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.

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.

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.

Plentiful, Affordable, Reliable, but especially Reliable

29 Sep

Reliability is one of those things we don’t notice until it’s not there.

There was an interesting article published last week in The New York Times by James Glanz entitled, “The Cloud Factories: Power, Pollution and the Internet.” While the story line revolves around the vast amount of energy that modern data centers consume and the pollution associated with it, the story also highlights an issue most folks outside the industry do not  usually think about.

We turn on a light, switch on the stove burner, or jump on the internet and expect it to work. Service is there, 24/7, without fail — usually.

Our energy delivery systems, especially the electric grid, are designed and operated to be highly reliable. The electric grid is designed and operated to ensure system integrity. Ancillary services spread throughout the generation, transmission, and distribution systems keep it up and running nearly without fail. But, when it does fail, it’s a newsworthy event.

One of the tools used to provide this flawless delivery is reserve capability. The power grid is built with excess capacity over and above what the operators expect the maximum demand to be. (called “peak demand”) This backup capacity is used when a primary power source fails, or if demand exceeds the planners estimates of peak demand. It’s an effective “belt and suspenders” approach.

In the U.S., the electric transmission grid and wholesale sale of electricity in interstate commerce (sales that cross state borders) is regulated the Federal Energy Regulatory Commission (“FERC”). FERC, in turn, certified the North American Electric Reliability Corporation (“NERC”) to ensure the electric network’s reliability by developing and enforcing reliability standards and assessing the grid’s adequacy.

NERC divides the U.S power grid into 14 regions and makes reliability assessments three times each year. With the exception of Texas, every region has a positive reserve margin. That is, there is excess capacity in 13 of the 14 regions. Due to its operating and commercial structure, the Electric Reliability Council of Texas, (“ERCOT”) faces some unique challenges. As a result, ERCOT has experienced rolling brownouts and blackouts over parts of Texas during recent peak summer and winter periods.

The point of all this, however, is that the data centers examined in the NY Times article are not as unique as the author seemingly implies. Maintaining a high degree of reliability demands that redundant systems that sit idle a good deal of time be in place. Whether its Google, your bank, a hospital, or the power grid, standby capacity is essential if the system is going to operate without a hitch.

As our legislators and regulators develop new energy policies and make choices about how best to generate, transmit, and deliver plentiful and affordable electricity, reliability issues will be front and center. Studies by both industry and academic institutions have shown that if intermittent renewables (particularly wind and solar) become a significant portion of our electricity generation, it will increase the need for backup generation (especially natural gas) to provide the reserve margin.

Of course, reserve capacity that sits idle most of the time is expensive. The trade off between spending more money on reserve capacity and risking reliability is a judgement call. How much is enough? Just as important is the question of how to create incentives for investors to build such expensive, seldom used, but essential facilities. Certainly, there may be room for efficiency offsets, but as the NY Times article points out, infrastructure is needed to support these operations.

Whether it’s using the cloud for computing or smart grid technology to deliver our electricity, large scale infrastructure remains a necessity.  Just as with reliability, most of us will never notice it except when it’s not there.

Why not a “Lewis and Clark Project” for Energy?

19 Sep

It amazes me to hear people talk about “drill here, drill now, pay less” or support an “all of the above” energy strategy, yet when asked, “drill where to find what?”, the response is oftentimes a blank stare or a generic, “on federal lands.”

Many people would be surprised to know that regarding our “frontier” regions, those outside of the traditional oil and gas production areas of the Gulf of Mexico, southern offshore California, and onshore continental US, we have precious little actual geological and seismic data to precisely estimate the extent of our resource base.

Although, the U.S. Geological Survey, a scientific bureau within the United States Department of Interior, does a remarkable job assessing domestic energy resources, much of its analysis and assessment is based upon scant, decades old data that possesses a high degree of uncertainty.

The complicated scheme of describing our estimated resource base combines statistical assessment, technological capability, and the economics of production only to baffle the public and confuse government officials tasked to divine an energy strategy.

If we are going to make sound decisions about our energy future, we sorely need credible, scientifically reliable data about the country’s resource base. The data gathering should not only include oil & gas, but also coal, uranium, water, wind, and geothermal resources.

That’s why Governor Romney’s proposal to conduct a comprehensive survey of America’s energy reserves makes so much sense. It should be promoted as a “Lewis and Clark Project” to gather much needed technical information about what lies beneath our onshore and offshore property.

In the closing days of the 18th century, Napoleon Bonaparte began maneuvering to restore France’s territories in North America. By late 1802, Spain transferred its territory west of the Mississippi along with the shipping rights through New Orleans back to France. American access to the port’s warehouses became a critical commercial issue for the United States.

In 1803, President Thomas Jefferson dispatched Secretary of State, James Madison, to join U.S. Minister to France, Robert Livingston, in negotiations to purchase New Orleans along with all or part of Florida.  Their ultimate objective was to secure U.S. rights to access the Mississippi River and the port. They were authorized $10 million for the purchase.

As conditions changed and war with the British appeared likely, Napoleon reconsidered France’s place on the continent.  When Madison arrived in France in April, 1803,  the deal the French presented was for the sale of all of Louisiana – 827,000 squares miles, twice the area of the U.S.  Although taken aback, by April 30th, Madison and Livingston reached an agreement to purchase the Louisiana territory, including New Orleans, for $15 million — well in excess of the initial authorization.

The official announcement of the Louisiana purchase was made in Washington on July 4, 1803. The Senate ratified the treaty sale on October 20th and the U.S. took formal possession of the territory in December, 1803.

What is most fascinating, however, is the fact that in January, 1803, before he even knew how the French would react to Madison’s misson, Jefferson was preparing for the future. In a confidential letter to Congress, dated January 18, 1803, Jefferson requested an appropriation of funds for the exploration of the continent “for the purpose of extending the external commerce of the United States” and to “incidentally advance the geographical knowledge of our own continent.” That letter secured $2,500 from Congress to cover the costs of the venture we now know as the, “Lewis & Clark Expedition.”

Modern parallels can be drawn between the Lewis & Clark Expedition and our current need to survey our energy resources today. As in the early 1800’s, we have a notional understanding of our frontier regions. We are in the early stages of assessing those resources, especially regarding federal offshore properties. Development and production in most of these regions is many years, if not decades, away. However, paraphrasing Mr. Jefferson’s letter to Congress, today we must “advance the geologic knowledge of our own continent.”

A “Lewis and Clark Project” managed by the USGS to evaluate our nation’s energy resources is long over due.  If we are going to address our energy situation and craft a rational energy policy, we need to have reliable information about our options. This includes credible data about our energy resource base: oil, gas, coal, uranium, geothermal, water, and wind. Putting off this important survey program will not only delay our ability to access these resources when we need them, but also drive up the cost because the risks associated with investments made on highly uncertain assessments is greater than those made on high quality assessments. Likewise, revenues to the government generated from bids on federal production leases would likely be higher if bidders had better knowledge about what the lease may contain.

The “Lewis and Clark Project” may also assist in determining where we should not proceed with energy development. For example, a National Marine Sanctuary System with 14 established sanctuaries exists today. Geologic and seismic data collection from “Lewis and Clark” could be coordinated in partnership with ongoing NOAA activities surveying met ocean and benthic environments to identify highly sensitive areas or support protective zones to avoid or mitigate impacts from possible future development activities. Understanding where and how to develop resources is as important as knowing what lies below the surface.

An initiative such as the “Lewis and Clark Project” should be something everyone can agree to support. This country faces tremendous challenges in deciding how to pursue energy development. A rational, well conceived energy policy is long over due. Adding to our knowledge in order to guide sound policy decisions should be a bipartisan priority.

Energize the Presidential Campaign

28 Aug

It’s late-August and we’ve entered two weeks of national party conventions with no hope of redemption from presidential politics during the next 70 days. Both sides are desperately trying to define the other through massive expenditures on attack ads, legions of surrogates, and talking heads spouting profundities regarding the other candidate’s treatment of a family pet or use of marijuana back in high school.

Too bad that, “we the people,” know so few details of either candidate’s proposals to lead us through the next four years. This is especially true regarding energy. Granted, this past week has seen both Messrs. Obama and Romney offer some time on the stump to energy, but neither has articulated a well-defined proposal for a national energy policy.

Energy affects every aspect of our lives. Plentiful, affordable, reliable energy supplies are fundamental for a healthy, growing economy, job creation, mobility, and national security. If combined with intelligent, cost-effective efficiency standards and innovative, long-term policies promoting private investment in new energy infrastructure and research, we could find ourselves on the path to real energy security.

The energy proposals of both campaigns, however, are discouraging. President Obama, not surprisingly, combines the issue under the banner of “Energy and Environment.” Governor Romney offers a more focused series of energy proposals under three broad categories: “Regulatory Reform,” “Increasing Production,” and “Research and Development.”

President Obama’s position is a series of grand, sweeping remarks about clean energy, clean jobs, and the, “All of the Above” energy strategy. More lines of text are devoted to environmental protection, including something called, “America’s Great Outdoors,” than to energy.  The positions are underscored with a pronouncement to, “make sure we never have to choose between protecting our environment and strengthening our economy.”

Governor Romney highlights his energy initiatives in 14 succinct bullets. They range from reducing regulatory delays, expanding resource production on federal property, to funding long-term energy research. It’s a fairly good smattering of short-term strategies until he succumbs to political temptation and includes the hackneyed slogan “energy independence” by 2020.

As a result, both candidates offer little more than poll tested, political positions reflecting the will of their respective base. Neither side has posited a serious, clear-eyed vision of an effective national energy policy. Sadly, a vote for either candidate is simply going to ensure the status quo.

The nature of our energy challenges dictate that the policy be bold, well reasoned, and long-term in perspective. In other words, no politically expedient, short-term gimmicks.

Energy is a complex topic. There are no quick and easy fixes. “Drill baby drill,” “all of the above,” or “energy independence” are politically charged chants that don’t begin scratch the surface of the energy enigma. Sadly too, the political arena is probably the worst place to attempt to craft effective, long-term solutions.

Energy is international in scope. All nations, to varying degree, are interdependent. Whether it’s in the form of liquid petroleum products, natural gas, coal, uranium, renewables, or electric power, energy is fundamental to every nation’s existence and capability to thrive. In one form or another, energy is bought, sold, or traded in open international markets every day.

Considering our country’s energy demand, its supplies, and all of the economic, physical, and self imposed restrictions associated with them, we can only aspire to energy “stability” or “security.” Absent the introduction of a disruptive technology, we cannot truly be “independent.”

Our energy policy must support the economic and security interests of the nation. It must be an unambiguous, broadly inclusive, high-level pronouncement to guide, not prescribe, how we meet our energy needs.

It must be based upon clear, scientific logic and the application of sound engineering principles. While many technologies may be possible, only those that are operationally and financially sustainable and can deliver the desired results will ultimately be accepted in the market. Intermittent renewables certainly have their place, but are in no way substitutes for our existing carbon and nuclear fueled technologies used to meet base load demand.

The massive scale of energy dictates long planning and utilization timeframes. Whether it is the liquid fuels providing our mobility, solid and gaseous energy supplies for heat and power generation, or the infrastructure to deliver them all, decisions made today will be with us well into the latter half of this century.

Finally, it must recognize that there is absolutely nothing in this world that is risk free. Choices and trade offs are inevitable. Rational, fact-based decisions of policy makers supported by the analysis of subject matter experts is required.

It’s likely too late in the silly season to expect that either presidential campaign would embrace this reality. Even more unlikely that the political hacks would allow them to publicly admit it. But, wouldn’t it be refreshing if they did? That would energize the electorate this year!

The case for a National Energy Policy

4 May

To remove any and all doubt of the urgent need for a rational energy policy, watch this clip.

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Enough said.