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Oil, Gas Sector Can Learn From The Financial Sector

September 30th, 2014 vaddison Posted in Uncategorized | Comments Off

By Carlos Soto, Enaxis Consulting

In many ways, the current landscape of IT within oil and gas mirrors the recent past of the banking sector. Rewind to 2007 and big banks were starting to aggressively adopt technologies like mobile computing, social media and high-performance computing (HPC), which is the ability to perform and track countless calculations in a fraction of a second. These adoptions led to service advances for customers and employees.

Video conferencing slashed travel budgets and facilitated expansion into global markets, often via outsourcing, which further drove efficiencies. Mobile computing enabled banks to offer customers flexible banking online, which removed the cost of paper and saved some companies millions. Placing iPads at branches improved customer service by decreasing customer wait times (CWT). HPC, according to some analysts, became a game-changer in derivatives trading and has challenged the capital markets sector to rethink decades-old strategies.

Along with the victories, however, the banking sector also learned some hard lessons; specifically related to a lack of processes, best practices and standards with regard to the implementation and use of new technologies.

The problem stems from the fact that many of these new technologies were introduced into banking organizations in an ad-hoc manner. Managers, eager to reap the rewards from the benefits of a particular technology, pushed for quick proof-of-concepts, often viewing adoption as a foregone conclusion. Rushed adoptions led to rushed implementations, which in turn created redundant silos, as similar technologies and vendors were introduced by different internal groups into an organization. In many cases, these silos replicated throughout the full spectrum of a bank’s organizational structure within three common ways:

• Different technology groups had their own implementation and use of mobile technology; often with programmers building proprietary services to help make the technology interface with existing systems.
• Verticals like HR, finance and operations worked with different technology groups to implement redundant services and technologies into their groups.
• Vendor management became inundated with multiple third-party companies providing duplicate services and tools to different groups within an organization.

Technology permeated the banking infrastructure before the formation of standards, governance and best practices. At the core of these difficulties was the paradoxical, organization decision of how to manage technology. Specifically, how do banks successfully handle the transformational disruption associated with integrating new technology? At this point several banking organizations started to create transformational executives supported by innovation managers that centralized the adoption and implementation of new technologies in an organized fashion. But the damage of having placed the cart in front of the horse had been done—cost inefficiencies, failed projects and aloof technology silos often remained untouched.

What oil and gas can learn from this brief look at banking is that information technology has become a cultural attitude within many organizations. People want to use their own devices at work, social media in service management is a strong capability for frequent corporate travelers, and video conferencing brings people closer together in meetings than a simple bridge line.

Almost a decade ago, implementing technologies to improve their working environment, forced banks to determine what kind role technology would play in their organization. Some banks became cutting-edge providers and builders of forward-thinking IT, while others became passive followers or late adopters of technology. But by determining what type of organization an oil and gas company wants to be, with regard to the introduction, implementation and adoption of technology, they can avoid the repercussions of a poorly planned IT strategy.

IT in oil and gas is at the cusp of experiencing more disruption from high-tech solutions; drones, HPC, big data, and cyber kill chains are just a few examples. How will your organization respond?

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

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Now Is Time For Federal Standards To Reduce Methane Emissions

September 23rd, 2014 vaddison Posted in Uncategorized | Comments Off

By Mark Brownstein, Environmental Defense Fund

On Sept. 18, 16 leaders of the nation’s largest environmental and conservation groups, including Environmental Defense Fund’s president Fred Krupp, came together to call for urgent federal action to curb methane emissions from oil and gas development.

This past March, President Obama laid out his Strategy to Reduce Methane Emissions, where he announced that the Environmental Protection Agency will decide by this fall how best to reduce methane pollution from the oil and gas sector. The strategy builds on the commitment from his 2012 State of the Union Address that the development of oil and gas resources must not put Americans’ health and safety at risk.

Here are five reasons why reducing methane is a national priority that requires the Obama administration to follow through on its commitment:

1. Methane and associated air pollution from oil and gas operations is heating up the climate and hurting our health.

Methane is a super pollutant, more than 80 times as powerful as carbon dioxide in causing global warming over the first 20 years. Data from a report prepared by leading climate scientists from the Intergovernmental Panel on Climate Change suggests that nearly a quarter of the warming we are experiencing today is caused by methane and other short term climate pollution. The oil and natural gas sector is the largest industrial source of methane pollution.

Along with methane emissions, oil and gas operations also emit dangerous pollutants including smog-forming volatile organic compounds and cancer-causing pollutants like benzene. Reducing methane emissions will also deliver significant public health co-benefits by cutting smog and toxic air pollutants in our communities.

2. The oil and gas industry won’t achieve the needed reductions on their own.

Some oil and gas companies have taken steps to reduce methane pollution, but there are thousands of companies, and many only focus on quarterly earnings and won’t spend one dollar more than they have to no matter how obvious the need. A recent EPA Inspector General report found voluntary efforts from the oil and gas industry aren’t enough to achieve needed reductions in methane emissions to slow their impact on our climate. EPA has the legal authority under the Clean Air Act to reduce this harmful pollution. In order to avoid the worst impacts of climate change and protect air quality, we need to put strong methane and air pollution rules in place.

3. Simple, cost-effective solutions are available today.

An ICF report from earlier this year shows simple, low-cost technologies commercially available today can slash methane emissions by 40% for only one penny per thousand cubic feet of natural gas (currently around $4). Other analysis suggests we can do even more. American innovation is making it possible to reduce methane pollution from the onshore oil and gas sector significantly in the next five years. And reducing methane emissions through proven technologies wouldn’t just help the planet; methane emitted to the atmosphere is American energy gone to waste.

4. There is a growing consensus that we can and must act.

This letter demonstrates the environmental community stands in agreement that now is the time to demand federal action to address harmful methane emissions from the oil and gas sector. But these leaders are not alone. Just this month Secretary Hillary Clinton underscored the need for action saying “Methane leaks in the production of natural gas are particularly troubling, so it’s crucial we put in place smart regulations and enforce them.”

Earlier this year Colorado led the country as the first state to directly regulate methane regulations in the country, and California has announced it will address methane as well. These states can and should be models for effective, commonsense methane national policy.

5. We need to clean up our current energy system while building a clean energy economy for tomorrow.

EDF and these 15 other groups are working hard to accelerate energy efficiency and renewable—the key to reaching a low carbon, clean energy future. But since we can’t reach this goal overnight, we need to do all we can to clean up our current energy mix to lessen the overall impact on the climate, where we know we can, to reach our greenhouse gas reduction goals.

Both President Obama and EPA Administrator McCarthy have made it clear significantly reducing methane emissions is a critical step in a national strategy to combat global warming. A decision by EPA to directly regulate methane emissions from the oil and gas industry—both new and existing sources—will demonstrate they are serious about tackling climate change. Now is the time to act.

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

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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 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

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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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