Posts tagged “refining”
Attention Shifts to Pipeline’s Potential Benefits
Over the weekend the New York Times carried an interview with President Obama in which he commented on the merits of the Keystone XL pipeline project. The Washington Post suggested that these remarks “give opponents reason for hope.” While confirming that the White House’s main objective criterion for making this decision was still the pipeline’s greenhouse gas impact, the President also speculated about the project’s job-creation potential and the ultimate destination of the crude oil it would carry. This appeared to endorse arguments raised by opponents of the project. These issues deserve more than the dismissive treatment they received in the interview.
Estimating Keystone’s Employment Impact
With regard to the number of direct construction jobs that the northern leg of the Keystone XL Pipeline (KXL) might create, I don’t know whether the right number is the 2,000 the President cited or the tens of thousands estimated in an earlier State Department study. Either way, his administration lacks credibility on this subject. This is the White House that devised a new metric of “jobs created or saved” for assessing the impact of its 2009 stimulus measures. It has also routinely touted projects with “green jobs” potential, not just in terms of their direct employment gains, but also their indirect job creation estimated via generous multiplier effects.
Either indirect jobs are always relevant, in which case KXL would create far more jobs across the economy than the President seems willing to admit, or they also aren’t relevant to justifying clean energy and other, more favored infrastructure projects. In any case, his reported ”chuckles” at 50-100 new permanent jobs struck me as unseemly for a President still contending with unemployment over 7.5 percent in the fifth year of this recovery.
In my previous column, Energy Industry Capital Spending Reaching New Highs, we looked at how the industry continues to ramp up spending across its sectors. As I noted, this is no surprise given the enormous capital requirements to sustain its business models.
However, what is surprising is that despite the significant tailwind of high crude prices since 2010 to current, net free cash flows (operating cash flow less cash capital spending) have actually declined for the industry overall. Operating costs are increasing crimping margins, and investment spending is rising faster than top-line revenue growth. To put things into perspective, although total industry operating cash flow (OCF) dropped only 1% in 2012 from 2011, from 2007 to 2012 spending grew at a per annum rate of nearly 10% while OCF increased at a 5% per annum rate.
The worst offender has been the U.S. E&P sub-sector heavily weighted to natural gas production at low prices; the sector has seen its deficit cash flow grow. In 2012, despite spending decreasing 2% from 2011, OCF dropped a whopping 17%. From 2007 to 2012, capital spending grew at nearly a 7% per annum rate, while OCF increased only 3% per annum.
The value chain for the energy industry is a simple one: Resources to Production to Cash Flow to Value.
At first glance, higher capital spending in the energy industry may seem a paradox during a period of weak global economic growth. However, it requires enormous capital to maintain — let alone grow — its business model. To that end, several tailwinds have helped fuel the industry’s relentless re-investment, simulative monetary policy – low interest rates, high crude prices, rising costs, increasing demand from developing nations, increasingly remote and difficult regions to explore for oil driven by globally constrained light sweet crude oil.
Particularly, high crude prices are a major catalyst driving spending higher. Since 2011, on average, crude prices — whether WTI or Brent — have been at a consistently historically high level; WTI at roughly $94/bbl, and Brent at about $112/bbl.
Looking at the overall energy sector that includes the oil & gas (U.S. E&P, Western Majors and Canadians), refining, pipeline, utility, and oil services sectors, the industry spent over $450 billion, or 58% higher in 2012 compared to 2007 spending, and 6% above 2011, at a per annum growth rate of nearly 10% from 2007 to 2012.
Gasoline prices differ substantially across different parts of the United States. For example, the average price in Illinois is currently 70 cents/gallon higher than that in Wyoming, and California motorists pay 86 cents/gallon more than the folks in Wyoming. Why is that? Source: GasBuddy.com. The biggest single factor is taxes. The tax on a gallon of gasoline in Illinois is 25 cents higher than in Wyoming, while the California tax is 35 cents higher. Source: American Petroleum Institute. But that still leaves 45 cents of the Illinois premium and 51 cents of the California premium unexplained. Political Calculations has created a map of average gasoline prices once you subtract out taxes. (His original map, like that from GasBuddy above, also… Continue»
It is clear that many people have a very simplistic — but wrong — view of the energy markets. This extends to politicians who believe they can usher in a return to $2 gasoline, as well as those who underestimate the difficulty of replacing oil with renewable energy.
For the average person, gasoline prices go up because oil companies are pulling strings, meeting in secret to set prices, or withholding product from the market. To top it off, we are sending them our tax dollars as subsidies while they are wallowing in cash! That’s the view from the man on the street. Somehow, I would have expected a USC business school professor to have a more sophisticated understanding of the situation — especially if he decided to write an article about it. But I would have been wrong.
Normally, when I read something like the following, I am more prone to just shake my head over the sad state of the person’s energy IQ. But I am making an exception here in the case of Professor Ira Kalb, a marketing professor at USC’s Marshall School of Business. The professor recently wrote the following article for Business Insider:
In a development that should not have come as a surprise to Econbrowser readers, TransCanada announced on Monday that it would proceed with the portion of the controversial Keystone pipeline expansion that would connect Cushing, Oklahoma to the Gulf of Mexico. Because this part of the project does not cross the U.S.-Canadian border, it does not require approval from the U.S. State Department.
Spring is approaching, and gasoline prices are once again climbing. But you may not know that this ritual of climbing prices happens almost every year about this time. If you check the history of gasoline prices at the Energy Information Administration’s (EIA) website you can see that gasoline prices almost always rise between January and May. The primary reason this happens is due to a seasonal switch in gasoline blends. There are two key (although not the only) specifications that refiners must meet for gasoline. The gasoline must have the proper octane, and it must have the proper Reid vapor pressure (RVP). While the octane specification of a particular grade is constant throughout the year, the RVP specification changes with… Continue»
Back home now, just trying to catch up on the energy news of note. Four stories that I want to highlight. First was POET’s announcement on their progress on cellulosic ethanol: Poet hits ‘long shot,’ cuts cellulosic ethanol costs WASHINGTON – The head of the world’s largest ethanol producer, Sioux Falls-based Poet, said Wednesday that his company has drastically cut its cellulosic ethanol production costs. It is a breakthrough that will allow cellulosic ethanol to compete with gasoline within two years. Jeff Broin, Poet chief executive, told reporters during a roundtable discussion that the company has reduced its cellulosic ethanol production cost during the past year from $4.13 a gallon to $2.35 a gallon. Andrew Leonard of Salon asked me… Continue»
The refining sector has been in the news a few times this week, and not in a good way:A Fine Mess For U.S. Refineries HOUSTON — Excess capacity, weak demand for fuels and rising product inventories continue to squeeze margins for U.S. oil refiners. Sunoco, the second-largest refiner in the country that doesn’t produce its own oil, said late Tuesday that it will soon shutter its Eagle Point refinery in Westville, N.J., which has a capacity to handle 145,000 barrels of oil per day. During the second quarter, Philadelphia-based Sunoco lost $77 million in its refining business and told analysts Tuesday that the third quarter could be worse. A point that I have tried to stress is that for the… Continue»
Yesterday the American Petroleum Institute conducted a blogger’s conference call to talk about various energy issues that they are focused on. I used to regularly attend these calls, but things have been quite busy and it has been a while since I participated. But I thought it would be worthwhile to check in and find out which issues they are currently occupied with. I asked one question on cap and trade during the call (see below). The API listed three key areas that they are focused on. These are the Waxman-Markey climate bill, which they think will cost jobs (particularly in the energy industry), domestic access to petroleum resources, and taxation of the oil and gas industry. Participating from the… Continue»