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By Robert Rapier on Dec 12, 2014 with 5 responses

Reading the Tea Leaves in the Oil Markets

As the year winds down, my next 3 articles or so are fairly predictable. One will be on the top energy stories of the year. As always, I would appreciate any suggestions from readers. Another is that I will grade My 2014 Energy Predictions. (Spoiler alert: I guessed pretty well this year). Finally, I will make predictions for 2015, while providing appropriate context for the predictions. I find the context is more important than the predictions themselves. I can make a prediction on the direction of oil prices, but if you understand the factors likely to drive the price in 2015, you can adjust your expectations accordingly as conditions change.

But this week I would like to post a new interview that I did with Jason Burack of Wall Street for Main Street. I have been asked many times in recent weeks for comments on what’s happening in the oil and gas markets. Here I lay things out as I see them in a wide-ranging 40 minute interview:

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By Robert Rapier on Dec 4, 2014 with 13 responses

Injection Season is Over

Back in February, I wrote an article called Natural Gas Inventories are Headed Toward Zero. The purpose of the article was to call attention to the fact that natural gas inventories were experiencing the fastest decline in U.S. history, and were approaching dangerously low levels heading into the end of winter. In August I did an update to that article called Why Natural Gas Prices Collapsed. Because natural gas prices rose following that article, and since injection season is now over (see below), let’s once more revisit what happened with natural gas this year.

In prior articles, I explained how the U.S. natural gas inventory system works. The U.S. has 9 trillion cubic feet (tcf) of natural gas storage capacity, but according to the Energy Information Administration (EIA), the actual amount in storage has never exceeded 4 tcf. During the summer season when demand is lower, natural gas inventories will usually build to between 3 and 4 tcf. This build usually starts around mid-April, and then about mid-November as cold weather begins to ratchet up natural gas demand, the withdrawal season begins.

This year injections began during the first week of April. At that time, natural gas inventories were at their lowest level in more than a decade, so that any supply/demand imbalances during injection season could cause natural gas prices to spike. In fact, gas prices did spike several times toward the end of what was the coldest winter in many years. My thesis was that low inventories would affect the natural gas markets in the following ways. Year-over-year natural gas prices were likely to be higher than the previous year because supplies were lower. Natural gas producers would need to produce at high rates to replenish the inventories, and since I believed they would be getting better prices for the natural gas, profits would be up for most producers. This, naturally, would cause the share prices of natural gas producers to rise. CONTINUE»

By Robert Rapier on Nov 20, 2014 with 17 responses

Torrefaction via Radio Waves

During the past five years that I spent in Hawaii, I worked on a number of different projects. The company I worked for invested in energy projects, and our focus was on converting biomass into energy. In my role, I often evaluated companies and technologies to determine the potential technical and economic viability.

I have found over the years that the vast majority of biomass to energy projects aren’t economically viable for one reason or another. I have looked at companies that utilize many different conversion technologies, and most of the time my job consisted of searching for fatal flaws of different approaches. I was the guy who said “No.” That approach saved my employer a lot of money, because none of the companies I said “No” to are thriving today. Most went out of business.

But I didn’t like always being the guy who said “No.” I wanted to put steel in the ground and build something. So I searched for ways to say “Yes”, or at least to turn “No” into “Maybe.” CONTINUE»

By Robert Rapier on Nov 7, 2014 with 11 responses

KiOR in Default on Loan

Update Sunday 9:30 PM PST: KiOR announced Chapter 11 bankruptcy this evening. The press release says that the company has “accepted a bid for substantially all of its assets from certain affiliates of Vinod Khosla” and that they have entered an agreement with one of Vinod Khosla’s organizations for debtor-in-possession (“DIP”) financing. The press release also notes “Common stock investors should note that effective November 6, 2014, the Company has been delisted from trading on the NASDAQ stock exchange and that other creditors have priority over shareholders under the provisions of the U.S. Bankruptcy Code. The Company does not anticipate any recovery for existing KiOR common shareholders as part of these proceedings.” KiOR’s bankruptcy this year was Prediction 5 on my my 2014 Energy Predictions made in January.

Update Friday 4:30 PM PST: This afternoon KiOR filed a Form 8-K with the SEC. This form is used to notify investors of important material events. In the report, KiOR indicated that they had received a Notice of Default and Acceleration from the Mississippi Development Authority (MDA) notifying KiOR that all obligations are now due and payable within three (3) business days from November 3, 2014. This default accelerates KiOR’s other loan obligations. In addition to the $78.6 million now payable to the MDA, KiOR says this default “accelerates the Company’s obligations under the following debt agreements:”

  • Loan and Security Agreement, dated January 26, 2012, among the Company and each of 1538731 Alberta Ltd. as agent and lender, 1538716 Alberta Ltd. and KFT Trust, as amended on March 17, 2013, October 21, 2013 and March 31, 2014. As of November 3, 2014, an aggregate amount of approximately $127.8 million is immediately due and payable. As a result of the MDA Notice, the loan accrues an additional four percent (4%) per annum default interest rate.
  • Senior Secured Convertible Promissory Note Purchase Agreement, dated October 18, 2013, among the Company, KiOR Columbus, KV III, KFT Trust and VNK Management, LLC and KV III in its capacity as agent, as amended on October 20, 2013 and on March 31, 2014. As of November 3, 2014, an aggregate amount of approximately $95.7 million is immediately due and payable.
  • Senior Secured Convertible Promissory Note Purchase Agreement, dated March 31, 2014, as amended on July 3, 2014, among the Company, KiOR Columbus and KFT Trust and KFT Trust in its capacity as agent. As of November 3, 2014, an aggregate amount of approximately $10.4 million is immediately due and payable.

So KiOR now owes, immediately due and payable, over $312 million. On the plus side, the 8-K notes “KFT Trust made a Protective Advance to KiOR in the aggregate principal amount of $1,102,691.” That is such a specific amount that I wonder if that might be the bill from the investment bank that has been shopping KiOR during the forbearance period.

My guess is that this now triggers a bankruptcy declaration next week. CONTINUE»

By Robert Rapier on Oct 31, 2014 with 11 responses

Is President Obama Manipulating Gasoline Prices?

Executive Summary for Those with Short Attention Spans

For those who tend not to read much past the headline, the answer to that question is “No.” If you want to understand a bit more about the issue of falling gas prices during election seasons, read on.

The Rotating Roles of Accused and Accuser

It never fails during election season that when gasoline prices are falling, the party out of power and media members sympathetic to that party will start to make accusations and insinuations that the President is manipulating gasoline prices in order to win elections. It happened when Clinton was in office, it happened when Bush was in office, and now it’s happening while Obama is in office. The only things that change are the party that is being charged of manipulating prices, and the people who are defending or accusing that party. This year it’s Fox News doing the accusing, and MSNBC defending. CONTINUE»

By Robert Rapier on Oct 21, 2014 with 45 responses

EPA’s Sleight of Hand on Cellulosic Fuel Rule Change

A few years ago, I wrote a post about the US Environmental Protection Agency’s (EPA) attempt to mandate a non-existent fuel into existence, and then fine refiners for not buying this fuel. That post was called “Why I Don’t Ride a Unicorn to Work“, and was designed to call attention to federal biofuel mandates that weren’t grounded in reality.

But what if I call a rhinoceros a unicorn? Does that mean unicorns then exist?

This week we have a guest post from Todd “Ike” Kiefer, who argues that this is effectively what the EPA has done. By declaring that the definition of cellulosic biofuels is ambiguous, the EPA has signaled that non-cellulosic feedstocks can qualify for full cellulosic tax treatment. Mr. Kiefer explains.

Previously Mr. Kiefer wrote an article highly critical of the Navy’s efforts promote biofuels in a periodical that is sent to Congress and top military leaders. The article was entitled Energy Insecurity: The False Promise of Liquid Biofuels (discussed here). His biography can be found at the end of the article. CONTINUE»

By Robert Rapier on Oct 16, 2014 with 26 responses

LanzaTech’s Vulnerability

It’s been years since I looked at this article I wrote on LanzaTech in 2007, but today I was made aware that it’s been linked to from an article in Biofuels Digest: Junk or treasure? Looking at carbon monoxide and LanzaTech. LanzaTech CEO Jennifer Holmgren had some comments referencing my previous article that are worth addressing. So let me summarize.

LanzaTech proposes to take waste carbon monoxide from sources like steel manufacturers and ferment that to produce ethanol. Holmgren says that the bacterium they use for their fermentation, Clostridium autoethanogenum, is highly ethanol tolerant. The scientific literature mentions tolerance in the 2% to 4% range, and says that the ethanol production rate slows down beyond 4%. I did see one patent application where they mentioned ethanol via this process in the 5.5% to 6% range.

To my knowledge LanzaTech hasn’t publicly stated the ethanol concentrations they achieve, and this prevents really rigorous calculations. Holmgren states that we needn’t make assumptions since “distillation energy requirements are textbook calculations and easy to calculate.” This only true if we know the ethanol concentration in the solution being distilled. As Holmgren’s own link showed in her response, it takes nearly twice as much steam to distill a 5% ethanol solution as it does a 10% ethanol solution. But without knowing for sure what their ethanol concentration is, we can’t know the energy requirement. So, I gave an example in my previous article to illustrate my point, which is this. CONTINUE»

By Robert Rapier on Oct 15, 2014 with 25 responses

Saudi Arabia Still Calling the Shots

The US Shale Oil Boom

There have been a lot of stories over the past few years about the implications of the US shale boom. To review for those who might have been living in a cave for the past 5 years, the marriage of horizontal drilling and hydraulic fracturing (fracking) has reversed 40 years of declining US oil production and created a shale oil and gas boom.

As amazing as it would have seemed a decade ago, US oil production is increasing at the fastest pace in US history. In the past 5 years US oil production has increased by 3.22 million barrels per day (bpd). The overall global oil production increase during that time was only 3.85 million bpd, meaning the US was responsible for 83.6 percent of the total global increase over the past 5 years.

US Oil Production 1965 through 2013 Fracking

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By Robert Rapier on Oct 9, 2014 with 38 responses

The Bell Tolls for KiOR

A Lesson Learned

If there’s one thing billionaire venture capitalist Vinod Khosla has learned over the past decade, it’s that the oil companies aren’t as stupid as he thought. In 2004, Khosla was telling anyone who would listen to him that the only things standing in the way of running the entire country on biofuels were the oil companies, and a lack of funding. He set out to change both of those things, vilifying the oil industry at every turn, and convincing Congress to shell out tax dollars so he could show the dinosaurs in the oil industry how Silicon Valley rolls.

The result has been a debacle, with billions of investor dollars and tax dollars flushed down the toilet. What Khosla didn’t appreciate is that he isn’t smarter than the people in the oil industry. It’s just that the computing and information technology industries were still relatively new, and a great deal of innovation was still taking place in a young field with lots of room for innovation. The oil industry is 150 years old, and while the fracking boom shows that innovation still takes place in the oil industry, it is a very mature industry. Thus change tends to be incremental, not exponential. Almost everything that appears novel to an outsider like Khosla has almost certainly been investigated by multiple companies.

But Khosla convinced a lot of influential people that the energy industry just needed a visionary like himself to shake things up. He gave lots of talks and testified before Congress. He created ludicrous projections for how quickly cellulosic ethanol could scale up. (See my article “Vinod Khosla Debunked.”) Investors (including taxpayers via Congress) couldn’t give him money fast enough, and he proceeded to blow through it as he learned some hard lessons in the energy business, sometimes “inventing” things that had been around for a long time. CONTINUE»

By Robert Rapier on Sep 30, 2014 with 9 responses

US Crude Oil Exports Headed to South Korea

The Ban on Crude Exports

One of the 2014 predictions that I made back in January was “The crude oil export ban will not be lifted in 2014.” The present ban on US crude oil exports dates to the The Energy Policy and Conservation Act (EPCA) of 1975. The act effectively bans crude oil exports to all countries except Canada. The export of refined products, such as gasoline, diesel, and jet fuel is allowed.

But given that the US is still a net importer of crude oil to the tune of ~5 million barrels per day (bpd), on the surface it seems silly to entertain the notion of exporting crude oil. The problem essentially comes down to the location of the crude being produced, and the configuration and location of US refineries. Prior to the shale oil boom, crudes processed by refiners had been getting heavier and more sour (i.e., contained more sulfur). As a result, refiners had invested heavily in equipment that could process these types of crudes.

Enter the shale oil boom, which has been producing ever-greater volumes of light, sweet crude since 2008. There is a limit to how much of this crude can be processed by refineries that have been configured to process heavy, sour crudes, and as a result some areas of the country are oversupplied with lighter oil. This in turn has led to discounts — sometimes very large — of light, sweet crudes relative to heavier crudes that are internationally traded. CONTINUE»