US Energy Policy - New Politics & Old Energy - No Panacea!

Over the last several administration changes, I have been asked to make comments on what it means from business segments I know a little about - including that within the oil sector. The comments herein first address the overriding issue of the financial crisis and banking in the real world. Next involves the oil sector and one of the major opportunities for Zenergy.

First, there will be considerable issues with the hangover from high oil prices and home values / credit for years - since 2/3 of our economy is consumer spending. With Freddie Mac & Fannie Mae (half of home loans) not being addressed by Congress (lending to those who can’t afford them) and the increased Federal involvement in housing, the basis of our economic issues will be stretched way out years. For banking since we don’t know the true home values, bad banking balance sheets = too conservative lending. That’s needed anyway! While many DC politicians blame Wall St for the problem and made most of the profits, homeowners riding the wave did moreso (by $$$ growth). Congress should also point their fingers at themselves for forcing the bankers / lenders - and the originators - we will still bail them out and blame everyone else. The good news is that oil prices are down (prime driver of recessions) and people will eat, need energy and will need to move stuff. Productivity IT businesses will do well, too.

With the change in our national leadership and the predicted change in the attitude regarding energy companies (especially nuclear, coal & oil), we need to look at the opportunities as we move ahead. It is important to understand the approach of the oil industry, so we can position ourselves. When thinking business-wise what tightening of credit and the drop in crude oil prices means, oil company executives will act rationally and do what they think will be the best for their firms as will all types of businesses. Oil company approaches will vary depending on the oil firm. The issue for most businesses today regardless of types is cash generation. For oil companies, it means addressing old and new production (usually focusing on marginal increases versus large capacity ones) and  cost reduction (delay / reduce exploration).Over time this leads to a better supply-demand balance and a floor on prices. This is what was done in previous oil recessions.

Looking ahead, risk will be minimized for ROI resulting in less being spent on exploration, especially BIG projects (this is an easy one). Folks supplying services for all this will be hit most. For small / mid-sized explorers, there will be less cash available - due to saving of cash, too. We will see tax increases on oil companies, along with dramatically reduced profits (mostly from crude drop). The expectation is taxes will probably come in a mix of increased pump Federal tax and oil company income taxes, eliminated tax credits, probably no offshore / Federal land drilling and then adding in greenhouse gas legislation / taxes. If we don’t address supply with a viable alternative, we’ll get back into accelerated oil prices in a few years. We must also recognize that the average age of a vehicle in the US is 9-years with 3rd world nations being 20+ (e.g. Cuba), so oil will be needed for decades.

There are a great number of economical renewable energy projects available with good ROI’s.  They possess a common approach including: A.) meeting a specific mandate whether it be from government legislation, from public pressure or from purely an economic view point; B) do not require government subsidies to provide them with long-term ROI’s; C) address risk and can withstand significant downturns in our current energy infrastructure pricing such as oil, gas and coal; and D) have a break even time period of 3 years or less. The government not having laid out their proposals on how they will address energy or if they change the playing field mid-game, it will cause those deals requiring investment to be put off.

Then there is going to be the reconciling of food v. fuel debate - rightfully so. In assessing soy / rapeseed / palm-to-diesel, an important parameter within the world grains discussion for food and fuel is the grain stock-to-use ratio. For corn, soy, palm, rapeseed and rice, it’s the lowest since the 1970’s. For wheat, it’s the lowest ever. US and World stocks are very tight with 38% of the growth over the last three years in industrial use of oils was due to Biodiesel expansion. Soy went from 2 to 9% of the total; rapeseed went from 5 to 25% of the total and Palm from 16 to 23% (dampened by ecological reasons). Foreign buyers will have 13% less soy available to buy and yearly prices will be highest on record. South American growers (like our partner Phil Corzine in Brazil) will play a bigger role in the future.

All this leads to our immediate potential and the basis of Zenergy plans. First, oil companies need increased crude / feedstock production, especially on the diesel side. The oil companies can probably squeeze another 5% diesel out of a barrel of crude oil, but that’s it. The main thing refiners need to use to utilize the heavier oils are hydrotreaters - same type hardware for processing Renewable Diesel. Regardless, we all need production / feedstock - and Jatropha is a good option with relatively low cost / risk. It also allows for a marginal increase in production. Next, the diesel segment realizes a $10+ per barrel premium from a supply-demand standpoint. Then there is the potential Carbon Credit investment tax credits coming for the oil / energy companies - along with being green.

As a final thought, ethanol is being rethought my many in the big scheme of thing, but we won’t get into much of that in this overview. We must say that the corn-ethanol oxygenate market is a good one that can utilize current production today. Reminds us who have been around a while of gasohol as a primary fuel from the ’70’s. Grasses / woodchip  / paper (and pelletizing) are a good feedstock for the future, but also good today for GHG, green coal and home heating / cooking stoves. Separately, the T Boone Pickens natural gas deal - Prop 10 in CA - is a big defeat (all about paying for infrastructure), so that alternative was rejected with its current approach.

So we move on to the next chapter in our nation. In my opinion, Congress is mostly to blame for our problems - and their solutions are not even close to any panacea.  But opinions are like noses, everyone has one and they smell. Regardless, the solutions are up to us in the real world.

Jay Thompson - Board Member - Zenergy Companies