CERAweek 2012 Summary from the Outside

CERAweek 2012 Summary from the Outside

This years CERAweek marks my first year in almost 10 years in not going to CERAweek.   I had the privilege to be invited and speak at CERAweek two times.   The amazing thing about CERAweek is the shear size.   I have seen it grown from the days in the Galleria area to now at the Hilton Convention Center hotel.

One of the values of being at CERAweek, which you cannot get from reading summaries, comes from the time to reacquaint yourself with your fellow energy colleagues.  Also, one of things I always marveled at from being at CERAweek is the logistics of the staff to serve meals.   When you attend CERAweek, it is not a buffet line – it is a three course meal for lunch and dinner.

In terms of content summary, Platts did a fine job summarizing many key points in their blog.  In addition, twitter works out well when you search #CERAweek.  The highlights, I believe, were noteworthy:

CERAweek Oil Day:

I have to agree with Iain Conn, group managing director and chief executive of BP’s worldwide refining and marketing group.  Mr. Conn said refinery investments will continue happen in the Atlantic Basin, but it will be strategically done.   He also specified he expected to see investments in facilities to take the condensates from the shale development and make products.   Those who have been reading my blog will note I made that call early February.

A group made of a good aquiantance Marianne Kuh, Chief Economist ConocoPhillips, and my friend Frank Verrastro, senior vice president and program director at CSIS Energy and National Security Program; noted the high crude oil price is more of a function of actual demand growth, not only political uncertainty of Iran.   I do agree with these points, but I still think monetary policy has influenced the price of oil as significantly as demand, if not more.

To prove my point, I have pulled annual oil prices, M2 money supply, and oil demand since 1981.  I have graphed the information below.   I also ran regressions on each of the variables to oil price.   M2 money supply has a better R^2 with 0.61 vs. 0.48.  Together they produce a rather strong correlation for an R^2 of 0.70.   Another interesting outcome of this analysis is it shows for the first time the amount of M2 is now greater than 10% of the world demand expressed in millions of barrels/day.  This started in 2009 as the FED aggressively moved to “save” the system.

Oil Price / M2 Money Supply / Oil Demand

CERAweek Gas Day:

There were several discussions of natural gas vehicles.   I think it’s a clear choice for fleets to convert to natural gas.  Mass transit vehicles should move towards CNG.   There was discussion on a recent article in the Wall Street Journal by Robert McFarlane, served as President Reagan’s national security adviser from 1983-85.  In the article Mr. McFarlane talks about methanol vehicles.   Speakers at CERAweek disagreed with him largely on the premise of structural issues.   I think the more valid concern would be the history and fate of MTBE.   From what I have gathered methanol would be more toxic than MTBE.  I do disagree in how we handle the MTBE issue – requiring MTBE then banning it.   MTBE was a messenger to a problem that is still happening.  MTBE gave you a mechanism to trace and track leaking gasoline.   By eliminating MTBE you did not solve the real problem.

Apache CEO, Steven Farris, made remarks in regards to supplying utilities with long-term contracts, but with a floating gas price.  Once again I have blogged about this before.   It would be worthwhile to continue to watch this evolution.  Many are trying to emulate coal contracts, but the reason and the value of contracting gas is not the same as it was with coal.

Of course it wouldn’t be gas day without a deluge of shale discussion and fracking concerns.  Many speakers talked about transparency and the efficacy of fracking.  I will have to agree here that it can be done in a responsible and safe way.   It is a matter of regulators to effectively regulate, because there will always be bad actors.

My former consulting company, Purvin & Gertz, who got acquired by IHS had their own session at CERAweek.   They spoke about the NGL markets.   Once again I did note about the dynamics of what is going on in this market in my previous blogs.   This is an exciting area, full of opportunities.

CERAweek Power Day:

For some reason, the day opened with a discussion of nuclear renaissance.   I will have to agree with GE CEO Immelt – there has never been or will be a nuclear renaissance in the US.  I will add the caveat – unless significant structural changes are made to our electric industry design.   This country has cost-effective options whereas other countries do not (e.g. France, Japan, etc…).

I will have to differ with many of Alstoms thoughts.  Alstom has been a very vocal and huge supporter of CERAweek for the past few years.   They spoke many times during the conferences.   I have read that they still are investing heavily in CCS.   They believe the focus for clean energy should be on the technology side.  Once again in my blogs, I elude to the point it is not the technology that is limiting “clean” energy; it is the business strategy and incentives.  They also point out that gas generation should focus on bigger turbines with lower cost.  Of course, that sounds ideal, but I think over the next 3 years the value proposition will be for more dynamic turbines versus bigger and efficient.  I say this because of the need to serve the intermittent nature of wind.

FERC commission, Philip D. Moeller, discussed the point that the consumer needed to see the real price.   I believe he is trying to point out the desire of real-time metering.   However I will disagree with this since there are several ways to make pricing more transparent to the consumer.   Rate design in itself does not hide the cost of power, since regulation comes with cost recovery.   It is the actors behind the rate design that hide the true cost of power – as noted in my previous blog.  Real-time pricing will change consumption, but the bulk of the impact could be done by having block metering – on and off-peak hours with no dynamic pricing, but a statement to the consumer. The hours between 7am-10pm will be more expensive than 10pm-7am.  This method would come at a fraction of the cost and involve much less complexity.   I do understand the value of the “smart” grid that it comes from other forms, such as reliability; but this is not how it is being sold to the consumer.

I couldn’t agree more with CEO and President Bruce Grewcock of Kiewet – “In a lot of jurisdictions, people are going to see rate shock when they see the true costs.”  Once again this is not coming from a smart grid realtime perspective, but the fact that there has been an underinvestment by the utilities.  Instead of focusing on true needs over the past years, we have focused on projects and mechanism of style (e.g. CCS, IGCC, fuel deferral, smart grid, etc…).   Inefficiency in markets will always come back to haunt you.


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