Tag Archives: oil

How to (Accidentally) Turn Your Natural Resources into a Tourist Attraction

Turkmenistan is one of the old constituent republics of the Soviet Union. Located on the northern border of Iran, the country holds within its borders the fourth largest reserves of natural gas in the world. In 1971, a group of Soviet geologists drilled into a large cavern of natural gas, while searching for oil and gas in the Karakum Desert in the center of the country. The cavern collapsed, swallowing the drilling rig and leaving behind a gaping, 70 meter wide crater. To make matters worse, this massive hole seeped large quantities of methane and other dangerous gases into the atmosphere. While not toxic in and of itself, methane is an asphyxiant and it can become highly explosive when mixed with air. Additionally, the impact of methane on climate change is approximately 20 times that of carbon dioxide. While the Soviet scientists may or may not have been concerned with the environmental effects of leaving the crater unchecked, the seeping gases certainly posed a more imminent threat to the neighboring village of Darvaza and anyone who might happen to pass through the area. Thus, the decision was made to light the gases on fire, in the hope that they would be depleted in no more than a few days.

42 years later, the crater is still burning. It has been dubbed as ‘The Door to Hell’ by the local population and is, perhaps, the most interesting example of flaring you could ever choose to explore as a tourist. Not that a lot of people do, mind you, as Turkmenistan recently placed seventh on a list of the least visited countries in the world. However, the Turkmen government is placing an ever increasing emphasis on developing tourism, as it strives to erase the somewhat negative global perception of the country, that developed during the reign of the eccentric President Saparmurat Niyazov. Thus, effectively ‘putting out’ one of the country’s main tourist destinations might not seem like such a bright idea. At the same time, Turkmenistan will look to maintain its recent economic growth through the continued development of its natural gas and oil industries, and keeping the Darvaza fires burning might not fit so well into that picture. In fact, President Gurbanguly Berdimuhamedow ordered that the crater be closed back in 2010, in order to limit its effect on the utilization of natural gas resources in the area. As of March 2013, ‘The Door to Hell’ is still open, however, and the future of the site remains to be determined.

Should the site be kept open in favor of the growing tourism industry or should the crater be closed? Is there perhaps another, less obvious option? Please pitch in with your thoughts and opinions.

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Broken Promises and Millennial Despair

President Obama released his Fiscal Year 2013 Federal budget this week and one of the big headlines is that he is seeking to end the tax benefits received by the oil and gas industry. This is not a new effort. President Obama and some in Congress have spoken about ending these tax breaks for the entire Obama term.[1] As a disclosure of bias, I did work for three years for ExxonMobil doing income tax work. After getting that out there, I believe that a focus on taking away oil and gas tax benefits is anti-American and is counter-intuitive to developing energy independence and security.

First, let’s go through the main tax benefits: intangible drilling cost (IDC) and manufacturing income deduction (Sec. 199). [2]

  1. IDC – These costs are incurred by oil and gas companies when they drill for oil and gas. For example, building an ice road in Alaska to reach isolated oil or gas can be considered IDC. Mainly, the costs that are intangible meaning that there would be no way to recover the value of the cost if the asset needed to be sold. The costs can be 100% expensed by small companies[3], but 70% expensed by integrated oil companies and then depreciated over 5 years. In 2012, this was about $190 million of the budget.1

I’m not sure why helping lessen risks in the oil patch is a bad thing. There are special types of risks taken by oil companies and the government providing a small inducement to invest in America is a good tradeoff. The elimination of the IDC for small companies would be devastating as this allows for smaller companies to compete with the majors who have a much more robust capital position.

  1. Sec. 199 – The manufacturing income deduction allows a percentage of qualified domestically produced income to provide a tax deduction.1 This credit allows for 6% of the qualified income to be deducted from income taxes as long as it is domestically produced. In 2012, this was about $604 million of the budget.1

This deduction applies to everyone who produces domestically, not just oil and gas companies. President Obama’s budget says: “The tax code currently subsidizes oil and gas pro­duction through loopholes and tax expenditures that preference these industries over others.”[4] Hmmm, I’m not sure how a tax deduction that applies to everyone who would produce lemonade or paper planes or any other good produced domestically somehow favors the oil and gas industry.

I have read that the President favors an “all of the above” energy plan[5]  but Mr. Obama has been nothing but inconsistency on energy. This is apparent in the 2013 budget. On one hand he wants to reduce America’s dependence on imported oil[6]. This is in itself is not necessarily a good thing. We can end the dependence on foreign oil, but what do we replace it with and at what cost? We can end importing oil from states that are neither friendly nor stable and start to import more from Canada (Keystone XL pipeline) or more from Brazil. In addition, his recommendation to improve fuel efficiency[7] is a wonderful recommendation. However, this insistence on populist attacks on oil and gas companies do not help us develop more domestically produced oil and gas. This increases the uncertainty of investments into projects that could provide both jobs and tax/royalty revenue to help with the deficit, two sorely needed outcomes.

Cutting $40 billion in the deficit by eliminating fossil energy tax breaks is not an important reform. Investing in America should be favoring all types of energy and letting the market decide. I think these attacks scores easy political points, but does nothing to address the overall structural flaws with the federal budget. Mr. Obama is not at fault for these huge deficits, both parties have put us in a world of pain. But this again points to Mr. Obama being less than advertised. Rejecting the Simpson-Bowles plan and continuing this piecemeal policy on energy shows there are no great transformations in this president. The alternatives do not inspire hope either, so it seems that either way the next ten months and the four years after that will be filled with broken promises and millennial despair.


[1] http://blog.chron.com/txpotomac/2012/02/obama-seeks-to-end-oil-industry-tax-breaks-again/

Houston Chronicle – Texas on the Potomac blog Puneet Kollipara 2/13/2012

[3] http://www.encapgroup.com/taxbenefits/

Energy Capital Group – Tax Benefits

[4] http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/budget.pdf Fiscal Year 2013 Budget of the U.S. Government Obama budget Page 40

[5] http://www.bloomberg.com/news/2012-02-13/obama-proposes-cutting-40-billion-in-u-s-fossil-fuel-credits.html

Bloomberg – Jim Snyder and Brain Wingfield “Obama Budget Would Cut $40 Billion in Fossil-Fuel Credits” – 2/13/2012

[6] http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/budget.pdf Fiscal Year 2013 Budget of the U.S. Government Obama budget Page 6

[7] http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/budget.pdf Fiscal Year 2013 Budget of the U.S. Government Obama budget Page 19

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Deepest oil well in Gulf IS LEAKING!!!

The Transocean Deepwater Horizon rig 130 miles South East of New Orleans exploded on April 22, 2010 and is now submerged and resting 1,300 feet from the well site on the seabed [1] .  The oil leak was discovered Saturday, four days after a explosion and fire. Eleven people of 126 aboard the rig are missing and presumed dead.   It is now gushing 42,000 gallons of oil day, about 5,000 feet below the oceans surface [7].  The oil slick is now 600 square miles (1,550 square kilometers),on the surface planes already dropped 7,715 gallons of chemical dispersant and has 100,000 gallons of dispersant ready to be deployed or one third the world’s commodity [3].  There are 32 spill response vessels and 1,000 workers trying to clean the oil slick and as of April 25, 48,324 gallons of oily water had been collected by surface skimmers [2].

42,000 gallons of oil a day leaking

BP is currently engineering a system that is shaped like a funnel or large dome that will be lowered underwater to collect the oil that is rising to the surface.  This is a new technology that has only been used in shallow waters after Hurricane Katrina and it is not positively going to work because has not been used at such great depths.  [4]. “There are currently 4 remote controlled submarines trying to pump fluids into a 450-ton blowout preventer to shut a valve that would close off the well”, according to Doug Suttles, BP’s chief operating officer for exploration and production [2].  If shutting off the valve does not work then BP will try to start drilling a relief well as soon as possible[3].  This would allow other work to permanently seal the well later.

With recent projected increased offshore drilling [6] , how many more oil spills or oil accidents will occur?  Although according to a study done by Texas A&M University, the amount of oil split in 2000’s vs. 90’s, 80’s and 70’s has dropped significantly[5], with deeper exploration will there be more environmental damage to come?

References:

[1] http://www.cbsnews.com/stories/2010/04/24/national/main6429004.shtml
[2] http://www.wdsu.com/news/23261961/detail.html

[3] http://www.bp.com/bodycopyarticle.do?categoryId=1&contentId=7052055
[4] http://news.nationalgeographic.com/news/2010/04/100425-energy-oil-spill-sunken-rig-serious/

[5] http://oceanworld.tamu.edu/resources/oceanography-book/oilspills.htm

[6] http://www.guardian.co.uk/world/2010/mar/31/barack-obama-offshore-drilling

[7] http://www.pnj.com/article/20100425/NEWS01/100425001

picture [2]

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Oil Prices and the Texas Economy: a crude measure of success?

On Thursday March 25th, Texas House Representative Mark Strama addressed Professor Webber’s ETP class. In discussing the role that Texas plays in the United States’ energy policy, he stated that there was a strong positive correlation between the price of oil and the strength of the Texas economy.  In the spirit of the Austin-American Statesman’s recent column ‘Politifact Texas’, which measures politicians’ statements using a “Truth-O-Meter”, I decided to research Representative Strama’s claim about the Texas economy and oil prices.

The chart attached to this post compares the fluctuations in price of a barrel of West Texas Intermediate crude with the unemployment percentage rate in Texas since January of 1976. West Texas Intermediate is the light sweet crude barrel benchmark that is used in the NYMEX pricing of oil futures contracts. Although there are many measures of Texas’s economic performance, the unemployment rate seems the most relevant to Representative Strama’s discussion as an egalitarian measure of the strength of the economy. An unemployed person cannot contribute income tax and is a consumer of welfare dollars. I gathered data from reputable sources and plotted the two variables on a month-by-month basis.

WTI and Texas Unemployment correlation 

Before I compiled the chart comparing the two variables over time I expected that they would be roughly mirror images of each other (a high oil price gives rise to a low unemployment rate) in the context of Representative Strama’s comments. However, the chart did not stack up with this expectation. The main features of the chart are the volatility in oil prices, with a low of near $12 a barrel in the late 1990’s followed by a general rise in oil prices, culminating in the $147 peak of summer 2008. There are also several ‘spikes’ in Texas unemployment rate in 1982, 1986, 2001 and 2008. There are many periods in which a declining oil price coincides with a declining trend in unemployment, and in the early 1980’s the high oil price ran alongside periods of increasing job losses for Texas.

To enrich the chart, I added markers showing the U.S. recessions (source: FRED, the St. Louis Fed database) . When these were added, the timing of Texas’s unemployment periods became clearer. In all instances where there was a general U.S. recession, Texas unemployment rose, in some cases dramatically e.g. in 2001 and 2008-9. Although this is an unremarkable finding, it indicates that the Texas economy is not as ‘decoupled’ from the Union as supporters of Texas secession might have you believe.

Ultimately, I believe that Representative Strama over-simplifies the relationship between oil prices and the Texas economy. Texas has come a long way since the Spindletop gusher of 1900, and it has a diversified economy with strong technology, retail, aerospace and healthcare sectors. Many of these sectors are adversely affected by high oil prices due to the increased transportation costs it brings or the increased manufacturing costs associated with petroleum-based raw materials. The factors behind the latest economic recession that has affected millions of Texans are less to do with a collapse in oil prices as they are general economic instability caused by the implosion of the banking sector which caused trillions of dollars of paper losses and a corresponding loss in investor and consumer confidence. On the basis of my research, I rate Representative Strama’s comments as “Barely True”, although I would be interested to see if any readers can support his viewpoint through their own research.

Sources:

West Texas Intermediate spot price from Wall Street Journal, Dow Jones and Company.

Texas unemployment data from Texas Labor Market Information, Texas Workforce Commission.

U.S. recession data from FRED, St. Louis Federal Reserve Database.

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Lighting up the Screen – how energy issues are depicted in movies

 Even in the depths of one of America’s gloomiest recessions, movie theatre revenues are booming. Americans spent around $10 billion at the box office in 2009 (online WSJ), a record for domestic revenue. The recent success of James Cameron’s Avatar (2009) in becoming the first $2 billion grossing movie in history is testament to the fact that US and international audiences are heading to the big screens in droves. Part of this increase may, I suspect, even be due to the recession. Hollywood productions offer their audiences a temporary escape from the harsh reality of the economy. What does this have to do with energy production and consumption you may ask? In the build-up to the Oscars and the images of celebrities whose paychecks are now entirely divorced from reality, I reflected upon the fact that very little of Hollywood’s output deals with the reality of energy. When was the last time you saw Kiefer Sutherland fill up his SUV tank in the middle of a chase in ’24’ (okay, that’s a television series but the image is funny), or George Clooney pay an electricity bill?

The reason is of course that these mundane realities aren’t things that audiences wish to see or be reminded of. However, when Hollywood scriptwriters and directors turn their attentions to the issues of energy and sustainability, the results can be engrossing and thought-provoking. One of my favorite movies of all time, Chinatown (1974) deals with subterfuge and murder within the murky world of….water irrigation.  The Matrix (1999), which has been around long enough now to be regarded as a science-fiction classic, imagines a world darkened by a perpetual nuclear winter, in which the only energy source available to the conquering race of machines is that power output of the human body itself. Thus humans are harvested in pods for their energy output. I am sure that if Professor Webber was advising the Wachowski brothers he would point out the thermodynamic inconsistency in this idea; since humans need energy from food in order to generate that power output (else dieting would be a lot easier!!!).  Nevertheless, it makes for a cool story and enables Keanu Reeves to roll out his barely-human style of acting without a backlash.

The aforementioned Avatar attempts to illustrate energy and sustainability issues through the conflict between homo sapiens and the blue-skinned “Na’vi” humanoids of Pandora. We humans are depicted as pillaging the pristine environment of Pandora for a mineral called “Unobtanium” that sells for $20 million (in 2154 A.D. dollars) a kilogram. When the movie’s protagonist, Jake Sully, is being inducted in the tribe in his avatar form, he learns that the Na’vi believe that energy cannot be created, only borrowed. Their harmonious philosophy to energy conservation draws parallels with traditional Native American culture, which was ultimately bulldozed (for the most part) by Western settlers. As a result the movie has been taken by some to be an attack on American energy use and foreign policy. In my opinion, its too simplistic to call Avatar a “tree-hugger” movie, since it does raise the valid question of what we, as a Western society, are going to do when the fossil fuels of this planet are exhausted? Onto the next planet perhaps?

Back on Planet Earth, P.T. Anderson’s 2007 epic “There will be Blood” deals with the story of an early 20th century settler, Daniel Plainview (brilliantly played by Daniel Day-Lewis) who builds a fortune on oil prospecting, at the expense of everything else in his life. I encourage any of you who have not seen this movie to rent it, if only for the visceral scenes of oil drilling and mining, at a time when the concept of “health and safety” was about as alien as a blue skinned being. Probably the most memorable moment of this movie is when Plainview illustrates the concept of oil reserve drilling using  a series of straws and a milkshake. I confidently predict that a repeat demonstration by Professor Webber would be a Youtube hit, at least amongst the ETP community.

Sources:

McBride, Sarah, “Cinema surpassed DVD Sales in 2009”, The Wall Street Journal online, January 4th, 2010, Technology section.

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Petroleum usage in current US military operations

Okay, so here’s a business guy in a course positioned at the intersection of engineering and law trying to blog for the first time ever, and to top it off it appears I’m the first one to post, so I have no frame of reference from my classmates.  Go easy on me….

While in Iraq last year, I was awestruck at the sheer scale of the supply trains that exist to provide logistical support to the American warfighter.  The purchasing, delivery, and usage of mobility fuels especially struck me as both a huge operational liability and a massive financial cost.  Non-stop breathing of exhaust fumes from F-16s, MRAPs, and a myriad of other tactical vehicles showed me very clearly the environmental cost we were paying as well.  I decided to do a little research into just how critical oil becomes in order to support our current foreign policy in places like Iraq, Afghanistan, Horn of Africa, etc.  I hope to shed some light on how significant a role petroleum plays in our foreign policy and to encourage thoughts on what else would be required of us, resource-wise, should we find ourselves moving towards military conflict with Iran or North Korea on top of our current commitments.  Unanticipated domestic response missions such as Hurricane Katrina in 2005 and foreign aid missions like the Haitian earthquake of 2010 only add to the burden on both oil supplies and the Defense budget alike.

For Fiscal Year 2010 (FY10), which runs 1 Oct 09 – 30 Sep 10, the Department of Defense requested $664B from Congress.  Included in this number was $130B solely to support the wars in Iraq and Afghanistan.  2.5-3.0% of the entire budget is allocated for fuels (product only), so big picture we’re looking at $3.25-$3.9B just for fuels that support our Southwest Asian operations, and $16.6-$19.9B overall.  That’s an awful lot of money at an absolute level, but bad news part one: it gets worse.  The Air Force has the lion’s share of this fuel demand (53%), and they spend an additional 144% of their fuel cost on delivery.  The Army only represents 7% of that fuel demand, but spends another $3.2B just on fuel delivery personnel costs.  $3.2B for gas jockeys!  Quick back-of-the-napkin calculations show that we could easily be spending over $48 billion dollars, all in, just to satisfy DoD fuel needs for FY10.

Bad news part two:  This budget, with respect to oil, was budgeted based upon a forecast for crude at $60.98/bbl.  Today’s (25 Jan) NYMEX close for WTI at Cushing was $74.96/bbl, a 23% increase over the forecast less than halfway through their fiscal year.  Morgan Stanley published their own forecast for crude prices recently, and they believe it will hit $95/bbl by calendar year end, so the DoD may have even more price shocks coming to them when the final gas bill is tallied up.  More accurately, though, the DoD doesn’t buy crude oil; it buys refined fuel products such as MoGas, Diesel, AvGas, JP5, JP8, and bunker fuel.  Using gasoline as a proxy for all refined products they buy (for simplicity) and Bloomberg data, as of today they could be paying as much as (spot) $1.99/gal or $83.58/bbl.  So maybe that $48B is even higher than has been forecasted.  Supplemental budget allocation, anyone?

Clearly energy use is a significant- game changing, in fact- issue for the American military.  Only 22% of their energy demand support basing and infrastructure, the rest is operational.  We must ask ourselves as a nation if we are willing to continue to spend this kind of money, consume massive quantities of a finite resource, and inflict an unknown amount of damage on our planet to sustain our current foreign policy courses of action.  If we collectively agree that it is justified for national security, then so be it.  If not, however, perhaps some calculated adjustments need to be made.

Sources: DoD, DLA, CIA

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