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Energy Week in Review

Headlines for the week ending March 15, 2013

Obama announces plans to fund alternative fuel research

Ethanol Surplus May Lift Gas Prices

Japan extracts gas from methane hydrate in world first

Dissident Shareholders Flex Their Muscle

Excerpts and commentary below the fold…

Obama’s Energy Trust Fund

President Obama announced Friday that he will ask Congress to create an energy security trust to fund research into alternatives to gasoline. The $2-billion fund to be disbursed over 10 years would come from increased revenue the administration expects from streamlining the permitting process for drilling, and from higher oil and gas production in the Gulf of Mexico, the officials said.

The role of the trust, which will be in the president’s budget proposal, would be to support cutting-edge research into fuels that would eventually replace gasoline, a prospect that the officials conceded was years away. They added that no new territory would be added to federal lands already set aside for energy development. Revenue channeled to the trust would be on top of revenue already expected from federal lands, and would not take money out of other government coffers to put to this project, they said. …

The announcement comes against the backdrop of high gasoline prices nationwide. It also arrives as the White House grapples with issuing a permit to build the controversial Keystone XL oil pipeline from Canada to Texas. A recently completed State Department environmental study concluded that the pipeline would have minimal effect on the environment, increasing the chances of the project’s approval. A project like the trust aimed at weaning the country off gasoline might be offered as a way to mute criticism from environmentalists before a decision on Keystone XL. (WGN/Chicago Tribune)

“… increased revenue the administration expects from streamlining the permitting process for drilling, and from higher oil and gas production in the Gulf of Mexico …” Heh. The Administration’s illegal and ill-considered moratorium and on-going foot-dragging on permitting have production levels in the Gulf at several hundred thousand barrels a day below pre-BP spill forecasts. The agencies involved in onshore permitting are dragging their feet too, abetted by their Boss in D.C. and all the sequester talk. Obama’s rhetoric is at such a disconnect with reality, but the mainstream press refuses to call him on it.

Ethanol Mandates and Gasoline Prices

WASHINGTON — A glut of ethanol in the gasoline supply is threatening to push up prices at the pump and may have exacerbated the growing cost gap between regular gasoline and premium, some oil experts say.

Refiners have been trading so-called ethanol credits furiously in an effort to meet federal environmental mandates, helping to significantly push up the cost of those credits — a jump to more than $1 from a few pennies in the last several days, and drivers are feeling the effects, experts say. …

“The market’s broken, because the Renewable Fuel Standard has been broken since the day it was enacted,” said Charles T. Drevna, president of the group. The refiners rely on a certain amount of ethanol as a way to increase octane, but they have been fighting the standard since it was created, partly because it requires them to use advanced biofuels that are not actually in commercial production.

Oil refiners also warn that higher prices for the credits will encourage fraud, something the ethanol trading system has encountered in the past. (New York Times)

Wait: “A glut of ethanol in the gasoline supply is threatening to push up prices at the pump …” How is this possible? Gluts are supposed to cause downward pressure on prices, according to the Law of Supply and Demand.

There is just too much to quote in this article. The government decided to step in and create an artificial demand for a product with few technical or economic benefits, and lots of hidden costs.

In a nutshell, Congress mandated a certain quantity of ethanol usage, neglecting to take into account reduced total demand for gasoline. At the present time, 10% ethanol in fuel is a technical limit; refiners cannot simply increase the amount of ethanol in the mix. They can get around dealing with physical barrels of ethanol by dealing in EPA-created credits. As a result, the market for those has become distorted.

Bottom line: the consumer will pay at the pump. ‘Twas ever thus.

Methane Hydrates

Japan says it has successfully extracted natural gas from frozen methane hydrate off its central coast, in a world first. …

Government officials have said that they aim to establish methane hydrate production technologies for practical use within five years.

A Japanese study estimated that at least 1.1tn cubic metres [roughly 44 trillion cubic feet] of methane hydrate exist in offshore deposits.

This is the equivalent of more than a decade of Japan’s gas consumption.

Japan has few natural resources and the cost of importing fuel has increased after a backlash against nuclear power following the Fukushima nuclear disaster two years ago. (BBC News)

Methane hydrates, or clathrates, could be a really big deal. In a hydrate, molecules of gas are trapped in a lattice of water molecules, resulting in a slushy-solid burnable ice. A tremendous amount of gas can be packed into a relatively small volume, but the challenge has been to commercially (and safely) extract it.

The current landed price of liquified natural gas is Japan is $14+ per mmbtu (roughly, per thousand cubic feet), versus wellhead prices of $3.70 in the U.S. 100% of Japan’s gas is currently imported from places like Indonesia, Australia and Qatar in ocean-going tankers. As the accompanying graph shows, Japan is hugely dependent on imported gas for electrical generation, a dependence that has grown dramatically since the Fukushima nuclear disaster. They have a terrific motivation to commercialize this technology.

generation

There are hydrate deposits worldwide. Hydrates exist at low temperatures and high pressure. Unlike conventional hydrocarbons which are trapped inside rock pore spaces, hydrates exist in solid layers that can be extensive.

Dissident Shareholders are Getting Restless

SandRidge Agrees to Either Fire CEO or Give TPG-Axon Control of Board

[Oklahoma City-based independent] SandRidge Energy Inc. agreed to fire its chief executive or give control of its board to an activist shareholder, settling a closely watched proxy battle amid an outbreak of investor unrest in the oil patch. …

The proxy battle is the latest case of a shareholder shaking up the board of an energy-industry company, as activists demand better stock performance and more-generous dividends from laggards. In January, Chesapeake Energy Corp. Chief Executive Aubrey McClendon agreed to step down by April after the company’s biggest shareholders took control of the board.

Hess Corp. is tussling with hedge fund Elliott Management Corp., which is opposing the company-backed directors who are up for election with its own slate.

Investor Carl Icahn, who agitated for change at Chesapeake, is now demanding that offshore driller Transocean Ltd. increase its dividend to $4 a share, up from the $2.24 the company plans to pay.

SandRidge has been the dominant player in the Mississippi Lime play in north-central Oklahoma, a rejuvenation of an old shallow oil play made possible by horizontal drilling. Current CEO Tom Ward was a co-founder of Chesapeake, along with Aubrey McClendon. While at Chesapeake, both gentlemen enjoyed employment agreements which allowed for their direct personal participation in all of the company’s ventures. This arrangement may be common among small, privately-held companies, but at a large public company like Chesapeake the situation is fraught with potential conflicts of interest.

The dissident owners of SandRidge appear to be concerned about the lack of independence of Mr. Ward’s board, and the involvement of Mr. Ward’s relatives in companies that the company has chosen to do business with. It looks like TPG-Axon has won this round.

Cross-posted at stevemaley.com.

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