Angel Gonzalez, After the Spill - Covering the Green Economy

After the Spill
The future of Big Oil in a greening economy

A massive industry, under increasing pressure
Energy is a big, profitable business.
Five of the largest 20 companies by market capitalization are energy companies
Source: FT, May 2010

Business of Scale
World Consumes 86 million barrels of oil a day
The United States consumes nearly a quarter of that amount
China is rapidly catching up- at about 8 million barrels of oil a day, 2nd largest user
Saudi Arabia, the world’s largest producer, produces about the same amount China consumes.

Growth Driven By Growth
Business boomed in the 2000s, as developing countries caught up in energy usage
Boom coincided with increasing scarcity of natural resources available to Western companies.
Top company roster beginning to resemble the new energy reality: China, Brazil, in the lead.

Extreme Measures
Locked out of easy-to-access areas, Western oil companies – and Asian oil companies too – are seeking oil in Canada’s tar sands and the deep water.
The price of oil, high despite the recession, makes it affordable to drill in those areas.
Drilling in those areas comes at a cost.

Faustian Bargain
Canada’s tar sands are close to major markets in the U.S. and China--- but they are an eyesore. Plus, their carbon footprint exceeds that of, say, Saudi oil.
They’re awfully
expensive to exploit.

Captain Nemo’s Realm.
The deepwater, since the 1990s, has been the most promising area for growth.
Brazil, West Africa, the U.S. Gulf of Mexico-- that’s where the last elephants are.
Western majors get first dibs because they have the deep pockets, the expertise and the technology. That’s what’s keeping them relevant.

Problem is…
Sometimes the unexpected happens.

Deepwater Horizon Spill
Responders unprepared to handle unprecedented scale, depth of spill
Some say industry went ahead of its capabilities
Spill stopped the whole economy of the Gulf Coast
Heavy environmental impact in a fragile, populated region

Worst Possible Timing
After years of lobbying, the oil industry had convinced the U.S. gov to expand offshore drilling. GOODBYE TO ALL THAT.
The spill coincided with the fishing and tourism seasons- maximizing the economic impact to the Gulf Coast and ensuing political backlash.
Incident happened on the verge of hurricane season- a dangerous time to work in the Gulf.

Consequences?
Oil industry could lose most of its hard-fought political gains
Billions of dollars in market value wiped out in giant companies like BP, Anadarko, Transocean, Noble Corp, Halliburton
Small companies face likely exile from Gulf
Drilling moratorium until gov. figures things out
Brings up the question: is it worth it?

An Uneasy Transition
Could the consequences of the spill steer the fossil fuels industry towards renewables? Depends on the political pressure it generates.
Industry-- starting with BP in the early part of the decade, and ending with Exxon Mobil in 2007 – already went through the global warming awakening.

Kicking the Tires

The Caveat
Renewables are hard to scale.
Mostly experimental and uneconomic at current energy prices.
Investment in renewables pales in comparison to investment in traditional oil and gas. Exxon: $25 billion/yr in oil and gas capital projects vs. $600 million in five years in algae.
PR, or prescient move?

The Most Scalable
Cellulosic ethanol: made out of vegetable waste, potentially inexhaustible – and inedible – feedstock.
Algae: reproduces quickly.
Neither are controlled by Third World dictators.
Oil companies think ethanol and diesel from these sources can seamlessly meld with existing infrastructure.

Playing it Safe
Natural Gas.

Oil’s Friendly Cousin
Natural gas is the cleanest burning hydrocarbon
It was once impossible to ship, but now can be traded between continents thanks to liquefaction technology
Huge deposits found in North America– locked in rock formations known as shales.

Advantageous…
All majors – Exxon, Chevron, Shell- are betting big on natural gas. Exxon says it will be the fastest growing fuel over until 2030, in a carbon-constrained world.
Abundance in North America helps fuel fantasies of energy independence.
Could help replace coal and clean up power-related emissions.

And Yet… Controversial.
The F-word: Fraccing. Critics say it consumes too much water and poisons water deposits and air.
Many of the most productive shale formations are near heavily populated areas: the Marcellus Shale in Pennsylvania and the Barnett Shale in North Texas.
Oil spill likely to result in tighter regulation of fraccing techniques.

Thank you
Feel free to reach me at
angel.gonzalez@dowjones.com
713-547-9214

Angel Gonzalez, After the Spill - Covering the Green Economy

by Reynolds Center for Business Journalism on Jun 24, 2010

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