, while low-risks sales have been higher.
Exhibit 7. High-Risk Home Prices Are Trailing, But Why?
Source: NBER
When sale prices are examined, high-risk properties didn’t fall quite as much below the average selling price as low-risk properties in 2011 and 2012. High-risk property sale prices rose faster and much more than low-risk properties until the two lines met in 2017. Since then, the low-risk properties outperformed the high-risk properties. It would have been nice to have known the relative prices between the two categories, as buyers may have been influenced more by relative prices, all other considerations being equal.
What we know about coastal properties is that sales and prices often reflect multiple considerations. If we consider the community where our summer home is, the sales figures may have little to do with climate considerations. For example, there has been one home sale this year, something we were keenly watching, as our town had just conducted one of its periodic property re-evaluations for tax purposes. Such reassessments are done every three years.
We were shocked at the new assessed value of our home, so we started doing research with the aim of appealing the estimate. We focused on just our street, which comes in from Route 1, then goes through some woods and wetlands before reaching the water, after which it follows along the coastline. There are homes on both sides of the street, so one side is waterfront, while the other is potentially water view.
There are 45 homes on our street. The assessed property values were increased by 40%, except for one, which we haven’t found out why. The average property value town-wide increased 20%. The appraisal people we dealt with could not explain why the 40% figure was used. The structure is assigned a separate value.
Only a few homes have been sold on our street in the past few years. In many years, no sales occur. That was why we were particularly interested in a home sale up the street from us, and in the area with no water view. According to our research, the home had been assessed for $463,200 in 2018, but that was being increased to $612,500. The home was listed for sale at $725,000. We recently learned from a real estate source that the house sold above the asking price, suggesting a bidding war. After having its assessment increased by 32%, the property sold for 18% above that value, and possibly even more.
Rhode Island residents are very sensitive to climate change. The state has filed suit against a number of major oil companies over damage due to climate change. If we accept the state’s arguments in its lawsuit, this particular home is likely to experience water damage due to climate change. Rather than Florida’s experience, however, buyers are clamoring for coastal homes in Rhode Island. This summer saw record-setting numbers of multi-million-dollar home sales, many in neighboring communities. Is it possible that there are other economic factors impacting Florida high-risk home sales than climate change fear?
What was maybe more interesting was a study conducted by an economics professor and a doctoral student at the University of Rhode Island (URI) examining the impact solar farms have on neighboring home values. Recognizing the growth of utility-scale solar projects in southern New England, the two economists wanted to see how they were influencing political battles. Dr. Corey Land, URI associate professor of natural resource economics put it: “[Utility-scale solar energy] has become a contentious land-use issue because solar arrays take up quite a bit of land per unit of energy produced.” This is a major problem for all renewable energies – their resources used relative to the energy output is high, a reason why these fuels were displaced in society’s journey to the highly-efficient energy system we operate today. The challenge is reconfiguring our energy system to be less polluting, while yielding as little of our energy efficiency as possible.
The URI study involved examining 400,000 housing sales between 2005 and 2019 within three miles of one of 284 sites where a solar array would eventually be installed. The house sale data came from Massachusetts and Rhode Island. The study found that house prices within a mile of a Rhode Island or Massachusetts solar array declined by an average of 1.7%, or $5,751. Furthermore, when property prices for homes located within 0.1 mile of a solar installation were studied, they fell by 7%, or $23,682, compared to houses further away.
The financial cost for home owners is significant when one realizes that the mean sales price of the homes in the study was $338,320. This value reflects an average property with a lot size of half an acre, a living area of just under 3,000 square feet, consisting of approximately 3 bedrooms, and was about 49 years old. About 21% of the properties were condominiums, 45% were located within 3 miles of a greenfield solar array development, and 34% were located in rural areas.
These latter points are important. Where should solar arrays be sited? The cheapest and easiest choice is often rural areas and farmland. This may become the most contentious choice. Brownfield sites may be better choices, but they often are more expensive and challenging to engineer. It is interesting to see the distribution between greenfield and brownfield projects, which helps explain why land-use issues are key to the battles over solar arrays.
Exhibit 8. Solar Arrays And Land-Use
Source: URI study
After analyzing the data, the study’s authors put the conclusions into economic perspective. They estimated that the net loss “was $1.66 billion in aggregate housing value due to proximate solar installations in MA and RI.” They went on to point out that “The EPA (Environmental Protection Agency) estimates a social cost of $51.80 per metric ton of CO2 (carbon dioxide), which translates to $771 million in lifetime benefits from the production of energy from solar installations (US EPA). We find that, considering only externalities, the benefit-cost ratio is 0.46, with a net loss of $893 million.” To put these figures into perspective, fourth quarter gross domestic product (GDP) for Massachusetts was $604 billion, while Rhode Island’s was $64 billion, or a total for the two states of $670 billion, representing 2.8% and 0.3%, respectively, of national GDP. The loss of slightly less than $1 billion of home value, net of the social cost of the carbon emissions avoided, is miniscule relative to the region’s economy, although the lost value is material to the home owners.
While the benefit-cost ratio was not favorable for the economies of Massachusetts and Rhode Island, the authors point out that over 90% of the energy generated in the two states comes from natural gas, which emits only half as much CO2 as coal. Thus, it is possible for emissions’ reduction benefits to outweigh the costs in states where coal dominates the fuel mix for electricity generation.
One of the more interesting observations in the study came from considerations over land-use choices between solar and wind energy. About solar, the authors wrote:
“Solar installations require over ten times more land area than non-renewable sources to generate the same amount of energy, and the requirement of large tracts of land for their construction has become the largest cause of land use change in the United States. Recently, the siting of large solar projects has become contentious in some parts of the country due to concerns about visual disamenities, impacts on ecosystems, siting of transmission lines, loss of a town’s rural character, water pollution, fire risk, water use, and reduction in property values (Farhar et al., 2010; Gross, 2020; Lovich & Ennen, 2011). The debate is especially heated when solar development is proposed on existing farm and forest lands, which is common because these are the cheapest locations for development (Kuffner, 2018; Naylor, 2019).”
What the authors pointed out was that wind energy uses considerably less land than solar arrays, and offshore wind (being developed by both Massachusetts and Rhode Island) uses no land. The study stated that: “Hedonic studies [measuring the value to consumers] that find no negative externalities from onshore wind energy development” are based on four studies, including three focused on wind turbines in Massachusetts and Rhode Island.
However, the authors later pointed out that “In contrast, studies in European countries find that wind turbines have a significantly negative impact on nearby properties, though the magnitude of the effect differs by region.” The European observation was based on three recent studies. This topic is going to be the next area of study by the URI economists.
The solar array impact study was published on September 30. We found it and its timing interesting in light of the numerous utility-scale solar projects being battled-over in Rhode Island communities adjacent to Charlestown, where our summer home is located. So far, those battles have not been resolved, so we expect the results of this study to be cited by the objectors to these solar projects.
Climate change is being used to promote renewable energy and object to the continued use of fossil fuels. The Florida analysis of home sales and prices by whether they are in “high risk” areas as opposed to “low risk” ones is another example of academics seeking a simple explanation for a divergence in trends. They fail to acknowledge that many considerations go into real estate purchases, contrary to those that influence most other purchases. Yes, climate change risk is a legitimate consideration, but we would suggest not the only one, and likely not the principal reason. To the contrary, siting a utility-scale solar array adjacent to homes does impact their values. The question becomes one of whether society will benefit more from the solar array than the economic pain inflicted on the homeowners. Understanding the trade-offs in the calculation is critical to determining which strategy should be selected. Simple answers may simply lead to horrendous economic mistakes.
The Race To Match Oil Patch Bankruptcy Records In 2020 (Top)
We now have the 2020 third quarter bankruptcy data for the E&P and Oilfield Services businesses from the Haynes and Boone law firm. It shows the financial devastation ongoing in the oil patch due to the oil price collapse and demand contraction this spring as the coronavirus shut down global economic activity. But the bankruptcies also reflect the ongoing challenges the industry has been dealing with since the late 2014 oil price drop that ushered in the era of ‘lower for longer’ crude oil prices.
With Haynes and Boone switching their data reporting frequency to monthly from quarterly earlier this year, we get to see the bankruptcy filings more frequently. Unfortunately, the timing of bankruptcy filings is driven by the state of negotiations between company managements and their lenders, which is subject to many twists and turns along the path to a balance sheet restructuring, rather than the calendar. Thus, looking at the data from any particular month only tells a part of the story, and maybe doesn’t truly reflect the state of the financial health of the industry, or the pressures to restructure company balance sheets. That is one reason why we show year-to-date bankruptcy data compared to prior years, rather than more frequent time periods.
Exhibit 9. E&P Bankruptcies Slowed In September
Source: Haynes and Boone, PPHB
For example, in the E&P sector, only four companies filed for bankruptcy in September with a total of $2.75 billion of secured and unsecured debt. One company, Oasis Petroleum Inc., accounted for $2.265 billion of that total. Absent that filing, one might have concluded that the E&P bankruptcy tsunami was ending. What is interesting, and does reflect the past financing focus of the E&P sector, is that year-to-date, we have had 30 fewer companies file for bankruptcy compared to the record year of 2016, but the total debt involved is within 10% of that record amount. With one quarter to go, it is not unreasonable to expect that we will exceed the 2016 debt total, but maybe not pass the total number of companies that filed for bankruptcy.
Exhibit 10. Oil Service Debt About 1% Below 2017’s Record
Source: Haynes and Boone, PPHB
In the oilfield services sector, seven companies filed for bankruptcy in September, the same number as filed in July, but five fewer than in August. The total amount of debt involved in the filings was only $900 million, which was below the $1.3 billion of August, and is about one tenth of the debt amount for July. Total year-to-date debt now is slightly over 1% below the record amount in the 2017 bankruptcies. Just as with the E&P sector, one oilfield services company, FTS International, Inc. with $705 million of total debt, accounted for 78% of the total debt for September.
Although the fracturing crew count has climbed to 130 from 47 between early May and October, and 10% more drilling rigs, 25, have returned to work in the past two months, with WTI oil prices struggling to hold around $40 per barrel, it is hard to argue that the industry’s financial distress has eased much. In that regard, we are always reminded of the dialogue in Ernest Hemingway’s The Sun Also Rises.
“How did you go bankrupt? Bill asked.
“Two ways,” Mike said.
“Gradually and then suddenly.”
Unfortunately, that is the story of bankruptcy in the oil patch, and often for bankruptcies in general. Without a stronger recovery in oil demand and slightly higher oil prices, most companies in the oil patch are walking on a knife’s edge, and they can easily go from gradually to suddenly bankrupt.
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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.
