Tuesday, December 29, 2009

When Big Oil Buys the Gas Company

Earlier this week ExxonMobil, the world’s largest publicly traded oil and gas producer, announced that it had agreed to buy XTO Energy, the second-largest producer of natural gas in the US. ExxonMobil will acquire XTO for stock valued at $31 billion, making this the biggest oil and gas deal in four years.

This acquisition (and more like it) will have very significant impacts in at least three areas: energy prices; advances in natural gas innovation; and climate change legislation.

1. The Impact on Energy Prices

By acquiring the second-largest natural gas producer in the US, ExxonMobil will increase its ability to influence natural gas prices.

Prices for natural gas under long-term contracts are currently fairly close to prices for oil when measured on a cost per BTU basis. But prices for natural gas on the spot market are much lower -- often as much as 400% lower -- than prices for oil. The more natural gas that remains available on the spot market, the more likely it is that prices for natural gas under long-term contracts will come down.

When independent natural gas companies like XTO selling gas on the spot market, there is pressure on prices for natural gas to go down. Which makes gas a nice alternative to oil and coal. Which ultimately puts pressure on oil and coal prices.

ExxonMobil and other major oil companies that buy natural gas companies could influence prices by simply selling less natural gas on the spot market. The major oil companies have plenty of cash, so they could hold onto their natural gas inventories until the gap between gas and oil narrows. That is not good for consumers . . . or for the country.

2. The Impact on Natural Gas Innovation

Over the last decade, a handful of the nation’s small energy companies discovered huge amounts of natural gas in new fields stretching from Texas to Pennsylvania. XTO was one of these companies. It grew almost unnoticed into the nation’s second-largest gas producer by amassing a substantial portfolio of gas fields and developing expertise in the complex technology needed to extract the gas from shale beds.

If the major oil companies buy up these smaller, innovative companies that are making all the new natural gas discoveries, then who will pursue new natural gas technologies in the future?

Good question.

3. The Impact on Climate Change Legislation

Oil is one of the major contributors to carbon emissions worldwide. Gas is a much cleaner fuel.

The oil industry and its trade organization, the American Petroleum Institute, have vehemently opposed any aspect of climate change legislation that would raise the price of petroleum-based products. In contrast, the natural gas industry has supported many aspects of climate change legislation. Because natural gas has relatively low carbon emissions, any restriction on carbon emissions will give it a competitive advantage over oil and coal.

If the major oil companies buy up all the significant natural gas companies, then who will advocate for climate change legislation?

Another good question.

John Howley

Orlando, Florida

Saturday, December 19, 2009

More Important Than Copenhagen

I told you so.

Four months ago, I predicted that, "Those looking for simple solutions to climate change will be very disappointed by the absence of firm emission reduction targets in Copenhagen later this year. . . . But at the same time, [the US and China] will pursue a second path of cooperation towards achievable solutions with or without an agreement on targets." See US and China Forge a New Path on Climate Change.

That is exactly what the US and China did in Copenhagen yesterday.

Why? Because nothing this important and this complicated ever gets resolved by a committee.

Consider for a moment the race to put a man on the moon. Thomas Friedman and others have said that this should be our model for the Green energy revolution.

I agree. But we did not get to the moon by holding international conventions and listening to dictators and despots like Iran's Ahmadinejad, Zimbabwe's Mugabe, and Venezuela's Chavez lecture us on the evil nature of our plans to be the first to put a man on the moon. Nor did we wait until we could reach the lowest common denominator consensus with Russia, China and 180 other nations on how and when to put a man on the moon.

If we had followed the path of seeking international consensus before we went to the moon, then we probably never would have achieved the goal.

So, now that we have gotten Copenhagen out of our system, let's get down to the serious work of pursuing the Green energy revolution the old fashioned way. With vigorous competition among nations to be the most energy efficient and energy independent economies in the world.

Walmart has given us a good first step. The company has sent out a Sustainability Index survey to 100,000 of its suppliers. The survey asks each supplier to provide information about their carbon footprint, energy and water usage, plans and goals to reduce their carbon footprint, energy consumption and water usage, and other factors that affect the sustainability of their operations. For now, Walmart will review this data internally. But it plans in later stages to release the data to consumers and possibly even disclose a ranking of individual products based on a Sustainability Index for the product and the company that manufactured it.

If you were a factory owner in China, what would provide a better incentive for you to reduce your carbon footprint and use of energy and water? (a) An international treaty that committed China to nation-wide carbon reduction targets over a 20 or 30 year period? Or (b) a Walmart Sustainability Index that made your products unsellable to the world's largest retailer unless you reduced your own company's carbon footprint and use of energy and water?

Forget Copenhagen. We need barriers to entry that will make it difficult for producers around the world to sell their products unless they are made using non-polluting energy sources and sustainable manufacturing practices.

We also need to alter the economics of energy at home. Yes, solar and wind are more expensive than most carbon-emitting alternatives right now. But only because those carbon-emitting alternatives do not pay the full cost of their pollution. If we make coal and oil companies include in their pricing the cost of eliminating their products' emissions (either with cap and trade or a carbon tax), then solar, wind and other non-emitting alternatives would seem very inexpensive by comparison.

Lastly, we need to use government funding and regulations to promote sustainable energy based on the long-term benefits -- just as we did when we used government funds to finance space exploration.

Imagine, for example, if all new construction and renovations in the US had to be "net zero" in terms of direct and indirect carbon emissions. By "net zero" I mean that the amount of energy used by a facility from non-carbon-emitting sources like solar and wind is equal to or exceeds the amount of energy from carbon-emitting sources. This could be accomplished by a combination of building codes requiring higher levels of efficiency in buildings (which many local governments are already imposing) and subsidies for investments in solar, wind and other non-carbon-emitting energy sources.

Yes, this would cost us in the short term. But think for a moment about the competitive advantage this would give us in the longer term. What if five or ten years from now our factories used highly efficient buildings that required less energy, and that energy was supplied by solar and wind plants that had ZERO fuel costs. Our factories would have a tremendous competitive advantage over factories in China and elsewhere that continued to use power generated by coal and petroleum fuels.

I hear all those out there who say that climate issues are different because they transcend borders. But space travel transcended borders too. And we did not succeed with space travel by waiting for everyone to agree. We went out and did it.

John Howley
Woodbridge, New Jersey