To strand or not to strand....that is the question....for XOM

[woodgeek]

So, finally came across a report from ExxonMobil to shareholders from last year.

Discussion:
http://desmogblog.com/2014/09/13/exxon-shareholders-no-carbon-bubble-risk-see-here

Report:
(broken link removed)

The question is whether Exxon will be allowed to extract all the hydrocarbon assets it holds, or whether it will be forced at a future data to leave some (or most) of it in the ground. This is, whether XOM's assets will be 'stranded' or not.

Climate scientists are pretty clear that extracting all commercially extractable (i.e. assets removable at a profit) will break the climate before 2100. The conclusion is clear....some or most of those hydrocarbons (including oil and gas, not just coal) will need to stay in the ground for at least a few centuries.

XOM's report says its assets will not be stranded...the argument is basically that there is no choice. Alternatives are too small/intermittent/whatever, and folks will refuse to accept lower GDP growth.

IOW, any policies that leave XOM's assets stranded will be so costly to the world economy that they will be politically untenable. So, no worries for shareholders.

I was aware that XOM was considering a C price in its future business modeling, and I thought (naively, it appears) that was making them more enlightened on global warming. Nope. They assume that the ultimate effect of climate treaties will be a regime where carbon is modestly reduced/checked by efficiency gains fostered by a modest C tax.

Why modest? Because they assume steeper reductions will be too costly. In evidence they cite cost studies from the mid-2000s.

The punchline: their flank is open....if cheap renewable energy comes along at scale (cough**solar**cough), then their argument to shareholders falls apart.

One wonders if they really believe that cost analysis from 2007 still applies to 2015, or will still apply to 2025, or if they are just hoping their shareholders will be convinced.

The corollary is that the EIA still projects a minute amount of wind and solar in the world energy system in 2050 and beyond....basically linear growth to a low plateau. Exxon points this out and uses it as evidence that their model is sound.

I think the EIA is clueless re RE.

 

[begreen]

I recall Cheney defending the oil sector around 2000 or 2001. Gore was proposing a $1 tax on then $1 gasoline to pay for developing an alternative energy sector. The VP snarled that if gas went up $1 our economy would fall apart. A year later we blew past the $2/gallon barrier then $3/gal. and miracle of miracles, survived.

 

[DBoon]

EIA forecasts are laughably terribly, filled with "business as usual" assumptions and never considering disruptive forces.

For a good laugh, just see http://www.eia.gov/forecasts/aeo/archive.cfm

 

[woodgeek]

Yar DBoon, I hadn't dipped into the EIA 2014 outlook. I had given up on them. What a mess of pretty garbage.

The EIA methods appear to be badly broken. In the final section they compare their projections to others, notably the oil majors, and note that project far higher fossil fuel use than the others. Their rationale (on p 140):

The AEO2014 Reference case generally projects the highest levels of total coal production, consumption, exports, and prices in comparison with the coal outlooks available from EVA, ICF, IHSGI, and BP (Table CP7). One key exception is INFORUM, whose projections of coal production, consumption, and exports are consistently higher than the AEO2014 projections. The IEA’s World Energy Outlook 2013 Current Policies case projections for coal consumption also are slightly higher than the AEO2014 projections, but only one year of the projection, 2035, is available for comparison. The detailed assumptions that underlie the various projections are not generally available to EIA, although there are some important known differences that contribute to the range of outlooks. For example, the AEO2014 Reference case assumes current laws and regulations, whereas other projections reflect alternative policy outcomes affecting the coal sector, particularly with respect to the price of carbon emissions. Although not shown in Table CP7, ExxonMobil projects a larger decline in U.S. coal consumption than any other group. The ExxonMobil outlook, which features a fee on CO2 emissions that rises to $80/metric ton (2013 dollars) in 2040, shows U.S. coal consumption declining from 17 quadrillion Btu in 2012 to 6 quadrillion Btu in 2040, an amount that is approximately 70% below the AEO2014 Reference case outlook for 2040 [1].

So, in comparison, EIA is assuming $0 cost of carbon in the US, zero EPA regs on CO2 production AND that all recent rapid RE developments are solely the result of incentives (wind PTC, solar fed rebate) which will expire in the next few years and not be renewed ALL THE WAY TO 2040!

This leads the entire RE sector to nearly flat-line before 2020, and then rise at a growth rate of 2-4% thereafter, an 'organic growth rate' that AFAIK the EIA just makes up.

EVs get similar treatment....their market penetration (currently 1.5% of new car sales) flatlines in their near future at 2-3% of sales (presumably due to phase out of incentives) and stays there until 2040. Their wild prediction for car tech: 'micro-hybrids' will gain a 30% market share by 2040. FYI, micro-hybrids are ICE cars with controllers that turn them off the engine at stop lights. Whoa.

Interestingly, while they base the projections on 'existing regulations' the EIA does not appear to be factoring in any EPA regs on CO2 in the electric power industry. Those regs have been coming down the pipe for 5 years now. One wonders how they will 'model' the 20 states suing the EPA rather than complying.

Man, I appreciate the EIA function of collecting and analyzing energy usage data in the US, but these 'projections' are less than worthless. They are actually giving Exxon's projections cover....the Exxon projection looks positively deep green in comparison.

 

[dougstove]

At what point will the widely dispersed economic/policy interests of the renewable industry start to outweigh the deeply vested interests in the current fossil fuel status quo?

Are we near a tipping point where income and dividends and votes flow from renewables?

 

[DBoon]

I did a lot of studies and some work for a not-for-profit a few years back (2007) and I studied up on the EIA projections for electricity consumption. If you'd want a real laugh, just look at a 10 year old EIA report in which they project oil at basically $30/barrel forever.

Realistically, it is a pretty tough job to put something like this together, but I have to believe that the methodology the EIA uses involves mostly hiring a bunch of recent college grads and interns to call up the energy majors and ask them what they think will happen in the future.

 

[woodgeek]

I did a lot of studies and some work for a not-for-profit a few years back (2007) and I studied up on the EIA projections for electricity consumption. If you'd want a real laugh, just look at a 10 year old EIA report in which they project oil at basically $30/barrel forever.

Realistically, it is a pretty tough job to put something like this together, but I have to believe that the methodology the EIA uses involves mostly hiring a bunch of recent college grads and interns to call up the energy majors and ask them what they think will happen in the future.

I remember the takedowns on these reports a decade ago by the 'Oil Drum' crowd. Their oil price projections every year always consisted of the historical price, and then a rapid future adjustment to a price everyone wanted, which then deviated very slightly from a straight line for 30 years.

I do appreciate how hard it is to build these models. Just the premise of doing so from current regs rather than some assumption re future regs or policy seems to make it a pointless exercise. I suppose as a govt body, they are not allowed to speculate re future policy, lest it appear they are taking sides. They just need to stick to the laws on the books.

So I get that they need to project RE tech AFTER all incentives have been removed in a couple years. But it seems they consider a 2 3 and 4% growth rate, call them low, reference and high RE cases and proceed. Why not 0, 5 and 15% growth rates? Or extrapolate current growth trends forward in wind, solar, EVs, grid storage until they hit an (estimated) physical limit, then flatline.

I guess the problem is two-fold. (1) predicting the future, especially of a future 'disruptive technology' is hard. and (2) its constrained by its mandate from the feds.

 

[woodgeek]

At what point will the widely dispersed economic/policy interests of the renewable industry start to outweigh the deeply vested interests in the current fossil fuel status quo?

Are we near a tipping point where income and dividends and votes flow from renewables?

As much as I think there is dark money from vested interests at work (e.g. ALEC), I think things in the US are currently in the court of public opinion. RE development in the US is a wildly popular idea, but not enthusiastically so were it to prove costly or in most folks back yards. So right now the action is on the public debate whether a FF-RE transition is feasible/costly/necessary. For years both sides agreed it would be very costly, and the two sides had their constituents (the folks that said RE was not necesssary, and the ones that said it was). Now, the costs are coming down, or becoming negative, and the whole game is changing.

So we have developers of RE seen not as entrepreneurs and job-creators, but as job killers and fraudulent takers of govt money.

Folks with EVs or rooftop solar are not seen as well intentioned or quirky early adopters, but as dangerous 'free riders' on grid or road infrastructure.

So, do you think the 'AGW denial' and RE 'free rider' vilification strategy will take root in the US consciousness? or >50% of it?

 

[EatenByLimestone]

Imagine what will happen if the economy starts actually growing and isn't pushed along by fuzzy govt accounting and reporting. I wouldn't write off the need for access to those assets yet. Hopefully we'll need them soon. Lord knows our economy needs a boost.

 

[dougstove]

So, do you think the 'AGW denial' and RE 'free rider' vilification strategy will take root in the US consciousness? or >50% of it?

I deeply fear, yes.
The current Canadian federal government successfully vilified economically and environmentally efficient carbon taxes.
('Job Killing Carbon Taxes'; economic lunacy since our revenue is based mainly upon demonstrably job killing income taxes).
So the provinces are going forward with 'cap and trade', a less efficient mechanism more prone to lobbying and market distortion.
I am deeply worried about regulatory capture and entrenched interests.

 

[begreen]

Things are not rational, they are skewed towards illogical self-serving. For example, congress vilified and penalized our postal system in an attempt to privatize it. They slapped an absurd pension requirement on the system that has raised the cost of mail for everyone. And yet it is still one of the best postal systems in the world.

 

[woodgeek]

Imagine what will happen if the economy starts actually growing and isn't pushed along by fuzzy govt accounting and reporting. I wouldn't write off the need for access to those assets yet. Hopefully we'll need them soon. Lord knows our economy needs a boost.

Well no worries there. All parties in the current gov't (including BHO and for that matter HRC) are still aggressively in favor of pursuing the development of oil and gas resources 'supply' while some are trying to reduce the demand side as much as possible. Cheap oil and gas will be stimulative to the economy.

The 'carbon bubble' argument is not about getting rid of fossil fuels before we have a substitute, (and freezing in the dark) so much as getting rid of them after we have a substitute of comparable price and quantity, (e.g. in the 2025-2040 timeframe), and the resulting damage to the stock price of those (currently very large) FF companies anticipating that writedown.

In essence, we might arrive at a technical and affordable solution for global warming, but deciding to field it might crash a heavily FF-invested stock market.

And lest anyone be skeptical that the 'carbon bubble' could happen....in the OP I offered the (rather lame I think) official statement by Exxon-Mobil themselves regarding the likelihood of the Carbon bubble. If it were a loony-fringey concept (rather than a genuine concern) why would they even address it??

 

[begreen]

I think you are correct. Until the balance sheet shows that the costs of a fossil fuel economy outweigh the benefits we will continue to muddle our way. We'll never fully wean ourselves off of FF, it is a practical product for many purposes, but as the insurance, health and cleanup costs for our current devil-may-care policies mount up it will simply be more practical to establish alternatives.

 

[EatenByLimestone]

I'm sure XOM and she'll, etc will diversify long before they go belly up. They'll probably buy a tobacco company or 2!

 

[BrotherBart]

I'm sure XOM and she'll, etc will diversify long before they go belly up. They'll probably buy a tobacco company or 2!

BB fires off an email to Rex Tillerson with an M&A suggestion.

.

 

[woodgeek]

Nice article from the Economist re the Shale Oil Biz.

They analyzed the balance sheets for 62 frackers, and said that while there have been plenty of stories of brave belt-tightening on the parts of the companies, the cost cutting is less than half of that required to be profitable at recent prices. A bigger effect is due to the frackers selling oil at $90/bbl due to 12 mos future contracts put in place last year, which are now running out. And they are all still taking on additional debt as well.

http://www.economist.com/news/busin...re-many-shale-firms-do-not-fractured-finances

Add in a second round of falling prices (due to full-up storage sites, Iran speculation) and it could get fugly.

If you can't read, click top link here:

https://www.google.com/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=the economist fractured finances

 

[iamlucky13]

EIA forecasts are laughably terribly, filled with "business as usual" assumptions and never considering disruptive forces.

If anybody could predict "disruptive" forces, they wouldn't be disruptive.

The EPA projects business as usual, because they don't have a crystal ball, not because they're completely inept. As a result, their forecasts tend to be pretty broad if you look at them in detail and don't just read the middle-ground case. For example, the 2008 forecast suggested the 2015 oil prices would be between $50 and $125 per barrel, with the middle estimate being around $90 per barrel. That's a huge spread.

The fact that you can disruptive factors can't be reliably predicted is why the EIA forecasts generally don't find much real world use.

 

[vinny11950]

Oil is going lower. China is slowing down more than expected, they may be at the beginning of an economic/financial meltdown. This deal with Iran potentially introduces more oil to the normal trading exchanges and takes away the Middle East war premium on oil futures.

At the same time there are record heat waves all over the world (Europe and India to name a few) and lots of droughts, with water becoming more precious as some major aquifers dry up. Pretty soon, in some places, they will be reconsidering using all that water to pump out oil and gas.

Tell me again, I just put up these panels and get electricity?