EMI's Top 5 Energy Stories of 2007

The follow is our Managing Editor, Peter Marin’s take on the top 5 Energy Stories of 2007

 

Dominick

 

EMI's Top Five Energy Stories of 2007

 

Peter Marrin- Managing Editor -  BTU Group

 

The year 2007 was another twelve months of shifting fundamentals in the ever changing energy industry. In many ways, it was a year of the same old factors grabbing headlines with many of our Top Five being repeats from last year, yet at the same time, the priority told a story of its own.

 

Without further ado, here are the Top Five Energy Stories of 2007 as determined by our distinguished staff at the Energy Management Institute.

 

5)- Mother Nature

 

The Weather will almost always weigh in among the Top Five Factors for Energy -- in fact, it landed #1 on our list last year -- and this year was no exception.

 

To start the year, record flooding in Cushing, Oklahoma -- the benchmark delivery point for the NYMEX WTI oil contract -- exacerbated a growing inventory deficit for crude oil, a year-on-year shortfall that reached almost 35 million barrels by year-end when dense fog forced numerous closures of the Houston Ship Channel. At the same time, one of the mildest winters on record was setting the pace for a natural gas supply glut which after yet another bust for hurricane forecasting, eventually sent natural gas stocks to record highs (near 3.55 Tcf) for season-ending inventories.

 

For power, it was another banner year for above normal temps this summer, which brought more than 2,500 new daily record highs and new summer demand records for many areas, particularly in the Southeast, where record drought conditions lingered through December. Also plagued by hot and dry conditions on the West Coast, a heat wave in July sent wholesale prices to over $300/MWh at some markets while an outbreak of wildfires in October turned up the heat on the power grid, leading to over a week straight of grid emergencies.

 

According to NOAA, preliminary data shows that 2007 is on pace to become one of the 10 warmest years for the contiguous U.S., since national records began in 1895. The annual average temperature for the Lower 48 was near 54.3 degrees F -- 1.5 degrees F above the twentieth century average. This currently establishes 2007 as the eighth warmest on record.

 

4) An Air of Change for Natural Gas.

 

NYMEX natural gas spent most of 2007 in a relatively tight $6.80-$8.20 spread -- a stark contrast to prior years with a low of near $4.00 in 2006 and an all-time high in the $13.00s in late 2005. However 2007 also brought some wild swings in spot pricing, from gas in the Rockies trading by the pennies a few months ago to some Northeast spot markets seeing recent spikes into the $20.00s.

 

However some subtle changes behind the scenes this year could help to even out the spot markets in the years ahead with major projects like the Independence Hub in the Gulf of Mexico on pace to reach 1 billion cubic feet/day by the end of the year -- to name just one of many new deepwater projects in the GOM -- and increased production from the Fort Worth and East Texas producing basins leading Texas natural gas exports to a record-high 10 Bcf/d over the December 8-9 weekend, according to natural gas pipeline flow information monitored by BENTEK. Overall exports leaving Texas are up approximately 26 percent when comparing December 2007 month-to-date to December 2006, BENTEK said.

 

Meanwhile, to accompany the increased production is an expanding natural gas transmission infrastructure. Perhaps the most noteworthy addition in this regard was the Rockies Express Pipeline (REX), which is designed to move gas out of the prolific Rockies and to more concentrated demand pockets in the East, which will ultimately ease the glut and support prices in the Rockies while helping to quench the gas thirst and pressure prices in the East.

 

When completed, the 1,678-mile pipeline will have a capacity of approximately 1.8 Bcf/d. The first 328-mile segment between Colorado and Wyoming is in service. The next segment, REX-West, a 713-mile 42-inch diameter pipeline that will extend from Wyoming to Missouri, should be available soon with full service by February 2008. Pending approvals, REX-East (from Missouri to Ohio) will be operational in 12-18 months.

 

Further down the pipe, ConocoPhillips said recently that it wants to build a multibillion dollar gas pipeline running from Alaska's North Slope to Midwestern states. The project, with a price tag of up to $42 billion, would be the world's largest most expensive energy facility, but could be worth it if it taps into the 36 trillion cubic feet of proved reserves the company says could be shipped within the next 10 to 12 years.

 

Meanwhile, as domestic E&P activity picks up so too will imports. During the summer, the Cove Point LNG receiving terminal began a 0.8 Bcf/d expansion to help accommodate a rocketing demand for LNG. According to the EIA, imports of LNG are expected to reach about 790 Bcf in 2007, a 35-percent increase over 2006, and about 940 Bcf in 2008, a 19-percent increase over 2007.

 

However as LNG becomes and increasing part of the natural gas, so too will geopolitics as world demand for LNG ups the stakes for the U.S. to gets its own supply. Some of the other heavy consumers are European nations as well as Asian countries like Japan, which drastically hiked its LNG imports when an earthquake shut the world's largest nuclear plant in July.

 

3) Global Warming and Carbon Awareness

 

The year 2007 was a year in which the green got mean as climate change talks heated up in all corners of the globe. Al Gore's film "An Inconvenient Truth" in 2006 was just the tip of the iceberg. Whether we were skating on thin ice or watching our steps lest we leave a carbon footprint, we were all sounding like scientists, citing carbon data in defense for or against global warming.

 

Things heated up at the start. In January, Weather Channel meteorologist Heidi Cullen declared that any scientist who refutes global warming should lose their professional certification, which was promptly and harshly rebutted by a 30-year veteran James Spann, chief meteorologist for ABC 33/40 in Alabama, who replied, "I do not know of a single TV meteorologist who buys into the man-made global warming hype." In May, the Weather Channel declared its official position in a press release -- "global warming is real" -- and yet in November Weather Channel founder John Coleman was taking heat for calling global warming "the biggest scam in history."

 

What gives? Sadly, the end of 2007 hasn't brought us the answer -- in fact, it probably brought more question with the recent United Nations talks in Bali offering two strongly opinionated sides but no clear victor. In the end, despite all the hot air, something real and tangible yet might still emerge with the recent Bali talks offering the beginning of a new and improved Kyoto Protocol, which expires in 2012.

 

Of course, talking carbon often leads us to energy, a primary source of man-made carbon, and to the U.S., the world's top emitter. And it is how the U.S. is recognizing its carbon footprint that makes the topic #3 on the top energy stories of the year.

 

On the energy level, carbon awareness can mean a lot, and emissions are being handled in a number of ways. For coal -- a primary source of greenhouse gases -- byproducts can be drastically cut upon generation with projects like super-clean Integrated Gasification Combined Cycle (IGCC) plants or the even-cleaner near-zero emissions FutureGen project planned in Illinois. Or the carbon can be stored underground with increasingly common carbon sequestration programs. Some plant emissions have even been re-injected into aging oil and gas wells to maintain pressure and production. Coal -- a product the U.S. possesses in immense quantities -- also promises to carry a sliver of the transportation needs with increasing interest in Coal-to-liquids (CTL) programs.

 

But it's not just a coal issue. On the energy level, carbon awareness has helped boost familiar renewable fuels from ethanol to wind power, has aided a growing nuclear revival and numerous LNG plans into the development phases, and has even spurred more activity in green trading, currently done on the Chicago Climate Exchange and soon to flood the New York markets in 2008.

 

In all likelihood, without the rise in carbon awareness, A Greener Face on Energy would never have reached #2 on our list.

 

2) A Greener Face on Energy

 

Renewable energy and alternative fuels were ranked #5 on our list last year and in a testament to their growth, they have leapt to #2 and show potential for further growth along our list with recent announcements only shedding promising light on the budding industry.

 

Certain rapidly growing renewables like wind and solar power were dealt a blow recently when the newest energy bill was forced to shed tax provision for those sectors before clearing the final hurdles, thereby leaving wind and solar to rely on annual approvals to ensure their tax provisions (their lifeblood in a sense).

 

Tougher state-mandated Renewable Portfolio Standards have kept certain key states like California on an aggressive path towards renewables with many states on pace for 20 percent by 2020. However the federal government is yet to enact any such mandates.

 

In the meantime, all other renewables are green and only growing.

 

The recent Energy Independence and Security Act of 2007 (passed to law this past week weeded of its wind and solar provisions) sprinkled some Miracle-Gro on ethanol. The bill requires a six-fold increase in ethanol use to 36 billion gallons a year by 2022, with 21 billion gallons to be cellulosic ethanol from feedstock like prairie grass and wood chips.

 

But the bill also underscores another growing trend in renewable energy -- conservation. This is no longer tree-hugger stuff; from demand response and advanced metering in power to mile-per-gallon auto standards like CAFE for the transportation sector, the "virtual supply" is becoming increasingly common in utility planning... not just adding supply but rather cutting demand instead. What a concept.

 

The year began with Bush's State of the Union laying out a plan of 20 in 10 -- "Tonight, I ask Congress to join me in pursuing a great goal... [to] reduce gasoline usage in the United States by 20 percent in the next 10 years." It was as if the writing was on the wall.

 

Nearly 12 months later, among the banner features of the new legislation is the first increase in automobile fuel economy in 32 years, boosting fuel standards to 35 miles per gallon. The bill also promised new energy efficiency standards for an array of appliances, lighting and commercial and government buildings.

 

While the root of the renewable tree gets nutrient from the new law, perhaps a more important source of nourishment came late this year when NYMEX Holdings and Evolution Markets announced they would form a consortium of financial institutions to launch the "Green Exchange," a commodities trading marketplace in which U.S.-based companies could buy and sell the right to emit carbon dioxide and other environmental pollutants.

 

The Green Exchange -- opening in February 2008 -- is loosely based on the four-year-old Chicago Climate Exchange, which accounts for $100 million in carbon trading annually. However the Green Exchange will also offer traders the ability to buy and sell emissions that cause smog and acid rain, as well as renewable energy credits. NYMEX hopes that this wider scope, as well as buy-in from financial industry heavyweights including Morgan Stanley and Merrill Lynch Credit Suisse, J.P. Morgan, Merrill Lynch, will make the Green Exchange the de facto standards for emissions trading.

 

1) Oil and the $100 sigh

 

There wasn't much debate that oil's march to $100/bbl should be the #1 headline-grabber for 2007. Approaching inflation-adjusted levels of the Energy Crisis in 1979, the surging price of WTI promises months -- and likely years -- of economic repercussions not just for the U.S. but for the whole world as the price spike coincided with other economic turmoil for the U.S. -- the burst of the housing bubble, the subprime loan crisis, the credit crunch and all-time lows for the U.S. Dollar.

 

As OPEC promised to boost production the Feds slashed interest rates in efforts to stem the oil price spike and downward slide of the U.S. economy, which has edged ever-closer to a recession.

 

Activity in oil futures and the broader petroleum complex was #2 on our list last year but for a different reason as a $78.40/bbl all-time high reached in July 2006 opened the door for a massive sell-off with the NYMEX front month eventually finding a floor near $50/bbl in mid January 2007. Since then the price of oil has nearly doubled, reaching into the $99s/bbl in late November.

 

The year began with OPEC initiating a second round of cuts in February 2007 but by November, the cartel's production quotas were again on the rise. And even as some OPEC members like Angola and Iraq were pumping much more oil than we thought, stockpiles continued to drop. By the end of 2007, total oil stocks in the U.S. were close to 33 million barrels below prior-year levels. According to the International Energy Agency's December report, while demand points higher, world oil supply fell by 22.4 million barrels in October, lowering demand cover to 52.6 days, just below the five-year average. A sharp decline in European products led the draw, with a similar picture emerging in November.

 

But sometimes, the fundamental factors did not matter nearly as much as other less tangible events (or hypothetical events) as the tight supply and ever-increasing demand made geopolitics that much more noteworthy. Some of the usual OPEC hawks like Iran and Venezuela made the most noise while other disruptions came from Nigeria militants and Turkey ramping up rhetoric (and military incursion) against Kurdish rebels in northern Iraq.

 

Meanwhile, in North America, the banter about record profits and price gauging simmered a little bit in 2007 as the oil majors began ramping capital investments into the billions of dollars. In particular, it was a year of focused attention in Canada as near $100-oil made the heavier-grade Alberta oil sands not just economically viable but downright profitable as companies doled out big bucks not just in Canada but also in the U.S., upgrading some refineries with the capacity to clean up the heavier oil. However, a hike in government royalties threatens further growth in the region.

 

 

According to the EIA's latest short-term outlook, global oil markets will likely remain tight through the 2008 as world oil demand will grow much faster than oil supply outside of OPEC, leaving OPEC and inventories to offset the resultant upward pressure on prices.

 

Looking further out, the EIA sees oil prices (in 2006 dollars) declining gradually from current levels to $58/bbl in 2016 ($70/bbl in nominal dollars), but after 2016, prices begin to rise as demand continues to grow and higher cost supplies are brought to market. In 2030, the average real price of crude oil will be near $72/bbl in 2006 dollars, or about $113/bbl in nominal dollars, the EIA said.

 

In the end, though long anticipated, actually breaking the $100-threshold scarcely mattered. Though unwavering oil demand growth projections seriously questioned the theory of elasticity of demand, in most other cases -- most notably in the economy -- the damage has already started and repercussions are already being seen.

 

 

 

Peter Marrin, Peterm@btu.net, www.energyinstitution.org

 

 

Dominick A. Chirichella

Energy Management Institute

tel 646.202.1433

fax 801.383.7510

dchirichella@emimail.org

www.energyinstitution.org

www.advancedenergycommerce.com

 

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