Archive | February, 2017

What goes around, comes around…or maybe not.

15 Feb

The industrial or specialty gas business isn’t one that many people often think about, but it provides very important products to a wide swath of the economy. Hospitals, food production, industrial manufacturers, and the oil & gas industry each have specific demands for gases such as pure oxygen, helium, and nitrogen, both in the gaseous and liquid state.

The process to remove or “separate” these gases from the atmosphere was perfected over a century ago as the materials and machines of the industrial revolution developed. They provided the ability to compress, heat, and cool air so as to process it and isolate its various components on an industrial scale.

For example, the need for industrial gas can be found at virtually any liquefied natural gas (LNG) facility. Large quantities of nitrogen are used to cool and purge process equipment, pipelines, and storage tanks. Depending upon the nature and size of the plant, liquid nitrogen is either manufactured on site or delivered to the facility and stored in a cryogenic tank called a dewar. (Named after Sir James Dewar, a Scottish chemist/physicist who invented a special vacuum flask to hold low boiling point liquids.)

Only about a half dozen major companies make up the bulk of the global industrial gas business. Recently, this industry sector has been hit particularly hard by the down-cycle in oil & gas and cost cutting in the health-care industry. This has led to attempts by industry participants to consolidate.

A week before Christmas, two of the larger companies, Linde AG of Germany, and Danbury, CT based, Praxair Inc., announced their intent to execute a “merger of equals.” The combined company reportedly would have a market cap of approximately $64 Billion and annual revenue of over $30 Billion.

Interestingly, if approved, this would close the circle in the life of what was originally part of Linde to begin with. Prior to World War I, Linde formed a US division named, Linde Air Products. The division grew such that, after the war, it dwarfed its Teutonic parent.

Union Carbide eventually purchased the company and ran it until 1992, when it was spun off and renamed Praxair. This deal would bring Linde’s American progeny back into the Linde family. The new company is expected to retain the Linde name.

Of course, there are a number of significant issues outstanding and the world is rapidly changing as both companies work to define the details of the reunion.

  • Where will the new company domicile in the EU?
  • What effect does the current US corporate tax rate have on Linde’s global structure? (In the past, companies engaged in “earning stripping”, loading US operations with debt and deducting interest against the higher US corporate tax bill, essentially shifting US profits overseas.)
  • What happens if the Trump administration revamps the entire US corporate tax code?
  • How might the governmental approval process be impacted by the newly evolving relationship between the EU and the US under an “America First” doctrine?

As a global business with a significant US presence, the new Linde will also run headlong into changing geopolitical relationships driven by the Trump administration’s foreign policies. Although these policies are only now being developed, it’s a safe bet that they will be markedly different than under the previous administration.

Consider this. It was recently reported that meetings have been underway between Linde’s CEO, Aldo Belloni, and Russia’s Gazprom Management Committee Chairman, Alexey Miller, regarding a cooperation agreement in the oil & gas sector. Supposedly it includes various aspects of Russian hydrocarbon processing, natural gas liquefaction, improving process efficiencies, and high-tech manufacturing, training and development.

How will Washington view such cooperation? How much will the diplomatic and intelligence scandal now unfolding within the Trump White House, combined the uncertainty regarding the direction of US – Russian relations (among others), affect the merger? What influence will “America First” have on the deal? Might these exogenous issues become too risky for the merged company and its shareholders?

Time will tell if it is wise to close the circle in the Linde family at this juncture.

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All Quiet on the Eleventh Floor

10 Feb

Last Friday, the Federal Energy Regulatory Commission (FERC), the independent regulatory agency within the Department of Energy, was left with only two sitting Commissioners leaving it in the unprecedented position of lacking a quorum.

The lack of a quorum among the five Commissioners, who offices occupy the eleventh floor of a nondescript Washington, DC office building at 888 North First Street adjacent to the Union Station railyard, does not prevent FERC from carrying out most of its day-to-day functions, but if it extends for very long, will affect the “America First Energy Plan.”

A relatively unknown agency whose actions touch the lives of nearly anyone using electricity or natural gas, FERC originated in 1920 as the Federal Power Commission to preside over hydropower development. Congress gradually expanded its jurisdiction to include regulation of both hydropower and interstate electricity, interstate natural gas pipelines and wholesale gas sales (the Natural Gas Act of 1938), and eventually (resulting from a 1954 Supreme Court decision) all wellhead sales of natural gas in interstate commerce.

During the decade of the OPEC oil embargos, Congress established the Department of Energy (DOE) in 1977, consolidated energy activities and transformed the FPC into the Federal Energy Regulatory Commission, an independent agency within the DOE. During the next ten years, FERC presided over the end of federal price regulation of natural gas while introducing competition to both gas and electric markets.

As an independent agency, neither the President, the Secretary of Energy, any officer or employee of DOE, or Congress review FERC decisions. Its decisions may be appealed to federal courts. Occasionally, DOE has intervened as a third party in FERC proceedings.

Not only is it intended that FERC be independent, but also bipartisan. The full Commission consists of 5 members appointed by the President and confirmed by the Senate. The President also appoints one of the Commissioners to be Chairman. However, no more than three Commissioners may belong to the same political party.

On January 26th, President Trump named Commissioner Cheryl LaFleur, a Democratic appointee, Acting Chairman. Then Chairman, Norman Bay, nominated by President Obama in 2014 and whose term expires in June 2018, made the unusual move to resign both his Chairmanship and appointment on the Commission, effective February 3rd. That left FERC with only one Commissioner and the Acting Chairman — a Commissioner short of the mandated 3-member quorum necessary “for the transaction of business.”

As a holding action until another Commissioner is appointed by President Trump and confirmed by the Senate, FERC delegated authority to agency staff to continue certain actions such as accepting and suspending rate and tariff filings, granting requests for an extension of time, accepting uncontested settlements, performing environmental and safety reviews, audits, and hydro inspections during this non-quorum period.

The delegation does not allow staff to issue new policies, propose rulemakings, and probably most importantly, issue certificates needed to site, construct and operate new energy infrastructure subject to FERC jurisdiction. In other words, new interstate natural gas pipeline projects waiting for approval from FERC cannot proceed until the quorum is re-established.

Clearly, this isn’t the reduction of government the new administration had in mind when it came to Washington to “drain the swap.” In fact, the longer this untenable situation exists, the more likely it is to impede progress in tapping the estimated $50 trillion in oil and natural gas reserves envisioned by the America First Energy Plan.

Fortunately, due to the nature and makeup of this independent agency, FERC itself has historically operated with civility and comity, even as it debated and implemented contentious matters of regulatory policy and rulemaking.

Although it has many critics and is sometimes overruled on appeal, as an independent agency, FERC strives to apply the law by the facts of the record placed before it. FERC’s quasi-judicial procedures combined with many years of guiding precedent lead some to believe it’s too bureaucratic, but on the other hand, it prevents decisions from being made strictly on political whim.

Acting Chairman LaFleur is a steady hand and has been in this position before. She said that she intends to, “keep the Commission moving forward during this transition.” Applicants as well as intervenors can be assured the agency will continue to hear their arguments during this unsettled interim period.

While it typically takes weeks or a few months to replace vacant positions on the Commission, given the current level of rancor exhibited by opponents to President Trump’s agenda, a prolonged non-quorum period is highly likely.

Rumors abound that the Trump administration is looking to another Texan with energy bona fides to be nominated Chairman. The rumored nominee, Barry Smitherman, is a former investment banker, member on the Texas PUC, and former Chairman of the Texas Railroad Commission that regulates the Texas oil & gas industry. What could possibly hold up Senate approval of such a qualified candidate?

One final note. After the next Chairman is seated, President Trump has two more positons to fill on the eleventh floor at FERC; both Republican nominees. Elections have consequences and while FERC is an independent regulatory body, its focus will soon clearly skew Republican.

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