India’s policy on oil and gas exploration and production

I have just published an op-ed article on India’s oil and gas exploration and production policy.  It appeared in Business Line, India’s leading business newspaper.  The main argument is:

That India does not fit ‘Big Oil’s’ strategy need not be disappointing. As the country’s economy grows, ‘Big Oil’ will have to find new business models to engage an emerging market of more than a billion people.

ConocoPhillips: An unfair rap?

So ConocoPhillips has not done well on the stock market in recent times.  It also did not help when Warren Buffett described his super-investment in the company as a “dumb” mistake.  Conventional analysis has held ConocoPhillips’ $35.6-billion acquisition of Burlington Resources responsible for its recent woes.  We are not convinced.

For example, ExxonMobil’s $41-billion acquisition of XTO Energy prices out at $15.57 per barrel of oil equivalent.  In comparison, the ConocoPhillips-Burlington transaction was at $17.79 per barrel of oil equivalent, a premium of about 14%.  While any premium in hindsight is too large, this is not as large as analysts make it out to be.

Us vs. them: Information and climate change

It is unlikely that the debate will ever be settled but this is a cool graphic depicting key issues among the climate change deniers and believers.

Shell may sell its refineries to Essar

Shell is discussing the sale of its three European refineries to Essar, as discussed in a previous post, at $4,000 to $5,000 per barrel of capacity.  While valuation will depend on the three refineries’ individual configurations and complexity, the transaction is at a significant discount from the industry’s Golden Age.

The three refineries with more than 500,000 bpd of capacity amount to about 15% of the company’s refining capacity.  Essar currently operates a 280,000 bpd refinery in India with plans to expand it to 700,000 bpd in 2011, and half of a 80,000 bpd refinery in Kenya.

Strategically, the Shell refineries will allow Essar to build inroads into the diesel-intensive European market.  Such networks will help Essar place diesel volumes out of its expanding Indian refinery, which will likely be oriented to maximize diesel.  Of course, short-term results will likely be lackluster but long-term, demand will grow and, in general, refining capacity globally will become constrained.

Renewables M&A gets down to earth

KPMG has published an interesting survey of mergers and acquisitions in the renewable energy industry.  Major conclusions include:

1. Deal volume has, of course, fallen from nearly $26 billion in 2007 to a little over $18 billion in 2008 …
2. … With the billion-dollar transactions of 2008 being replaced by smaller-sized deals in the $300-500 million range and …
3. … Focused on currently operating assets in contrast to acquiring promising but undeveloped capacity
4. Investors are also using the depressed valuations to focus, consolidate, and grow positions
5. Government regulations and support drive renewable investments and, in recognition, nearly 16% of worldwide stimulus funds totaling almost $3 trillion have been allocated to “green” energy

Gorgon’s new model for liabilities of carbon capture and sequestration

The WSJ has an interesting blog uncovering an under-reported aspect of the $37-billion Gorgon natural gas project in Australia being developed by Chevron, ExxonMobil, and Shell.

Under the terms of the agreement, the companies will be responsible for the storage of the carbon-dioxide resulting from the natural-gas project during its operating lifetime and for 15 years afterward, Bloomberg reports. After that, the Australian national and state governments will be responsible.

A major legal hurdle in carbon capture and sequestration (CCS) projects is the ownership of liabilities.  Who should be liable for, say, potential leaks during the course or after developing a project?  Gorgon provides an interesting model.

Irrational exuberance or legit joy?

The New York Times has published a piece commenting on the flood of recent oil field discoveries, far exceeding the pace in this decade. Much as this is cause for joy, new oil finds are deeper, costlier, and more difficult to process. Finally, we ought to have a few more data points before calling a curve.

Will renewable energy benefit from R&D investments?

In a presentation, Rice University’s Baker Institute scholars have looked at patenting activity over the past few decades, government funding in R&D, and potential impacts on renewable energy.  Their conclusion is surprising: Lower government funding in renewable energy reflects R&D’s declining productivity (based on patents) rather than lack of support.

While more details are necessary for a full evaluation, we are skeptical of their preliminary conclusion for several reasons including:

1. Patents are not the best indicator of R&D productivity (as the authors also acknowledge)
2. Patenting frequency has fallen significantly over the years due to prosecution times and costs
3. Government funding decisions are typically not sophisticated enough to reflect patenting activity

Thoughts?

Wanted: Higher carbon prices

If we want higher carbon prices to incentivize projects that reduce carbon emissions, the latest auction in the United States’ only mandated carbon market — the Regional Greenhouse Gas Initiative — wasn’t good news.  The price of a ton of carbon dioxide equivalent fell from $3.23 in June to $2.19 this month.  Why?

1. Utilities are struggling with the recession’s impact on electricity demand, …
2. … fuel switching from coal to natural gas has gotten easier given that the latter is the cheapest it has been in five years, and …
3. … the RGGI is providing more allowances than demanded by the market (a la the European Emission Trading System in its early years).

Nevertheless, there is cause for cheer:

… RGGI authorities … hailed this week’s sale and the one-year run of the regional cap-and-trade effort as a success. … ”Trading volumes … now match volumes in other established carbon markets, such as the Kyoto Clean Development Mechanism,” RGGI’s executive office … said ….  Since the start of RGGI one year ago, the allowance auctions have generated almost $433 million for state coffers. RGGI officials report that to date, more than 100 bidders have participated in the sales, and every major power plant in the Northeast is now reporting its CO2 emissions on a quarterly basis to the program.

As an aside, it is interesting to see how much of an impact verification processes can have on carbon prices.  The CDM credits trade at a significant premium (at least 25%, sometimes, 200%) to those from other exchanges.  More in this report on the state of voluntary carbon markets authored by Ecosystem Marketplace and New Carbon Finance.

Friedman on solar energy: Invented in U.S., sold abroad

Tom Friedman visited Applied Materials recently and has written a piece in the New York Times hypothesizing why all of its solar panel factories are abroad.  His conclusion:

… their governments have put in place the three prerequisites for growing a renewable energy industry: 1) any business or homeowner can generate solar energy; 2) if they decide to do so, the power utility has to connect them to the grid; and 3) the utility has to buy the power for a predictable period at a price that is a no-brainer good deal for the family or business putting the solar panels on their rooftop.