NYC metro area could be the global energy showcase

My heartfelt thoughts go out to everyone in the path of Sandy.  The devastation is beyond compare and greater in areal extent than predicted.  All of the state and local agencies reacted quickly and with greater depth than anyone could have imagined.  Special thanks go out to all of the rescuers, firemen, police, individuals, families, and others too numerous to recount here.  And special praises to out to the orderliness of everyone concerned.  This is how Americans behave under adversity – exemplary. 

The next phase is finding shelter for all of these displaced people.  Families are the obvious go-to places.  Hotels will be the next go-to places.  But after that, where do people turn – families out of the metro area?  What about their jobs?  The next several weeks will be spent clearing streets of debris, pumping water out of all kinds of subway stops, commercial buildings basements, homes, etc., fixing all kinds of communications and restoring movement into and out of the metro area.  Then months and years will be spent on rebuilding homes, repairing all sorts of buildings and rebuilding the shore.

Out of all of this chaos is an opportunity to replace the old infrastructure with new infrastructure and new city plans and designs.  The East Coast has been reliant on heating oil for over a hundred years.  Now there is an opportunity to lay new natural gas lines, install solar panels on all of the new homes and buildings that will be built, install LED street lights, rebuild the communications and roads for more efficient and faster service.  Believing in human achievement and if politics can be laid aside, the metro area could become an energy efficient showcase for the world.

Energy efficient ideas:

• New natural gas lines – the natural gas utilities for the NYC/NJ/PA/Maryland and Delaware could redesign routes or establish main lines that weren’t there previously.  This would provide fuel-switching capabilities for consumers.
• New furnaces - the states and utilities should encourage the installation of the highest possible efficiency furnaces rather than the cheapest, least efficient furnaces.  This would save on natural gas or oil consumption for heating and cooling.
• New energy monitoring equipment - Hotels and homes that need rebuilding should include some of the latest technologies that monitor home energy consumption.  This would save on electricity consumption.
• LED streetlights – these tend to be expensive until economies of scale begin to take place, the electricity savings here would be excellent for local towns and cities.
• New solar panel installation - states, utilities and local authorities should extend or introduce solar panel installation incentives for the new construction of residential and commercial buildings in the metro area.  There are too many incidences where local governments have too many rules on solar panel installation.  Now is the time to streamline this process.

These are but a few ideas that could be implemented.  This is the time to turn adversity into the future.

Kodiak Oil and Gas message to US

Tuesday night, Kodiak Oil & Gas Corp. reported fourth quarter 2011 and full year 2011 financial results.  It was not the results that interested me; it was what they said.  Kodiak, in a paragraph about future expectations, described our energy policy without calling out the foibles.

I quote from the financial statement, “During the past month the quoted prices for oil coming out of the Williston Basin on pipeline (typically quoted at Clearbrook, Minn. and Guernsey, Wyo.) were substantially less than prices quoted for West Texas Intermediate.  The increase in the differential was primarily the result of significant amounts of crude oil from Canada which was competing for capacity on existing pipeline infrastructure, the down-time associated with scheduled maintenance at refineries and the expanded volumes produced in North Dakota in late 2011 and early 2012 as weather conditions were mild. North Dakota is currently producing approximately 535,000 barrels of oil per day.”

First, they addressed a pipeline issue.  They received an oil price substantially lower than prices quoted for West Texas Intermediate (actually there are two points to address here).   The increase in the differential (WTI quoted price less the price quoted for oil coming out of the Williston basin on pipeline, adjusted for delivery point) was primarily the result of significant amounts of crude from Canada, which was competing for capacity on existing pipeline infrastructure.  With production continuing to increase in Canada from oil sands production and North Dakota shale oil production, there is a pipeline capacity shortage at the current time.  While the Keystone XL will not address the capacity issue today, ceteris paribus, it will tomorrow.  Clearly, we do not have enough pipelines configured to address the shortage in that part of the country.  The second point, is that WTI is quoted at Cushing, OK.  This is the delivery point and pricing point for WTI crude.  There are storage terminals there, but definitely not enough.  When the storage reaches capacity, there is no place to put the benchmark crude, so it is priced lower and redirected through the pipeline system.  This benchmark has been compared to and priced against Brent crude from the North Sea, further exacerbating the pricing of crude in the US and ancillary hedging.  This second differential is being addressed by reversing the flow of crude from Cushing, OK to another pipeline system, by building a spur.  The President and environmentalists are fighting this.

Second, the company addressed the downtime associated with scheduled maintenance at refineries.  While this is a normal, seasonal downtime maintenance (typically maintenance is done twice a year – the first is to switch the refinery’s ability to produce winter heating oil to summer gasoline; the second occurs in the fall to switch to winter heating oil from summer gasoline), it is a bit early due to the warm winter weather.  In September 2011, ConocoPhillips shut down its refinery in Trainer, PA and Sunoco’s Marcus Hook, PA refinery was shutdown in December 2011.  These refineries shutdowns have contributed to the some tightness in the refining market.  While the general public complains about gasoline prices, they don’t think twice about paying roughly the same price for a gallon of bottled water.  The number of jobs required to bring that gallon of gasoline to us is multiples that of jobs provided by bringing the water to us.  Yet, the general public does not fight to prevent a refinery shutdown.  Without the refineries, gasoline prices would be much higher.  We can not have a choice of no refineries and low gasoline prices.  The general public wants to close refineries in general.

Third, the expanded crude oil volumes from North Dakota to 535,000 barrels of crude oil production per day contributed to the lower quoted prices out of the Williston Basin.  Thanks to new and enhanced drilling techniques of horizontal drilling and hydrofracing, production of oil and natural gas has increased substantially in the US.  Reserves of both have been added as well.  For instance, natural gas reserves in the Lower 48 States have increased from 184,106 billion cubic feet in 2004 to 263,408 billion cubic feet in 2009, according to the EIA latest data.  That is a 43% increase in reserves in 5 years because of these technologies.  North Dakota’s oil production has increased from 98,000 barrels of crude oil per day in 2005 to 310,000 barrels per day in 2010 in a 5-year period, or an increase of 216%.  That further increased to 535,000 barrels per day by January 2012.  Yet, the general public and environmentalists want to stop these practices, along with the many high paying jobs.

What is clear to me, is that the US has no clear understanding of jobs, costs, substitutes, supply and demand of all aspects of energy.  Our government, as well as the EU, found that by putting into place oil sanctions against Iran with the hope of reducing oil revenues, Iran’s life blood, that, we would force them to the negotiating table.  So far this has not happened, instead crude oil prices have rising rapidly along with gasoline prices.  This type of diplomacy was ill conceived and is creating as much hurt to the US and EU citizens, an unintended consequence, as it is to the Iranians.  To add more incompetence to this diplomatic folly, is notion of releasing oil from the Strategic Petroleum Reserves (SPR).  This is bad politics and economics.  What if we released oil from the SPR during the summer driving season (seasonally the highest price of gasoline during the year) to reduce the price of gasoline going into elections, and then Iran did something crazy like attack Israel or sink ships in the Strait of Hormuz to bloc oil shipments?  We will have released oil for political purposes and not fundamental purposes. If the above scenario happenes, the price of gasoline will easily move above $5.00 per gallon.  Then what?  How was that 2% payroll tax savings used now?  

How would you feel if 2% of your future Social Security retirement savings went to OPEC?

Last week, our government extended the payroll tax cut until the end of the year, 2012.  The Senate approved the $143 billion measure on a 60-36 vote minutes after the House approved it in a 293-132 vote.  But we did not permit the Keystone XL pipeline to go forward.  You might ask how do the two relate. 

Social Security Payroll Tax Cut steals from the future to pay the present

While I am in favor of tax cuts, if spending is cut as well; I am not in favor of the Social Security Payroll tax cut.  This is the classic “Rob Peter to Pay Paul” trick, or “I will gladly pay you Thursday for a hamburger today.”  What makes this so thoughtless is that we are drawing down on a future savings/retirement program, which for many is their only source of retirement funds.  How this fund is to be repaid will not be painless – whether the corporations have to pay more, thereby reducing their profits and potential employment, or through payroll tax increases to offset the cuts, or some other creative accounting slight-of-hand measure the our esteemed colleagues in Congress can concoct.  In any event, let us go to the numbers.   They extended the 2 percentage point cut in the 6.2% Social Security payroll tax that would save around $80 monthly for someone earning $50,000 per year and give a maximum cut of $2,200 to high-end earners, which tops out at $106,000 per year. 

No Keystone XL pipeline – results in an increase in oil and gasoline prices

While approving the construction of the pipeline will not have a short-term impact on the price of gas at the pump, much like its predecessor pipeline from Alaska, the Keystone pipeline would secure a long-term source of non-OPEC crude products available to U.S. refineries.  Currently, global supply of crude remains tight, primarily due to political tensions in the Middle Eastern countries that are OPEC members.  All of this is taking place during a decrease in global demand for crude and its refined products. 

What has the gasoline price done since the payroll tax cut went into effect?

Since the payroll tax cut was implemented in January 2011, the Energy Information Administration (EIA), in its weekly U.S. All Grades Reformulated Retail Gasoline price database, reported that for the first week of January 2011, the average price was $3.201 per gallon.  By the last week of December 2011, the EIA reported that it was $3.413 per gallon.  By February 20, 2012, gasoline was $3.591 per gallon.  Since the payroll tax cut was enacted, gasoline is up $0.38 per gallon.    

And how does this affect the average driver?

According to the U.S. Department of Transportation (DOT) as of 2011, the average person drives 13,476 miles per year.  According to the Bureau of Labor Statistics (BLS), the average miles per gallon for a passenger vehicle is 27.5 mpg.  Dividing 27.5 mpg into 13,476 miles per year equals 490 gallons of gasoline purchased each year.  With gasoline prices up $0.38 per gallon, that translates to an additional $186 paid for gasoline per year.  Back to our $50,000 per year employee, he/she used two and one-half months of payroll tax savings to buy gasoline. Taking this one step further, if in 2011, 48% of crude oil demand is imported (before it is refined into gasoline), then $186 time 48%, or $90 (slightly more than one month’s of payroll tax savings) is being sent offshore.  Of that, approximately 44% of imported crude is from OPEC.  Approximately, $40 (44% of $90) of the 2011 gasoline price increase was paid to OPEC.  If prices go to $5.16 per gallon (not out of the relmn of possibilities), 100% of the payroll tax savings will have gone to the increase in the price of gasoline, with 18% of 100% going to OPEC. 

We are paying OPEC at the expense of our elders’ retirement plan.  Think about that.

This week representatives from countries around the world will be traveling to South Africa for the UN Summit on Climate Change.  This Summit begins on Monday, November 28 and continues through December 9.  I have several thoughts about climate change.

Climate Change – congratulations to the world for taking this on, despite the nature of the data.  Corporations around the world and individuals are making adjustments to their residential and commercial lives to reduce their carbon footprint.  Corporations and other entities are attaining positive results through a variety of means and technologies.  They are employing solar, wind, geothermal, better insulation, smarter architecture, energy efficient technology, etc. These costs are being born by them with various subsidies to encourage the adoption to the technology.  The education by these groups should be applauded.

However, I do not think that this should be mandated on an international basis.  Given the current financial and economic environment, this would be a costly endeavor.  Corporations and companies forced into reduced carbon emissions, would pass the costs onto the consumers, who can ill afford such pass-through costs at this time.

Environmental Protection Agency – again, congratulations to another environmental group.  The EPA should be basking in their glory for their efforts in changing the behavior of consumers and corporations in the US.   While the results are dated, smog levels around the country have dropped considerably because of fuel regulations on NOx and Sox reductions.  Rivers are significantly better.  Acid rain has been greatly reduced.  In fact, according to recent conversations that I have had with a farming coop, acid rain reduction has been so successful that the soil is now barren of sulfur.  Farmers must purchase sulfur and apply it with the fertilizers. 

However, they should not be constraining job growth by preventing the development of projects such as the Keystone XL oil pipeline, shale gas development with associated pipeline infrastructure or oil drilling.  The success of drilling shale gas, has been so successful that 6 years ago, we were importing 15 percent of our natural gas needs.  We had constructed LNG regas facilities along the coasts to import natural gas from Qatar and other Middle East countries.  Now, we are talking about building LNG trains to become an LNG exporter.  Who would have thought? All of this shale gas development has significantly dropped the price of natural gas that we have returned to one of the low- cost countries for natural gas.  Companies like Dow are talking about taking advantage of that cost benefit, by restarting one of their mothballed ethylene plants.  This will allow the US to bring back high paying chemical, fertilizer and petrochemical jobs that were lost when we were natural gas importers.  That will lead to more industry, more revenues and more taxes.  Many of the facilities are already built and can be brought back on line with minimal capex.  All of this has a job multiplier effect, adding support industry jobs.  Allowing us to develop these reserves provides us/US with cheaper energy, more jobs, more revenues (worth repeating), more taxes (again worth repeating), and more security (less revenues going to unfriendly countries).  This is a win-win for all of us/US.

Carbon Dioxide - lastly, DO NOT, I repeat DO NOT, all the trading companies and investment banks to trade carbon credits.  If you think that the banks and trading companies make too much money now, give them carbon credits to trade.  They will become rich beyond your wildest imagination and the government would lose out on one of the biggest paydays in history.  I propose that we allow the EPA to tax carbon dioxide emissions.  It could be pro-rated across the industries using a life-cycle apportionment.  This means that we do not shut the coal business down, because it is our greatest energy source and security of all the energy types (for now).  But the EPA would apportion some of the carbon tax to them – this would encourage the closing of high-sulfur mines, while keeping larger low-sulfur mines operating.  Utilities would then allocate capital resources across their electricity-generating portfolio and eventually close high-sulfur emitting coal-fired power plants.  While both of these industries would shed jobs, the revenues that the EPA take in from the carbon tax on emissions would be used for incentives to build low or no carbon emission, electricity generating capacity.  This should create more jobs than it eliminates.

Until next quatbtu.

Jobs, Jobs, Jobs – thar’s oil in them thar fields

The jobs are out there.  But you must be willing to go to them.  North Dakota is the place, but it is not where people normally think about.  It is cold, windy and flat, with little to no night life.  The jobs –  are working in the oil patch.  This is nothing new; as I drilled in there in the early to middle 1980s.  Back then we drilled vertical wells to 14,000 feet.  When we drilled into the Bakken and Three Forks and analyzed the formations with drill stem tests (a test the measures the oil productivity potential), it tested oil, but not at an economic rate to make it worth completing.  So, we left it behind pipe.  We all knew that at a higher price in the future, they would make nice wells.  

The future is here and now, not just because of the price, but because of the advent of technology.   Two technologies have advanced that make these formations economic – horizontal drilling and fracturing (I will come back to this in a future blog).  This has created a drilling boom and the need for all kinds of jobs – construction jobs of all kinds (residential, commercial, hotel, water tanks, oil tanks, pipeline, etc.), restaurant jobs, trucking jobs, small store jobs, waste removal jobs, mechanical jobs, etc.  The point here is that this industry, reviled by most of the nation, provides great paying jobs.  When an industry is allowed to grow, unintended consequences develop – good unintended consequences.  It does have negative unintended consequences too, like water use and waste disposal and inflation.  These are things that can be dealt with in time and with good planning.

In a previous blog, I mentioned the Keystone XL pipeline that could provide 20,000 jobs.  The complaint is that these jobs are transitory and poor for the environment.  While environmentalists are needed to make sure that the environment is not abused, practicality must be considered.  Environmentalists have become anti-job creators, but it must remembered that the job creators (energy companies) pay for their ability to be anti-job creators.  In both the Keystone XL and North Dakota cases, these jobs are well paying and will last for years.  Yes, the energy industry goes through boom and bust periods, but what industry does not.  In a recent StarTribue article, they reported that the state of North Dakota had an influx of 35,000 people willing to take those jobs listed above.  This boom started around 2005.  On the Job Service North Dakota website today, it listed an additional 17,454 job openings.  As a result of the two technologies mentioned above, oil production in North Dakota has increased from 45.424 million barrels per year in 1981 to 113.033 million barrels per year in 2010, according to the Energy Information Administration (see the EIA chart below). 

That oil production increase and oil price increase has resulted in a $1 billion state budget surplus for North Dakota.  That is worth repeating – a $1 billion state budget surplus.

WE NEED THIS TYPE OF ENERGY - STRONG JOBS AND A REDUCTION OF FOREIGN DEPENDENCE.