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Helsinki and the NOI

23 Jul

Last week it seemed nearly all public attention was focused on the Helsinki Meeting, especially the press conference with Presidents Trump and Putin. Of course, the talking heads had a field day dissecting what we knew about the meeting, speculating on the private discussions, and examining what Trump said, then later explaining what he meant to say.

If, however, you are keenly attuned to US and global energy matters and set aside the political theatrics, media games, and fascination with American and Russian intrigue, you may have noticed something very interesting that happened at Helsinki that inadvertently links to a process taking place this week at the Federal Energy Regulatory Commission (“FERC”).

The very first question asked during the press conference was not about nuclear arms, Russian annexation of Crimea, the Ukraine, Syria, Iran, North Korea, or Russian intervention in US elections. It was about natural gas.

Specifically, a Russian journalist pointedly asked President Trump how he squares his position that the Nord Stream II pipeline makes Europe a hostage to Russian natural gas and alternatively, the US is a safer, more reliable supplier. Yet, at the same time, the US relies on Russian gas (delivered as LNG) to supply Boston. In essence, asking President Trump whether the US is truly capable of reliably suppling Europe with American gas.

So, what does that have to do with FERC?

FERC is the independent federal agency that, under the Natural Gas Act of 1938, has jurisdiction over siting, construction, and operation of any natural gas facility that transports gas in interstate commerce. This includes natural gas pipelines, storage facilities, and LNG terminals.

Before any new interstate natural gas facility can be built and operated, the company must receive a Certificate of Public Convenience and Necessity from FERC. It often takes more than two years before FERC can decide whether to issue a certificate.

The review process, dictated by the decades-old National Environmental Protection Act (“NEPA”), is a complex and detailed assessment involving multiple federal and state agencies. Under the NEPA process, FERC directs the overall review. Before deciding to grant an applicant with a certificate, FERC weighs the project’s benefits against possible adverse impacts.

While the White House Council on Environmental Quality has proposed making the NEPA process more efficient, well-funded opposition groups have raised questions in federal courts about, among other things, the level of FERC’s consideration of greenhouse gas emissions.

The bottom line is that having failed to stop America’s upstream oil and gas resource development with their “keep it in the ground” campaign, anti-fossil energy activists are pouring money and resources into federal court appeals of FERC’s certificate decisions.

The natural gas infrastructure itself has been proven to be safe, efficient, and of limited concern regarding GHG emissions. Ultimately, the appeals simply frustrate the process, extend permitting schedules, and foist millions of dollars of additional costs upon the project developers and American energy consumers.

The good news is that FERC has already recognized the challenge of reviewing and approving new natural gas infrastructure and set into motion a process to collect comments and suggestions on actions needed to avoid bottlenecks forming that would block US natural gas production from reaching American and global energy consumers.

Last year, shortly after the quorum of FERC commissioners was re-established, the Chairman stated his desire to revisit the way in which FERC assesses new gas facility certificate applications. On April 19, 2018, FERC issued a Notice of Inquiry (“NOI”) to initiate a review of its 1999 Policy Statement regarding the analytical and procedural processes currently undertaken to determine whether a proposed project should be certificated.

The NOI noted that significant changes have taken place in the natural gas industry over the 19 years since the 1999 Policy Statement was adopted. Most significantly, hydraulic fracturing has ushered in a “revolution in natural gas production” leading to major geographic shifts in the location of new natural gas supplies, changes to gas flows in the interstate pipeline system, and expanded use of natural gas for power generation and as a feedstock for the domestic petrochemical industry.

Comments regarding the NOI from the natural gas pipeline industry and other stakeholders are to be filed with FERC this Wednesday, July 25th.

Those supporting new gas infrastructure can be expected to voice opinions about such things as the efficiency and effectiveness of the NEPA review process, coordination of federal and state reviews, post certificate appeals, and policy consistency regarding GHG standards and demonstration of market need. Ultimately, process timing and certainty will be key.

Those opposed to pipelines will likely target contractual standards for new projects, seek regional planning for natural gas, express concerns about overbuilding pipeline capacity, and support landowner rights and the elimination of eminent domain. The opposition has long argued that FERC favors the fossil fuel industry and “rubber stamps” pipeline company applications.

The NOI will be an important source of input to FERC as it reviews its certificate policy. How extensively its policies and procedures change remain to be seen. But the review is warranted.

More importantly, however, if we don’t soon get the much-needed new natural gas infrastructure permitted, built, and operating, we won’t be able to take advantage of our energy resources. Then the question posed by the Russian journalist in Helsinki may, in fact, prove prescient.

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Restore the Quorum

25 Jul

Frustration over the lack of any appreciable progress in Washington is at an all-time high. It’s especially egregious considering the same political party presently controls the executive branch and both houses of the legislature.

Conservative leaning policies were expected to be the order of the day. Many Americans, desperate for a government that worked, cast their votes in unconventional fashion hoping to shake the status quo. Instead, gridlock, confusion, and rancor still occupy every nook and cranny of government. Clearly, the November shake up wasn’t hard enough.

JPMorgan Chase CEO, Jamie Dimon, seldom seen as the "average Joe" on Main Street, reflected people’s frustration when he recently opined, “[He’s] tired of listening to the stupid s_ _ _ we have to deal with in this country.” He went on to say the situation has hurt the American economy which, because of “stupidity and political gridlock”, only grew at 1.5 to 2 percent since the Great Recession.

Blame for the quagmire extends in all directions. Republicans blame Democrats for obstructing the president’s agenda. The Democrats point fingers at the President for dilly dallying in nominating people to fill open positions. All the while, Washington’s crisis du jour diverts critical attention from serious day-to-day business. The results speak for themselves:

 SENATE CONFIRMATION OF APPOINTEES *
 Nominated  Confirmed  Failed

 Avg. Days to Confirm
Trump

197

 48 4

44
Obama

356

 149 5

37
W. Bush

296

 149 2

27
Clinton

256

 196 4

28
HW Bush

243

 144 1

30
Source: Center for Presidential Transition

* Excludes non-civilian & judiciary positions   

   As of mid-July, of first year

A prime example of the resulting gridlock is the unprecedented existence of the lack of a quorum of commissioners at the Federal Energy Regulatory Commission.

FERC, among other things, regulates the transmission and wholesale sales of electricity and natural gas in interstate commerce, and regulates the transportation of oil by pipeline in interstate commerce. FERC also reviews all proposals to site, construct and operate natural gas pipelines, storage and LNG terminals, and issues licenses to non-federal hydropower projects.

The agency is composed of up to five commissioners who are appointed by the President and confirmed by the Senate. The President appoints one of them to be the chairman and no more than three commissioners may be from the same party.

FERC employs extensive technical and environmental expertise and has developed a deep body of energy regulatory jurisprudence. As a result, it’s uniquely positioned to oversee the implementation of energy policy and review and permit new energy infrastructure

Three commissioners (a “quorum”) must be seated for FERC to meet and issue major decisions. While there is some limited ability for certain matters to be delegated for handling by FERC staff, the significant issues must wait until a quorum is re-established.

Despite the importance of FERC in implementing many of the energy, environment, commerce, and infrastructure related policies of the new administration, the agency has been hamstrung for the past six months.

The quorum was lost in February after then chairman, Norman Bay, a democrat appointed by President Obama, resigned. A few months later, another of the two remaining commissioners left FERC.  The last remaining commissioner, acting chairman, Cheryl LaFleur, has vowed to continue through her term and has been performing yeoman’s work keeping FERC functioning during these difficult circumstances.

The impacts from the lack of a quorum are real and acute. According to a recent report by Bloomberg, more than $50 billion in energy projects are awaiting FERC action. The Interstate Natural Gas Association of American stated that at least one dozen interstate natural gas pipeline projects amounting to $14 billion in total costs are bottlenecked. In addition, critical policy issues such as those related to electricity market restructuring reforms cannot be fully addressed.

Help is on the way, but it’s as if its taking the New York subway to get here…fits and stops and no guarantee when it might arrive. President Trump has nominated three Republicans and is soon expected to nominate a Democrat appointee. Two of the Republicans have completed their confirmation hearings, but have yet to receive a Senate vote of approval.

Our dysfunctional government has reached a critical level. Gridlock and delays threaten the nation’s path to energy security, economic growth, job creation, infrastructure investment, and environmental progress. Six months was more than enough time for the president to nominate and the Senate to confirm the FERC commissioner appointments.

There is no reasonable excuse not to restore the quorum at FERC before the summer recess. All that is asked is for the Senate and the administration to do its job so that the American people can do their jobs.

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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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The “LNG Fix” Becomes Law

6 Aug

The federal government’s bureaucratic and sometimes Byzantine procedures for enacting new laws can achieve the proper results. It may not be pretty or swift, but it does work.

Case in point. In the closing days of July, immediately before an existing deadline, both houses of Congress passed and President Obama signed another stopgap highway bill (H.R. 3236) that extended funding for much need highway and transportation projects through October 29th.

Included in H.R. 3236 was an obscure revenue provision equalizing excise tax rates for liquefied petroleum gas, liquefied natural gas (“LNG”), and compressed natural gas—the so-called “LNG fix.”

The LNG fix provision, buried among a host of other disparate add-ons, was the culmination of years of effort by the natural gas vehicle industry to eliminate the unfair disadvantage of taxing LNG used as a vehicle fuel. This anomaly placed a significant financial burden on high horsepower vehicle operators (especially long-haul truckers) switching from diesel to LNG.

During the last five years, driven by tighter emission standards and the enormous volumes and lower prices for natural gas produced by hydraulic fracturing, both compressed natural gas (“CNG”) and LNG have made tremendous strides in penetrating the high horsepower engine fuels market. Because LNG burns cleaner, is lower in cost compared to petroleum alternatives, and now reliably produced domestically, it has become an attractive fuel for heavy-duty tucks, rail locomotives, and maritime vessels.

Traditionally, the federal excise tax on liquid fuels is assessed on a “cents per gallon” basis. The federal excise tax for both LNG and diesel is 24.3 cents per gallon. The federal excise tax on CNG is 18.3 cents per energy equivalent of a gallon of gasoline.

Unfortunately, the simplicity of a straight “cents per gallon” tax methodology creates a problem when the energy content of the alternative fuel is significantly different. The fuel containing less energy per gallon is disadvantaged because a greater volume must be used to get the same amount of energy output.

Specifically, LNG has an energy content of about 74,700 Btu per gallon while diesel’s is about 128,700 Btu per gallon. In order to get the same energy output, you use more gallons of LNG in comparison to diesel, hence you pay more in federal excise taxes. For LNG, it means effectively paying what amounts to 41.3 cents per gallon of LNG or nearly 70% more than diesel.

Similarly, propane produces only 72% of the energy output of gasoline, but is taxed at the same 18.3 cents per gallon rate.

The new “LNG fix” tax rate will become effective on January 1, 2016. By taxing the fuels based on an energy equivalent rather than a pure volumetric basis, tax parity is achieved. This then allows both LNG and diesel to be taxed at the same 24.3 cents per gallon, but it’s a diesel gallon equivalent (“DGE”). In other words, the cents per a gallon having the energy equivalent of a gallon of diesel.

The cost difference is not inconsequential. For an LNG fueled truck travelling 100,000 miles each year using 20,000 DGE, the annual fuel tax under the existing code is $8,262. Under the new energy equivalent tax code, the operator will pay $4,860 annually or $3,402 less per year.

As our country takes steps to reduce air emissions from road vehicles, locomotives, and marine vessels and realize the economic advantages of our lower cost, reliable, domestically produced fuels, building tax parity among fuel alternatives is the right thing to do. This change in the tax code doesn’t ensure that LNG will replace petroleum based liquid fuel, it simply levels the playing field.

It also proves that despite what may be a convoluted legislative process, persistence and reason can sometimes overcome Washington’s political partisanship and gridlock to deliver beneficial results for all of us. We will all benefit from the “LNG fix” for years to come.

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Beyond commodity prices –the story on midstream oil & gas opportunities in 2015

26 Jan

The January 22, 2015 edition of “Oil & Gas Monitor” contains the full version of this post. I urge you to view it at: http://www.oilgasmonitor.com/beyond-commodity-prices-the-story-on-midstream-oil-gas-opportunities-in-2015/8483/

The latest news covering the oil and gas market for 2015 focuses almost entirely on the detrimental effects of low prices on exploration and production, making it easy to miss the bigger picture. Just as the fluctuations of the stock market do not reflect the entire state of the US economy, commodity oil and natural gas prices do not tell the whole story of our industry. Even in the face of a 50% drop in the price of a barrel of oil, and a reduction in natural gas prices, opportunities still abound for investment, especially in the midstream segment.

Even in light of the plunge in oil prices and cuts in upstream investments, the U.S. Energy Information Agency expects oil and gas production to continue to hold steady and may even potentially rise in 2015.

In order for the producers to monetize their reserves, the production must be moved to market. Designing, permitting, and constructing these facilities is challenging and the ability to deliver the planned projects safely, on time, and on budget, is a key requirement. Speed to market for these gathering, processing, and pipeline companies is essential.

Companies with the experience and know how to develop and implement strategies for delivering these projects, from inception, permitting, and construction, will be in demand. Whether it’s knowing how to traverse a wetland, culturally significant geography, remediating existing brownfields, or employing the best sustainable development practices for the project, employing firms with the proper knowledge and technical capabilities needed to deliver under difficult conditions is essential.

We don’t lack for oil and gas sector investment opportunities, and success will follow those companies who can muster the understanding, skill, and experience needed to capitalize on these challenges.

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Meet the Future – Methane Hydrate

17 Mar
Untitled

Flame over methane hydrate and its clathrate crystal structure.
(Source: United States Geological Survey)

If you’ve been involved in the energy sector for as long as me, you’ve undoubtedly heard endless speculation and debate over the direction of our energy future. Specifically, what energy source is capable of succeeding coal, oil, and natural gas? Most often, this discussion is framed as,”How will we displace our use of carbon-based supplies?”

But, have you ever stopped to think about what the energy future would look like if, rather than barreling off the downslope of Hubert’s Peak, we discovered how to commercially tap a vast new source of the cleanest of hydrocarbons–methane? And, what if that new supply of natural gas had nothing to do with hydrofracturing? Then what?

That’s the question more people may soon be asking if ongoing research results in more reports, such as the one this week from Japan. Methane hydrate, which can be found just under the earth’s surface throughout much of the world, is that exciting new energy source.

Methane hydrate is a naturally occurring chemical compound in which molecules of methane (natural gas) are embedded within ice, forming “clathrate.” A precise combination of temperature and pressure must exist for the unstable hydrate to form. As a result, it is extremely difficult to capture the methane before the hydrate dissociates into water and natural gas.

Although the compound is sensitive to temperature and pressure conditions, methane hydrate has been found throughout the world both on land, particularly in the arctic, and beneath the sea. Areas where the continental shelves transition to the deep ocean appear to provide favorable conditions for methane hydrate formation.

Scientists and engineers worldwide are diligently working to provide us with the keys to unlocking this new source of natural gas. In fact, over a decade ago, the U.S. government passed into law the “Methane Hydrate Research and Development Act of 2000.”

The Department of Energy (“DOE”) leads the R&D programs and coordinates an alphabet soup of federal agencies and departments including, the BLM, BOEMRE, NOAA, NRL, NSF, and USGS researching methane hydrate. DOE is tasked with expanding our understanding of methane hydrate so that ultimately it may be developed as a viable energy resource.

Other countries including Canada, China, Japan, Norway, and South Korea as well as academic institutions and private companies, including such energy giants as BP, ConocoPhillips, ExxonMobil, have hydrate research projects underway. Following Fukushima, Japan with relatively few domestic energy resources, is especially keen to discover how to harvest methane hydrate.

As with most any fundamental research, from an outsider’s perspective, progress appears to move at glacial speed. However, such broad-based interest and allocation of resources doesn’t materialize unless there is significant potential for a major breakthrough in technology. When the understanding of methane hydrate progresses to the commercial development stage, it will usher in an energy revolution greater than the current “fracking revolution.”

Consider the potential impact of methane hydrate as an energy source. The U.S. MMS (now part of the BOEMRE) estimated that there is somewhere between 11,000 and 34,000 trillion cubic feet (“Tcf”) of methane hydrate under the continental shelf in the northern Gulf of Mexico. About 6,700 Tcf of that may be commercially viable to extract. (from DOE/NETL publication, “Energy Resource Potential of Methane Hydrate”)  According to the Potential Gas Committee, the total U.S. natural gas resource base, not counting methane hydrate, is slightly over 2,000 Tcf…enough to meet our needs for the remainder of this century.

Assuming a typical recovery rate of about thirty percent of that 6,700 Tcf quantity, the U.S. could double its total natural gas resource base with methane hydrate from the Gulf of Mexico alone. In other words, the U.S. would have enough natural gas to satisfy demand at existing levels during this century and most of the next.

Clearly, we are a long way from being able to commercially produce substantial quantities of natural gas from methane hydrate. There is much we don’t know about the compound and technical challenges to safely and responsibly produce it are considerable. But, as the news from Japan indicates, progress continues to be made.

To some, such as 350.org, the prospect of massive new supplies of natural gas is the death knell for reducing man-made global CO2 emissions. Nothing is more frightening. But, I tend to believe just the opposite. It may be the world’s best prospect for reducing global CO2 levels.

Scientists tell us that reducing CO2 emissions in the developed countries isn’t the key to lowering GHG levels worldwide. The focus must be on developing countries. Absent economically viable alternatives to coal and petroleum fuels, these countries will follow the historic path of the developed nations by using the cheapest, most readily available energy sources. There must be suitable substitutes for coal and petroleum.

Wind and solar are intermittent and exorbitantly expensive in the context of developing markets, therefore cannot be deemed viable substitutes. Nuclear is a good base load energy source, but initial capital expenses for its development price it out of the reach of most developing nations.

Like it or not, natural gas is the only abundant, reasonably priced alternative that can compete with cheap coal. By emitting less than half of the CO2 of conventional coal, developing regions using more natural gas results in a viable way forward for those concerned about climate change.

We are not yet capable of tapping the potential of methane hydrate, but just as the decades long scientific and technological research that brought about hydraulic fracturing and horizontal drilling, the basic research on this exciting new frontier presses ahead. Glimpses of the energy future appear to reveal even more natural gas.

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2012 – Another Trip Around the Sun

31 Dec

New Year

The year-end is traditionally the time to spend both looking back and thinking about the future. I’m no different than most. I find myself doing much the same, sans resolutions.

I began my adventure into the blogosphere this year, writing about energy issues. So, I’m compelled to close out 2012 with a post listing some of the year’s most significant developments along with a few forward looking comments. No particular order, just some random thoughts over a seasonal glass of eggnog.

Without a doubt, the expanding application of horizontal drilling and hydraulic fracturing unlocking our vast shale reserves was the single most important event of the year and will continue to be so in the foreseeable future. Next year, look for Monterey shale to be added to our lexicon along side Bakken, Eagle Ford, and Marcellus shale. Farewell to the notion of Hubbard’s Peak, LNG imports, and any Oscars for “Promised Land.”

Politics seemed to overshadow virtually everything this year, including energy. Thankfully, we all survived the Presidential silly season. Neither candidate offered much new with respect to energy policy or ideas for the next four years. We’ll likely continue to do much the same…blunder along with a purported strategy of, “all of the above,” and an unhelpful dose of regulatory intrigue and interference.

In the competition to fuel power generation in 2012, coal was displaced in ever increasing proportions by lower priced natural gas. In addition to market forces, newly proposed regulations by this administration and the environmental lobby’s “war on coal” took a toll on King Coal.

Emissions of CO2 in the United States fell this year to levels not seen since 1992. Much of this drop is directly attributable to the increased use of cleaner burning natural gas in power generation as well as depressed economic activity leading to lower energy demand.

In 2012, Keystone XL was the first oil pipeline to become a household name. After years of intensive regulatory review and on the eve of final State Department approval of the Canadian border crossing, the administration took the bold political move to further study it. The southern leg was subsequently approved while the Chinese entered preliminary agreements with Canada to buy the Alberta produced oil instead. A Pyrrhic victory at best for environmentalists with an economics lesson that oil is a global commodity that will flow to willing buyers.

Intermittent renewable wind projects once again teeter on the brink of intermittent profitability with the looming loss of the Production Tax Credit. Even if the wind subsidies are eventually reinstated, 2013 looks to be a difficult year for wind promoters because of the uncertain political landscape.

Oddly enough, shortly after nixing leases to explore for oil and gas in the Atlantic Outer Continental Shelf (“OCS”), the administration made plans for an OCS renewable energy lease sale (primarily for offshore wind that is even more expensive than onshore). Talk about a party that no one attends.

It’s not inconceivable that if we fall off the fiscal cliff tomorrow, less federal money flowing to the states in 2013 could prompt state legislators to reconsider all measures impacting their state’s economy. The high cost of renewable energy mandates may well lead some states to some repeal their REM’s.

A DOE sponsored study by independent consultant, NERA Economic Consulting, was released this month. In examining the economic impacts of U.S. exports of liquefied natural gas (“LNG”), it found that some increases in the price of domestic natural gas will occur, but there will be net economic benefits from allowing LNG exports. There are 15 pending applications seeking a license from DOE to export LNG to non-FTA countries. While DOE now has an independent analysis of the impacts, the question remains, “what is this administration’s position on exporting LNG?” Stay tuned.

Internationally, Japan is once again looking to restart its nuclear power generation. All nuclear power generation in Japan was shut down following the Fukushima incident, forcing Japanese utilities to rely primarily on power produced from imported LNG. As expected, the cost of LNG in Japan has skyrocketed forcing the new government to reconsider the nuclear ban. I trust this event is in the risk register of those looking to export LNG from the U.S.

The Chinese were successful in buying into the North American oil and gas industry this year. The Canadian government approved Chinese National Offshore Oil Company’s (“CNOOC”) purchase of Calgary-based petroleum company, Nexen, for $15 Billion. In 2005, CNOOC attempted an $18.5 Billion purchase of Unocal, but political tensions over China-U.S. trade relations ended that deal.

Finally, recent reports indicate the western hemisphere’s most notorious dictator, Venezuela’s Hugo Chavez, is suffering from complications after cancer surgery in Cuba. His condition is described as “delicate.” When Mr. Chavez no longer rules Venezuela, there will be a scramble to control Venezuela’s petroleum resources. The country is estimated to have oil reserves that exceed Saudi Arabia’s. In addition, Venezuela delivers approximately 9 million Bbls of crude oil per day to the U.S. making it our fourth largest crude oil supplier. This situation is definitely a vital strategic interest for the U.S.

While there are numerous other significant events in energy not listed here, this is only a mere blog post. Besides, I’ve finished my eggnog and there’s New Year’s Eve celebrating yet to do.

For those of you who have followed my blog this inaugural year…a big THANK YOU!  To everyone else, I hope you find it worth your time to visit throughout the coming year.

Happy New Year!  May it be a healthy, fulfilling, and prosperous one.

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Mr. President…Congratulations! You’ll need more energy this term.

10 Nov

 

Congratulations Mr. President. You pulled off an incredible election win, defying the pundits and earning another four years in the White House.

Let’s face it though, your election win is historic because it was the most money ever spent to maintain the status quo. The operation of the Constitution through the Electoral College gives the appearance of an impressive victory, but the popular vote belies that result. You weren’t handed a mandate and you face virtually the same hopelessly deadlocked Congress. Wall Street isn’t exuberant either.

Nevertheless, savor the moment. But, you’ll need to keep the victory lap short.

Clearly, your most pressing agenda item is the dreaded “fiscal cliff.” You’ll likely be spending a good deal of time ensuring that our financial problems don’t morph into another Greek-style economic crisis. Along the way, you’ll probably attempt to implement some spending cuts and tax reforms, tweak Obama care, face down the Iranians, strike a few more al-Qaeda, and keep China and Russia in check . If you stop to think about it, the global financial collapsed you faced on your first day on the job back in January 2009, looks like just another day at the office.

So where can you boost the energy level, build a few bi-partisan bridges, and increase the prospects for a successful encore term? Try energy. No, not one of those caffeinated drinks so popular with the millennials. (By the way, don’t let Sasha or Malia get a taste for those.) Real energy.

OK, energy wasn’t your strong suit during the first term. You promised to stop the rise in sea level, create a green economy,  implement Cap and Trade, support carbon-free technologies, promote clean coal, unleash the hounds of enforcement at EPA, and promote zero emission electric vehicles.

What you ended up with was spending a few billion dollars on Solyndra, EnerOne, Tesla Motors, et. al., a green job drain to countries such as China and Sweden, Cap and Trade buried by the economy and Congress, threats to bankrupt new coal-fired power plants, about 10,000 Chevy Volts sold, the BP blowout, and a few million homeless residents living without power on the New Jersey and New York shoreline. But that one doesn’t count because it was caused by an errant hurricane, not an anthropogenic rise in sea level.

Yet, believe it or not, energy could be a bright spot this time around. Take advantage of what’s happening in the sector and reach across the isle. I’ll bet that you’ll find more than a few hands extended to you. While you don’t have the budget or political clout to inaugurate grand programs, you can achieve some near-term wins and lay the foundation for realistic future advances. Besides, working families and businesses will thank you for keeping their utility bills and gasoline budget in check.

What’s behind this vision? For starters, domestic oil and gas production has rebounded as a result of hydraulic fracturing. There is a real prospect to import less foreign oil as a result. Jobs of all kind are being created to support the boom in domestic production. The new supplies have driven down the price for natural gas spurring private sector investment in more affordable alternatives to diesel and gasoline. Finally, because it’s displacing coal in power generation, cleaner burning natural gas is reducing the country’s Green House Gas (“GHG”) emissions despite the defeat of Cap and Trade.

So, what should the second Obama Administration do to capitalize on this situation? The fiscal cliff, stubbornly high unemployment, and anemic GDP are casting dark clouds over every aspect of this term. Energy is no exception. Just remember three simple words: Plentiful, Affordable, Reliable.

Start by recognizing that now is not the time to press Congress for climate change programs, a new carbon tax, Cap and Trade, or spending on green washed programs of any type. You need not abandon your long-term desire heal the planet, but the first order of business is to heal the economy. Besides, you have breathing room on GHG emissions since they are currently headed in the right direction, even though it’s for all the wrong reasons. Don’t ever forget that working families and businesses are paying for those GHG reductions with job losses and budget cuts.

Continue exploiting natural gas. It’s creating more jobs than any other business sector, bringing down the cost of heat and light, providing a sustainable competitive advantage to domestic chemical and fertilizer producers, driving private sector investment as an alternative vehicle fuel, and is the most effective means of implementing real progress on reducing CO2 emissions today.

Develop domestic oil. Just as with natural gas, hydraulic fracturing in oil production could yield massive changes in how we meet our demand for oil. Other technological advances promise to unleash vast quantities of shale oil that some estimates place at nearly 5 times greater than the reserves of Saudi Arabia. Don’t deny the country the benefits of access to our domestic resources by limiting exploration and production to private lands.  Pursuing your “all of the above” strategy should include “all that’s below.”

Stop unnecessary regulatory initiatives that create duplicative, burdensome barriers to growth. To be sure, government regulations are needed to protect public health, safety, and the environment. With the advances in extractive technologies such as hydraulic fracturing and shale oil recovery, regulations must evolve to be effective. Since many oil and gas industry accidents are low probability, high impact events, the industry is subject to the most comprehensive regulation and oversight imaginable. These are oftentimes administered at both the federal and state level. That’s why intelligent regulation, not simply more red tape should be the rule.

Obviously, these changes in our energy supply picture will provide significant national security advantages at a time when the global neighborhood isn’t becoming a friendlier place for the US. But energy independence is a political statement not a policy. Look, instead, to increasing our energy stability and security. Take a North American rather than a parochial US view of our national energy security.

Canadian oil is as secure as our own production and we should do our best to ensure that our neighbor prefers doing business with us. Likewise, a North American view recognizes that the Eagle Ford shale formation in Texas doesn’t stop at the Rio Grande river. Similarly, Mexico shares the Gulf with us and they have yet to adequately develop their offshore resources. Rather than looking for ways to build a bigger fence, we should be working with Mexico to build their energy industry. If oil and gas production can create jobs and support the economies of the US, Canada, and Mexico, a fence may become superfluous.

Finally, promote the energy initiative that yields the biggest return on investment of any energy source or program – efficiency. Intelligent conservation and efficiency measures such as home insulation, white roofs, or efficient light bulbs aren’t exciting or attention grabbing, but yield immediate and sustainable results today. Besides, you can’t argue with the saying, “a gallon saved is a gallon not imported.”

The good news, Mr. President, is that you still have some very good energy options to pursue. Even in the face of our severe fiscal and economic challenges, energy can make inroads to economic recovery and national security. Take advantage of the plentiful, affordable, reliable energy supplies available today, champion intelligent regulation, and promote energy efficiency. While these may not be seen as significant legacy initiatives, sometimes leadership demands a steady hand and a workmanlike focus on the fundamentals. That’s exactly what this nation’s working families and businesses could use right now.

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No Energy Behind Empowering States

12 Oct

Legislation was introduced in the U.S. Senate last month entitled, “Empower States Act of 2012,” (S.3573) calling for the recognition of the states’ primacy in certain matters pertaining the management of hydraulic fracturing operations.

Introduced by Senator John Hoeven, R-N.D, and co-sponsored by Senator Lisa Murkowski, R-AK, the bill is intended to ensure a states-first approach to managing hydraulic fracturing operations and promote fair and effective regulation.

The bill was read and referred to the Committee on Environment and Public Works. In light of a Democratic Senate, it has no chance of becoming law.

The preamble recognizes that states, such as North Dakota that regulates oil and gas production, have comprehensive laws and regulations ensuring safe operations and protecting drinking water. Furthermore, the EPA already gives states that maintain regulations protecting human health and the environment the right to control hydraulic fracturing. So, why this bill?

Proponents of the bill, including the American Petroleum Institute, contend that it merely restates the authority of the states to regulate this drilling activity and provides “certain, effective, and fair” rules for hydraulic fracturing.

Those who oppose it claim the bill is intended to fence the EPA out of the oil patch by erecting barriers such as the submittal of a “statement of energy and economic impact” before enacting new regulations and directing that judicial review be done “de novo” with preference to district courts within the state or the District of Columbia.

These are the classic arguments in the debate of federalism. On the one hand, those closer to an activity are best able to regulate it. Alternatively, activities affecting the greater public interest are best overseen at the federal level.

I’m ambivalent regarding this legislation.  Clearly, I support increased domestic energy production undertaken in a responsible manner. Yet, I believe that the nature of energy production, along with similar activities such as infrastructure development, is characterized by broadly dispersed public benefits and localized impacts.

States with a history of supporting extractive energy production have developed a solid track record of regulation. There is little outright reason to fear that they will neglect or abuse laws protecting our health, safety, and the environment. Yet, energy is also a national issue affecting our economy and security. The Balkanization of energy matters, including this legislation, is not in our best interest.

Unfortunately, a solution lies somewhere in the middle. Currently, our greatest national deficiency is that we have no guiding energy policy. Worse yet, we don’t have a bipartisan political environment to effect one. As a result, Congress spends time and resources drafting legislation having virtually no chance of passage and neither adding to our energy supplies, nor protecting our health and environment. We must do better.

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