Introduction to MLPS
A Master Limited Partnership (MLP) is a publicly traded partnership with a tax structure that enables it to attract low-cost capital. The main attraction of an MLP from an investor’s point of view is that MLPs don’t pay corporate income tax. Profits are passed directly to unitholders via regular distributions. Profits from conventional corporations are taxed at the corporate level, then a second time via the personal income tax on distributed dividends. In contrast, MLP distributions are taxed just once, at the individual level.
But MLP distributions aren’t immediately fully taxed either. In fact most of the distribution — typically 80 to 90 percent — is classified as a return of capital under the depreciation allowance, which subtracts capital depreciation from net income to account for the fact that assets like pipelines and wells lose value over time.
The depreciation allowance lowers the immediate tax bill but also the cost basis of the MLP investment, resulting in a larger capital gain when the MLP is sold. Over time the tax-deferred income can be invested elsewhere, allowing investors to compound returns that would have otherwise been taxed, while also earning a steady stream of income. This has made MLPs an extremely popular income investment. CONTINUE»
The Best Path Forward on Coal?
This week the Wall Street Journal is running the latest set of answers from their “Experts Panel.” Four questions were posed to the energy panel, and I chose to answer three of them. (The 4th was about solutions to the drought in the Western US — which I don’t feel qualified to answer). The first question I answered was “What’s the best way to move forward on coal?” – and my answer was published yesterday: The Case Against Burning Coal. That was followed up with a podcast “debate” between former Shell President John Hofmeister and myself on coal’s future: Time to Stop Burning Coal? WSJ Experts Debate.
I suppose the topic of climate change will always be polarizing. One side believes that fossil fuel consumption threatens our very existence while the other sees climate change as a huge scam that threatens to destroy economic progress. Of course there are many shades of gray between these extremes, but those with the most extremist views are generally the loudest voices.
Today I hope to engage some of those loud voices with a rational, fact-based discussion. CONTINUE»
Meet Nate Hagens
A good friend of mine said something to me the other day that I thought was profound. Nate Hagens is a former editor for The Oil Drum, and has written and lectured extensively on the risks of resource depletion. Nate holds a Master’s Degree in Finance from the University of Chicago and a PhD in Natural Resources from the University of Vermont. In his previous life Nate was a Vice President at the investment firms Salomon Brothers and Lehman Brothers.
Today Nate sits on the Board of Directors of Bottleneck Foundation, Post Carbon Institute, Institute for Study of Energy and Our Future, and Institute for Integrated Economic Research — and he farms in Wisconsin. He described his personal journey from Wall Street to Wisconsin in one of the last articles ever published on The Oil Drum: Twenty (Important) Concepts I Wasn’t Taught in Business School.
Fossil Fuel Subsidies
We were discussing the topic of fossil fuel subsidies on Facebook. The background is that two years ago I wrote an article for Forbes called The Surprising Reason That Oil Subsidies Persist: Even Liberals Love Them. The article is neither a defense of subsidies, nor a dig at liberals, but it became the most highly read article ever on Forbes Energy Source. Today the article still generates some rabid comments, often by people who obviously didn’t take the time to read much beyond the title before offering their opinion on the article. I had just responded to a recent comment and posted that comment to Facebook, and thus began the discussion. CONTINUE»
Another Courageous Punt
I hadn’t planned to write yet another Keystone XL pipeline article, but I have gotten a lot of questions since the recent announcement by the Obama administration that they are still unable to make a decision on the project. I agree with the Washington Post’s assessment of the situation, that this is now into absurd territory.
At this point I don’t think the project will be approved by this Administration, although it could be approved by the next. I think this is a simple political calculation by President Obama, that by foot-dragging and delaying he is keeping his environmentalist allies at bay, but without all of the political fallout around Democratic Keystone XL supporters should he simply reject the pipeline.
This is one reason I would make a terrible president. I can’t play games like this. You make a decision. It can go one of two ways. You can say “I am going to make a stand along with my environmentalist allies who voted me into office and reject a continued expansion of fossil fuel infrastructure.” That would be a courageous stand, albeit one more steeped in symbolism than in measurable climate impact. More on that below. CONTINUE»
The Big Island
For the past five years, home for me has been on the northern end of the island of Hawaiʻi. For those unfamiliar with the Hawaiian islands, they consist of eight major islands. The biggest of these islands is the island of Hawaiʻi, also known as the “Big Island.” The Big Island has a land area of 4,028 square miles — bigger than the area of Rhode Island and Delaware combined, and almost as large as Connecticut. It is also home to a couple of volcanoes that are over 13,500 high (and incidentally do see snow during the cooler months). But the population density of the Big Island is much lower that the other small states at 185,000 people, versus around a million in both Rhode Island and Delaware, and 3.5 million in Connecticut.
Hawaii has abundant energy resources from wind, the sun, geothermal, water, and biomass. Yet Hawaii relies on petroleum for 80 percent of its energy, making it by far the most petroleum-dependent state. One major reason for this is that Hawaii is the only state that still gets a large portion of its electricity from oil. Over the years the states on the mainland displaced oil with coal, natural gas, and nuclear power, and today are starting to displace some of these with renewables. But Hawaii doesn’t have coal trains or natural gas pipelines, so we continued to use oil for electricity even as everyone else switched. The cost of continued oil reliance to electricity consumers has been very high.
But because of the relatively low population density and the abundant natural resources, the Big Island has the potential to do something that will prove to be much more challenging elsewhere: Derive most or all of its energy from renewable sources. I recently visited a laboratory that is working hard to realize this vision. CONTINUE»
Sometimes the written word is easy to misinterpret. More than once I have written an article to find that some minor point I made became the focus, or that the point I was making was just lost. Most of the time that’s my fault, but sometimes it’s because an editor wanted to spice up the title and make it a bit more controversial. In that case, that can inflame the reader before they even begin to read, and they either make comments based on a misleading title, or they read the article with significant bias.
I think there is a risk of misinterpretation with today’s article, so I want to spell out my intent up front. This should not be read as a defense of ExxonMobil or their business practices, because that’s not what it is. It’s an attempt to get the reader to understand how they think, and why they do some of the things they do. Importantly, you may not be able to understand their actions given your view of the world. It’s not because they are simply denying reality so they can keep making money, they just don’t see the same things you see. Here is my attempt to explain that.
A Carbon Asset Bubble?
The 2009 Copenhagen Accord on climate change stipulated that if the worst impacts of climate change are to be avoided, we have to stop taking fossil fuels from the ground and burning them. Doing so has been increasing the carbon dioxide in the atmosphere for the past two centuries. Former Vice President Al Gore has been but one high profile voice advocating for leaving those fossil fuels in the ground, which would create a big problem for fossil fuel companies whose value is based on their fossil fuel reserves. Gore outlined his position last year in a Wall Street Journal editorial The Coming Carbon Asset Bubble. CONTINUE»
How We Can Industrialize the Internet of Things
By Kevin Klustner
A number of thoughtful people – including Cisco CEO John Chambers – believe that the Smart Grid will ultimately be bigger than the Internet, by a magnitude of 100 or 1,000.
That’s a fairly audacious prophecy.
And, if you asked a wide range of industrial companies with energy-intensive facilities right now, they might not necessarily agree with this prediction.
But their skepticism is understandable – and it’s also based on current reality.
Indeed, many energy-intensive businesses today aren’t able to interact fully with Smart Grid signaling and pricing for the highest cost efficiency because of a lack of real-time knowledge and a lack of technology integration with their automation systems. CONTINUE»
In January of this year, as I do each year, I made several predictions for 2014. One was that natural gas prices would be higher. That prediction is looking pretty solid, with natural gas inventories this week dropping below 1 trillion cubic feet for the first time since 2003 — 49% below the level of one year ago. As I have argued in recent articles, this is likely to mean a year of higher natural gas prices than what we have become accustomed to over the past couple of years.
Among the other predictions I made for 2014 was “KiOR will declare bankruptcy in 2014.” While it is still a bit early to write KiOR’s (NASDAQ: KIOR) obituary, the patient is looking pretty unhealthy. I have been getting a lot of emails asking for comment on their recently released annual report, and I would have had something posted already, but I was traveling during the first half of the week. So let’s dissect what has happened. CONTINUE»
Natural Gas Update
Two weeks ago I wrote about the abnormal situation with natural gas inventories in Natural Gas Inventories are Headed Toward Zero. I got a number of questions and comments about that essay, and since then we now have another two weeks of inventory data, let’s update the picture.
First, I want to deal with some misconceptions that a few people had. I don’t think we are going to run completely out of natural gas in storage. My point was that this winter marked the sharpest decline trajectory and we have made the largest ever withdrawals from storage in history, and barring a sudden warm spell we are going to go into injection season with very low natural gas inventories.
This has implications. Why? Because historically a significant deviation of inventories from normal will have a lingering impact on natural gas prices. CONTINUE»
I have gotten some inquiries about my status, as I don’t typically go two weeks between posts. I am fine, but it’s been a very busy two weeks. There was lots of travel, lots of deadlines, and in between I worked in a trip to Hawaii to spend a few days with my family. I got to be there for my oldest son’s 18th birthday, and then helped chaperone an overnight camping trip for my son’s 5th grade class on the beach in Hawaii. I must say I never got a school field trip like that in elementary school in Oklahoma!
This week I am back in Arizona, where I continue to work on a project. Next week I will be in Washington, DC to sit on a panel at the 2014 Methanol Policy Forum. My panel is called “Unlocking Our Vehicles to Methanol.” I just cleared my last pressing writing deadline, and there are two topics I want to write about. One is the situation with natural gas inventories. The next Weekly Natural Gas Storage Report will be released tomorrow (March 13th), and I will put up a short post following that. So today I will address the other topic that’s been on my mind.
The 60 Minutes’ Edits
During my interview with Lesley Stahl, we discussed a lot of things that I wish had been aired. In fact, I told one of the producers that I think they could have avoided a lot of the fallout if they had aired more of my interview, because I presented a more balanced view than was presented by the overall story. As I said during my interview, the issue of cleantech isn’t black and white, or good versus evil. It is a complex story with many angles, and an attempt to reduce it to black and white was certain to create controversy. CONTINUE»