Greener pastures

There are many threads of discussions on clean energy use. The recently concluded US presidential election probably was a catalyst for the uptick in these discussions, particularly in transportation, the area of alternative energy that seems to be most engaging to the average person.. In fact the Go Green” buzzword has gone crossed over from the environmentalists’ domain to the whole world at large. And today industry is responding. The future holds many promises with firms coming up with both fuel-efficient and cleaner options.

Where do we stand right now in terms of live projects of ultra low emission transportation options? Here are some recent advances in the field.

Battery powered cars

In 2008, Tesla Motors began producing the Tesla Roadster – a 100% electric sports car that does 0-60 miles per hour under four seconds a with top speed of around 200 kilometer per hour. That’s pretty fast by any standard, battery or gasoline. The car uses no gasoline and can boast of zero carbon emission (provided the battery is charged from a renewable energy source like solar panels). Single the charge is enough to last for over 350 kilometers. Priced at around $100,000 for two seater, this vehicle has been finding buyers among early adopters.
However, refueling is not as quick as with a vehicle that runs on petrol. It takes about three and a half hours to recharge a fully drained battery. Though it is unlikely to run down a battery before its overnight recharge in urban condition, but it is certainly not practical for long journeys or to places without access to electricity. Another concern is around power supply – if millions of such cars are plugged in, power grids will have to undergo costly grid expansion.

Hydrogen fuel-cell cars

Honda’s FCX Clarity is the world’s first production hydrogen fuel-cell vehicle. The outcome of over two decades of research is a non-polluting sedan (the only emission is water vapour) that can travel up to 450 kilometers on one tank and reach a speed of up to 160 kilometer per hour. The car runs on a lithium battery pack and a hydrogen storage tank. Fuel economy of the Honda FCX Clarity is twice than that of a similar size and performance gasoline powered car.

The disadvantage again is the availability of hydrogen filling stations. Even in the US distribution of hydrogen filling station is very sparse. There are just five hydrogen filling stations in the greater LA/Orange County area – where most of the cars are currently leased.

Plane that runs on gas

It is not just automobiles that are turning green. On February 2008, the Airbus A380 became the first commercial aircraft to fly with synthetic liquid fuel processed from gas. The fuel is produced using Fischer-Tropsch process and is known as gas-to-liquids (GTL). The European aircraft manufacturer has admitted it to be a “practical alternative to conventional jet fuel in the short term.”Moreover, GTL enjoys the many other advantages in terms of aircraft fuel burn and virtually free of impurities like sulphur. While the basic science for this has been around for a while, large scale commercial applications are taking off.

I think the next few years are likely to see many more advances such as these.

Think global, hire local

The Oil Boom of the 70’s saw a flurry of oil and gas exploration and production activity in the Middle East. Since there was a dearth of skilled manpower to sustain the fast growth in the region, international and national oil companies turned to experienced staff from overseas to make up for the talent shortage in the region. After 40 years of operation, the situation hasn’t changed much. Though there has been massive growth in the work force, the percentage of expatriates remains the same.

All was okay until recently. There has been an increase in violence directed at expatriates in Saudi Arabia. Meanwhile local unemployment has been growing; Arthur Little’s report released this week highlights how this problem has been growing in the region. Yemen’s unemployment rate is 36%, Saudi Arabia’s is creeping up to 14%.

Finally the cost of expats, typically 2-5 times higher than locals, is also more difficult for NOCs to bear. With the populace seeking to “share the wealth” (eg, the agitations in the Niger delta) governments are interested in greater knowledge transfer, upskilling and general hiring of local talent. The Dept. of Petroleum Resources, Nigeria has recently issued a directive to oil and gas companies to hire local talents instead of expatriates. Similar guidelines are already being provided by licensing and governing bodies in growth regions such as Libya and Iraq.

Instead of viewing such directives as a handicap, International oil companies should make most of the situation to cement their relationships with national governing bodies, while NOCs can build up their image as national champions; giving practical solutions for their country’s expatriates dependence in the future. National oil companies’ aspiration to play a major role in the international energy market is very closely related to building local capability. As they venture into other countries, they will need the expertise to manage their growing international operations.

There is a financial imperative to this calculus too. Block awards and renewals are increasingly tied contractually to local workforce development. IOCs also worry about the approximate 50% of the current expatriate workforce that will retire by the next decade. There is no time like now to build a local workforce that will not only deliver the project at hand but may also be a springboard for regional expansion.

Oil & Gas hiring amidst Global Recession

Now that the global recession has become a household term and lay offs & pink slips have become a part of our daily vocabulary, you might find it odd to find large number of ads by oil & gas companies on job classifieds. Oil prices are less than half of what it used to be a few months back. So, why are the oil companies still hiring?

Sure, the worldwide economic growth is slowing and the low crude oil price IS affecting new projects. Prospects aren't too bright for any job, be it in Oil & Gas or any other sector. But if you work in the field, there are still plenty of interesting positions. Companies that have started new upstream activities will continue with their effort. Recession or not, that is still a lot of work waiting for workers to complete. In recent report on The Daily Times, a few local oil companies have stopped their hiring, larger companies continue to hire.

There are two major reasons behind it.

First reason is the basic economic principle of demand and supply. Demand for oil and gas remains high due to the emergence of new economies like China and India. Though China has come down from a blistering two digit growth, the current growth rate is at an enviable 9%. India too is not far behind. Even if oil demands slack from traditional giants America and Europe, new economies will continue to drive up the demand. Recently, the International Energy Agency predicts that China and India will need 300% more crude oil for their economies by 2030. This is good enough reason for oil companies to continue investing in exploration & production projects, either greenfield or in prepping older wells through enhanced oil recovery techniques.

The second major reason for this continuous hiring effort from the oil companies is talent shortage. Today, there are so many jobs, particularly in technical fields, filled by graying workers hired in the 1970s. Most of them will be reaching retirement age in a few years. While the oil and gas companies looking to rejuvenate its work force with young blood, your prospects of getting positions in this sector s remains strong.

Oil below $40 per barrel?

Deutsche Bank AG has said that Oil prices may fall as low as $40 a barrel by April as demand collapses and production costs eases. In a report published on Bloomberg, Deutsche have said:
“Cash production cost ‘floors’ for the oil price are a shrinking target because of lower costs and a stronger U.S. dollar…This implies a `V' shaped downside to $40 a barrel crude around April 2009.”

Oil has dropped 63 percent from a record $147.27 in July. As on yesterday, crude futures hovered around $54 a barrel mark. In a separate item reported in the Financial Times, top executives from national oil company of China have predicted about $40 a barrel, thereby putting quiet a few new oil-exploration projects at risk of cancellation.

Oil that cheap is a major concern for big oil-producing countries like Iran, Iraq, and Venezuela. Any cut in production by OPEC, the cartel of oil exporting countries, is not likely to be as effectual as it was once thought to be. OPEC’s previous announcement of output reduction of 1.5m barrels a day failed to revive the falling crude oil price. The group's biggest producer, Saudi Arabia, will “move cautiously” amid the increase in the supply of non-conventional oils such as ethanol in the U.S.

However, this development has another implication. Cheaper oil could also take out some steam out of the push for clean energy in the US – which is much costlier.

Busting some myths

There has been a fair amount of discussion about energy policies in the recent past, aided in no small part by the interest generated in the recently concluded U.S. presidential election. Some facts that were thrown about has been taken as received wisdom. We examine some of these here.

1. Oil companies are extracting extra “economic rents” for the high price of gasoline/petrol

There are many factors that resulted in the run up of gasoline price. About 70-75% of the price is that of crude and refining/distribution/service station charges. The government taxes comprises of 10-15% depending on regulatory regimes. At the end of the day, Oil and Gas companies earn about 5-10% as profit.
There are also several additional factors that impact the price at the pump- cost of exploration and development, cost of extraction (the cost of human services as part of this is another story- more on this in another post), refining cost (no new refineries have been commissioned in the US in the past 17 years). I also think that the cost of speculation was a big factor- note the rapid decline in price in the last two months as many margin call positions were liquidated in the oil futures markets.

2. Oil companies are not investing in alternative energies.

The U.S. oil and natural gas industry invested almost $100 billion between 2000 and 2005 in emerging energy technologies, including $12 billion in non-hydrocarbons and $42 billion in greenhouse gas emission mitigation technologies from 2000 to 2006. This is not mere green PR, but real investments.
There have also been some advances in less intrusive technologies for exploration and production. However, the industry has successfully developed breakthrough technologies like 4D seismic imaging and multi-directional drilling, which have helped reduce the industry’s environmental footprint dramatically. Today it is possible to develop nearly 80 square miles of area below the surface from a single two-acre site on the surface.

SPE Salary Survey

Society of Petroleum Engineer (SPE) recently released its annual salary survey for the Oil & Gas sector. I must say that I was delighted to find the result of the survey which is very promising and reassuring especially in this period of economic gloom! At a time when global giants are tumbling, people are being laid off in the thousands, the report findings are in stark contrast to the global economic slowdown. You can download the complete results here.

This survey was SPE’s second effort. Last year a similar survey was carried out among SPE members. This time around, the scale of respondents was higher and so was the diversity in their demography. Unlike last year, more than half of the respondents are working in countries other than the United States. In total, there were respondents representing 125 nations, working in 116 different countries around the world including a sizable number from North Sea/North Atlantic and Middle East regions.

A quick overview on the findings of the survey –

The average annual increase in base pay is reported as 8.1% overall. The work region with the highest increase is Australia/New Zealand, at 10.6%, while Canada is lowest with 7.3%.
This is great in comparison to other sectors where growth in the mid/high level is much less and in many cases, almost stagnant.

The United States, Australia/New Zealand, and North Sea/North Atlantic have the highest average pay in the industry while Southeast Asia being distinctly the lowest paid.

The average age of respondents is consistent around the globe – around 39 to 45 years.

If you’re looking to join this sector, here’s proof positive of the amount of money you can make. If you’re already in the business, you can do a quick benchmark against professionals in other geographies, disciplines and experience brackets.

Double trouble: deflationary oil prices & financial meltdown

Overlapping Crises

The current financial crisis has ballooned around the world economy and there are fears that this international recession could even trigger a global economic meltdown. Most economic analysts are predicting that it will get worse before it gets better. This is reflected in some of the recent downswings in stock markets worldwide as near term recessionary expectations are being priced in today. The channels of credit have dried up and businesses small and large have been plagued by a credit crunch.

The other key trend is in the sharp volatility of hydrocarbons prices. After a remarkable run up over the last two years, crude prices have plummeted over the past few months. We hit $58 for crude today; and will probably drop further as the global demand cycle weakens in the near term. While there are many factors driving the price of oil (demand- supply, speculation, political risk, etc), it is undeniable that there has been some demand destruction due to unsustainable high prices in the $150 range.

Effect on Projects
So how is this price deflation and the economic crisis at large going to effect the industry, and industry jobs in particular?

In the last few years, quite a few operators were able to leverage cheap credit and high commodity prices to finance large new exploration projects in some new areas. However with the squeeze in the credit markets, some of these projects are either being put on hold or delayed. Small cap companies are scaling back operations, seeking new partners or have become targets for acquisition. There are other companies are also restructuring their project plans to tide over the current period of economic uncertainty. Shell recently announced the delay of its oil sands project in Canada, Yemen has also delayed its gas production outlook. However, most large cap integrated oil companies are not cutting back as they did not factor in prices in the $140 range while making their investment decisions. This is also the case for most national oil companies.

In the long term, my sense is that the demand-supply equation will be unbalanced. The IEA predicted last week in its World Energy Outlook that by 2010 oil companies will have to commit to projects producing almost as 7m barrels a day – if the world is to avoid a supply crunch by the middle of the next decade. This is due to the steep rates of decline in existing fields to meet demand of growing economies like China and India. Further investments should stanch the natural rate of output decline of 9% down to 6.7%. As a result they have predicted a price range greater than $100 by 2015.

Outlook
So the question is how will the credit crunch and lower oil prices affect the labor market in the Oil and Gas industry? Will it stall the recruitment and talent acquisition process? Are we going to see a repeat of the layoffs of the 1980s?

It’s early to say right now; we may have more volatility coming down the pike. But over the medium term once key economies right themselves, demand should increase. China has taken a good step in that direction this week. Only time will tell, but I feel pretty optimistic.

What do you think?