Ending the Crimea and Ukraine Crisis

Curtailing the exports of Russian oil and gas would send their economy into a tailspin, crater the value of their currency and their stock market and create massive hardship for politicians and citizens alike.  I propose a strategy to “checkmate” Putin and his band of thugs forcing them to retreat from Crimea and eliminate the threat of Russian expansionism.

Russia is the world’s largest producer of oil and the second-largest producer of natural gas.  Oil and gas revenues account for more than 50% or their federal budget revenues.  Russia exports about 5 million barrels per day of oil most of which serves the European market.  Collectively, the EU, Turkey, Norway, Switzerland and the Balkan countries get 30 percent of the natural gas from Russia.

The U.S. and European Union must immediately impose banking sanctions, freeze assets and curtail trade with Russia. The U.S. must assure Europe that we will backfill any shortfall in natural gas with our exports of LNG (liquefied natural gas) from a network of LNG terminals already in place in the U.S.  Any natural gas shortfall in the U.S. can be backfilled by our vibrant system of coal plants.  We must also mitigate the impact of a crude oil shortfall by exporting oil from domestic “frontier” areas which are just now beginning to ramp up production.  In addition, we must encourage Saudi Arabia and other friendly Arab nations to increase production to fill the gap. 

Unfortunately, the scenario described above is pure fantasy because of Obama’s war on carbon.  LNG export terminal permits have been slow-walked, Frontier areas of exploration have been deemed “off limits”, the Keystone XL pipeline has been delayed and the coal industry has been decimated by EPA action.

To counter rapidly declining natural gas production in America, several natural gas import facilities were built and subsequently rendered obsolete with the coming of the “shale gas” revolution.  Today, the U.S. is the largest natural gas producer in the world.  Much of the equipment (tanks, piping etc.) at the “obsolete” import facilities can be used in an export facility.  All that is needed is liquefaction equipment.  Unfortunately, the permitting process takes more than two years and involves FERC, DOE and multiple layers of regulations.  The Administration could and should have streamlined the process recognizing that permits had already been issued for many of these as import facilities.  By now, at least three of these formerly permitted import facilities would have become operational as major export facilities with others coming on stream during the next year or two. 

Coal will not be used to backfill any shortfall in domestic natural gas as power plant fuel.  A promise that President Obama has kept is that “If someone wants to build a new coal-fired power plant they can, but it will bankrupt them…”   The President’s EPA has implemented so called M.A.C.T rules for existing coal fired power plants that have already shut down over 10% of the nation’s coal-fired capacity and may impact up to 30% of the coal fleet.  Then in September of 2013, the EPA announced a proposed rule for carbon emissions caps on all new coal fired power plants which, if enacted will effectively halt new construction.

Forget new production from “frontier” areas.  Shortly after the President was inaugurated, his Department of Interior shelved the existing plan that would have leased promising and heretofore unexplored offshore (OCS) areas in Alaska, California and the East Coast.   These “frontier” areas may contain billions of barrels of oil and gas but we will never know.  In addition, and in the wake of the BP oil spill, the Administration stopped issuing permits for deep water drilling in the Gulf of Mexico.   Shallow water drilling was also slowed dramatically by regulator’s demands for drilling plan modifications.  It took nearly a year and of legal wrangling before a single deep water permit was approved. 

The Keystone XL pipeline, when completed could move 700,000+ barrels per day of Canadian crude oil to Gulf Coast refineries adding to the world’s crude supply and backing out U.S. imports of foreign crude to refineries in the Gulf Coast.  In addition, the pipeline will stimulate incremental domestic exploration and production which could be transported by new “feeder” lines to Keystone.  The initial application for Keystone was submitted in 2008.  Finally, in 2011 both the State Department and the DOE concluded that pipeline “would not appreciably increase” global life-cycle greenhouse gas emissions”.  Even so, the President stopped the project from moving forward even after the pipeline route was changed to avoid traversing an important aquifer.

In conclusion, I believe that “war” is and will continue to be waged using economic power and leverage.  The first battle with Russia has been lost.  If we continue to pursue the present path of over-regulation, high taxes and government intervention into free markets we will lose these battles.  If we do not get our spending under control, countries like China will exert ever increasing leverage impacting world events.   Think hard about these issues at the ballot box.   

 

 

 

Predictions for Obama’s Next Four Years – Right or Wrong? - Updated 11/28/2012

In a November 11, 2012 blog, I outlined my predictions for Obama’s second term.  I intend to revisit these predictions as significant events occur.  These will be dated and presented in reverse chronological order for easy reading.

·         Prediction: Obama’s second term will be characterized by more bailouts.

o   11/28/2012 – FEDERAL STUDENT LOAN PROGRAM TROUBLED – The President pushed for the expansion of Federal Government involvement in financing student loans.  Last year 93% of these loans came directly from the Government.  As usual this program is a disaster waiting (not long) for disaster.  The program does not consider the borrower’s ability to pay and does not assess the “value” of the borrower’s education.  Student loans outstanding are now nearly a trillion dollars (up 56% in real terms since the end of 2007).  Delinquency rates (non-payment for 90+ days) have increased from 8.9% in June to 11% in September of 2012 alone.  The New York Fed researchers claim that these figures will become much worse because many recent borrowers are still in school or have been granted postponements for various reasons.  Imprudent borrowers are likely to become “indentured servants” for life.  Bankruptcy is not an easy answer because it is nearly impossible to discharge education loans via Bankruptcy.  The endgame is either a bailout of the program itself or “relief” for individual borrowers.  In any case, the taxpayer will be on the hook.

Obama's Next Four Years

Politics and Energy intersect.  The Election sets up a very serious crash at this intersection.  Over the next four years, federal agencies like the EPA, Department of Energy etc. will help implement Mr. Obama’s agenda.  The war on coal will continue in earnest, oil and gas drilling on Federal Lands will be limited by OCS leasing and serious regulations will be promulgated on fracking.  Continued trillion plus deficits coupled with Progressive ideology will, at some point yield higher taxes.   Look for a push for fee on carbon and/or a VAT.  Don’t look for real spending cuts.  In fact look to the agencies for more “bailouts” (one of the more significant may be mortgage principal write-offs for homeowners costing the taxpayer $100 billion plus).  Here are my detailed predictions for the next four years.

"A Plan For Jobs." Really?

I have read the glossy “new” brochure put out by the President’s campaign entitled “A Plan for Jobs”.  It is simply a rehash of old ideas that haven’t worked for the last four years and have stifled economic growth.  Since this is an energy blog, I’ll limit my comments to the energy section of the brochure.  Before examining the “specifics”, it is interesting to note that nowhere in the brochure is there any mention of the Keystone XL Pipeline.  If the President was really interested in private sector job growth why did he kill the pipeline?  Some estimates indicate that upwards of 100,000 jobs would be created by the pipeline.  Many of these would be well paying jobs, not the low paying service sector jobs created during the Obama administration.  Now, on to “specific” claims made in the brochure coupled with my comments.

Cap and Trade California Style

California will raise taxes by from $550 million to $3.5 Billion in 2013 alone through Cap and Trade.  Here is how this tax scam works.  The law will ultimately apply to all major sources of greenhouse gas emitters in the state, and phases in over time.  Each source will have a base for greenhouse gas emissions.  The state will auction the right to emit greenhouse gases in excess of an annual cap which ratchets down 2-3%/year. The law envisions an 80% reduction in greenhouse gases by 2050.  Companies can also “buy” leftover allowances from emitters that have met targets or purchase allowances from projects that “remove” carbon from the atmosphere. 

Renewable Portfolio Standard - Disaster for the Economy

Executive Summary

The words “Renewable Portfolio Standard” (RPS) should strike fear into the hearts of all Americans.  Unfortunately, most Americans don’t understand the concept of RPS, much less its dire consequences.  To date, 29 states have passed RPS legislation which requires utilities to, over time, increase the amount of renewable energy delivered to its customers.  On the surface this sounds like a laudable goal.  Unfortunately, there are two major problems with RPS legislation.

·         Utilities are forced to purchase uncompetitive electricity generated from renewable sources (These much higher costs, sometimes 2 to 3 times higher than electricity generated from fossil fuel, are passed along to the consumer or electricity).

·         Taxpayers foot the bill for direct subsidies, grants, loan guarantees etc. while rate payers are saddled with higher energy costs for the life of the renewable energy power contract (usually 20-25 years).

Oil And Gas 102

I have used PowerPoint as a way to present the basics of Oil and Gas price fluctuations and their short and long term drivers.  The presentation includes

• Global Supply/Demand and Surplus Capacity
• Economic Growth as a driver
• Domestic Supply/Demand
• Energy Policy
• Oil Market Speculation

And much more!

(Start the presentation by clicking on the arrow in the middle of the screen.  Typically each slide has many "layers".  Use the space bar to proceed through each layer of the slide.  When the last layer of a slide is reached using the space bar will result in moving to the next slide)

Oil and Gas 102

More PowerPoint presentations from BTUGuy

Disclaimer: Content, including research, tools and securities symbols, is for educational and informational purposes and should not be intended as a recommendation or solicitation to engage in any particular securities transaction or investment strategy. You alone are responsible for evaluating which securities and strategies better suit your financial situation and goals, risk profile, etc. The projections regarding the probability of investment outcomes are hypothetical and not guaranteed for accuracy or completeness. They do not reflect actual investment outcomes and are not guarantees of future results, and do not take into consideration commissions, margin interest and other costs that will impact investment outcomes. Content may be out of date or time-sensitive, and is subject to change or removal without notice

Speculation in Oil Markets

Editor's note: The following is an excerpt from a research paper I recently completed.

Background

Oil futures markets are a relatively recent phenomenon.  The first “oil” futures contract developed was for heating oil traded on the New York Mercantile Exchange (NYMEX) beginning in 1978. The success of the contract led to the implementation of the West Texas Intermediate (WTI) crude oil futures contract in 1983 as well as a gasoline contract in late 1984.  By 1990 there were 10 active oil futures trading contracts worldwide. Prior to 1978, the “bible” for price discovery was a daily publication called “Platt’s Oilgram”.  Prices for physical oil were reported to Platt’s by the oil traders themselves.  Platt’s makes a good faith effort to verify prices by contacting parties on both sides of the transaction.  Obviously, verification takes time so Platt’s price information, although relatively quick and accurate, is not instantaneous.   

The oil futures market provides instantaneous price discovery.  Futures markets also allow industry participants to shed risk by selling product for future delivery at a guaranteed price.  This practice is known as hedging.  The futures markets allow non-commercial players (speculators) to participate in oil markets.  Speculators serve two purposes.  First they provide liquidity to the market allowing trades to be made more readily.  Second, they represent the “other side” of the transaction.  For example a crude producer may want to sell his oil into the futures market to “guarantee” a price in the future.  Obviously, for each contract there must be a seller as well as a buyer.  The futures market provides a clearing house for buyers and sellers.  A speculator may be that buyer.

Dueling Models

Has “speculation” driven prices to levels higher than the “true value of oil”?  The three part answer is as follows.

o       The Commodity Futures Trading Commission (CFTC) says no.

o       The James A. Baker III Institute for Public Policy at Rice University (JBIPP) says maybe

o       The St. Louis Fed says yes

Each of the aforementioned institutions agrees on one point – The supply/demand balance is the single largest factor in pricing of oil.

Energy Facts and Fallacies

Energy is a complex business that doesn't lend itself to sound bites.  Nearly every day, one is exposed to statements that are misleading or just plain false.  I call this B.U.L.L. (bombastic utterances of laughable lads).  Below are some of the sound bites proffered by politicians and "talking heads" followed by a detailed explanation illuminating the truth as I see it.  The statistics and figures presented come from reliable sources.  Subject matter covered is as follows:

• "Oil Exports"
• Domestic Oil Production, Imports and Reserves
• Oil Production from Federal Lands
• Energy Independence
• Quick fix for gasoline prices
• Oil Company Subsidies
• Oil Company control of retail markets
• Oil Market Speculation
• "Dirty" Canadian oil
• Keystone XL pipeline

Obama's Energy Policy - The War on Carbon

The Administration pays lip service to developing our own oil and natural gas resources.  As always, actions speak louder than words.  The Administration has: 

• Placed a de facto ban on leasing of offshore federal lands off the west coast, east coast and Alaska
• Substantially slowed the permitting of shallow and deep water drilling in the Gulf of Mexico
• Killed construction of the Keystone XL pipeline
• Subsidized failed green energy projects
• Through EPA action in early 2009, began the process that will ultimately lead to massive regulations for almost anything that emits carbon dioxide.

Delta to Buy Refinery - Such a Deal?

Conclusion

It is my opinion that Delta’s acquisition of the Phillips 66 Trainer refinery is a risky bet.

• Domestic gasoline demand has declined leaving the industry with surplus capacity
• The locus of demand is shifting to developing Asia.
• The policy of many OPEC producers has been to refine more of their own crude oil
• Domestic margins for gasoline are being squeezed in part due to the US exporting rather than importing the product (Exports increase transportation cost and therefore decrease refinery net back).  The short term exception is for those who have access to WTI and Bakken crude oil (more on this later)
• Slow economic growth will continue to hamper refinery profitability
• Simpler sweet crude refineries (like Trainer) are competing with more sophisticated Gulf Coast plants and from imports from Europe

Cape Wind Blows (for Taxpayers and Ratepayers)

Cape Wind is a massive $6 billion, 468 Megawatt wind farm to be built off the Coast of Massachusetts.  The project includes 130 wind turbines covering an area of 25 square miles.  Great huh?  Not so fast.  In my opinion, this project could never be built without massive subsidies.  In the case of Cape Wind, the taxpayer and ratepayer will carry the burden.  Here are some fun facts.

Buffett's Green Sure Thing - Topaz

In December of 2011, MidAmerica Energy Holdings, a subsidiary of Berkshire Hathaway purchased a large solar PV project called Topaz from First Solar.  The project is a 550 megawatt solar farm being built in California with an estimated completion date of 2015.  First Solar work included an approved EIS and a 25 year PPA (purchase power agreement) with PG&E. The price of the transaction was not disclosed.  In my opinion, the price was likely quite low.  First Solar was unable to finance the project itself, however, First Solar will benefit handsomely from the sale because of its Engineering and Construction Contract and its Operating and Maintenance Contract with MidAmerica.  In addition, it is likely that the solar panels used in the project will be First Solar products.  MidAmerica is financing 50% of the project through bonds.  I have researched the project and it appears that Buffett made a very good deal (Bruce Krasting wrote a very interesting blog about this project in December of 2011.  See the link http://brucekrasting.blogspot.com/2011/12/another-sweet-deal-for-buffett-who-pays.html ).