Wind and Solar Bypassing Oil and Gas

By Deborah Lawrence (formerly Deborah Rogers)

Most Emerging economies pay a great deal for electricity and wind and solar are now providing a new low cost alternative to natural gas, coal and diesel for power generation. Much has been said about demographic changes and growth in populations in these countries and interestingly, the oil and gas industry has made assumptions that they would be the primary beneficiaries of such growth with regard to energy usage. The picture that is emerging, however, tells a different story.

In a report called Climate Scope 2014, Bloomberg New Energy Finance (BNEF) stated:

“…[the] average industrial electricity prices across all countries (55 in toto, all developing nations) [was] $147.90/MWh. This falls well above the the average BNEF levelized cost of energy (LCOE) for wind at $82/MWh…it does suggest that industrial customers in these nations could potentially enjoy substantial savings by purchasing wind generated power rather than paying for what they currently receive from the grid.”

Moreover, BNEF estimates that the levelized cost for solar averages about $142 currently which is in line with industrial prices generally within these emerging economies. Nevertheless, it is also estimated that solar costs will fall further over the next few years with most estimates calling for a fifty percent reduction by 2017. This will make solar as attractive as wind in a very short period of time leaving hydrocarbons as the high cost alternative. A complete reversal from just a few short years ago.

In many geographical areas, diesel generation is the only option. This, of course, is prohibitively expensive. Distributed generation (DG), or roof top solar, can provide electricity at much reduced rates. The study found that the costs for electricity exceeded 15 cents/kW in most of the countries, some rising as high as 22 cents. Solar can be bought now for about 15 cents. And these costs will continue to go down as innovations and scale come into play.

BNEF states:

“…in countries where less than half the population has access to a grid of any sort, distributed sources of clean generation represent a logical and less costly alternative solution to diesel generation.”

China, of course, is also a big player in this emerging scenario. And they have been serious about it. In 2013, China’s portion of all global renewable investment amounted to an impressive 21%. During this time, the country added more than five times more wind and nearly twice as much solar as any other country.

In May, 2014, the Chinese government announced plans to significantly increase this solar capacity. At YE2013, China enjoyed 20 GW of solar generated power. Within the next three years the country intends to more than triple that amount to 70 GW. They have also set targets for wind of 150 GW over the same time frame.

In another report issued by The Global Commission on the Economy and Climate, an international partnership of eight leading research institutes, acknowledges the vast investment needed for energy in the next twenty years:

“A massive wave of energy infrastructure investment is coming: to keep up with development needs, around US$45 trillion may need to be invested in the next 15 years. This gives countries a chance to build robust, flexible energy systems that will serve them well for decades to come, but it also represents a critical window to avoid locking-in technologies that expose them to future market volatility, air pollution, and other environmental and social stresses.”

In other words, a monumental wealth creation event is emerging and the value appreciation potential points in the direction of renewables rather than hydrocarbons.

Renewables now represent a larger percentage of total capacity in developing nations as well. There is no reason to think this will change. This puts continued investment in hydrocarbons at risk. The volatile pricing structure of oil and gas can now be countered effectively by DG solar and wind. Demand, therefore, for hydrocarbons has not proven as great in non-OECD countries as previously expected. It is a simple matter of economics. Why pay more for diesel when one can generate one’s own electricity right at home for a fraction of the cost. If a country has very little infrastructure in place for hydrocarbon use, then it makes more sense to by pass the expensive of such infrastructure in favor of renewables. The cost will still be high but once in place the variables and vagaries of oil or gas prices is a thing of the past. Further, the capacity for wind and solar and large hydro projects is immense in developing countries further leveling the energy playing field from which they have so often been excluded in the past.

It seems that energy has finally become democratic.

Solar Jobs Benefit Economy, Maybe More Than Oil and Gas Jobs

By Deborah Lawrence (formerly Deborah Rogers)

Job creation is important. Very important. That is why good critical thinking needs to be applied when considering jobs figures and claims. All too often, we read about job numbers in the business press and register it as either good or bad in our minds and then quickly dismiss it. But we should be thinking this through more thoroughly. Why? Because there can be a world of difference between abstract job numbers and concrete ramifications in the real world.

For instance, the U.S. has been engaged in a drilling frenzy for shale gas and tight oil. Regardless of what one thinks of fracking, the shale industry has indeed created jobs…but they have proven to be short term jobs and very expensive.

Bear with me.

As tight oil production from shales ramped up, U.S. supply disrupted the current global market pricing equilibrium and consequently oil prices began a free fall last summer. At present, prices have plunged about 60% since June. Not surprisingly, this has detrimentally impacted the companies involved in shale extraction with the result being that capital expenditure budgets are being slashed for 2015.

Due to this drop in oil prices, companies have begun to announce layoffs. Oil field service giants, Schlumberger and Baker Hughes have announced they are axing about 16,000 jobs between them. BP has announced another 3200 layoffs. And the Dallas Fed has estimated that the state of Texas will probably lose about 125,000 direct and indirect jobs from the oil sector. One state, 125,000 jobs.

This becomes truly interesting, however, when one considers that this is simply the normal pattern for this industry. Boom and bust. Short term party, usually longer term sober up. And the reason for this is that the oil and gas industry is commodity based and therefore subject to the vagaries of international commodity market pricing. But what if our energy and energy jobs came from a technology rather than a fuel?

A very different pattern emerges.

In 2014, the solar industry racked up impressive jobs numbers. In fact, much more impressive than oil and gas and even pipelines combined. A new report from the Solar Foundation and George Washington University shows the U.S. solar industry gained about 31,000 new jobs in 2014, a 21.8 percent growth rate or nearly twenty times more than the economy as a whole. But to put this in further perspective, oil and gas, including all pipeline jobs, gained a little more than half of the solar jobs.

And there’s more.

The solar industry alone now employs approximately 174,000 people in the U.S. When I first started tracking solar job numbers a mere three years ago there were about 183,000 total employment for wind, solar and geothermal combined. Now that figure is almost matched by solar alone. What a difference three years has made.

But the real irony here is that solar (and wind) is a technology, not a fuel, and technologies typically become cheaper with scale and time. And they are not subject to the vagaries of commodity pricing. So when looking to create…and sustain…long term good paying jobs, policy makers would do well to promote solar and wind over oil and gas. The math is actually quite simple. As prices have fallen in renewables, more people wanted the product and thus more jobs were created. Significantly more. This is in direct contrast to oil and gas where when prices fall, men and women end up out of work. And herein lies the crux: we can only create new jobs in oil and gas if we also create concomitant higher prices in the overall economy. High energy costs spill over into virtually everything else because energy is our economic bedrock. It is an interesting dichotomy: oil and gas creates jobs only if prices and inflation rise whereas renewables create jobs if prices and inflation fall.

We can already see evidence of this: power generation costs from solar have been on a downward trajectory and solar jobs are growing briskly, outperforming the economy as a whole by 20 times. The oil and gas industry, on the other hand, did indeed create jobs before this latest pricing rout but at the same time oil prices rose about 450% since 2000. As prices declined, jobs were lost. And this has always been the paradigm of oil and gas.

Do we really have to scratch our heads on this?

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Wall Street Banks Will Profit From Shales…Again

By Deborah Lawrence (formerly Deborah Rogers)

Shales have always had a problematic business model. They decline too rapidly. The recovery efficiencies are very poor averaging a mere 6.5% in direct contrast to recovery efficiencies in conventional plays of about 75-80%. The wells are quite expensive and perhaps most damning of all, most of the companies engaged in this self styled revolution have not been able to generate free cash flow…at all. In fact, cash flows have been negative since at least 2009.

Ed Morse, Global Head of Commodities Research at Citi and interestingly one of the primary cheerleaders for shales, admitted in the May/June 2014 issue of Foreign Affairs:

“It is true that through 2013, the upstream sector of the U.S. oil and gas industry has been massively cash-flow negative. In 2012, for example, the industry spent about $60 billion more than it earned…”

So why has Morse been such an outspoken advocate of shales when he was aware of the cash flow problems? It might have something to do with the considerable merger and acquisition fees that shale deals were generating for Citi. In fact, shale fees took the place as lead profit center in many of the large Wall Street banks after the demise of mortgage backed securities. The decline in natural gas prices which of course was due to over production just like this decline in oil prices, ushered in a bonanza in fees for the banks. Interestingly, the same exercise is about to start again. Tight oil has now glutted the markets. The companies have too much debt and assets will have to be sold. Probably for cents on the dollar. Mergers and acquisitions will be on the rise for the next few years and will undoubtedly be highly lucrative for the banks yet again.

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Understanding LNG Export Profit…or Loss

LNG exportation has been a hot topic for some time. Using a simple metric called the 6:1 rule which was first set forth by economists at the Dallas Fed, one can determine the approximate per barrel cost needed by exporters to make a profit off LNG. This is done by estimating the BTU equivalency between crude and natural gas.

Slide from Cheniere investor presentation

Slide from Cheniere investor presentation

According to the Dallas Fed, the 6:1 rule defines the relationship between gas and oil prices by reflecting the energy content of the two commodities. Since one barrel of oil contains the energy equivalent of the 5.825 million BTU of natural gas, the 6:1 rule was developed because the BTU equivalency of crude is about 6 times that of natural gas. Applying this rule, one finds that if WTI oil is trading at $50 per barrel, natural gas should trade at $8.58, a multiple of 6. Brown and Yucel (Economists at the Dallas Fed) observed that although the 6:1 rule is less accurate typically than the 10:1 rule over long periods of time, in times of rising gas prices, the 6:1 rule becomes a more accurate predictor of natural gas prices. In periods when natural gas prices are declining however, the 10:1 rule is a better predictor.

Using this slide from an investor presentation by Cheniere, the first to receive permission from FERC to export, one can see that they can deliver gas to Asia for $11.10. Using the 6:1 rule, one simply multiplies $11.10 by 6 and one recognizes that Cheniere needs appr. $66/bbl to breakeven…at best. Using 10:1, Cheniere would need $110/bbl to breakeven. An approximation between the two points is about $80-90/bbl.

Oil is now trading at $45/bbl so Cheniere’s economics no longer make sense. Their profit has vanished.