Hill+Knowlton Strategies

Last week we were reminded of the rare, but sometimes terrible consequences of working in remote places to secure energy supplies. In monitoring the situation unfolding in Algeria I was struck not only by the terrifying nature of the raid on the In Amenas facility, but also at the challenge of getting good information, by Governments, the firms involved and the media. Of course this is a very remote site, in the sands of the Sahara no less, so you would expect difficulties in getting reliable information. That said in these hyper-connected days the vacuum created by rolling news and live blogs on newspaper websites and Twitter was for an observer challenging. For those more closely involved it must have been intolerable.

In the weeks and months that follow BP, Statoil and Sonatrach together with their respective Governments and the wider industry will try to come up with a solution. There will no doubt be many suggestions though there was one thing that might help that occurred to me during a particular bulletin and that was the use of unmanned aerial vehicles.

Perhaps this has already been done by companies, but I suspect it hasn’t yet. I saw reports that the American military had used an unarmed UAV to monitor the situation at In Amenas. Of course the monitoring capabilities of these machines is vast with their specialist cameras. Their range is also extensive, their cost falling and the risks of using them very low. Will it really be that long before energy firms with remote assets start to deploy these machines?

It first struck me that it won’t be long before the media begin to use them. Watching rolling news over the last few days, there has been scant imagery showing events unfold. Only a few smartphone pictures ultimately made it to our screens. For families affected this must have been something of a blessing, but for bulletin editors used to having footage almost immediately of an event like this, it must have been a challenge. I really wouldn’t be surprised to see the first media drones (UAVs) circling above an unfolding story within a few years time.

So if the media look likely to invest to stay ahead of a developing story, I would also not be surprised to see companies investing in this technology in the coming years.

Of course the situation remains unclear still for some families and we hope and pray that there may still be some miraculous good news to come to those families who have had their lives thrown into turmoil.

You are very likely to know that the US has developed technologies which enable them to access natural gas reserves trapped in shale rock formations. This is known as the ’US shale gas revolution’, and its potential impacts on the global markets is causing great debate amongst many. 

 On the domestic front, net US imports of oil and gas will fall next year to their lowest level since 1987. By 2014, it is predicted that America will rely on the rest of the world to supply less than a third of crude, gas and other fuels (compared to nearly two-thirds in 2005). If these forecasts are correct, the US is moving towards a state of energy independence.  

 Furthermore, reduced US gas prices resulting from the surge in domestic gas supplies, may lead to an increase in US manufacturing, with many chemicals manufacturers for example, who were at one point leaving the US, intending to expand their US chemicals production and take advantage of the more favourable situation of (comparatively) cheaper gas.

 Aside from domestic implications, the US’s expansion into shale gas as one of the world’s largest economies and one of the great global energy importers arguably will have sturdier repercussions on the rest of the world.

 Take Canada for example. With 100 per cent of Canada’s current natural gas exports going to the US, and net natural gas exports to the US forecasted to contract by less than one-third of what Canada was exporting to the US as recently as 2007, Canada may have to begin to diversify its energy supplies, either by investing and developing in their own domestic markets, or by expanding abroad.

 Australia is another example of a country which has been dependent on gas exports to the US, and may need to begin to diversify its own markets. Given the geographic location of both countries, Asia is a market which both could look to expand in. However, the Australians may wait to see what Canada does, for if Canada did pursue more of a domestic energy policy, it would reduce competition for the Asian markets. Moreover, Australia could learn from Canada’s domestic energy expansion model and use it as their own.

In Europe, it is still unclear what the nature of its own shale gas opportunities look like, but if the ‘US Shale gas revolution’ was to spread across the pond, Russian markets, who export vast quantities of gas to Europe, could be affected as markets in the Middle East may be (regarding their exports to the US). 

A further point made about the Middle East by many, is that if the region is to become less economically vital to the US, then this begs the question what impacts this will have on the geopolitical importance of the region.

 What is clear, is that the US is far more advanced than its economic competitors in Europe, Russia and China, having developed the technologies to source shale reserves (which it continues to develop at a rapid rate). It will be interesting to see how the imminent use of shale gas will impact global markets.

There are plenty of signs as of late that the U.S. is reducing its dependence on foreign oil and creating a future as a natural gas exporter instead. Hawaii could be the most pronounced harbinger of that shift.

In a meeting of the Natural Gas Roundtable late last month, Jeffrey Kissel, president and CEO of Hawaii Gas, said he wants to bring liquefied natural gas from the mainland, incorporate more renewables onto the electric grid and wean the state off of expensive foreign oil that has plagued the state’s economy for decades.

Despite the utility’s name and its parent, the state is 90 percent dependent on imported foreign oil and spends $8.4 billion to import those 42.6 million barrels of petroleum annually, he said. Macquarie Group is Hawaii Gas’s parent company and the fourth largest gas marketer in the U.S.

“Our economy has paid a heavy price for the near total dependence on oil,” Kissel told the room full of energy analysts and other stakeholders. “Hawaii, without a diversified energy strategy, is just as vulnerable to an economic collapse as a stock portfolio invested in just a single security.”

Kissel’s comments come on the eve of the passing of long-time Senator Daniel Inouye, a champion of alternative energy for the state.

Inouye supported the state’s 2008 goal to generate 70 percent of its electric power from clean sources, including renewables by 2030.

The state’s administrator Ted Peck has said the state is on track to cut its emissions by half by 2020.

According to Hawaii Energy’s most recent (2011) report, the state’s energy conservation and efficiency program whose mission is to reduce the state’s use of imported oil, said the state burned 30,700 barrels a day to generate electricity during 2009.

This month, the Energy Information Administration said nationally, “our dependence on foreign petroleum has declined since peaking in 2005.”

In the early release of its Annual Energy Outlook 2013, the statistical arm of the Energy Department says it expects crude oil production technologies will increase domestic supply and that domestic crude production will grow 234 thousand barrels per day (bpd) through 2019 at which point production will reach 7.5 million bpd.

Using less oil and producing more is a positive step toward achieving the president’s goal of being less vulnerable to petroleum price spikes and OPEC supply decisions.

But the natural gas picture is equally as positive. Relatively low natural gas prices coupled with record levels of storage has left an enticing opportunity for U.S. producers to liquefy their gas for export to more lucrative markets like Asia and Europe.

Kissel said he wants some of that supply and endorses a national LNG policy that could help make that a reality.

Hawaii has no naturally occurring oil or gas; it imports all of its oil, and the state has two oil refineries near Honolulu that produce nearly 90 percent of the fuel used in the state for transportation and power generation.

Hawaii Gas produces its own methane in the form of synthetic natural gas, and it extracts propane which it distributes throughout the state.

Kissel said Hawaii Gas is ready for real natural gas.

“In the early part of the 20^th century, we made low btu town gas from ship’s bunker fuel, then diesel, and now SNG. As a result, we are culturally prepared to move to LNG now,” Kissel said.

Hawaii Gas has applied to open an import terminal “this year or next year,” with the Federal Energy Regulatory Commission, he added.

Kissel said Hawaii has gas distribution infrastructure on every island and in every major population center. So, LNG, “even on a small scale will provide immediate economic benefit to the community without having to wait for large scale construction projects to materialize in the current economic and litigious environment.”

Perhaps in several decades, the only oil Hawaii will be associated with will be Hawaiian Tropic.

As December approaches, I have the honour of getting excited about Xmas, as well as the infamous Vale Day.

Running the media element of the flagship Investor Relation day for Vale (CL), the second largest mining company in the world, in London I get to be part of a fantastic event held at the NYSE Euronext.

This year Murilo Ferreira (CEO) and Luciano Siani (CFO) made their first appearance in london in front of the media since their appointments. The media which included attendance from key newswires, nationals and trades were ecstatic at the opportunity of speaking with the Executive team which do not often travel to London.

On the back of the event, 23 significant pieces of coverage were secured mainly focused on the fluctuating price of iron ore. Murilo Ferreira suggests that  in 2013 “Prices will not change so much. We expect only minor movements”.

Below i have included a few pictures from the event.

I am already looking forward to Vale Day 2013! 

Vale Day 2012: Official picture at NYSE Euronext

Vale Day Press Conference

We’ve moved from Movember to December pretty quickly, but I thought it was worth sharing the highlights from Team Danger! High Voltache (that’s us in the London Energy and Industrials team)  as we embarked on some hair growing efforts in the name of promoting men’s health.

With two MoBrothers and many MoSisters we managed to raise £204 to support a good cause.

You can check out the highlights (with many a shameful photo) here.

Natural gas prices are the lowest they’ve been in decades.

This has presented an interesting opportunity for utilities and suppliers—long-term contracts.

The contracts would presumably keep prices stable for consumers, and they provide natural gas utilities, buying the commodity for electric generation, with a long-term customer at a fixed price, a price that would otherwise be lower and/or volatile in the spot market.

Against this backdrop, relatively low U.S. natural gas prices are enticing U.S. producers to liquefy their gas supply and export it to emerging markets where natural gas is selling at more than $14 mMbtu.

The Energy Department released its long-awaited report on December 5 on the impact natural gas exports will have on the U.S. market. DOE said at most U.S. natural gas prices would rise by about $1.09 per thousand cubic feet, and prices would peak at about 20 percent in 2020. The prospect of the rising U.S. natural gas price has not discouraged producers from the appetite to export.

That’s the short story of long-term contracts.

In a discussion late last month, hosted by the National Regulatory Research Institute, it appeared long-term contracts, while attractive, are still a real challenge, even when the price of natural gas is relatively low.

Ken Costello, NRRI’s principal researchers said gas utilities generally rely on swaps, futures and options rather than long-term contracts to hedge some of the price volatility of natural gas because those financial instruments require less of a commitment.

Costello conducted research on long-term contracts for commodity gas and state commission policies on gas hedging.

Why do utilities prefer financial hedging over long-term contracts? Costello said the long-term contract gains relative to the risks “aren’t favorable to utilities.”

“Generally, utilities don’t make money when they sign long-term contracts,” he said.

In a power point presentation, Costello noted that “For cost recovery and ratemaking, long-term contracts usually receive the same treatment as shorter-term transactions, and…long-term contracts, with their fixed payment obligations, are in effect an imputed debt that a utility carries on its books as ‘off-balance-sheet’ financing.”

The uncertainty of gas prices is a deterrent for natural gas buyers like electric utilities. They have to commit to a certain price which may go up over a period of years, but it could also go down.

Utilities would rather take their chances in the spot market.

The key to increasing long-term contracts may rest with the state commissions because state commissions have a responsibility to protect the electric customer. With low gas prices, state commissions like the Oklahoma Corporation Commission are looking at whether their policies encourage long-term contracts.

In the case of the Oklahoma, Brandy Wreath, the director of the OCC’s public utility division, said the protracted long-term contract approval process discouraged utilities.

Costello said Colorado, Oklahoma and Oregon’s state commissions have been the most encouraging in removing obstacles to long-term contracts. They’ve modified their rules.

Most other state commissions do not have a policy on long-term gas contracting.

Costello said “Colorado and Oregon utility commissions found that long-term commercial arrangements could produce large benefits to utility customers in the long run and are in the public interest.”

In Oklahoma, Wreath and senior utility analyst Joel Rodriguez said they basically rewrote their policies to encourage more long-term contracts. It was a collaborative process, they said, one that included lawmakers, the public, all stakeholders. There was a notice of inquiry and technical conferences.

The biggest change is that once a long-term contract is brought to the commission for approval, the entire process, which includes answering objections, takes 30 days.

If someone objects to the contract, the commission will answer the objection within 3 days. The process used to take 18 months, Wreath said.

“[Now] we won’t be asking producers to hold bids open for 18 months,” he said. “We need to remove price volatility from ratepayers.”

The OCC said new policy for long-term contracts includes more flexibility and ratepayer protection, more flexibility and autonomy for utilities so they do not have to have to have preapproval for every contract. And, the post-approval period approvals are faster—30 days.

Oregon’s PUC has streamlined its process to about four months. Barbara Summers, director of business development for NW Natural, a subsidiary of Encana Corporation, focuses on how long-term contracts reduce risk for both consumers and suppliers. She said it’s imperative that state commissions revisit their long-term contract policy overall to make it easier and more attractive for all parties.

Discussion of long-term contracts extends beyond NRRI. Michigan Gov. Rick Snyder is one of the country’s most prominent pro-natural gas leaders. He wants his state’s Department of Natural Resources and the Public Service Commission to work with private companies to develop a natural gas reserve.

So, when the state leases rights to drill on public land, the state would keep some of the natural gas for its own storage to sell under long-term contracts. The goal?  Keep winter heating prices stable and low.

President Obama continues to talk about U.S. energy independence while the U.S. fossil fuel industry continues to eye global energy markets for export instead.

Both can happen, but marrying the two themes could become a challenge for the president in his second term; his policies and increased scrutiny of fossil fuels in his first term has made it unattractive for U.S. energy companies to supply the U.S. market.

Exporting is a way for companies to circumvent U.S. regulation and make more money.  

Independence—How is it possible?

The U.S. imports only 20 percent of its energy. But, the International Energy Association says the country could become “energy self-sufficient” by 2035.

According to IEA’s World Energy Outlook 2012, the world will continue to rely on fossil fuels for transportation and electric generation, courted by subsidies to the tune of $523 billion in 2011, up 30 percent over 2010 and six times what renewables receive globally.

To boot, the U.S. will continue to import 3.4 million barrels of day of crude.

But, the increase in U.S. unconventional drilling for natural gas and oil from shale resources will improve the U.S. trade balance, notwithstanding U.S. legislation or regulation to thwart exports.

IEA says global energy demand will grow by more than one-third now until 2035 with most of that growth in China, India and the Middle East—about 60 percent—with an interest in natural gas.

While the market is open for all global suppliers, the U.S. fossil fuel industry, hammered by environmental regulations or impending ones, are looking for ways to circumvent its realities and make a profit.

Branko Terzic, executive director of Deloitte Center for Energy Solutions says, it’s about finding a market, anywhere.

The U.S. coal industry is already a net exporter because the U.S. has 28 percent of the world’s coal deposits.

Coal, for example, produced 20 percent of the nation’s total energy in 2011. Most of that went to U.S. electric generation, about 50 percent.

But, that picture has changed over the past year for the U.S. coal industry.

A Bleak Future for U.S. Coal

The Obama administration’s Environmental Protection Agency has emerged with four separate regulations on power generation–Cross-State Air Pollution Rule, Mercury and Air Toxics Standards, Coal Combustion Residuals and 316 (b) regulations.

And, the U.S. coal industry is already feeling suffocated.

• Peabody Energy is the largest U.S. coal company. According to Seeking Alpha, Peabody says U.S. coal demand will fall by about 10 percent this year, and utilities are already canceling coal deliveries because existing hefty stockpiles of unused coal. Luckily, Peabody has mines in Australia, and the company has been in talks with Coal India Limited to supply the country for its expanding electric generation.

• Arch Coal is the country’s second largest coal company. According to Seeking Alpha, during fiscal year 2012, Arch Coal’s profitability has declined sharply. Although sales remain flat, $523 million in mine closing costs have contributed to $390 million in losses over the past nine months. Arch Coal’s two major markets are the U.S. and Europe. Unfortunately for Arch Coal, giants like BHP Billiton, with mines in Indonesia and Australia, can more easily capture emerging markets like China because of the shipping advantage. For 2011, Arch reported $61 million in Asian revenue out of $4.3 billion in total sales.

• U.S. coal company, Alpha Natural Resources, which acquired coal giant, Massey Energy Inc. for $7.1 billion in 2011, saw a first quarter loss in 2012 of $18 million, down from a year-ago profit of $49 million.

The National Mining Association says the U.S. has a 235-year supply at current consumption. And, emerging economies like India and China are standing by for U.S. coal.

World coal demand is driven primarily by China and India, which together have built more than 800 new coal-fired electrical power plants in the past six years, with China averaging two new plants each week, he said.

Here at home, about 69,000 megawatts of coal-fueled electricity generation is expected to shut down because of the EPA pollution regulations in the U.S.

While American coal is certainly heading to emerging markets in small quantities, another pitfall for the U.S. coal industry could be the growing environmental opposition to export terminals.

The pitfalls for coal can be opportunities for U.S. natural gas, however.

Fracking Natural Gas

According to the IEA, natural gas becomes a growing resource worldwide, especially with advancements in horizontal drilling—hydraulic fracturing. That’s good news for U.S. producers suffering losses from the low price of natural gas.

During the summer of 2012, natural gas surpassed coal as the primary fuel for power generation for the first time ever.

Natural gas prices are at their lowest level in two decades. Last spring, the price of natural gas dipped to $2 mMBTU.

Additionally, unusually mild seasons over the past two years have left natural gas storage units full. The supply is forcing some smaller natural gas producers out of the market altogether. At $2 mMBTU, for some, it doesn’t make economic sense to drill for more gas. Meanwhile, countries in Asia paying upwards of $14 mMBTU for their gas, makes Asia fertile ground for the relatively low-priced U.S. supply.

U.S. natural gas is not traded on any world market, so it avoids the volatility that drives up prices elsewhere. Therein lies the opportunity for U.S. producers—selling the gas to Asia and Europe for both transportation and electric generation.

The LNG Question

Enter Cheniere. In President Obama’s first term, Cheniere ran the gauntlet of applications and approvals, raised money and broke ground on the first LNG terminal expected to ship out 2.2 billion cubic feet of natural gas/per day during the president’s second term.

The United States already exports relatively meager quantities of natural gas, mostly via pipeline; about 6 percent of total produced gas is exported.

As of November 8, 2012, one of 19 applications for broad export had been approved—Cheniere Energy Inc.’s application for Sabine Pass in western Cameron Parish, Louisiana. Only 16 of the 19 have been approved to export to countries with which the U.S. has a free trade agreement.

A number of hurdles could thwart profitable export of natural gas from the U.S., one of which could be a long-awaited report from DOE on the impact that natural gas exports will have on the U.S. natural gas sector and the U.S. economy.

The report is expected in December or January. It was expected this fall. DOE said it would not approve any additional LNG applications until it finished the comprehensive review of the exports’ impact.

Is Oil the Key?

As resources leave our shores and potentially raise prices here, can the U.S. become energy independent or “self-sufficient,”?

It’s possible. While the EPA continues to scrutinize unconventional natural gas development, the White House continues to outwardly support drilling.

And, despite the president’s re-election and an expected reduction in oil exploration and drilling, 2013 promises to yield more in oil resources. The president promises to open up the Gulf of Mexico for deepwater drilling for the first time since the BP oil spill in 2010.

In 2012, Interior issued 78 exploration drilling permits and 36 development drilling permits. This sets up the industry well for its 2013 drilling season.  

Spending in the Gulf of Mexico is expected to be up nearly 30 percent–$40 billion. Total expenditures on Gulf drilling for most of the president’s second term are expected to reach $167 billion in the 2013 to 2016 period.

“On a total energy basis, we’re 83 percent domestic energy,” Terzic of Deloitte says. “We’re only talking about oil. We’re not talking about coal or natural gas [because] we don’t import those.”

Terzic says, “We can become supply independent [with oil], but we won’t become price independent. As long as we allow domestic oil to be priced at global prices, any time there’s a crisis in a global region, it’ll cost us.”

Today, I flew back from Bergen, on the West coast of Norway, after 24 incredible hours visiting Statoil’s (CL) impressive Troll platform.

Now it has taken me a few years to get this trip organised, but I must say, it’s all been worth it.

Taking a helicopter with Statoil’s CFO, Torgrim Reitan, and seven other very keen journalists, including the Economist, WSJ Europe and Petroleum Economist, we flew 25 minutes to reach Troll’s Platform A.

Troll A Platform

On board, the platform manager gave us a tour of the sites. The highlight of which, can only be the shaky 8 minute elevator ride down 303 metres below sea level to walk on the North Sea bed. Down there, separated by the Sea by only 1.5 metres of concrete, you could hear the force of the waves hitting against this incredible platform’s pillars. You could also hear (or more likely feel) the gas being pumped upwards as you touch the platform’s main pipelines.

Torgrim Reitan, Statoil's CFO feeling the gas being pumped through the platform's pipelines

The Troll platform delivers gas to 10 million households in Europe and accounts for 40% of gas used yearly in the UK. As such it plays an important role in the UK energy market. To commemorate the experience we all signed our names on the inner walls – next to Norway’s ex-prime minister and Norway’s King and Queen.

signing my name at the bottom of the North Sea

Coming back above sea level (all feeling a little relieved), we were shown the health and safety equipment – including emergency life boats which drop into the sea within 3 seconds of release – and the gas compressor room.

I am hoping by now you have a pretty clear picture of my experience yesterday, what you may not imagine though is how clean and comfortable the platform is designed to be. With recycling bins on every level, lounges that could rival those of a cruise ship and bedrooms bigger than some in London – it is certainly state of the art for a rig!

I am grateful to Statoil for the privilege of such an experience and grateful to all those who attended and made it an even better event. Definitely a career highlight!

the lovely visiting group

“I’m afraid the truth is that these events are always very bad and perhaps the worst of all the duties of a PM,” Harold Macmillan records in his diary in 1962. The Conservative Prime Minister had removed a third of his cabinet, including his Chancellor, earlier in the evening. In his infamous ‘night of the long knives,’ Macmillan had decided to be bold and brutal in equal measure. Most reshuffles, like this week’s change of hands, are less dramatic affairs.

Before picking his or her new team, the Prime Minister will be conscious of the under-promoted, the over-promoted, those who want to move and those who refuse point blank. They will want to promote their allies, but will be mindful of providing too big an opening for potential rivals. They then need to factor in policy considerations. Industry will surely be in uproar if the new Secretary of State is moved along again.

No wonder ex-Prime Minister’s bemoan reshuffles in their memoirs some years after the dreaded deed.

This week’s reshuffle started on Monday night and wrapped up earlier this morning with the appointment of the last handful of junior ministers. Personnel changes will of course continue over the next few weeks as ministers appoint special advisers, and the allocation of responsibilities are eventually divided up. DECC now has its full ministerial team in place following the appointment of ex-BIS Spokesperson in the Lords, Baroness Verma, last night. She replaces Lord Marland as Parliamentary Under-Secretary of State.

While the massed ranks of the political commentariat pore over this week’s shake-up, interest in the departments responsible for green growth has been relatively muted. What then might the reshuffle mean for the Government’s green growth agenda? Do the slew of ‘pro-growth’ announcements from Numbers 10 and 11 this week feed that agenda?

For my view on these questions please click here:

http://www.hkstrategies.co.uk/sites/default/files/HK%20_Strategies%20_Energy_and_Industrials_Going%20For%20Growth.pdf

Paralympic high jump has to be up there among the most amazing feats of the human body. Seriously, it’s amazing!!

Last night, half of team E+I made it over to the Olympic Park, only an hour and a half behind schedule. Since I already wrote a blog about energy and the Olympics, for the Paralympics I’ll keep it brief and share a few highlights of our evening instead…