Monthly Archives: October 2016

The OPEC Deal: A Last Gasp of Relevance? – 10/31/16

OPEC may have pushed oil prices above $50 with promises of their first production cut in eight years, but doubts remain about how effective a deal could actually be. Between bulging inventories, internal tensions, and a loss of market share relative to non-OPEC producers, even the largest cuts promised in the range put forth in September look relatively minor, as well as unlikely.

Still, OPEC members have been too shaken up by the price collapse for the group to take no action. And should the group have a repeat of Doha, where the talks collapsed over Iran’s part or lack-thereof in the cuts, the costs to the already battered economies of OPEC could be massive. Failure to finalize the deal could mean a return to prices in the low-$40s, according to Goldman Sachs Group Inc.

Of course, if OPEC does manage to implement the maximum cuts, then they would still need to wait for the record surplus to fall off.

The bloc’s own data show that, under the cuts, the excess held in stockpiles would fall just 11% next year. Should competitors — chiefly Russia and the U.S. — decide to increase production and take advantage of the situation to gain a higher market share, the deal could easily fall apart. Any deal not involving at least Russia would have a superficial impact.

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If OPEC reduces output by 900,000 barrels a day from September levels as agreed in Algiers, inventories would contract as a result; however, even within OPEC, countries are probably going to miss that target. Four OPEC countries claiming exemption from the deal — Libya, Nigeria, Iraq, and Iran — increased output by 450,000 barrels in October alone, according to a Bloomberg News survey of available data. Any increased output from those members would have to be matched by grudging cuts by other. Most extra cuts would probably be coming from Saudi Arabia which faces its own economic troubles and reluctance to sacrifice market share for the sake of a losing battle.

Cutting output by enough to achieve OPEC’s objective also hinges on non-OPEC producers, especially Russia, playing their part. Yet Russian officials have said at most refrain the nation would refrain from further increases, according to Interfax, and Russia has had mixed history when it comes to following through with agreements with OPEC.

Representatives from other major oil countries such as Brazil, Kazakhstan, and Oman are also hesitating to accept or outright denying any responsibility to cut their oil output. Officials from Oman have said the nation is willing to cut production as part of deal, but is waiting for OPEC to reach an internal agreement before deciding on its own cuts. Meanwhile, Brazil has publicly committed itself to boosting output by 290,000 barrels a day next year, the biggest increase of any non-OPEC nation, according to the IEA. Kazakhstan also plans to boost output next year following the restart this month of its Kashagan oil field after 16 years of development.

Should OPEC implement its deal, it will almost certainly mean some increase in oil prices. How much some means will depend heavily on how much stock investors put in the group’s ability to affect markets as it used to. As U.S. shale drillers return, threats to oil demand come in new and old forms, and so many more factors outside of OPEC’s control threaten its relevance, it’s hard to say how much longer markets will focus so intently on what the group does.

BHP Invests in Solar and Battery-Storage – 10/28/16

BHP Billiton Ltd., a multinational mining, metals and petroleum company headquartered in Australia recently announced it is partnering in a solar energy and battery-storage project to test technology that could be adopted at its remote mining sites.

An ability to store renewable energy in remote locations would boost miners’ options at operations located far from power infrastructure, BHP’s Wild said.

The world’s second biggest mining company by revenue, BHP is participating in the $42.5 million Lakeland Solar and Storage Project in Australia to test a 13MW solar PV installation and grid-scale storage as part of its recent forecasts showing a bullish scenario for clean power and stricter than expected environmental regulations.

In markets including Chile and Morocco, renewable energy sources already compete with non-renewable fuels on cost and will achieve global parity on a new-build, unsubsidised basis within a decade. Non-hydro renewable power will grow at more than 9% a year through 2025, according to BHP.

The Paris climate accord negotiated last year is “more substantial and ambitious,” than expected, BHP said in its statement. BHP sees the accord as supporting previous studies projecting a loss of about 2% of the value of its assets by 2030 because of measures that put a price on pollution. Investments in thermal coal or oil would be put at most risk under concerted global action, while the development of gas assets could become more attractive, the company said.

The company also suggested that oil demand is likely to fall on increased fuel efficiency and rising demand for electric vehicles, which may account for 13% of the new vehicle fleet in 2035, according to BHP’s benchmark internal forecasts.

EIA Finds CO2 Emissions Are Falling – 10/27/16

U.S. energy-related CO2 emissions totaled 2,530 million metric tons in the first six months of 2016, the lowest emissions level for the first six months of the year since 1991, according to the U.S. Energy Information Agency. The EIA attributed the low emissions to mild weather and a decline in energy-related emissions.

The EIA’s Short-Term Energy Outlook projects that energy-associated CO2 emissions will fall to 5,179 million metric tons in 2016, the lowest annual level since 1992.

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In the first six months of 2016, the United States had the fewest heating degree days since at least 1949, the earliest year for which EIA has monthly data for all 50 states. Overall, total primary energy consumption was 2% lower compared with the first six months of 2015. The decrease was most notable in the residential and electric power sectors, where primary energy consumption decreased 9% and 3%, respectively.

Coal and natural gas consumption each decreased compared to the first six months of 2015. More so for coal, which generates more carbon emissions than natural gas. Coal consumption fell 18%, while natural gas consumption fell 1%.

Consumption of renewable fuels that do not produce carbon dioxide increased 9% during the first six months of 2016 compared with the same period in 2015. Wind energy, which saw the largest electricity generating capacity additions of any fuel in 2015, accounted for nearly half the increase. Hydroelectric power, which has increased with the easing of drought conditions on the West Coast, accounted for 35% of the increase in consumption of renewable energy. Solar energy accounted for 13% of the increase and is expected to see the largest capacity additions of any fuel in 2016.

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Self-Driving Cars: Semantics and Reality – 10/26/16

Depending on who you ask, self-driving cars are either already here or decades away. The reason for this is the existence of many different degrees of autonomy.

Today, a one-lane highway autonomy program in Japan shows an early degree. By removing many of the variables that would otherwise add too much complexity for today’s computers, the ProPILOT technology amounts to what many would call “self-driving”. Optimistic observers would then point to the operations of Uber in Pittsburgh as “urban driving”, a significant advancement signaling more to come before 2020.

Yet, this is different from the truly driverless car.

Ford Motor Co., BMW AG, Volvo Car Corp. and Lyft Inc. all say they will produce fully autonomous vehicles by 2021 or sooner. And while such claims are not technically false, they play fast and loose with the reality of the technology for the sake of hype.

To quote a few experts in the field:

Mary Cummings, a professor of engineering at Duke University, told WSJ, a fully autonomous car “operates by itself under all conditions, period.” She adds, “We’re a good 15 to 20 years out from that.”

Chris Urmson of Google’s self-driving car project told the SXSW conference that “self-driving technology will arrive for some of us in a few years, and for the rest of us in 30. That is, it could arrive soon for very specific uses; but as a full-bore replacement for humans, it will take a long time.”

“I always remind people we’ve had driverless vehicles carrying people between terminals at an airport for 40 years,” says Steven Shladover, manager of the Partners for Advanced Transportation Technology program at the University of California, Berkeley. “But they’re operating in a very well protected right of way.”

So there are some nuances that should be addressed.

Driverless vehicles have existed for a while, but not in a form most people would notice or care about.

If you want to take a taxi sans driver around Pittsburgh or some other open-minded major metropolitan area, then you have the chance to do so as part of one of the several test programs going on.

If you want your own car to carry you around the city, Ford, for example, has said it would release such a car by 2021… but only in the portion of major cities where the company can create and regularly update its 3-D street maps. Volvo, Lyft, GM, and Israel’s Mobileye NV will impose similar geographic limits on their self-driving vehicles.

If you want your car to drive itself just about anywhere you could drive it yourself, you’ll probably have to wait a couple decades or at least until 2030.

The reality is that, for now, “self-driving” cars will primarily have autonomous features like the ability to maintain a safe following distance, change lanes and stop in an emergency. Of course, someone just trying to get around the city wouldn’t care that their self-driving taxi can’t make a cross country road trip. As it comes closer to the driverless ideal, self-driving technology will save lives and change the world for the better regardless of the semantics behind what makes a car truly autonomous.

Solar in Florida and Texas – 10/25/16

Though they’re getting cheaper, the cost of solar panels is still a huge expense for most households. As a result, rooftop solar users often look for leasing options that spread that cost across years so it can be offset by selling excess electricity back to the grid, but not all states allow third-party leasing.

Florida is one of five states that specifically prohibit the third-party ownership used in residential solar development. A proposed amendment in Florida could finally change that for the state, for a price. The amendment would allow leasing in exchange for allowing utility companies to charge solar panel consumers extra for keeping them connected to the power grid. Of course, giving utilities the option of charging extra maintenance fees targeting residential solar users can become a problem as was the case in Nevada.

The reason power companies have pushed for such measures comes from concerns about fixed costs. Utilities must pay for the distribution and generation infrastructure and argue that “all users pay a percentage in their bill to cover the cost of those systems,” says Jocelyn Durkay, the energy senior policy specialist for the National Conference of State Legislatures. “But having a solar rooftop system may result in a customer’s bill being virtually zero.” That loss of revenue came with less stress on the grid helping to keep down the costs of upgrading the grid to handle new demand; however, as more people install the systems, the cost of keeping fossil fuel power as a backup for renewable energy is outweighing the benefit.

Yet, with many states are trying to broaden their renewable portfolios, many utilities are starting to see the writing on the wall. Battery technology investment and interstate transmission projects are already in the works in many places where renewable energy has a foothold. Even the Florida amendment is a bit different from Nevada’s. The measure offers a compromise: Allow people to lease in exchange for giving utilities a way to recoup some of their losses. The only question is how “fair” extra fees would be when utilities are balancing rising environmentalism and operating losses.


Texas is facing its own conflicts over solar power.

Developers are expected to build about 4GW solar capacity in the state by 2020, according to a report by Bloomberg New Energy Finance. Cheap solar energy from the noon sun threatens to depress electricity prices during peak midday hours when generators profit from higher electricity demand.

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Solar power also puts more pressure on coal- and natural gas-fired power producers already hurt by historically low gas prices, competition from wind power, and stagnant power demand.

Solar is expected to lower power prices by about $2.58 per MW-hour during peak hours by 2020 in Texas’s west hub, the report by BNEF found.

Who’s Paying for Wind Power? – 10/24/16

Wind power is getting bigger in the U.S.

According to data compiled by the AWEA, installed generation capacity for the renewable energy source nearly doubled in the last five years. In 2015, wind produced 4.67% of all generated electrical energy and it made up 41% of power capacity additions.

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The demand for wind power is coming from various parties. Under the Obama administration’s bold environmental policies, federal agencies like the Department of Defense have become a large customer, but the private sector is driving much of the boom.

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Tech companies have been particularly aggressive in buying clean power. Amazon.com Inc. recently agreed to buy 90% of the power generated by a 253MW wind farm being developed in west Texas. Apple Inc. Facebook Inc., and Google have made similar moves to directly purchase clean energy for their facilities. Centralized, power hungry data centers give tech companies an advantage in replacing large shares of their power with cleaner sources.

Still, more conventional companies are buying into wind power too. Johnson & Johnson is buying 100MW of capacity from a wind farm also located in Texas. In a 12-year contract, it will buy half the output from the farm. Other big buyers, according to the AWEA, include Wal-Mart, IKEA, and Dow Chemical.

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Rural areas are also benefiting greatly from extra income brought in from leasing land for turbines as commodity prices have collapsed.

“One turbine has changed my life,” Ed Woolsey, a fifth-generation Iowa farmer who now leases his farm to others to cultivate, said to Bloomberg. Woolsey was referring to the lease agreements with wind companies which typically net farmers between $7,000 and $10,000 per turbine each year (the median household income was $51,939 in 2013).

Warren Buffett’s MidAmerican Energy is negotiating with landowners for leases to build a $3.58 billion series of wind farms across Iowa, the largest economic development in state history. Iowa got 31% of its power from wind in 2015.

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Energy Efficiency Rising According to the IEA – 10/21/16

The world is using its energy more efficiently even as markets are flooded with cheap oil and gas, the International Energy Agency (IEA) reported in an analysis of global energy efficiency gains released earlier this month.

Energy intensity, which measures the amount of fuel consumed per unit of gross domestic product, fell 1.8% last year, triple the average rate over the past decade, the Paris-based IEA said.

“It’s becoming increasingly clear that energy efficiency needs to be central in energy policies,” said Fatih Birol, executive director of the IEA. “All of the core imperatives of energy policy — reducing energy bills, decarbonization, air pollution, energy security, and energy access — are made more attainable if led by strong energy efficiency policy.”

China reduced its energy intensity 5.6% last year, the most of all nations surveyed. The nation has invested $370 billion in efficiency from 2006 to 2014, saving as much as 497 gigawatts, equivalent to all of the country’s installed renewable generation, according to the IEA.

Government policy setting standards on everything from cars to buildings to appliances has been the main driver behind the efficiency push, the IEA said.

Stricter mileage rules on cars and light trucks led to an overall reduction of 2.3 million barrels of oil per day last year, or 2.5% of daily oil supply.

The IEA estimated its 29 member countries saved enough energy between 2000 and 2015 to power all of Japan for a year.

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The institution says even those gains aren’t enough to curb global warming. An overall decrease of at least 2.6% would be needed to reach the climate goals set out in the Paris agreement sealed in December, the report said.

Cost Savings in Oil Drilling – 10/20/16

Last spring, Statoil ASA announced it had used the same oil well design and components to drill three reservoirs for the price of one. Such large cost savings through standardization could explain how so many companies can keep drilling at low prices.

Even as oil producers have planned $1 trillion worth of spending reductions between 2015-to-2020, they have continued to green-light new wells even as they add to the supply glut.

Though much the blame for the resilience of the world’s oil drilling has fallen on U.S. shale producers,  the slashing of costs through standardization of components used in drilling suggests another suspect. Earlier this year the heads of some of the world’s biggest oil majors met in Davos to discuss a push to standardize the equipment used in exploration and production.

Originally, standardization efforts were meant to speed up lead times—the interval between the discovery of oil and when drilling commences—in order to make up for a shortage of trained personnel. Ordering standardized parts can allow the firms to pre-stock components and rapidly sign contracts, letting them ramp up production at a faster rate and cheaper cost.

But now, such standardization efforts are putting downward pressure on all oil production costs, according to Goldman’s analysis. Given that GE Oil & Gas has estimated that standardization can lower drilling expenses by an average of 30% for some projects, it is safe to say that the glut is at least partly the result of permanent operational advances.

Technological advances are also helping oil and gas companies cut costs.

In May, Halliburton Co. helped tap the longest shale well on record—8,500 feet deep and another 18,544 feet long—for Eclipse Resources Corp. in Ohio. That well was fracked 124 times compared to the typical 30 and 40 times, up from just nine fracks in 2011, according to Drillinginfo. Eclipse saved 30% by supersizing the well, said Chief Operating Officer  Tom Liberatore.

On the more high tech side, a program developed in part by General Electric Co has helicopter drones being tested to sniff for methane emissions at well sites.

The detection and stopping of leaks, a requirement from the EPA, is the first of many planned applications for oilfield drones to make workers more productive. GE is working on having Raven make methane inspections go three times faster, said Ashraf El-Messidi, a research engineer for the project.

GE’s oilfield drone project began last year after some of its other industrial divisions explored how they could use unmanned aircraft. Other applications could include inspecting flare stacks at refineries or checking gear for mechanical wear and corrosion, John Westerheide, head of the Raven project.

The test in July was done in partnership with Southwestern Energy Co. and Oklahoma State University.

U.S. Shale and the OPEC Deal – 10/19/16

When oil prices plummeted in 2014 due to a global glut of crude oil, many expected U.S. shale producers would collapse quickly. Those producers had other plans in mind.

Though the glut resulted in a wave of bankruptcies, companies working against or through chapter 11 pumped more efficiently and post-bankruptcy assets can operate sans debt burdens. All in all, total U.S. oil production has only fallen by about 535,000 barrels a day so far this year. Goldman Sachs estimates a return of 600,000 to 700,000 barrels of oil a day by the end of next year, for comparison.

And if members of OPEC manage to strike a deal to cut oil production, U.S. producers have demonstrated their flexibility is greater than most when it comes to bringing new production online.

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Shale operators are still hurt by low prices, but producers with strong balance sheets like EOG Resources Inc. and Continental Resources Inc. may be able to generate enough money to pay for increased production even at low prices. Because older oil fields decline by 5% a year and global demand is still rising such companies are still getting interest from investors. And those with capital to spare can buy productive assets at fire sale prices from the more over-extended companies.

Still, the U.S. companies will need oil to hold above $50 a barrel for months before they commit to more spending, according to analysts from S&P Global Platts. To reach that threshold, OPEC planned deal to cut output would have to make a significant improvement in crude prices, which have held steady around $50 even at the best of times in 2016.

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But remains to be seen if OPEC can enforce the new restrictions when Saudi Arabia has to make for Iran, Nigeria, and Libya demanding room to grow, as well as Russia’s historical unreliability when it comes to output deals.

For now, U.S. companies are using the price rally caused by the talk of a deal to hedge their price risk for next year and lock in future cash flows. Rigs targeting crude in the U.S. also rose to their highest level since February, Baker Hughes Inc.

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Russia and the OPEC Deal – 10/18/16

Russia will join in the OPEC deal to limit oil production… at least according Putin.

With an economy heavily dependent on oil revenues, Russia has suffered greatly under low oil prices so it was naturally supportive of the agreement in Algiers between OPEC nations to limit output and boost prices. The next OPEC meeting on Nov. 30 that will deal with the distribution of cuts and whether or not producers outside the group will take part will be a chance to show how committed to the deal Russia actually is.

Russia would prefer to freeze its output at current levels rather than make reductions, according to Energy Minister Alexander Novak. Yet, Russia is pumping more oil than ever before bringing into question whether or not it can actually be trusted to cooperate with OPEC.

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“Traders have welcomed the news from Russia that it is ready to join other members to adopt sensible strategy to curb the supply and stabilize the price,” Naeem Aslam, chief market analyst at ThinkMarkets U.K. Ltd., said. “Caution may be the best practice. If history tells us anything, it is that these major oil players also have the habit to not respect the agreed agreement.”

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Russia and the OPEC, who together pump about half the world’s oil, could actually boost fuel prices and revive the energy industry if the output restrictions are put into effect. Yet, while Putin’s comments suggest such an agreement is possible, Russia not committed to pulling back.

An OPEC committee will work on the details of how to share the burden of cuts and present its proposals at the formal Nov. 30 meeting in Vienna. There ministers from some group members will meet with non-OPEC nations including Russia to discuss wider cooperation.

The odds of a successful deal remains, according to Goldman Sachs, since Libya and Nigeria are pumping 500,000 barrels a day more than expected and poor compliance from non-core OPEC producers is expected.

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