Audio Interview: Gary Sernovitz on Fracking Personalities

Note: I reviewed Gary Sernovitz’ book in September, and we did a phone interview back then, which I’ve now posted as an audio interview, Part I – on the big personalities in fracking. Part II – on environmental issues, will follow. I recommend listening to the audio version, but I’ve posted a transcript of our conversation as well.

Mike:               Hi, my name is Mike, and I used to be a banker.

Gary:               And I’m Gary. I guess I’m sort of still a banker, at least a private equity investor.

Mike:               Perhaps more importantly, you’re also ‑‑ full name, Gary Sernovitz the author of, among other things, The Green and the Black: The Complete Story of the Shale Revolution, The Fight Over Fracking and the Future of Energy. Thanks for talking.

Gary:               Thanks for having me.

Mike:               As you know, I read and really enjoyed your book, and I reviewed it on my site. I just want to praise you for doing what I think is my favorite thing, which is taking a complex issue upon which nobody agrees, and everybody thinks the other side is complete fucking idiots, and saying no, we’re not all idiots. We could understand each other. So thank you for doing that. That’s really great.

Gary:               Thanks for the praise and clearly, that is not the dominant mode of American discourse, as evidenced by the discussions heading into November.

Mike:               Yeah, it’s really difficult to not see the other side as either morons or dupes or evil. And I would say if you just say the word “fracking” we’ve already introduced the idea the other side is one or all of those things. I appreciate you describing yourself as a New York liberal. And I described you as deep in enemy territory there for fracking, and yet you have to both answer for your profession, which is to be investors in energy and in oil and gas and fracking, but at the same time, be a thinking person.

Gary_sernovitz
Gary Sernovitz

I don’t know who’s more unattractive, oilmen or Wall Street guys, but every once in a while, I’ll say something mildly positive about a Wall Street guy in some column and people will write inevitably “You’re such a jerk talking about the banksters as if they’re not all evil.” Okay, sorry.

Gary:               I manage to work for a private equity firm that invests in the oil and gas business to be the worst of both worlds.

Celebrities of Fracking – Aubrey McClendon

Mike:               Some of the interesting parts about your book are combinations of celebrating capitalism, and ingenuity of the shale revolution, and incremental changes. And then part of that celebrating capitalism is celebrating some of the funny and interesting characters who made good off of the thing.

I’m interested in some of those. Some of them I’ve heard some of their names but don’t particularly know them, but I understand they’re rock stars of your industry. I’d love to chat about those if you don’t mind.

One, your favorite seems to be Aubrey McClendon who I guess died after you’d written the book. I don’t think you referenced his death, or maybe you do?

Gary:               No, he died in what is not terribly clear ‑‑ whether it was self-inflicted or not, but drove about 80 miles an hour into a highway overpass the day after being indicted.1 Obviously, a lot of speculation on the timing of that.

Aubrey_McClendon
The late Aubrey McClendon, from a 2011 cover story

Mike:               Certainly looks suspicious, as a complete outsider.

Gary:               The conclusions most people have drawn ‑‑ but I think there has been no official word from the investigation one way or the other. Not necessarily that there needs to be, but the funny thing about the book is there was an alternate book that was just sort of a straight biography of McClendon that kind of was impractical to write with my job and with need to write ‑ he’s backed by a firm in his later life that competes against my firm in terms of providing capital to oilmen. I ended up putting that to the side.

Mike:               There’s a book worth or more of Aubrey McClendon stories?

Gary:               Yeah, sort of every chapter you find he’s Zelig of the book. In every chapter he kind of finds his way. There is a small Aubrey biography woven through it unwittingly, just because he is one of the more colorful characters. He kind of harkens back to a different kind of swashbuckling capitalism. Partly he enters the oil business, kind of a wildcatter, and partly he did have a very unusual role just that effectively the company he had, Chesapeake, was thought of as somewhat small, sort of volatile, high risk.

Mike:               A wildcatter spirit of a company versus the more corporate people?

Gary:               And hold onto your seatbelts when you deal with Aubrey and Chesapeake in general. When the shale revolution started ‑‑ it wasn’t really him, it was another company, Mitchell Energy that started it. So when it started, what Aubrey did was really kind of sort of start this competitive frenzy in successive basins where people would discover oil, maybe we have a shale here in north Louisiana or east Texas or North Dakota on the oil side, or Pennsylvania or Ohio. And Aubrey had thousands of guys knocking on doors, and an unlimited appetite for capital and complexity, and everything that just got billions of dollars.

Then everyone looked around and oil companies pursuing more normal course ambition ‑‑ “Well, Aubrey’s going to suck up all the opportunities!” and so he was the catalyst in these basins for this frenzy. Then ultimately, you know what happened was he kind of didn’t fully grasp ‑‑ no one did, how good this was going to be. So he ended up with a lot more gas and crashed the price of gas. So many basins worked, and successively cheaper prices, and that happened on the oil side, and then also just any companies with too much debt heading into a downturn is always going to be in trouble. He kind of got a margin call on his personal account for two billion dollars.

Mike:               I should be so lucky someday. I will be so upset when I get a two-billion-dollar margin call.

FrackingGary:               That’s how much he was worth at the peak. I don’t know what the margin calls was for but my net worth went down by a couple billion dollars. Then he kind of got kicked out of Chesapeake because of all sorts of other somewhat old-school CEO perks that are sort of beyond ‑‑

Mike:               Sort of pledging shares, right, for his own purchases?

Gary:               More like he had the right to buy interests personally in all the oil wells Chesapeake owned, which is a thing ‑‑

Mike:               I see, a conflict of interest.

Gary:               Yeah, just kind of was not done that much anymore. Then he got backed by a private equity firm and they bought eight billion dollars of properties, oil properties right before the oil price collapsed. The bigger issue facing him was not really this indictment, which is somewhat on a pretty secondary issue, but really was on financial difficulties, and five or six different companies all bleeding cash, and all big debt problems.

Just sort of the world coming in ‑‑ he owned 20% of the Oklahoma Thunder and he had pledged that for a loan. I think maybe it was last weekend [September 2016] for some reason he needed to have the largest collection of Bordeaux in the world. So that’s being auctioned off now by his estate. Somewhat in bad form, and got a lot of bad publicity. He had pledged 20 million dollars to Duke his alma mater.

The_Green_and_the_blackMike:               I read about that, that Duke said “where’s our 20 [million]?,” and the heirs didn’t find that tasteful.

Gary:               Oh, the Duke alumni, the Duke community ‑‑ just say yeah, that’s a charitable donation. It is unclear what will happen, but it is definitely a very 19th century or very early 20th century, Dreiser story of rising and falling and rising and falling.

Mike:               Captain of Industry or Robber Baron type.

Gary:             Outside the realms of normal corporate America or the norms of it. Obviously kind of very entertaining but did have an impact on it. He was known to be an extremely nice guy.

Mike:               Presumably a gregarious salesman type.

Gary:               Yeah, he wasn’t cynical. His margin call was on buying – insatiably – stock in his own company, so he obviously believed in it. He was not a dark figure but an irresponsible figure, then left a lot of obviously shareholders, partners, and everything holding the bag, based on sort of a wild irresponsibility in terms of how he built his business.

Mount Rushmore of Fracking – Lucky or Good?

Mike:               What I liked about your ‑‑ on the one hand celebration of capitalism and innovation and in a sense “here’s the new shale billionaires” ‑‑ you have a “Mount Rushmore” of four of them, who rose above the others. On the one hand, we have a tradition in the United States of celebrating these people as paragons of capitalism and far-seeing geniuses, of which Aubrey is included with that, with Mark Papa from EOG and this guy Harold Hamm, and I guess George Mitchell, one of the originators of the techniques.

Sernovitz has a "Mount Rushmore" of fracking
Sernovitz has a “Mount Rushmore” of fracking

But then I appreciate that you also say there’s an aspect of the story which is these guys have just sort of dumb luck combined with bizarre personalities, like you’re describing with McClendon with his appetite for risk and appetite for everything ‑‑ I appreciate it. And then trying to figure out: Are these guys just beholden to their own personalities and limitations and that’s why they did these odd, risky, crazy things, which turned out to be “right place, right time,” at the right scale? Which is obviously huge they all did that.

There’s this awesome passage which I’d also like to read, which is among my favorites of the whole book, which is describing Aubrey:

“Aubrey feels sometimes like seeing the country’s best restaurant critic blissfully eating from a box of day-old donuts. People respect the critic for the sensitivity of his palate, but maybe the man just likes to eat.”

I really liked that.

Gary:               That’s brilliant.

Mike:               It is really. It encapsulates that we celebrate these capitalists for their amazing talent and yet I don’t know, maybe the guy’s slightly insane and just has no taste at all. It’s just awesome, but of course, I love day-old donuts too. I can relate.

Gary:               I think people in the oil business are very fond, and this is probably in any business, “My successes are because I’m smart; his successes are because he’s lucky.” Being in a business one gets a bit more color on who was lucky, who was smart. Most people are some combination thereof. But I think the thing to remember about the entire industry is before the shale revolution the US onshore ‑‑ we had a company in Corpus [Christi] working in South Texas, about drilling wells for 400,000 dollars to find 2 million dollars’ worth of gas.

Mike:               Scratch and peck kind of little tiny companies.

Gary:               Yeah. And anyone in the oil business, like Exxon, which looked in contempt at the US onshore business as a bunch of losers who couldn’t make it doing big international stuff in Kazakhstan or offshore Angola or Equatorial Guinea. There was a certain very admirable hustle, that kind of never-say-die that kept ‑‑ people shouldn’t have been drilling before ’98 in the US if you think about where were the best reserves of oil and gas.

It was just – globally – it was just the infrastructure wasn’t there to displace it. Then the shale revolution came and suddenly ‑‑ the amazing thing wasn’t just that actually underneath the stuff that these guys were scratching and pecking, as you say, were an amazing volume of oil and gas but actually oil and gas was a lot cheaper to extract than the stuff Exxon was doing.

Mark Papa

It’s one of these stories of “the first shall be last, last shall be first” that really came out of nowhere. And everyone got caught up in it. Then there’s all these micro stores because there’s a lot of basins that have risen. Think about there in Eagle Ford, which is the one closest to you guys. Eagle Ford now is – the most shale wells have been drilled in Eagle Ford. It’s now kind of a mature basin. It was really developed by EOG, gets a lot of the credit ‑‑ Mark Papa.

Mark_Papa
Mark Papa left EOG in 2013

And kind of was one where it was a stealth play. And then there’s this mad rush for the Eagle Ford. Now the Eagle Ford is kind of considered well, there’s A) it’s drilled up a lot, and some of it’s more natural gas, and some of it’s more natural gas liquids, and it’s not that good. And by the way, if you go to West Texas, the Permian, there’s an Eagle Ford stacked on top of another Eagle Ford. There’s all these thousands of feet of different benches you can drill horizontal wells in.

Eagle Ford is now considered okay, a little mature, maybe some opportunities, but you’re only interested in moving back there if you can’t find anything in the Permian in West Texas and New Mexico. There’s dozens of different kinds of stories of rises and falls and the business ‑‑ there’s not just a lot of amazing oilmen who picked exactly the rise and fall correctly. There were some who were just there in a basin that ended up rising. And there are some that did guess it correctly. There are some who came in too late and ended up losing a lot of money.

Mike:               There’s a bunch of things I want to follow up on that. One is the Permian which I don’t know much about but a month ago [September 2016] the general newspaper readership got a sense that Apache Energy had a huge find. I want to follow up on the “genius capitalists” of the thing.

There’s a local guy who I don’t know personally, but was celebrated around the discovery of the Eagle Ford. Suddenly this guy I hadn’t heard of before, named Rod Lewis became a known shale revolution gas billionaire. Part of his legend – and I don’t think he appears in your book, is as a very blue-collar guy checking old oil wells and then ‑‑ sudden success is always overnight and it took 20 years that we didn’t know about…

But you do describe a guy, and I don’t know if you have stories about him or his thing, but you do have a thing that sounded very similar to that, in your book. Terry Pegula, who sounds similarly this blue-collar guy in the business of helping plug old oil wells and then suddenly seems to, out of nowhere, have acquired a massive amount of leases, which is then first worth a billion and then three or four billion a couple years later. Do you know the Rod Lewis story to tell? Local people might be interested. I’ve only heard basically what I just told you.

Terry Pegula

Gary:               Petro-Lewis is a very well respected company and definitely considered one of the Eagle Ford’s central private play. I don’t know his story particularly, but Terry Pegula, who now owns the Bills2 and Sabers and the savior of Buffalo was definitely almost like a hoarder of leases.

terry_pegula_and_wife
Terry Pegula and wife Kim

Mike:               Clean your stuff out, man. We’re going to call the cops on you. He was that guy?

Gary:               Yeah, and would take them from other companies with the agreement that I will plug these wells ‑‑ a natural gas well sometimes can produce for a century maybe, at very low volumes, but it gives you the right, based on the lease, to actually drill beneath it. Even if you have a well producing 50 dollars a day of stuff, it does give you the optionality ‑‑

Mike:               Vertically you can go below that existing small-producing well.

Gary:               Yeah. He didn’t do that on purpose. No one thought when he was hoarding these leases that there was going – Qatar was going to be in Pennsylvania and eastern Ohio. He was just doing it because he liked doing it. I think also as a car dealer once said to my wife his view, “If it’s free, it’s for me.” People would just give it to him because it took liabilities off their hands. I don’t know the Petro-Lewis story but that’s one of those kind of amazing stories, sort of the wheels of markets and capitalism and fortune and luck and idiosyncratic histories that people like to wrap up sometimes in a more heroic narrative.

Mike:               We love the narrative of the blue-collar guy making good. That’s a pleasing capitalist ‑‑ it’s terrible when the rich remain rich. It’s great when the poor suddenly make it rich.

Harold Hamm: Humble, but sensitive, Trump supporter

Gary:               That’s why Harold Hamm, hearing him getting offended by “fracking,” he is the single person who’s gotten richest individually off the shale revolution. He is one of 13 kids, a sharecropper in Oklahoma, who barely graduated high school. Never went to college. Didn’t have shoes until he was six. A story out of a different century and now is the 70th richest man in the world. He signed a giving pledge with Bill Gates.

Mike:               I think you described him getting into North Dakota because he was one of these losers who had no other chance.

harold_hamm_donald_trump
Continental Resources CEO Harold Hamm endorsed Republican Presidential front runner Donald Turmp.

Gary:               Exactly. He admits it. He’s a humble guy in some ways. He kind of admits “I couldn’t afford what we were paying” ‑‑ basically you’re paying option value for leases in North Dakota.

And I heard Harold Hamm speak, and he gave a very pro-Trump soliloquy, like 45 minutes long with slides, more of a presentation. He talked about a very obscure argument. I don’t even know what happened, but Trump came to Colorado and also said basically the same thing Hillary said, which is communities should be allowed to regulate fracking in their backyard.

And Hamm’s like: “Forgive my friend Donald. He didn’t know what he was saying. He agrees with me.” Even the word “fracking.” He’s one of Trump’s chief supporters. And he made it clear that if you use the word fracking around him, the conversation is over, because it is an insulting term to describe hydraulic fracturing.

Mike:               Okay, words matter and that’s a hurtful word for him.

Gary:               Yes.

Mike:               Okay. He sounds a little sensitive, but anyway.

Gary:               You’d think 70th richest man in the world and 12 billion dollars would make you less sensitive. Apparently,  that’s not the case.

Mike:               Words have power and he’s a man who can be hurt by that word.

 

Please see related audio post (upcoming)

Part II with Gary Sernovitz – on the environmental issues of fracking

Before becoming an oil private equity guy, Gary Sernovitz was the next F. Scott Fitzgerald, and authored two novels, Great American Plain, and The Contrarians.

Please also see related posts:

Book Review: The Green And the Black: The Complete Story of the Shale Revolution, The Fight Over Fracking, and The Future of Energy  by Gary Sernovitz

Natural Gas Revolution – Corporate, Well-capitalized

Mad Max Bizarro World – South Texas

Audio Interview with Bryant on Fracking, and Regrets

 

 

Post read (200) times.

  1. The indictment came down in March 2016
  2. Just found this story from 2014 and Trump’s tweets about getting beaten by Pegula in a bidding war for the Bills. Trump, ever the petulant child.

Book Review: The Green And The Black by Gary Sernovitz

I’m always on the lookout for people who can hold diametrically opposed views in their head simultaneously. Is that why I enjoy Claire Danes in Homeland so much?[1]

Gary Sernovitz, the author of The Green and the Black, brings the perfect profile for diametrically opposed thoughts about the fracking boom, which is probably what we need to explore the oil and gas revolution of the past decade. He’s a self-described New York liberal, who works as a managing director of a private equity firm focused on oil and gas.

He’s deeply immersed in industry research, and he’s a good writer with a sly sense of humor.

He covers the environmental impact, financial impact, and the geopolitical impact of the shale revolution. He also clearly appreciates the capitalists at the core of the story, although often humorously for their mistakes and faults as much as for their tremendous success.

Environmental Impact

Since any conversation about fracking inevitably leads to an environmental fight, its worth noting Sernovitz quickly distances himself from a hardcore industry perspective.

“I believe the scientific consensus that climate change is happening now because of fossil fuels. The evidence for yet more changes is overwhelming. Climate change is a serious threat to human life. While I am more hopeful than most environmentalists that we can address these issues with technology, efficiency gains, and a cleaner energy mix, I believe that continuing to consume energy as we do will have terrifying effects over the coming decades.”

One central point of Sernovitz’ book, however, is that the environmental narrative of the fracking boom isn’t as simple as it’s frequently portrayed. Neither from the opponents’ side, such as was presented in the anti-fracking documentary Gasland, nor from proponents’ side, from industry.

gasland

It’s safe to say that each side of that debate considers the other side to be morons, which is never a great place to begin a discussion. Sernovitz is neither a moron nor an ideologue. Rather, he is someone who, while profiting from the oil and gas business and fracking in particular, has spent a tremendous amount of time thinking about opponents’ views.

To Sernovitz’ credit, he dedicates 49 pages to what he calls “The Local Perspective,” by which he means what an economist might call the environmental externalities of fracking. The open frack-water ponds, the worries about local drinking water, the possibility of leakage, the earthquakes.[2] Gasland, he argues, presented a simplified, non-scientific and non-representative propaganda piece about dangers to the drinking water, which is probably not the real big local environmental impact of fracking anyway.

He also dedicates 34 pages to what he calls “The Global Perspective” on fracking, which he short-hands as the “the Al Gore” worry, that the boom in cheap non-renewable hydrocarbons dooms us to a warmed planet and apocalyptic results. To his credit – and in line with my own fears about the biggest environmental impact of fracking – Sernovitz allows that he worries about this too. Our short-term pleasure at being able to drive huge SUVs at affordable pump-prices will be punished by the long-term irreversible damage we do to all living things by not switching to renewable, non-polluting energy sources, and possibly quite soon.

gary_sernovitz

Sernovitz’ articulated environmental hope, and one senses that he’s explored this angle deeply with concerned liberal foundation boards who want to invest with his company but also prefer not to wreck the planet, is that the ‘clean gas’ boom will be an intermediate weaning step away from dirty coal and onto the energy renewables in the future.

But he’s not such an ideologue that he’s sure:

  1. this will happen; or
  2. That the methane emissions from gas extraction wont prove, in the long run, as deadly to the planet as coal’s CO2 impact.

He concludes that we just don’t know enough yet about the methane problem to measure it against other alternatives. Meanwhile he holds out hope that gas isn’t all bad, when compared to its current alternative, coal.

Capitalist fun

Sernovitz clearly enjoys the story of capitalism working – innovation, mistakes, risk-taking, salesmanship, fortunes lost, fortunes won, and surprising global changes wrought, where they were least expected. He admires the pioneering spirit and grit that the early frackers showed. Elements of fracking techniques, including horizontal drilling and using liquids to open up closed shale rock, had existed for decades. But as Sernovitz explains, the right combination of techniques required much trial and error.

One story of The Green and the Black is how this combination of innovations and elimination of errors transformed the US from a forgotten has-been producer of expensive oil and gas into a leading supplier and global driver of far-cheaper oil and gas.

Picture_of_fracking

Sernovitz does not settle for the convenient anointing of far-seeing geniuses that many business books do. Instead, he acknowledges the role of extraordinary luck, as well as a we-had-no-choice-with-our-backs-up-against-the-wall decision-making of the fracking giants Aubrey McLendon, Mark Papa, Harold Hamm, and George Mitchell – who he anoints the four members of the Mount Rushmore of Fracking.

How financially valuable?

Sernovitz tries some back-of-the-envelope calculations of the income and wealth effects of the US fracking boom. Between 2007 and 2014, he estimates, the oil and gas industry netted $150 billion in additional income due to the shale revolution. More substantially, however, is the future wealth effect of making shale deposits a viable source of oil and gas. Between usable and estimated reserves, plus ancillary investments in pipelines, gathering systems, and export terminals, the wealth effect of the fracking boom probably adds up to $2 Trillion, according to Sernovitz. Which is quite a lot.

Other facts about the fracking boom also offer a sense of scale, such as the weird one that the size of the Bakken shale in North Dakota would give – at $60 per barrel of oil – a theoretical Nation of North Dakota a per capital oil wealth between four and five times bigger than Saudi Arabia. Whoa.

In my one-time adopted state of New York, where fracking was subject to a moratorium since 2008 and effectively banned since 2015, the technique and subsequent energy boom is a kind of shorthand for capitalist evil.

Where I currently live in South Texas, fracking may not be universally celebrated but even people who did not get rich from the recent boom have a sense that it has meant a huge economic shot in the arm for the region. Criticism tends to be muted, and, politically at least, a non-issue. People don’t need to shout “Drill, Baby, Drill” in South Texas because that’s going to happen anyway and it’s in fact against state law for municipal entities to restrict it. There’s no reason to shout about an activity that the entire political structure supports.

Geopolitcs

Sernovitz would like the layperson to understand not just the financial implications of the shale boom, but also the potential geopolitical changes wrought.

Here Sernovitz strikes a mostly optimistic note. Reduced dependence on frenemies like Saudi Arabia and Bahrain, and independence from more traditional enemies or rivals like Iran and Russia, he argues, makes the shale revolution a geopolitical gamechanger for the United States.

We will have less need to prop up kleptocracies or become partisans in places like South Sudan or Libya if we’ve got options, at a reasonable price, under our own land. This won’t stop the sea from rising and swamping our coastal cities, of course, but it is one less thing to disrupt the world.

Absence of traditional blame narrative

Have you ever had a conversation with a sub-prime mortgage CDO structurer about what he thought he was doing before 2007, creating a weapon of mass financial destruction? No? If you did, you’d understand the story is a bit more complex than the journalistic narrative. The products were not designed to be as toxic as they seemed, in retrospect. For reals, and I’m not being smirky as I write this, the underlying products were designed so that people with an imperfect credit history could buy a house. That was the real product, which we seem to forget. People in the sub-prime mortgage CDO production chain all had their own narrow self-interested job to do, but the underlying idea was not evil at all.

In that spirit, I appreciate Sernovitz’s frustration:

“It sometimes seems as if environmentalists believe that the oil industry’s business is to make carbon dioxide. Our business is to make fuel. Carbon dioxide is the by-product, the vast majority of which is emitted when people consume our products – in ‘your’ wheels, not ‘ours.’”

And then he continues,

“Yes, I believe that there is a moral difference between making money by producing oil and spending money by consuming it. I do not dispute that climate change is more on my conscience that on others.’ But that moral difference is subtle, subjective…”

I also appreciate Sernovitz’ position as a New Yorker surrounded by people who casually hate his industry. He does not have the luxury of unreflective one-sidedness. On the contrary, he is an expert ambassador for the industry living deep in enemy territory.

One of the problems with forming unbiased opinions on complex business topics is that true experts tend to come from within their own industry. And in that sense, may be discounted by critics as self-interested in defending the industry. But if you don’t listen to experts from the industry, you’re probably not listening to the most important experts on the situation.

Of course, at the end, I’m jealous of Sernovitz too.

He writes humorously and from a position of deep knowledge about an important finance topic. He writes about the big picture, as well as the minutia of his industry. He continues to make money with his expertise. Did I mention he’s funny as well?

Basically, I hate him.

Maybe I’ll get up the guts to ask him to do a podcast here.

The_Green_And_The_Black

 

Please see related posts:

All Bankers Anonymous Book Reviews In One Place

 

 

 

[1] Is that why I’m still a Catholic despite the ridiculous medieval bent to the Church’s teachings?

[2] Since I finished the book a week ago, earthquakes in Oklahoma have put the “seismic activity” problem of frack-water disposal back on the front burner. Ugh.

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Rage Against the Machine – Oil & Gas News Coverage Version

Morning News Rant

Do you find yourself eating your morning granola, hunched over the financial news, stopping in the middle of a paragraph, feeling your eyes glaze over as your BS-meter tilts red in 0.6 seconds, and then looking up at the window to start mumbling like a deranged person to yourself about the absurdity of that business story?

Reading the newspaper and getting upset
Grumpy investor reading the news!

You do?

What a coincidence, because so do I!  That’s so weird!  It’s like we’re twins!

Well, ok, not so weird, because you read Bankers Anonymous and you understand that’s one of our conditions – the daily, and perhaps hourly frustration with the Financial Infotainment Industrial Complex’s faulty depiction of events that affect our lives.

Why do I bring up our common condition today?

I’ll tell you why.

Oil and Gas Drilling
The Natural Gas Revolution in South Texas

I live in South Texas, where the development of fracking fields is in the process of revolutionizing energy production in the US.  I believe the consequences of this process, for everything from renewable energy, to regional job creation, to potential environment liability, to geopolitical and Middle Eastern politics cannot be exaggerated.

As a result, I read what I can about business developments in my regional back yard, both in the local paper – The San Antonio Express News – and the Wall Street Journal.

The local paper’s coverage has its flaws[1], but I want to pick a fight with a story today in the Wall Street Journal.  I have found that of the two papers, only the Wall Street Journal covers the Eagle Ford Shale stories from the perspective of national and international public and private equity firms, and I appreciate this, since it’s missing from my local paper.

I should also say my following rant pertains not particularly to the oil and gas or fracking industry, but rather practically any industry covered by the Financial Infotainment Industrial Complex.

The part of the story where my BS-meter hit red

The WSJ story describes the sale of Texas shale-driller GeoSouthern Energy Corp to Devon Energy Corp for $6 Billion, the largest acquisition of the year in the US in the oil and gas industry.  (Pretty important news, which at least 24 hours after the announcement, the local paper still hasn’t touched.  But I digress.)

What gets my goat is a quote buried in the middle of the story by “Wells Fargo energy analyst” David Tameron.  Tameron says:

If you are private[2] right now and you can sell yourself, you do.  If I’m a buyer and there are a lot of people who want out the door, it’s a good time to be buying.

 

Maybe this quote was taken out of context, and if so, I apologize to David Tameron, Wells Fargo energy analyst, for what I’m about to say.

My interpretation of Tameron

I interpret Tameron’s statement as:

“If you’re selling an oil drilling company, it’s a good time to do that.  Also, if you’re buying an oil drilling company, it’s a good time to do that.”

This is an absurd ‘analysis,’ by David Tameron, Wells Fargo Energy Analyst.

Tameron’s statement goes unchallenged by the Wall Street Journal as the self-serving, churn-inducing statement that it really is.

In the real investing world – not currently occupied by either David Tameron, Wells Fargo Energy Analyst, or the Wall Street Journal reporter on this story – there are attractive times to invest $6 Billion in an oil and gas drilling company, and there are less attractive times.

Most of the time, for real investors, we can not be sure whether it’s an attractive time, or not, to be making a $6 Billion investment in an oil and gas drilling company.  Because it really depends on a lot of unknowable future factors, not least of which are the future input costs and output costs for oil and gas, both of which are volatile.

Some time in the future, we may eventually know whether it was a good time to be a buyer of GeoSouthern Energy Corp for $6 Billion, or not.  The answer may even change a few times in the future, again, because markets fluctuate.

From an investor’s perspective

What I do know, however, is that it’s not simultaneously a good time to buy and a good time to sell.

Wait, I need to be more specific.  For investors in the transaction, it is not simultaneously both a good time to buy and a good time to sell.  From an investor’s perspective, it will end up being a good time for one side, and a bad time for another side, some time in the future.

From the brokers’ and the Financial Infotainment Industrial Complex’s perspective

But the investor’s perspective is not shared by brokers or the Financial Infotainment Industrial Complex.

For financial intermediaries (brokers) who buy and sell companies – or stocks, or bonds, or currencies, or real estate – its always simultaneously a good time to buy and sell the same thing, since this is how they make money.

And for members of the Financial Infotainment Industrial Complex, of which the Wall Street Journal is among the most important and sophisticated, it’s always simultaneously a good time to buy and to sell.  Because transactions create events, which in turn gives them something for them to talk about.  They are not investors but rather cheerleaders.

This Eagle Ford Shale example this morning – like the several or dozens of financial transactions a day we vaguely witness passing through the peripheral transom of our financial mindshare – just reminded me of the different incentives we have when compared to the united front of brokers and the Financial Infotainment Industrial Complex.

The Financial Infotainment Industrial Complex needs to churn a story every day, that’s how they get revenue.

And brokers – represented in this example by David Tameran, Wells Fargo energy analyst – need to try to churn a transaction every day.

As consumers (victims?) of the Financial Infotainment Industrial Complex we get hit with somebody else’s strong bias – the need to constantly churn transactions.

The truth that this does not help us think straight about investing – in fact it undermines our ability to think about investing – is rarely mentioned.

You and me, I guess we know this.  We are, somewhat, occasionally, immune.  But what about the rest of the folks out there, fed the disturbingly wrong, the self-servingly biased line, that it’s always simultaneously a good time to be buying and selling?

Sigh.  Time to finish my granola.



[1] Fine, since you asked, what’s wrong with the local paper?  The local paper only covers the Eagle Ford Shale with three themes. A) Fracking = Lots of Jobs!  B) We need to invest in the roads in south Texas that are being hurt by super-heavy truck traffic!  C) There are plucky wild-catters trying to make money here.  Of these, stories A and B are true as they go, and C is absolutely, totally, and completely misleading, since wildcatters comprise approximately 0.0001% of the activity in the Eagle Ford.  As far as the other potential stories of the Eagle Ford, the local paper does not cover them.  These might include: a) Environmental impacts b) The national and international businesses doing deals in South Texas, and their relationship to high-profile public and private equity firms c) Technological innovation in the fracking process in the past 10 years and d) the revolutionary impact of 90 years’ worth of affordable energy on our lives as well as on the renewable energy business.

[2] “private” in this sense meaning the fact that GeoSouthern Energy Corp is owned privately, it has no public shares outstanding.

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Interview Part II: Frack Jobs – Plentiful but Rough

Oil Field workersIn this interview Bryant talks about the difficulty of employing oilfield workers, who often look for trouble.

Bryant:           Hello, my name is Bryant, and I presently work for a company that develops and operates frac-sand silo terminals in the Eagle-Ford shale.

Bryant and I spoke about his views working on the fracking world in an earlier podcast but we also spoke extensively about the impact of the Natural Gas Revolution on jobs in South Texas. The first point is that there are a ton of jobs created.  The second is that it turns out the work-force can be pretty rough.

Bryant:          The extracting of natural gas from the earth does create a lot of jobs, which is something that obviously this country is starving for at this time. You know people tell me, “I don’t want to work as a rig hand.” No, I’m talking complete cities are developing because of this stuff. An oilfield comes in first: you need restaurants, you need hotels, you need rent-a-cars. You start to develop quite a bit of economy — you have an economy wherever this stuff really starts to kick off, and I think that’s good. You need welders. You start to then develop actual skilled workers.

Michael:         I went on the site of this company and everything was provided seemingly by something else. There were the Schlumberger signs, the Halliburton signs, the guys guarding the entrance to the ranch that they were drilling on. There was the catering guys. This is being done in an area where it’s basically raw ranchland for a hundred years, and they have to basically import services for everything. It was kind of amazing.

Bryant:           Everything, generators, electricians — any time I have an issue with my silos and I need an electrician, it’s not easy. If you need a skilled worker in some of these areas they’re very difficult to come by. Like I said, labor, that’s why the Eagle Ford is so attractive. You’ve got San Antonio, Houston, you’ve got major cities that people are leaving and flocking to these smaller towns, really in the middle of nowhere, and providing all the services needed.

This stuff, fracking, it employs a lot of people that may not have education. It employs a lot of people that have a lot of mouths to feed, that may not have really the education to go and get an office job. I think that’s really important for the world. A lot of people don’t have the opportunities to get the job they really desire. They just need a paycheck. This really helps. I would hate to see all these towns I deal with, all those people not working. We’d have a serious problem on our hands. I mean by just violence, and upset people.

Michael:         You and I talked about your earlier job in the Eagle Ford that was with a buddy of yours…Can you just describe for me the part about what it’s like to manage a bunch of guys in an oilfield work environment, and how different it was from what you’d expected, or where you come from?

Bryant:           It’s tough. It’s probably the hardest part of my job still to this day. I came from working before I moved to Texas to work in this industry I worked for the publishing industry in New York City for five years. I was constantly surrounded by people that probably like to read a lot of books and keep up with current events, etc. I came into an industry where not a lot of the workers on the ground have college educations.

Michael:         What about high-school educations?

Bryant:           Not a lot of them have high-school education as well, so it’s very difficult, at least for me just to bridge that gap between office work and someone that’s been driving a truck for their whole lives, and who don’t really understand why there are procedures that can’t be broken, and why there are rules that need to be maintained. They just seem to care about it’s my truck, I want my money, and that’s it or I don’t want to work today because I didn’t get a good night’s sleep last night.

So, it is very difficult. I hate to use the word unruly, but you come across a lot of people that they sometimes don’t really care as much as you’d like them to. Now it also is very difficult in that a lot of these towns you get fired or you quit from one place, you just walk across the street and they’ll hire you immediately to do the same thing you were just doing. There’s such a need for drivers and people with experience. Workers know this. So, they know if they don’t show up because they went out and they blew their check and got drunk, and just didn’t wake up, and they come in two days later and you fire them, they’re just going to walk across the street and get fifteen, twenty dollars an hour doing the same exact thing for somebody else.

That environment is difficult. A lot of companies are trying to adapt, trying to have the medical insurance and 401(k), trying to maybe have a little signing bonus. You have to do things to keep good workers because it’s very competitive. But it is very difficult to manage people in the oilfields sometimes. They can be a little rough around the edges, but that’s why I think managing in this industry actually pays pretty well. It’s not an easy task.

Michael:         I’m afraid you don’t have enough tattoos to be running this kind of crew.

Bryant:           I definitely change my attitude a bit, depending on who I’m with. If I’m not in the field, you kind of change a little bit. You try to blend in a little more and probably in the vocabulary. I use a lot more oilfield jargon than when I’m probably doing a sales call or some kind of meeting at a corporate level. So again, I think that’s what makes it a fun job for me. You’re constantly a chameleon and you’re in between two different worlds all the time.

A lot of these guys can be pretty irresponsible. They make really good money, so a lot of times they come from places where they don’t make — they come from poorer backgrounds and all of a sudden you’re making twenty, twenty-five bucks an hour, you’re clocking twenty, thirty hours of OT because it is twenty-four hour drilling. This stuff never stops, so you’re making a lot of money. You probably didn’t learn money management much and kind of start getting into trouble.

Michael:         Is there trouble to be had in South Texas?

Bryant:           Oh yeah, there’s always trouble. I’ve never actually been up to North Dakota. They say it’s like stepping onto the moon, it’s so barren. I do know people that have been up there and they said, “Honestly, you get to some of these places, and the only thing there is, is like a barbecue joint, a trailer park, and a prostitution house. That’s all you need is drinks, and money, and women, and these guys probably stay pretty happy for a while.” There is trouble. There is a lot of trouble.

I used to actually give out paychecks on Mondays instead of Fridays because workers tended not to show up on Saturday. They’d get their money on Friday, they’d go and get drunk, and I’d get a call maybe somebody was in jail, or somebody was drunk, and I really had to just change my rules. I said everyone gets paid on Monday. You don’t go out and get in as much trouble on a weekday. Yeah, there’s a lot of trouble.

 

Bryant and I spoke of the difficulty of managing the low-end of the labor market, but then he described the other end of the labor market, the scientists and engineers providing the brainpower for the shale play.  As much as the story job-wise is mostly positive, I couldn’t help but think of the idea that we’re in the role of a 3rd world country…we provide the low-end cheap labor, and the rest of the world provides the brains.

 

Bryant:           I’m going to tie this into politics a little bit, but you meet all these engineers for the big three: Halliburton, Schlumberger, and Baker, and not a lot of them are from the U.S. You meet a lot of them from India. You know, Asian and South American. It’s crazy. You actually sometimes walk into these offices and it’s like the United Nations. It’s people from all over the world, which is great, I’m all for it, but I think it shows that we are slipping more and more, like everyone has been saying, in our math skills, in our education, period. We have a great technology but we’re not really creating people or educating people to do it. We’re kind of letting it get away.

Michael:         So, the high-end intellectual jobs, the engineering jobs, the people inventing this stuff or figuring it out are not necessarily trained here. They train somewhere else and then they get here.

Bryant:           This is definitely the testing ground. The U.S. is where it’s happening, but a lot of those times it’s being created by an engineer that’s not from here. You’re getting people from other countries that are seeing an opportunity to come into the industry and make some money. The industry is eating them up. The industry has money to pay for the best, so they’re buying the best minds they can buy to make their work more efficient so they can make more money.

Please also listen to Part I: Fracking and Regrets

 

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Interview Part I: Fracking and Regrets

I had a conversation with a friend who ships trainloads of ‘frack-sand’ into the Eagle Ford shale in South Texas.  We talked about the Natural Gas Revolution, as well as the surprising and possibly regretful turn his life has taken, far from working in book publishing in Brooklyn.

 

Bryant:  Hello, my name is Bryant, and I presently work for a company that develops and operates frack-sand silo terminals in the Eagle Ford shale.

Horizontal fracking or hydraulic fracturing is a new technology. It’s been around probably — I would say since about 2007, but obviously now it’s really picking up. What it is, is instead of drilling and fracturing the earth, only in a vertical manner you drill vertical and horizontal and you fracture along the horizontal, through the shale.

Michael:  When you and I were having a beer with a mutual friend of ours, he was describing basically oil and gas trapped in small little bubbles of rock that you can’t, with conventional drilling, get at. But you sort of smash it up with this horizontal drilling by shooting water and sand and chemicals, and it smashes up the rock and then the oil and gas flows. Is that basically still the right, accurate description?

Bryant:  Yeah, that’s exactly right. First you drill it, and then — which means you just basically drill a hole and then you pull out all the drill pipe, and you go in with the fracking equipment. They call it the gun. The gun then blows off, which shoots shrapnel in all directions. After that, you pull that out. You then pump millions of pounds of water at a very high pressure, which then opens up the routes that the shrapnel first created to get to those pockets, and then you pump millions of pounds of frack sand, chemicals, and guar. It almost creates a slurry that helps keep those routes open so the oil and gas can actually flow out of the well.

Michael:  To go back to the original description, your link in this chain is that you move huge amounts of sand from northern United States into South Texas?

Bryant:   Yes, right now we’re averaging about 35,000 tons a month, which is about 70 million pounds so it’s quite a bit. It’s about 350 rail cars a month. Each one holds 200 thousand pounds.

Michael:          350 rail cars, so you basically take over an entire train, you fill it up with sand. It leaves Wisconsin, or where is this coming from?

Bryant:  The mines are all located in the north, mainly Wisconsin, Minnesota.  Apparently it has to be portions of the earth that were covered over during the Ice Age, and therefore have been untouched for a very long time, and the earth is very, very hard. This sand can basically deal with very high pressure.[1]

Michael:  Referring to Eagle Ford. I know what it is because I live in South Texas, as do you, but basically this is a giant area covering a huge number of counties under which they’ve discovered there’s all this oil and gas trapped in previously undrillable area in the shale formation.

Bryant:  The Eagle Ford Shale actually is a formation that spans from Laredo, obviously it continues into Mexico, I’m only giving you the American formation. Starts in the Laredo, Carrizo, Cotulla area, spans northeast right under San Antonio, up through Cuero and Kennedy, really very key spots. That’s actually where the first well was ever drilled, but that’s really the formation of it.[2]

What makes it the best play really in the world right now is the economics of the play.  So, all the infrastructure is in place to bring in high volumes of sand, high volumes of water, high volumes of guar from India coming into the Port of Houston, Port of Corpus Christi. You’ve got chemicals; you’ve got bauxite coming in as another form of I guess sand or proppant from South America. So, you have infrastructure in for high volume of rail and barges, etc. There is a large amount of workforce. You have a lot of people looking to work. You have infrastructure, and then probably the most important is it doesn’t cost a lot of money to then get the product to refineries because you have all the refineries located on the Gulf Coast, so your margins to get it to market are a lot higher when you’re in the Eagle Ford. That’s really what makes it the most attractive play right now in the world.

Michael: I went down to Eagle Ford to tour it. I asked one of the guys down there; I said, “How long is this thing going to go for? How many years do we have for drilling?” He said, “What we’re looking at is probably fifteen more years of heavy drilling and fracking operations.” Is that what people talk about when you’re there?

Bryant: It fluctuates all the time. When this first started a couple years ago, you know, it was twenty to thirty years. Now they’re saying yeah, about fifteen. I read an article the other day it’s sixteen. That seems to be the consensus.

Michael:  Then I asked him, “So if we’ve got natural gas reserves that are now available in the U.S. that we never thought were available because this stuff was trapped inside the rock, and now it’s being released from the rock, how long do we have great reserves of natural gas?” He said, “About ninety years-worth is of the known or probable, available natural gas.” Ninety years worth in the United States, does that sound right? Is that what people talk about?[3]

Bryant: I wouldn’t doubt it. The Marcellus Shale which encompasses a lot of up-state New York, Pennsylvania, even creeps its way into Ohio and down into West Virginia – the Marcellus Shale they say hasn’t even been fully, surveyed. They’re saying that shale alone if developed would become the largest gas shale in the world.  So yeah, I believe that’s probably pretty accurate.

Michael:  So if we’ve got ninety years — here’s where I go with that. When I think about what is going to be sources of energy for, say, the rest of my lifetime, your lifetime, pretty much what that tells me is that extraction of carbons from the earth is going to be cheap for the rest of our lives, and renewables that from a political standpoint I may prefer that we use solar power or wind power because it just seems cleaner and better for the earth, but that’s probably not going to be viable when compared to natural gas, for the rest of our lives.[4] This is sort of what I take away from it when somebody says yeah, we’ve got about ninety years worth of really cheap gas we can access. I don’t know if you have any thoughts about that.

Bryant:  I do. I’m originally from the Northeast, so I work in an industry that is frowned upon by a lot of people in the northeast. So a lot of my friends will tell me, “Why are you involved in something when you could be involved in solar power or something greener?”

Michael:  When I told the woman who looks after my kid a couple days a week that I’d been down to see a fracking site, she said, “Fracking, isn’t that illegal?” Do you get a hard time from people, from your old world about fracking itself?

Bryant:  I do. I get a horrible time. I even hate myself sometimes. If you were to tell me ten years ago that I would have been doing business with Halliburton, I would have denied it, but I’m now in that world. I attend a lot of conferences where you look around and it’s just not the type of people I thought I’d be hanging out with all the time. Basically it’s all about fifty, sixty, or forty or fifty-year old white men that have just been raised in the oil field in some form. I like art and things like that. So it is a little crazy, and I do get a lot of flack from them, but I always do welcome a debate.

Michael:  Do you have any thoughts you care to share about where you see yourself in five years, either how you’re going to make your fortune as an oil guy or not, and another would be whether you have any kind of personal regrets about starting out in the publishing industry and ending up as an oil guy.

Bryant: Yeah I think I’ll probably answer the second question first because it will lead to the first one. Obviously when you’re young and in college, you’re a real idealist. I was really into writing and reading and if I could do it all over again I probably would have focused my energies more on a lifestyle where I could have lived off of some kind of art or humanities. But life is not — I don’t think college really prepares you as well for reality, at least in my opinion.

Personally, I would have preferred to not have taken this route, but I’m not ashamed in what I work in. I do find it fascinating. It is something that moves on a global scale, which I think is very interesting.

In this business you’re constantly meeting people with money and with ideas and with connections. I hope to one day be able to capitalize on my knowledge and my connections, but I actually prefer to go somewhere else in the world. I wouldn’t mind getting involved in South America.

I think the way it’s going to happen in the rest of the world is actually a little more interesting because they’re going to have all the little problems that we’ve already solved here a long time ago. And problem solving is actually kind of a fun part of the job. The rest of the world really doesn’t have the infrastructure that we have here for moving equipment and materials. I think that would be even interesting to do. I don’t have to necessarily get involved in drilling or trading. It could be as simple as logistics. Things like that are actually — I think there’s room for it in the future, and hopefully five years from now I’ll have some options to do that.

 

Next up in Interview Part II – Bryant and I talk about the Eagle Ford labor market.

 



[2] And the Eagle Ford shale play has really changed the look of South Texas.  It’s kind of a Mad Max Bizarro world down there.

[3] In other words, this Natural Gas Revolution is huge.  As further described here.

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The Natural Gas Revolution Part VI – Has It Killed Renewables In Our Lifetime?

Here’s my hypothesis[1]: The abundance of cheap domestic natural gas – what I’m calling the Natural Gas Revolution – makes “renewable” energy sources like wind and solar financially untenable, and possibly unnecessary, for the next 90 years.[2]

I can’t prove my hypothesis because energy pricing is complicated.

Figuring out the ‘price’ of energy derived from traditional fuels such as coal, natural gas, and nuclear is not as straightforward as it may seem.  I’ve made an attempt based on a conversation with an official at my local utility company.  But every financial assessment depends on a series of assumptions: from the future price of input fuels, to regulatory changes, to models that take into account the depreciation of assets such as a nuclear or coal plant.

We know that energy produced from nuclear and coal plants has relatively low prices, partly because, in the case of my local utility, it bore the cost of building the nuclear and coal plants long ago.  As a result, we can afford that energy.  We also like the price of natural gas, because both plant construction and current market prices are low.

On the other side of the ledger, my local utility in recent years added solar- and wind-derived energy to its energy portfolio, both of which cost considerably more.  At a free-market price, wind power would be about 50% more expensive than natural gas energy, but a federal government Production Tax Credit (PTC)[3] brings the wind-energy price within the range of natural gas-derived energy.

Solar power is even more expensive than wind.  Solar may cost three times as much per KW hour as natural gas – assuming current technology – but with a federal subsidy through tax credits,[4] solar energy can be priced at a cost about twice as expensive as natural gas.

The energy provider of my home city targets a ‘portfolio mix’ by 2020 of 20% ‘renewables’ – at this point primarily wind and solar energy.[5]

As a retail consumer, I pay 9 cents/Kilowatthour on my energy bill.  This retail price reflects a blend of energy costs from the utility’s primary sources of nuclear, coal, natural gas, and renewables, plus the cost of administration and delivery to my house.  The price per KWhour could be brought down, somewhat, by prioritizing energy sourcing purely on a cost basis, which would favor coal and nuclear, and increasingly – given the natural gas revolution – natural gas.  Wind and solar make less sense on a pure cost basis without the federal taxpayer subsidies that make them feasible for the local utility.

My local utility has chosen to build a portfolio to include wind and solar energy; as a person with environmental sensibilities, I see the benefits of this and I feel good.  In addition, from a risk-mitigation perspective, the utility wants to stay ahead of regulatory changes which may make coal production more costly[6], or periodic events that make nuclear untenable[7], or market prices that would increase the cost of energy from natural gas.

So the local utility embraced wind and solar in part as a reasonable portfolio hedge against the risk of high natural gas prices.

But the future price of natural gas, and the likely range of prices for gas[8], just shifted massively with this natural gas revolution.  Folks I’ve spoken to in the natural gas sector forecast 90 years’ worth of known, accessible, cheap natural gas in shale rock formations.  All of this natural gas we really had no way of bringing to market just 4 years ago.

As a result, from a purely financial perspective I fear we’re locked into paying extra for renewables in a way that makes much less sense than it did just a few years ago, before the natural gas revolution started.

Fans of renewable energy are not going to like this message, I know.  In the largest sense, however, it should be seen as good news, and I’ll explain why.

It’s a huge economic boon to the entire country.

So why is cheap natural gas such good news?  For the majority of consumers the natural gas revolution will benefit their pocketbooks in subtle but important ways.

A drop in the price of energy impacts the price of nearly everything, keeping goods and services cheaper than they otherwise would be.  Just as expensive oil during the Oil Embargo of the 1970s kicked off a round of intense inflation, cheap natural gas will act to keep inflation contained in the future.

To ask people to throw away cheap energy and adopt expensive energy is a lot like asking everyone to throw away cheap food to consume expensive food.

The closest analogy I’ve come up with for renewable energy is the organic food movement.

Organic food works on a small scale, with a dedicated group of true-believers who eat food as an expression of their values.  It’s interesting to think about, but I’m not betting on widespread adoption.

Of course I’m in favor of organic food, and I serve it to my daughters whenever I can.  I’m happy to pay a little extra for the pleasant feeling of using fewer chemicals on the earth, or to support happy, free-range chickens.  The vast majority of food consumers in this country, and the world for that matter, however, do not have the luxury of paying more for food today for some intangible or unvalued long term benefit, even if it ‘costs’ more in terms of health or environmental impact in the long run.  The organic food movement pushes against the immutable logic of the wallet.

Similarly, renewable energy has required people to express their values through their energy consumption, paying more for something that impacts the earth less.

I’m generally in favor of renewable energy, and I would love for more things to be powered from solar and wind generated energy.  Unfortunately renewable energy is a luxury, and it just became even more so with the natural gas revolution.  The risk of future natural gas price spikes decreased dramatically with this revolution, making a portfolio including renewables less financially relevant than it was until recently.

Most people live in a resource-limited world, where cheap food or cheap energy is not a choice, but a necessity.  In my city, San Antonio, for the 25% of residents and 30% of children who live with daily food insecurity, the organic food movement exists in a parallel, irrelevant universe.

Most people I talk to don’t seem aware that the natural gas revolution of the past 4 years has made renewable energy untenable, financially. for the next century.

I see two reasons not to mourn the financial marginalization of renewables right now.

The first is purely financial since the tax subsidies needed to close the gap between wind and solar and more ‘market-based’ energy sources such as natural gas would have to grow in the future rather than shrink.

The second is more political.  This next point is more my instinct than provable fact.  But here goes: Whenever you have an important business – like renewable energy – wholly dependent on government subsidies, the opportunity for power-brokering by public officials and ex-public officials becomes extremely tempting.  More than tempting, it’s inevitable.

I have a real issue with ex-government employees who go out and create ‘green energy’ investment companies, which fund companies whose major source of income is government guaranteed contracts for expensive energy in the form of wind and solar.  Since it’s all divorced from market prices, there’s a huge opportunity for influence peddling and government favors for former public servants.

There may be some of this going around in my city of San Antonio, but there are also big national examples of this.  Yes, I’m looking at you Terry McAuliffe and your GreenTech Automotive.  Most egregiously, I’m looking at you, Al Gore, and your New York Times-reported net worth over $100 million, largely built on this power-brokering technique,[9] earned in just 12 years since leaving office.  I’m very sorry you weren’t president, but your way of making money since then disgusts to me.

As the gap between the cost of natural gas energy and government-subsidized renewables grows in the coming years, one of the main externalities of the renewable energy sector is the opportunity for government graft.  So I’m not just concerned that we’ll pay more than necessary for energy, but I’m also convinced some of our public servants will make sure that the green energy industry pays them back handsomely for their support.

 

See also Part I – Mad Max Bizarro World

Part II – Big, Corporate, Well Capitalized

Part III – The Drilling and Fracking Scene

Part IV – How Big Is This?

Part V – The Labor Market

 



[1] I can’t prove this with data, hence it’s only a hypothesis to be tested over time.  But I still think I’m right.

[2] The natural gas revolution is happening mostly in the United States right now, in the Eagle Ford area of Texas, as well as the Bakken in North Dakota, and the Marcellus Shale of the Eastern US.

[3] Created by the Federal Government’s Energy Policy Act of 1992, which allows energy providers an income tax credit of 2.2 cents/KW hour.  Assuming a current natural gas energy derived price of 4 or 5 cents/KW hour, we can estimate the ‘market’ price (before PTC subsidy) of wind energy for the local utility at around 7 cents/KW hour.

[4] Solar tax credits tend to be Investment Tax Credits (ITC), providing 30% of the cost of development of a solar plant.

[5] With a minimal amount of ‘landfill’ gas supplying a third alternative source of renewables.  My local utility’s published description of their mix of energy sources now and in the near future can be found here.

[6] If environmental regulation made utilities pay out of pocket for ‘carbon offsets’ for example, coal could become much more expensive.

[7] Like periodically happens, e.g. 3-Mile Island, Chernobyl, Fukushima.

[8] At the risk of stating the obvious, I believe the natural gas revolution means low natural gas prices at low volatility for decades, perfect if you’re a utility company forecasting your energy portfolio needs.

[9] No, I don’t have a breakdown between fees he’s earned on his movie, speaking fees, and his income from serving on the board of private equity firms that value his power-brokering to the ‘green-energy’ industry.  Kleiner Perkins made him a partner in 2007 and it wasn’t really for his investing acumen.  I just don’t think he’s rethinking the entire private equity business with his Generation Investment Management Fund, the way he describes in this WSJ Op-Ed.  Instead, I think he’s probably doing the same old power-brokering that becomes available anytime a big industry becomes completely dependent on government contracts and subsidies.

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