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Russia, Europe Are In A Race To The Bottom

September 16th, 2014 vaddison Posted in Uncategorized | Comments Off

By Leonid Bershidsky, Bloomberg View

As Europe and Russia head into another round of sanctions, economic data are driving home an important point: Nobody stands to win in this tit-for-tat battle.

The International Energy Agency’s (IEA) September Oil Market Report offered bad news for Russian President Vladimir Putin, calling a recent slowdown in oil demand growth “nothing short of remarkable.” The IEA noted that the pace of growth was at a 30-month low in the second quarter and cut its 2014 and 2015 forecasts, blaming economic weakness in Europe and deceleration in China.

This matters for Russia because hydrocarbons made up 70.6% of exports last year and 50% of budget revenues. The government starts to worry about its ability to finance its obligations when the price of Urals oil drops below $100 per barrel. It is now at $96, dangerously close to the $93-to-$95 range needed to support Russia’s budget plans for 2014 to 2016.

Oil is not the only raw material whose price is declining. Goldman Sachs Group Inc. issued a report titled “The End of the Iron Age,” citing a “dramatic” drop in iron ore prices—mainly because of a decrease in Chinese demand—and predicting that prices would be even lower through 2017 because of “structural oversupply.” The price of steel has been falling, too. Metals accounted for 7.7% of Russia’s exports last year.

Europe is also vulnerable. Declines in raw materials prices are only going to compound the deflationary effect of the Russian food embargo, introduced in response to the European Union’s Ukraine-related financial sanctions. Europe faces a glut of fruit, vegetables, milk products and fish, which is weighing on prices at a time when the European Central Bank is taking extraordinary measures to boost inflation closer to its target of 2%.

[On Sept. 12], a new set of EU sanctions [took] effect, cutting off European debt financing for Russia’s state-owned energy and defense companies and banning European oil service companies from participating in Russian projects. In response, Russia will likely ban the import of European cars and some types of clothes, according to presidential aide Andrei Belousov. Like the food embargo, this will drive European prices down and Russian prices up.

In this race to the bottom, Russia may prove the more resilient, if only because Putin’s authoritarian regime has a mandate from a majority of Russians to wage a new cold war. The food embargo and the price increases it caused in Russia did not drive down Putin’s approval ratings, and Russians have stoically accepted the ruble’s recent losses against the dollar. The currency depreciation can also help the government weather low raw materials prices by boosting the value of foreign-currency exports in ruble terms.

Europe, on the other hand, cannot take much more economic pain. A new slump could send some governments tumbling. In France, 62% of the population already wants President Francois Hollande to resign.

The world is too interconnected economically, and the European recovery too fragile, to keep using trade disruptions as weapons. Even Ukraine is taking a hit from slumping metals prices: Steel and iron ore account for about a third of its exports.

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Post-Macondo Offshore Safety Directive Brings Changes In UK

September 9th, 2014 vaddison Posted in Uncategorized | Comments Off

By Brian Minty, FQM Ltd.

The Macondo blowout has irrevocably changed the regulatory environment of oil and gas production. The Deepwater Horizon explosion, whilst tragically claiming 11 lives, was also considered to be the largest ever accidental oil spill, with a vast long-term environmental reckoning. Four years on, and the legislative repercussions of the catastrophe are becoming evident, too.

In the wake of the disaster, an inquiry by the European Commission into the preventability of further similar incidents concluded that the existing divergent and fragmented regulatory framework, along with current industry safety practices, did not provide adequate assurance that risks from offshore accidents were minimized throughout the Union. As a result, the Offshore Safety Directive (OSD) was adopted on June 28, 2013.

The aim of this directive is to reduce, as far as possible, the occurrence of major accidents related to offshore oil and gas operations and to limit their consequences. The U.K. will have to harmonize the directive by July 19, 2015, with full compliance the year after. The current period of consultation means the clock is ticking for all operators, but what are the implications of the directive and who will be mostly affected?

Perhaps one of the biggest structural changes is that a new competent authority, or CA, is to be formed within each member state, with powers to oversee enforcement measures and which will report annually on operator performance. The exact format of this body is currently in discussion but, overall, it will have significant powers to impose penalties and enforcement actions if companies do not respect the minimum standards.

Revisions to these minimum standards seem reasonable enough and ask questions that operators are used to answering: Are you technically competent enough to operate? Are you transparent enough about your reporting and operating systems? And are you financially robust enough with the correct liabilities in place? However, as always, the devil is in the detail.

Looking closely, we see that the financial tolerances of companies will come under much greater scrutiny before operatorships are granted, and obligatory wider emergency planning and reporting will be required. Technical solutions presented by operators will need to be verified independently prior to and periodically after the installation is taken into operation.

An all together new level of transparency is also required, so that companies will have to publish information on their websites about standards of performance and will be requested to submit reports of incidents overseas to enable key safety lessons to be shared.

One of the biggest changes involves questions around liability and compensation. Oil and gas companies will be fully liable for environmental damage caused to protected marine species and natural habitats over a much larger area. At present, the current EU legal framework for environmental liability (ELD) is restricted to territorial waters, i.e. about 22 km (14 miles) offshore but, by 2016, this will extend to cover all EU waters, including the exclusive economic zone, so approximately 370 km (230 miles) from the coast. As the dollar cost of Macondo has clearly demonstrated, very few operators have the financial capability to support the cost of environmental damage and remediation. Such a significant change could even impact the insurance industry as a whole.

While the majority of the items above are represented at least partially within other EU and national regulations, the sticking point, for smaller oil companies is the section on proven “technical and financial capacities.” The OSD requires member states to ensure that licenses are not granted until satisfactory evidence has been provided that the applicant has, or will make, adequate financial provision for potential liabilities. This is not a new concept in the U.K. offshore world; however, the government, oil and gas industry, and insurers will need to tackle the question of how to factor extended ELD damages into financial provision calculations.

So, as the countdown continues, what do you need to know?

All in all, the directive is not quite as punishing as it could have been but with its many legal definitions that require testing, especially around independent verification and environmental liability, it is far from straight forward. There are definite deadlines to be met, and it is likely that the majority of operators will struggle with both the concepts involved and the resources to implement them.

One thing is sure, with further reforms on the horizon in both the civil and criminal liability spheres, the OSD appears to be only the first step by the EU in reforming our offshore environmental and safety regimes in response to the Macondo disaster.

Brian Minty is associate director at FQM Ltd., a health, safety, environment and quality consultancy and training organization.

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2014 Is The Year Of The Energy-Water Nexus

September 2nd, 2014 vaddison Posted in Uncategorized | Comments Off

By Kate Zerrenner, Environmental Defense Fund

2014 is shaping up to be the year of the energy-water nexus. First, the United Nation’s World Water Day centered on this topic. Then, the U.S. Department of Energy released a 250-page report on the energy-water nexus and indicated that it will be included in its Quadrennial Energy Review. And, this week, the biggest international water conference, World Water Week, is taking on the nexus.

Held every year in Stockholm, Sweden, World Water Week is led by the Stockholm International Water Institute (SIWI) and serves as a platform for over 200 collaborating organizations and 2,500 participants from 130 countries around the world to discuss global water and development issues.

In choosing the energy-water nexus as this year’s theme, SIWI and its supporters are affirming—on a global stage—what policy experts have been saying for years: energy and water are inextricably linked, and the best way to set the energy-water system on a sustainable course is to plan for both resources holistically.

In order to inform discussions and encourage collaboration among energy and water professionals at the World Water Week event, SIWI released: “Energy and Water: The Vital Link for a Sustainable Future.” This paper analyzes key opportunities and challenges facing the energy and water communities, including shale gas fracking, sustainable hydropower, and the importance of forests to proper energy and water co-management. But there were two chapters in particular that I hope will spark productive conversations at the event: Water and Energy: A Necessary Evolution from Dialogue to Partnership? and Water and Energy in the Urban Setting.

Asymmetries between water, energy

While the connection between the energy and water sectors is clear, there are considerable asymmetries in how the two are priced, regulated and managed. Furthermore, it is no longer possible for each sector to simply talk about the other; they must work together to address the nexus.

For example, much of the electricity market is deregulated and run by large private companies participating in regional, national, or global markets, whereas the water sector is generally run by small public utilities operating in highly-regulated markets at the local level. Also, although energy efficiency is a central part of the energy sector, inefficient use of water seems to be the norm. Finally, energy is clearly priced and there is an awareness of pricing in the market and among customers, especially at the industrial level. Water, on the other hand, is typically not something we worry about: Not only is customer awareness of water prices low, but the way water is priced in the U.S. is not reflective of its true value.

This disparity lies at the heart of what makes the energy-water nexus so challenging. My hope is that the leaders of this year’s World Water Week conference focus on addressing these asymmetries, because doing so is the first step toward addressing many of the other challenges outlined in SIWI’s paper.

Cities may face conflict over energy-water nexus

Another key theme the paper covers is the need to address energy and water trade-offs in cities. We often hear about the water needs of agriculture, which is important, but with urban populations expected to double globally by 2050, we will face conflict over whether cities or power plants get the water if we’re not careful.

To some degree, this is locational. For example, Southern California has a very high water-associated energy demand because its water has to be pumped in from Northern California—a problem that could intensify as northern water sources are constrained by the state’s historic drought. As climate change exacerbates our water shortages, particularly in areas that are already water-stressed, cities may be forced to pursue a similar approach, looking outside of their own districts for water resources. This additional transportation of water could increase energy demand overall, which would, in turn, increase demand for water, creating a vicious cycle in the energy-water nexus spiral.

A more systematic approach to the water and energy needs of a city could help maximize efficiencies in both sectors and manage the scarce existing resources. The city of San Antonio offers a good example of effective energy-water co-management; San Antonio Water System (SAWS) prioritizes energy management and has won numerous awards for its energy savings. The water utility’s most innovative project to date is Dos Rios, a combined sewage treatment and biogas plant that reduces harmful air pollution and generates revenue from the sale of biogas. CPS Energy, the city’s progressive, municipally-owned electric utility, even installed a large, 20-megawatt solar farm at the facility to further cut harmful pollution and water use.

Each sector must view the other as a vital component of their collective futures: water is an energy resource and energy is a water resource. Equalizing the way we regulate and price the two is a step toward approaching these massive problems in a more systematic way.

Other water-stressed countries are thinking about this in innovative ways, so there’s no reason for the U.S. to reinvent the wheel. Over the next few months, I will be looking at some policies and strategies other countries are using to address their own energy-water nexuses. World Water Week is just the start, and there are still four more months left in the year to solidify 2014 as “the year of the energy-water nexus.”

If you are interested in learning more about how energy and water are fundamentally intertwined and what this means for the future, join Kate Zerrenner and Dominique Gomez of WaterSmart Software for a Twitter chat on from 12:30 to 1:30pm CST Sept. 3. To learn more, visit Environmental Defense Fund’s (EDF) EnergyWaterChat web page at http://www.edf.org/live-twitter-energywaterchat. This blog post originally appeared on EDF’s Energy Exchange blog.

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Data Security Requires High Priority

August 20th, 2014 vaddison Posted in Uncategorized | Comments Off

By Sarah Thomas, Enaxis Consulting

To most of us, data security is a black box. We read about Heartbleed, Stuxnet, conflict between national government covert programs and industry, and outdated technology that is susceptible to infiltration. In the end, the vast majority of us throw our hands up, don’t change our passwords, and resign ourselves to the idea that perhaps nothing is private; nothing is secure. If something happens to us as an individual, we take care of it retroactively through our bank or whatever institution is associated with the aspect of our life that has been affected. At work, we realize there is information security, but all we know is it keeps us from doing what we want, when we want and we are constantly trying to get around the protections the company may have put in place.

Data security has real and tangible implications; however, and it can mean the difference between a company that survives and one that is catastrophically undermined. The costs include the loss of customers and a diminished reputation, loss of intellectual property, and exposure of sensitive product, company or consumer information. The cost of clean-up in terms of public relations, revamped technology and management systems, and careers impacted can be significant. According to a 2013 data breach study by the Ponemon Institute, the average cost of a data breach in the United States in 2013 was more than five million dollars, but the continuing impact costs can be much greater.

The vast majority of data breaches occur either because of a deliberate hack from the outside, or because of human error, such as a lost device or computer. Only 30% of the time is a breach the result of a flaw in the technology system. When a data breach does occur, there are four primary factors that can decrease the impact of that breach:

• The company maintains a strong security position;
• The company has an incident response plan;
• The company has a C-level information security officer (CISO) and
• The company engages consultants prior to and after security incidents.

All four of these categories illustrate a dedication and commitment to placing data security high on an organization’s priority list. With the rapid pace of change within information technology, ever more advanced hacker techniques that are often government sponsored, and the tendency of employees to ignore what doesn’t affect them, data security no longer has the luxury of being a side-effort or after thought. Developing a company’s security position, a data breach incident response plan or organizational development to create a CISO office, takes analysis, industry insight and strategy development—all areas where consultants with experience in data and information security can help.

This blog post originally appeared on Enaxis Consulting’s website.

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Kinder Morgan Reverse-Engineered Itself

August 12th, 2014 vaddison Posted in Uncategorized | Comments Off

By Matt Levine, Bloomberg View

The self-acquisition presentation that Kinder Morgan filed Aug. 11 is a great thing to read if you’re interested in the question of whether and how financial engineering adds value. One way of describing Kinder Morgan is that it is a big company that owns oil and gas pipelines, with some shareholders who own its stock and some bondholders who own its bonds. But that is not a strictly accurate way of describing Kinder Morgan. In fact Kinder Morgan is not a big company that owns gas pipelines. It’s actually four big companies, each of which does some things relating to those pipelines, and each of which has its own investor base.

There’s Kinder Morgan Energy Partners (KMP), which is a publicly traded partnership that owns a lot of pipelines. There’s El Paso Pipeline Partners (EPB), a publicly traded partnership that owns a different lot of pipelines. There’s Kinder Morgan Management (KMR), a publicly traded limited liability company that manages KMP. And there’s Kinder Morgan, Inc. (KMI), a publicly traded corporation that runs the whole operation, owns chunks of the other bits, and skims some money off the top of what the partnerships take in. Each of the four bits has its own group of shareholders, and three of them have bondholders too.

So you have roughly seven different ways to invest in the Kinder Morgan enterprise, depending on things such as your tax situation and your risk appetite and your need for income and your particular asset preferences. It’s highly engineered to appeal to different investors in different ways.

And yesterday Kinder was like, no, never mind, let’s just mash it all back together. KMI will buy the other three companies—mostly for KMI stock, though there’s a little cash too—and assume their debts and just be one big company that owns gas pipelines, with its stock owned by shareholders and its bonds owned by bondholders and no more of the headaches that come from managing four different companies.

Now one obvious thing to say about this is that nothing is happening. Before there were a bunch of people who owned stock in the Kinder Morgan enterprise. Afterwards, the same bunch of people will own stock in the Kinder Morgan enterprise, and it will be the same enterprise. So, in the aggregate, the value of their stock shouldn’t change. Perhaps one bit of the enterprise is getting a better deal in this buyout, but that better deal is just coming out of the pockets of another bit of the enterprise, and all in all the bits should balance.

The bits do not balance.

Basically, by re-shuffling papers Kinder Morgan has discovered $12 billion of shareholder value. And not just shareholder value: Usually a good way to find shareholder value is by taking it from bondholders, but in fact here the bonds are also trading up, and the enterprise’s credit ratings are likely to improve. Every group of investors has made money. Kinder Morgan has created value from nothing.

Of course, it did this by reversing financial engineering, which is a bit of an embarrassment, but a contingent one. If financial engineering can have negative value then it can have positive value too. Some ways of slicing up cash flows seem to be more valuable than others, so it can be worth billions of dollars to find just the right way to slice up your cash flows. If you’re a skeptic of financial engineering this should trouble you, even though Kinder Morgan is scrapping its particular flavor of financial engineering as over-complicated and unworkable.

Now, there are explanations of where Kinder Morgan found all this value, but they mostly won’t be that satisfying for skeptics. A favorite explanation seems to be that the four-part structure is too complex for investors to understand, and that investors will pay more for a simple structure. This is problematic in that investors are paid to understand their investments—this is called the “efficient markets hypothesis,” roughly—and while this thing is convoluted it is not that convoluted. A further problem with this theory is that there is ample empirical evidence that investors will in fact pay more for things that they don’t understand; see, e.g., the global financial crisis.

Another explanation comes from the fact that KMI skims a rather controversial amount of money off the top of KMP’s income in the form of incentive distribution rights. This makes KMP’s cost of capital prohibitively high, deterring otherwise-profitable investments. That seems to be true, but again it’s just a zero-sum shuffling of cash flows; if KMP is overpaying KMI for its services then eliminating that overpayment should be as bad for KMI as it is good for KMP.

But there’s one other place to look for value. If you see a piece of financial engineering that makes everyone involved better off, then a reasonable guess is that it makes somebody who’s not involved worse off. There are various possible uninvolved parties, but none is more popular with financial engineers than the IRS. If you can shuffle some papers in a way that saves money on taxes, why wouldn’t you?

This morning I mentioned that Kinder’s shedding of its publicly traded partnerships (which don’t pay corporate income taxes) seems like a strange move in an environment where everyone is trying to avoid corporate taxes. But it turns out, it’s not that strange! For one thing, the Kinder enterprise is already paying a lot of corporate taxes on the income that those partnerships generate, since a lot of that income is paid to (and taxed at) KMI anyway. So this is not quite a case of a tax-exempt company volunteering to pay taxes.

For another thing, Kinder’s tax accounting for this transaction involves taking a stepped-up tax basis in the KMP/EPB assets that KMI is acquiring, giving the enterprise large future tax deductions. All in all, it seems as if Kinder Morgan as a group will actually be saving money on taxes. Specifically: Significant income tax savings from the acquisition amounting to ~$20 billion over ~14 years

On some dumb simple assumptions you can get a present value for those tax savings of a little under $12 billion. That number looks mighty familiar: It’s roughly how much value Kinder Morgan added by announcing this deal. These cash savings are a lot simpler to understand than the fuzzy benefits of the deal like, um, being simpler to understand. Kinder Morgan may have created some value from nothing. But mostly it seems to have created some value from the usual place: by reducing its tax bill. And no one doubts that financial engineering is good for that.

Read the full version of this opinion piece at bloombergview.com.

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National Security Rests On Energy Independence, Energy Security

August 5th, 2014 vaddison Posted in Uncategorized | Comments Off

By Don Briggs, Louisiana Oil and Gas Association

Energy independence is the popular talk at the water cooler. However, it is vital to understand that energy independence walks hand and hand with energy security. It is a marriage that is a necessity for the future of the United States’ national security.

Why does the current instability in Iraq cause our gas prices to jump? Why should anything going on in Libya affect the United States energy market? One simple reason: the United States has been dependent on foreign resources for several decades. Our dependence has not been on just any ole’ country. Specifically, we have been dependent on the Organization of Exporting Countries (OPEC) for our yearly imports of petroleum.

To be more specific, the latest data from the United States Energy Information Administration (EIA) shows that we imported 5.83 MMbbl/d of petroleum from OPEC countries—or 55% of our net imports for 2012. This fact quickly answers the previous question of why our market is disrupted by Middle Eastern instability.

Naturally, looking at this data, it would be accurate to say that energy independence needs to occur sooner than later. While this is an accurate argument, the broader scope of energy security cannot be ignored. No one would argue that the United States is a world super power. However, as instability continues in the Middle East, and the demand for natural resources in America grows, an obvious tie between our power and our natural resource stability can be seen.

As the oil and natural gas supply increases with each new day here in the United States, it is vital that our federal government and our individual states recognize the importance of free enterprise. Rather than hamper new development and exploration, our nation should be doing everything possible to encourage new oil and gas business. Will oil and gas be the fuel of the future? Authorities on all fronts argue this issue daily. For today, oil and natural gas are the leading fuels that literally power our country. Petroleum products can be found in nearly any item you pick up.

What are the tangibles of energy security? For starters, the U.S. Department of Defense relies on petroleum for over 75% of its needs. Another example of energy security is the fact that nearly every farming and manufactured food and household product is made through the use of petroleum. Just as Russia has done with the Ukraine by cutting off natural gas supplies, similarly, if Saudi Arabia decided to diminish their imports to the United States, immediate chaos would be thrown into the U.S. trade market.

What is the solution to achieving energy independence and security? The United States is on the right path. Developing our own technologies and our own natural resources will only speed up the process of establishing our long-term energy security. The ripple effect, however, on our energy security and independence starts small. For example, when a local or parish/county government overregulates or prohibits oil and gas operations, even this action decelerates our long-term safety and strength as a nation.

Don Briggs is president of the Louisiana Oil and Gas Association (LOGA). This blog post originally appeared on the LOGA website.

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Cost Kills Renewable Route To End Oil Dependence

July 29th, 2014 vaddison Posted in Uncategorized | Comments Off

By Leonid Bershidsky, Bloomberg View

Conventional wisdom states that renewable energy cannot cover 100% of the world’s needs: It’s too expensive and too scarce, and switching would be inefficient while hydrocarbon resources are still plentiful. A group of 28 U.S. scientists and engineers has attempted to make the opposite case.

The group focuses on California, arguing that the state could move its industry, transportation and housing entirely to wind, water and sunlight energy by 2050—and gain from it economically. By U.S. standards, the state is relatively energy-efficient to begin with: It consumed 201 million British thermal units per capita in 2012, the third-lowest after New York and Rhode Island. It’s energy-hungry, though, compared with the global average consumption of about 75 million British thermal units per capita.

The group of engineers and scientists, mainly from Stanford University, concluded that there is nothing in the entire state that couldn’t run on electricity even if only today’s technology were used. By 2050, according to their 55-page report, California could run all its transportation on batteries and hydrogen fuel cells, heating and cooling on heat pumps, and high-temperature industrial processes on combusted electrolytic hydrogen. Installing the necessary capacity would require 0.9% of California’s land area, mostly for solar plants that can be more useful here than in most other U.S. states. Roofs of buildings and parking lot canopies would also need to be used, and wind farms would be built offshore. The plan doesn’t provide for the construction of new hydroelectric plants, just a reasonable expansion of the existing ones’ capacity. Tidal and wave energy can cover up to 1% of the state’s needs in 2050.

The experts argue that one of the biggest problems with renewable energy—the fact that it is not produced continuously, with wind turbines running only a third of the time on average—can be solved by combining power sources and installing storage. They project that the state has more wind, solar, hydro and geothermal energy resources than it will need in 2050. The energy shift would result in a loss of 413,000 nuclear-related and fossil-fuel jobs—California now produces 9.5% of U.S. oil. But it would create 632,800 jobs in construction and the new energy industry, resulting in a net gain of $24.6 billion a year in 2010 dollars for the state’s economy.

So far, so good, but what about cost—the killer argument against all major renewable projects? Switching from natural gas, which California uses to generate more than half its electricity, would require major infrastructural changes. In all, the experts estimate that installing the necessary renewable-energy capacity by 2050 would require an investment of $1.1 trillion.

Their justification for that cost is not entirely satisfactory. They claim the move will eliminate $103 billion a year in “mortality costs” of air pollution, at about $8.2 million per human life, and $48 billion in “global warming costs.” The health-cost savings alone, they argue, will make the investment pay off in just seven years. These are the kind of squishy numbers that turn most people off clean energy plans: The global warming calculations are highly abstract and the attribution of deaths to air quality is shaky. There are lots of other ways to make people’s lives better, and pollution is too far from the top of the list of Americans’ worries to justify spending a trillion dollars on alternative energy in California.

A better argument might be that as the use of renewable energy becomes more widespread, its direct cost will fall below that of hydrocarbon energy. Wind turbines cost 20% less in 2011 than they did in 2008, both because of technological advances and economies of scale. Solar energy, too, is getting cheaper to generate as panels become commoditized. The study’s authors project that by 2030, the weighted-average cost of sustainable energy will be 6.2 cents per kilowatt-hour, or about half the current level. Current wholesale prices for hydrocarbon energy start from less than 4 cents per kilowatt-hour, but it will only increase in price as fuel gets more scarce and harder to extract.

This might not yet be a convincing case for investing $1.1 trillion or even subsidizing private firms that might want to do it. It’s no longer an impossibility, however. Countries making tens of billions of dollars in energy revenues—such as Norway, which consumes almost twice as much energy per capita as California—should start looking into major renewable projects to ensure their future once fossil fuels run out.

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New Russia Sanctions Are Hollow As Old Ones

July 22nd, 2014 vaddison Posted in Uncategorized | Comments Off

By Leonid Bershidsky, Bloomberg View

Though they sound more serious, the latest Western sanctions against Russia for failing to stop the war in eastern Ukraine are, again, mostly bark and very little bite. The growing disparity between the sanctions imposed by the U.S. and the European Union also raises the question of whether the two are allies in any real sense of the word.

Russia’s participation in the events in Eastern Ukraine is progressively less deniable. Videos of Grad unguided missiles fired at Ukrainian territory have been traced—as conclusively as possible under the circumstances—to a Russian border town. It is increasingly clear that as Ukraine’s military attempts to crush the rebels, Russian President Vladimir Putin cannot afford let it happen: That would damage his popularity at home.

Putin’s Ukrainian counterpart Petro Poroshenko faces even more powerful pressure to keep hitting the insurgents with all he’s got. The momentum is pro-war, and there are only two ways left in which the West could productively intervene: Provide military assistance to Ukraine or pressure it to make a compromise with Russia, accepting some of its terms. Since both these paths are unpalatable for obvious reasons, and Western politicians must be seen as doing something, there are the sanctions—but God forbid they should cause trouble for U.S. or European companies. That reticence will make the measures ineffective against Russian ones, too.

The U.S. Treasury Department’s new sanctions announcement is a masterpiece of ingenuity. It names large companies such as the state-controlled oil major Rosneft, second-biggest natural gas producer Novatek, third biggest bank, Gazprombank, and government-owned development bank, VEB, which makes for impressive headlines. But the sanctions against them are narrow.

The banks are not banned from dollar clearing, and Gazprombank-issued Mastercard and Visa cards will still work, unlike for a few previously sanctioned small Russian banks.

The energy companies can still trade with U.S. entities. Igor Sechin, Rosneft CEO and Putin’s close friend, says he is confident his company’s several big projects with ExxonMobil are going ahead, and nobody in the U.S. has contradicted him.

The only thing denied to the big Russian companies will be new financing with a maturity of more than 90 days from U.S. entities and individuals. The markets have already taken care of that: In recent months, it has become hard for Russian public and semi-public companies to line up foreign credit. They have been preparing for this moment since March, and Rosneft, for one, accumulated $21 billion in cash and other short-term financial assets at the end of the first quarter as a cushion in case external financing dried up. A back-of the-envelope analysis of Gazprombank’s balance sheet shows that last month, less than 12 percent of its foreign-currency liabilities were owed to foreign entities, including U.S. ones, and that share has been shrinking.

Europe has not even gone that far.

The leaders of the 28 EU nations agreed to stop the European Investment Bank from funding further Russian projects. It has disbursed a total of 1.6 billion euros ($2.17 billion) in Russia, none of it this year and a little over 1 billion last year. The EU also decided to use its influence at the European Bank for Reconstruction and Development to stop further funding in Russia (the influence is decisive, though Russia is a big shareholder in the development bank, too). The EBRD’s total investment in Russia to date stands at 24 billion euros ($32.5 billion), but in recent years its Russian activity has been shrinking (to less than 2 billion euros last year). In any case, 84% of it went to private sector companies, which Putin doesn’t worry about too much.

In addition, EU leaders agreed to “consider the possibility of targeting individuals or entities who actively provide material or financial support to the Russian decision-makers responsible for the annexation of Crimea or the destabilization of eastern Ukraine”—a vague hint that may or may not turn into a list of sanctioned companies by the end of this month. The list, if it does emerge, will probably be less impressive than the U.S. one, given Rosneft’s recent activity in the EU.

The disconnect between U.S. eagerness to punish Putin and EU’s unwillingness to punish itself is growing steadily. The new U.S. sanctions, meanwhile, cannot be effective without symmetrical European ones. Dollar financing is not the only kind available; Europe may even be a better place to seek resources, now that the European Central Bank is dovish on monetary policy and the U.S. Federal Reserve is tightening it. The wariness about lending to Russian public entities is, of course, present in Europe, too, but that’s not the same as actual sanctions.

The Russian stock market tumbled after the sanctions announcement.

It will, however, bounce back, as it has already done this year, as soon as the first speculative rush is over and investors realize the sanctions are, again, more thunder than hail.

The West is still not doing anything that will stop Putin from playing his game of brinkmanship. The conflict in eastern Ukraine will continue and more people will die simply because a true compromise is not acceptable to any of the sides.

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Goldman Sachs Supports Methane Policy, And Why It Matters

July 15th, 2014 vaddison Posted in Uncategorized | Comments Off

By Ben Ratner, Environmental Defense Fund

Good energy policy ideas can come from all corners, and Wall Street is no exception.

Goldman Sachs recently served up a powerful case for action on methane in a stroke of market logic grounded in data. In a recent report, the investment bank argues that environmental regulation is more than a necessary evil when it comes to oil and gas development—it’s a vital enabler for economic growth.

There’s power in diverse groups coming together.

Goldman’s insight for the U.S. oil and gas industry—that the current environmental policy vacuum is a major cause of investor queasiness—suggests that markets can help drive environmental progress.

Business, investors, policymakers can join forces

Among the policy priorities Goldman Sachs identifies in its report is the establishment of strong and stable rules to ensure companies follow safer development practices and reduce emissions of methane. A highly potent greenhouse gas and the primary ingredient in natural gas, methane is leaking from across America’s natural gas supply chain. It’s now responsible for more than one-third of today’s greenhouse gas emissions worldwide.

With “timely cooperation among business leaders, investors and policy makers;” however, Goldman Sachs believes that strong methane policies are feasible in the not-so-distant future.

Investors need market certainty

As public controversy abounds over the environmental impacts of producing new supplies of American oil and gas and policy uncertainty persists, Goldman Sachs believes large would-be investors will keep their mega-checkbooks holstered.

Or, more likely, they will re-direct those checks to foreign competitors in countries where projects can proceed with more market certainty.

That means that although North America could add up to 2 million jobs in traditional manufacturing and other industries over the next decade, it’s far from certain to investors that policy and market dynamics will allow the United States to grab this opportunity.

Removing this uncertainty is where the investment bank sees a clear role for regulation.

Goldman’s report shows that, although investment surged in the North American upstream oil and gas industry, investment lagged foreign nations 15-to-1 in downstream industries such as chemical plants that use products developed in the fields for manufacturing.

This is partly because investors lack confidence that upstream supply will be stable over time given controversy and the lack of strong policy.

Or as Goldman Sachs CEO Lloyd Blankfein recently observed on the Charlie Rose Show, industry operators who get new facilities permitted in the absence of methane rules will achieve “a very hollow victory.”

Methane message resonates with industry

I represented Environmental Defense Fund at the Goldman Sachs North American Energy Summit last month.

My remarks to the summit focused on methane because it’s the linchpin to the climate performance of the oil and gas industry—and a litmus test for its ability to address a broader suite of very real environmental concerns.

If we take a proactive approach and fix the methane problem, we can begin reducing the environmental risks from unconventional oil and gas development and provide more assurance that the public and the markets need to reap economic benefits.

The best way to do this is with a smart, comprehensive, and timely national methane policy, building on President Obama’s methane strategy in the Climate Action Plan, and an ongoing EPA analysis. Such an approach could ensure that we cut emissions as much as possible, as quickly as possible, and through a consistent framework that works for businesses, I told the summit.

It could draw heavily on the experience of leading states like Colorado, which brought together industry and environmentalists to forge sensible standards that are keeping methane in the pipes and out of the atmosphere.

I was encouraged to hear interest in policy collaboration from multiple industry and investor leaders. These forward-thinkers understand that while methane and the other important environmental challenges with oil and natural gas won’t go away on their own, they can be minimized if we roll up our sleeves and establish the kind of policy certainty Goldman identifies as a driver of business value.

This blog post originally appeared on the Environmental Defense Fund’s website.

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Reframe Problems To Help Find Answers

July 8th, 2014 vaddison Posted in Uncategorized | Comments Off

By Patrick Leach, Decision Strategies

A few years back, I designed a simple spreadsheet tool for an oil and gas client to use in specific circumstances. This circumstance arises when the company is drilling a well and gets something stuck way down in the hole (often several kilometers down). At that point, the company usually tries to fish it out using a tool specially designed for the purpose. The problem is 1) such fishing expeditions often fail— i.e., the tool fails to grab a hold of whatever is stuck, and 2) you don’t get to find out that it failed until after you’ve pulled the fishing tool all the way back to the surface. The round-trip time to go in, try to grab and come back out can be a full day or longer, depending on how deep the hole is. And if you’re offshore in deep water, each day of rig time can cost about a million dollars.

If your first attempt fails, you can always try again. And again. And again. But at roughly a million dollars per try, the costs mount fast. If and when you become convinced that further attempts are futile, you fall back on Plan B: you plug the bottom part of the hole with cement (abandoning whatever it is that’s stuck), pull back, and “sidetrack”—i.e., you drill around the plug you just made. This usually involves putting an extra string of steel pipe into the well, and settling for a smaller well diameter from that point forward. It’s generally much more expensive than fishing the tool out, which is why you try fishing first.

Once you get into the cycle of repeatedly attempting Plan A (fishing), it becomes one of those areas where human psychology runs rampant. Everybody on the rig gets up every day thinking, “Today we’re going to fish that thing out of the hole!”regardless of how many times they’ve already tried and failed. Nobody wants to give up. The result is often a huge loss to the company as the crew wastes days or weeks of rig time in repeated attempts at Plan A before finally conceding defeat and proceeding with Plan B.

So the question is: How many times should you try Plan A (fishing) before giving up and implementing Plan B (sidetracking)? The correct answer, of course, is that you should give up on Plan A when the average cost of continuing with Plan A becomes worse than the average cost of implementing Plan B (recognizing that if Plan A repeatedly fails, you have to go with Plan B anyway). But that will be heavily dependent on what the probability of success for Plan A is on any given day. How do you arrive at that?

This was where the “Fish or Cut Bait” tool came in (as we came to call it), and its success comes not from fancy math (there isn’t any), but rather from getting people to reframe their thinking. Instead of asking what the probability of success for Plan A will be on any given day, the tool asks for just two probability inputs:
1. What’s the probability that Plan A will never work, regardless of how many time you try?
2. What’s the probability that Plan A will work on the very first try?

These are numbers which people often have a feel for—much more so than trying to predict success on any given day. Reframing the question in these terms makes it much easier for people to get their heads around the problem.

From that, the tool uses other inputs (the time and cost required for each attempt at Plan A, and the cost of Plan B), as well as one key piece of logic which I got from interviewing drilling engineers: in general, if Plan A fails today, its probability of success tomorrow goes down. Occasionally we might learn something today that causes the probability of success to go up, but that’s the exception, not the rule. This rule, plus a few simplifying assumptions, enable the tool to come back with a definitive number of attempts to make at Plan A before giving up and going with Plan B. This number should be taken with a grain of salt—no tool’s output should be accepted as The Truth—but it’s a good starting point for discussion.

More to the point, even though the tool was designed for the specific case of having a piece of equipment stuck in a well, the concept is generic. We sometimes find ourselves in situations where we can keep trying over and over to fix something at a modest cost—and those attempts may or may not work—or we can give up on trying to fix it and do something else at a higher cost (replace it, go in a different direction entirely, etc.). In these circumstances, the Fish or Cut Bait tool might be useful.

And even if it isn’t, simply reframing the problem in a way that allows us to see things more clearly is often a huge step toward finding a good answer.

P.S. You can download the Fish or Cut Bait tool on the Decision Strategies website at http://www.decisionstrategies.com/toolbox/

Patrick Leach is CEO of Decision Strategies. This blog post originally appeared on Decision Strategies’ website.

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