My Gosh, I Agree with Ted Turner
December 22, 2009
Denver hosts the Colorado Oil and Gas Association convention every summer. This year we were favored with ex-senator Tim Wirth as a speaker. Mr. Wirth was a New Age politician representing Colorado for some twenty years. He then went on to work for Al Gore and currently is working for Ted Turner. For those who care to do so, conclusions may be drawn about Mr. Wirth’s world view and politics.
And yet, he had some interesting things to say. Mr. Wirth comes across as a thoughtful man, even though his outlook is different than that we, in this industry, are often exposed to. Obviously he sees himself as a spokesman, even an apostle, of the global warming gospel. But he had a very strong message for us, specifically for the natural gas business.
He chastised natural gas people as both foolish and naïve. His point was that a great debate, a battle, is being fought in Washington and in the media over a bundle of issues centered the concept of global warming. This is no great surprise. I think we all know this to be true. Legislation being hammered out now and in the next few years will profoundly affect our industry, our economy and our lives for decades to come.
Mr. Wirth recognized that his audience was strongly against such governmental interference in our energy markets. He did not try to convert us. He did not insult our intelligence. But he did consider us fools. And listening to him, I was hard pressed not to agree with him.
In the ongoing public debate and resulting political horse trading, he said that the natural gas industry has aligned its interests with the other hydrocarbon energy producers; i.e. oil and coal. This is natural. We call it the oil and gas industry after all. An informal poll of folks I know in the natural gas business shows that people employed in the natural gas business, at least those over the age of 30, think global warming phony science at best, and most likely a plot by socialists to destroy the free enterprise system.
But in this case, the self-interest of the natural gas business is aligned with the renewable energy people, the environmental lobby and the regulators. Every time we stand arm in arm with our cousins in the coal or oil business, we are shooting ourselves in the foot. Natural gas is what makes renewable energy workable. Natural gas is the natural ally of all except the Trotskyite wing of the environmental lobby. Natural gas allows regulators the insurance policy to begin the formidable task of regulating atmospheric carbon dioxide.
But such political clout as the natural gas business has stands with oil and coal. But Mr. Wirth pointed out that such loyalty is not returned. As evidence, he cited the preliminary energy bill put out by Congress. Lobbyists for oil and coal had done their work and earned their money. It was laden with exemptions and set asides for both oil and coal. There were no favors, set asides or exemptions that helped natural gas. Our allies had done nothing for natural gas. It was every man for himself and the devil take the hind most.
Natural gas is pretty apolitical. Of course, the people in the business have their own opinions, which tend much more to Rush Limbaugh than to Bill Maher. It is an entrepreneurial culture that tends to business rather than favor seeking. Our contractors are for the most part merit shop, as well as are our operating organizations which further contributes to our lack of interest in politics. We have to deal with various federal and state agencies to get permits and access to federal lands, but those interactions are technocratic rather than political as well. As a consequence, we are a notoriously poor soil for raising political contributions. Politicians do not seek us out because we don’t give them money and we do not seek out politicians because we just want to be left alone. We have been lucky but also naive.
When faced with politics as engineers, we tend to react as though we had smelled an over ripe carcass and rapidly exit the room. That is why we became engineers. The sordid details of human organizations and how they work hold little enchantment for us. Better the pure world of mathematics and the acrid smell of welding than the trading of favors and ethical gamesmanship of politics. If we were comfortable with those things, we would have gone to law school.
But we live and enjoy a civilization that only exists because of the availability of widespread and cheap energy. Whether justifiable or not, the circumstances by which that energy is produced and used are now going to become the subject of politics. We may shrug our shoulders, talk about how socialists will ruin everything with politicians no more than bagmen for the rich or lazy and then leave the room. If we do so, then our futures will be decided by others. Yet you know as well as I that the level of ignorance in our culture and decision makers regarding energy is abysmal.
Energy production and its use are about to change. That future is not ordained or governed by the laws of the inevitable. The future is up for grabs. Mr. Wirth was perceptive, natural gas is a world class athlete watching from the sidelines while the biggest game of its career is being played. But we are going to have to climb down from our pedestal. We are going to have to get involved and we are going to have to compromise our “beliefs”.
Most in the natural gas business view “environmentalists” as the enemy and react to them with contempt and dismay. But they are the natural allies of natural gas and in desperate need of what natural gas brings to the table. The environmental movement has made a mistake and actually come to Power. They will find, as have those who came before them, that Power is seductive. Just as the all-consuming need of Cash is to have more Cash, Power is consumed by the need is to stay in Power. Staying in Power requires politics, which requires compromise, and so they will do so.
Environmentalism needs to compromise on producing energy. Even setting aside thermodynamics, renewable energy and green energy are not realistic alternatives on anything less than multi-generational timetables. Of course the purists in the environmental movement will require bicycles and composting toilets rather than our present life style. The environmentalists in Power realize the folly of these people as it relates to staying in Power. And so the purists will be sent packing, hence the term Trotskyites.
To those in Power looking to compromise, natural gas is the perfect alternative. While nuclear power offers an alternative, it too is generations away and so of little use in the game of Power.
Natural Gas Prices
November 16, 2009
Most days I usually get around to a check of natural gas prices. I am on the email list for Simmons Energy Note written by Bill Herbert, which is well worth checking out, and he carries enough pricing information to get a sense of what is going on. Today's prices for natural gas are in the low to mid $2 range, which is not good. Average strip price for 2010 is $5.24, which is better but not great, at least from a conventional wisdom perspective. Conventional wisdom of natural gas producers, I might add. I suspect that natural gas users have a different conventional wisdom.
As my work life is tightly bound to the capital spending of natural gas producers, I tend to attach a great deal of importance to their conventional wisdom. Conventional wisdom may not be right, but it is the basis of the decisions that get made by our clients.
One of the advantages, as well as disadvantages, of attaining a certain age is that life starts to look like a television series. You start to see the same plot lines repeating. I am not sure whether I am watching Two and Half Men, Desperate Housewives or Dexter. A good case can be made for all three. Actually, if I had to choose, I'd probably go with the Sopranos. But I digress, another symptom of that certain age.
For most of my career, today's natural gas price would have been pretty darn good. The 2010 strip price of $5.24 would have been a fantasy. So why are we in such a depressed mood? Granted, July 2008 was giddy at $13, but we all knew that was not going to last. We got caught up in the party and now we have a hangover. But we need to realize that all of us, producers, service providers, users, need stable pricing.
High commodity prices in natural gas hurt everyone. First of all, we understand that as prices go up, usage goes down. Natural gas is in competition with coal. Natural gas is always at a cost disadvantage to coal as a fuel. Natural gas is only used because of its more environmentally friendly nature and the much lower capital cost of the facilities that use natural gas to generate power. It also helps that those natural gas fired power generation facilities are much more flexible than their coal burning cousins. But as natural gas prices go higher, its use as a fuel to generate power goes down sharply.
Higher natural gas prices also create funding for market disruptive projects such as liquefied natural gas plants (LNG). LNG has high capital costs but low operating costs. LNG plants bring to market stranded natural gas supplies that have little value without the LNG option. What this means is that an LNG facility, once built, will produce natural gas, 24/7/365. No matter what the natural gas sells for. Even in a glutted market, LNG producers will produce. Any cash flow is better than no cash flow, as they must amortize the capital whether they produce or not. Offshore LNG is a huge depressant to the domestic North American natural gas market, but high natural gas prices ensure that they will be built. This doesn’t do folks like me any good. From the standpoint of energy security for the US, I don’t think it does any of us any good.
But just as Tony Soprano rids himself of one disloyal subordinate only to discover another, the commodity markets swing between unsustainable euphoria and black despair. Those of us whose livelihood depends on them are just along for the ride.
Leadership Near a French Town
July 16, 2009One of my particular fascinations is organizational dynamics and how the leadership of different individuals impacts those dynamics. A large part of my fascination derives from seeing how my own attitudes have changed over the time. I find that my ideas have changed since I have been ultimately responsible for an organization and the well being of its people, rather than an ambitious engineer trying to make a mark. Or maybe I just got old. But I prefer to think of it as a more nuanced view of organizations and individual ambition and behavior.
A case in point is one of the stories that have been iconic to me over the years. The story takes place near a French town (Sedan) in May, 1940. It is the ninth month into WWII. A belligerent Germany faces the Allies in what appears to be a replay of the stalemate of WWI. In one of the great surprises of that war, the German army crosses the Ardennes Forest and appears outside of Sedan, France. In a brief but violent action, the German army crosses the Meuse River there and stands ready to break out across the flat plains of the French countryside.
The field commander of the German force is a charismatic individual by the name of Heinz Guderian. Having led his army through an impenetrable forest and then crossed a major river against heavy odds under fire, he has achieved victory. Though his men, and more importantly his armor and aircraft, need both reinforcement and rest, he is insistent that he continue his advance to the French coast at once.
His superior, Paul von Kleist, does not agree and orders him to halt so he can be reinforced and the gains consolidated. Guderian refuses to do as von Kleist commands and in a stunning move, resigns his command. The German high command now has a serious problem. The newspapers will create a sensation if the hero of the Sedan breakthrough resigns because of what will be seen as the excessive caution of the bureaucrats back at corporate headquarters. Adolf Hitler, himself, intervenes and mediates between Kleist and Guderian. Kleist has no ability to match the force of Guderian’s personality, and so Guderian gets his way and leads his army in a brilliant dash across the plains of France. Some 10 days later, he is on the English Channel. France is effectively split in half with her army immobilized. The English army is running for the beach at Dunkirk and virtually assured of destruction. Guderian has accomplished in a month what the entire German army had failed to do some 25 years earlier, despite spending 4 years and millions of lives in the attempt.
Having come up from the ranks and carrying the spirit of an entrepreneur, I admire the man on the spot who is willing to make decisions and stand behind them. Guderian risked his life on his decision. There is no question that he was committed. I suspect that the firing squad or a garrote would have been his fate had he resigned and not won his confrontation with his superiors. But he did prevail, as well as was proven right.
Yet, he did take a breathtaking risk for his country as well. The British and French armies outnumbered his force. They had more and better tanks. They had more and better aircraft. His force had been pushed hard in crossing forests, river and battle. They were at their logistical limits, while the Allies were fresh and had the advantage of shorter supply lines. It could have easily gone the other way with the German force cut off and destroyed.
Instead Guderian achieved success. His example has been followed since that time by the armies of the West. From Patton to Scwartzkopf to Franks, mechanized Western armies have followed the Blitzkrieg model pioneered by Guderian. But Guderian’s success in France did not lead to great fortune for him.
Guderian can be a cautionary tale indeed. Success by the bold believer comes at a price. Talent and the single-minded pursuit of personal validation that lead to success at one level can be fatal at a higher level within the organization. Guderian was on the fast track to the top, but he was heavily invested in being right. He won all of his battles, on the field and at the conference table, but lost his wars. His talent was lost to the organization and his potential was lost because it could not be tamed.
But do you want your organization to be committed to a risky course of action by your equivalent of Heinz Guderian? Let me tell you, that can be a scary thought when you wake up in the middle of the night. We need our people on the spot to take the initiative, to make the decisions that need to be made. But what about when they make a mistake or overstep their bounds and lead us over the edge?
Perversity Strikes Again
July 10, 2009There was a little noticed article buried in today’s newspaper. It seems our esteemed Governor, Bill Ritter, has asked one of our congresspersons, Diana DeGette, to back off on some legislation that she is sponsoring. I do have a sense of the ironic and reading the brief article caused a spasm of laughter on my part.
Our Governor, a leading figure among the new wave Democrats of our fair state, has made a bid for national prominence by creating a 22nd Century Energy Policy for Colorado. As a result, we in Colorado are riding on a fashionable wave of renewable and green energy into the future. Our oil and gas industry is a villain, to be chastised and relegated to the past, along with other objectionable parts of our history. We would like to sweep our (real) cowboys, farmers and energy workers under the carpet here in the Boulderite vision of the Rocky Mountain state. Mr. Ritter has frequently and publicly thrown a cold shoulder to the oil and gas business.
Ms. DeGette, the congresswoman of metro Denver, continues in the tradition of her predecessor, Pat Schroeder. Only without the charm and charisma. Ms. DeGette, a natural enemy of anyone making an honest living or having unregulated fun, is seeking to enact legislation that would make natural gas drilling in the US an order of magnitude more costly than is currently the case. Given the current climate of opinion and political reality, her legislation is almost certain to pass.
Ms. DeGette’s legislation has been supported by all of the right-thinking (I love word dissonance) politicians in Colorado. But a funny thing happened to Mr. Ritter. He is the Governor of Colorado. Colorado desperately needs money. In the past, certain far-sighted individuals made it nearly impossible for the State to reach any further into its citizens’ pockets for more money.
Mr. Ritter has come face to face with the facts of life in the Rocky Mountain States. Very large portions of those states’ revenues come from the royalties generated from oil and gas production. People more than a few miles from the Pearl Street Mall or the 16th Street Mall overwhelmingly work for either the government or resource companies. Farming used to be a third employer, but Washington has already done a number on them. As a result, our income and sales tax revenue is depressed and the rural parts of the state are in what amounts to a depression.
Thus Mr. Ritter must break ranks with his friends, who operate on the Capital Hill in Washington rather than Denver. Ms. DeGette, along with Mr. Udall, Mr. Salazar and Mr. Bennett, need not worry about revenues or costs. They belong to the Federal Government.
One must feel sorry for Mr. Ritter or Bill as he is known to his friends. He came to prominence as a well-spoken and telegenic District Attorney in Denver. To his credit he worked a construction job as a youth. Unfortunately it was union construction with him a member of the labor union. Then he became a lawyer and then a DA. The idea of physical or financial limits, rather than political ones, must be a very difficult and strange one for him to deal with.
Those who read my column in the ForeRunner newsletter recognize my preoccupation with the general Perversity of the Universe. I am sure Mr. Ritter would sympathize with my point of view.
Of Mice and Windy Men
July 10, 2009
It is a special time to be in the wind power business. It is not often that one gets to make a lot of money at the same time one is hailed as a paragon of selfless virtue. It is truly a rare event that should be savored. Usually those who endeavor to make money are seen as the villains that they so clearly are.
But pulling my tongue out of my cheek, we see the wind power business as very positive for the future of our business, i.e. delivering engineering and project services to the natural gas industry. While we understand that Mme. Pelosi believes that natural gas is not a fossil fuel, we know that the more enlightened members of her staff will catch this mistake eventually. Natural gas will be given no favors by this administration or Congress. And since ForeRunner’s work force is not legacy union, we are out of luck there as well.
But we can count on the insight provided by John Steinbeck on plans, even the plans of Wise Ones in Washington. Some years ago Mr. Steinbeck said that the best laid plans of mice and men often go astray; that is, our plans do not turn out as we expect. And this is as true for Washington as it has been in my life.
While official Washington’s view on energy is the triumph of Science over engineering, engineering must always be satisfied. After all, no one has yet made water run uphill without a pump (or windmills generate energy when the wind is not blowing). And so those of us who abuse Mother Earth with our pipes and compressors and towers still have a role to play in our nation’s energy supply.
Simply put, the order of magnitude growth in wind-powered electricity is mandated. The wind is there, and we know how to make the windmills. Subsidies have been provided and regulations written, which will make the money available. A veritable flood of windmills will cover the land over the next 10 years.
But as Scripture reminds us, the wind blows where it will. It also blows when it will. Thus we are left with the problem of generating power then the wind does not blow. As it turns out, that is a surprisingly large amount of the time. Even in Wyoming, which I certainly find surprising. My childhood memories are of hurricane force wind 24/7/365.
But since even Boulder, CO needs power when the wind does not blow, we must use nasty old standbys (fossil fuels) to keep the cappucino machines running. As it turns out, the wind changes its mind about whether it wants to blow or not in a remarkably short time. So we are left with the need to provide large amounts of power on unpredictably short notice, as well as the need to shut off that same large amount of power on equally unpredictably short notice. What can we use to balance those windmills?
Until Science gives us their promised magic batteries, the only solution we know of for rapid ups and downs in the need for power is our old friend, the gas turbine. Going back to Mr. Steinbeck, we begin to see the essential truth of the insight he provided some 70 years ago. The Plan for Pristine Purity of energy from the wind requires the construction of more fossil fueled energy. Even more perverse is the scale of work to be done. Given the amount of wind energy planned, the amount of natural gas infrastructure needed will be substantial. Gas turbines use very large amounts of natural gas, and they use it right now. To get an idea of what is needed, you might think in terms of the water piping in your house. It provides for the daily needs of the household, but then hook a fire hose to that house water piping; a fire hose that turns on and off several times a day.
The supply of natural gas is not a problem. We have plenty; and if we need more, we just have to drill more wells. But there is a great need for bigger pipes, more compression and gas storage in the vicinity of the gas turbines. We are going to have to tear up our house a bit to put in bigger water pipes, as well as locate some water tanks on our street.
This will undoubtedly prove a great irritation to our friends in Boulder. How they balance their need for on-demand cappuccinos with the vagaries of nature will be great theater.
Dead Cat Bounce
June 15, 2009There is a lot of cautiously good news for the energy business these days. The market is up, strongly so. While there remains plenty of bad economic news, like tulips in the spring, there are now occasional bits of good news on the economy. The price of oil, that bellweather of our industry, is over $ 60 a barrel. The tsunami like shock wave of bad news has swept over us the past 6 months, crushing everything before it. But like a shock wave, it is now past and we raise our heads out of our cellars and look around. Mirabile dictu - new projects are beginning. Today, it is easy to believe in spring.
But the question that haunts us all - Is this spring or is it Indian Summer? To use the language of the trading floor - Is this the beginning of a new bull market or is it a Dead Cat Bounce? The market uses the phrase "Dead Cat Bounce" to describe a market rally in a falling market. Metaphorically, it works off the fact that even though a cat is dead and has no life, it will still go up (bounce) somewhat if dropped far enough.
While I believe it a gruesome image, I do like the phrase. It has that combination of dissonance and vaguely scandalous thought that I strive for in my daily life. And it speaks so well to our current dilemma. Are we seeing the beginning of new and vigorous growth, or are we watching a dead cat that has fallen several hundred feet? No one knows the answer until well into the future, at which point it only allows us the pleasure of saying, "I told you so."
In the here and now however, decisions need to be made. Decisions that must be made in the fog. Decisions that can be ridiculed at some future date by those who know the outcome. The decisions that are made will affect peoples' lives. Across the country, people are struggling with this decision. Should I buy a new car, or should I keep the old one? Should we buy that bigger house our growing family needs, or do we make do for awhile yet. Do I commit our company's resources to a new capital project, or do I save my cash to buy my competitor's facilities out of bankruptcy? Our futures are being shaped by these decisions.
Blog Archives
December 2009
My Gosh, I Agree with Ted Turner - 12/22/2009November 2009
Natural Gas Prices - 11/16/2009July 2009
Leadership Near a French Town - 07/16/2009Perversity Strikes Again - 07/10/2009
Of Mice and Windy Men - 07/10/2009
June 2009
Dead Cat Bounce - 06/15/2009Notes From Dubai - 06/15/2009
Value - 06/15/2009
Buffoons or High Priests - 06/15/2009
April 2009
Cold Harbor - 04/10/2009An Arrogant Crow - 04/07/2009