May/June 2015 Issue
In this issue of AMP, we asked five executives in the energy sector: What is currently driving change in your industry?
Photos courtesy of businesses
Roger Jenkins is confident that anyone who has watched as the price at the pump — or the size of their royalty checks from shale drilling — decline can name the biggest influence on his industry today.
“The recent collapse in oil prices is causing us a big amount of concern and work and capital allocation and budgeting,” Jenkins said.
“That has been the focus since October.”
This isn’t the first price downturn Jenkins has experienced in his career.
“I was hired into one in 1982, there was another in ‘87-‘88, and another in ’99,” he said. “I’m not sure people remember, but in ’99 crude was $9 a barrel.”
The 2008 financial market crash also created a smaller pull-back in demand, he said, but more significantly impacted credit globally.
The collapse in gas prices the country is currently experiencing, though, is different, said Jenkins.
“It’s coming on the tails of a long run of $100 [per barrel] oil, causing us to have really high costs across the industry, making it hard to get those costs down quickly.”
The same shale oil boom that has driven the United States to record levels of production required a lot of capital expenditures, and with OPEC refusing to drop its production in an effort to damage American shale oil output, the matter is further complicated. Like other companies, Murphy Oil is looking at where it can reduce expenditures.
“We’ve cut the capital budget nearly 33 percent,” he said. “We were advantaged in that we had sold down in Malaysia at an opportune time, and we had one of the top two or three balance sheets in the industry. We were in a good situation to weather this.”
Some analysis initially predicted a “V-shaped recovery” to oil prices, but it hasn’t worked out that way.
“Now it’s a U, and the question is how long is the bottom of the U,” said Jenkins.
But even when they’re back on the upswing, there’s reason to be cautious, he added.
“We handle going back up a lot easier than going down, but I think there will be more caution before going back to higher capital,” he said. “Once bitten in these things, it doesn’t go back quite as quickly.”
A 35-year veteran of the electric industry, Hugh McDonald sees three primary forces shaping it today: infrastructure investment, new technology, and economic development.
“Between now and 2017, Entergy Arkansas is going to invest $2.4 billion” into its infrastructure, said McDonald.
That includes both taking down retired generating plants that have reached the end of their 50- to 60-year service lives — such as the Ritchie Plant in Helena — as well as acquiring newly built, more efficient, natural gas-powered generation plants.
“You’ve also got major equipment in substations and transmission lines,” he said.
New technology requires investment, too, such as smart meters and more efficient generation and transmission equipment.
“We’re taking it to the next frontier; more digitally enabled technologies and customer services,” McDonald said. “It allows us to respond faster to outages, provide more customer-demanded products and services, and a smarter grid is more adaptive in emergency situations. And it helps us manage our assets better, have more real-time maintenance.”
Economic development is affecting Entergy in a couple of ways. Higher energy prices in Europe have resulted in re-industrialization along the Gulf Coast, and with projects like Big River Steel in Arkansas that means more large customers — the “denominator” in the way Entergy and its regulators calculate rates.
“If you can grow the denominator even as you’re investing so much capital in the business, you can keep your rates low,” he said. “Our rates in Arkansas, Louisiana, Texas, and Mississippi are significantly lower than surrounding states.”
Finally, federal environmental regulations are causing a move away from coal-fired power plants and toward natural gas, which is currently cheaper to buy, he said. But that’s another reason Entergy has sought a “balanced portfolio” of generation sources.
“Because we have a low percentage of coal and a high percentage of nuclear and natural gas, we’re actually pretty well positioned for some of these EPA Clean Power Plan proposals,” said McDonald. “I’m not suggesting we aren’t going to have to make changes, but we’ve got a pretty good hedge because of our clean generation portfolio in the future.”
William Ball sums up the potential of solar power in three words: community solar farm. That’s where a group of residents install solar panels on a remote site instead of on their homes, with individual metering for each owner.
“It is set up like a co-op,” said Ball. “There’s an LLC, and everybody has a little piece.”
Because it’s incorporated, it’s eligible under state regulations for accelerated depreciation that makes it possible to earn back the installation costs more quickly. And even if one of the owners moves, as long as they stay within the territory of the electric utility that receives the power from the solar array, they still benefit from net metering, which provides a credit on their power bill for the electricity introduced to the utility’s system.
“It’s almost like a CD where you get 8 to 10 percent return rather than 1 percent,” he said.
Regulations remain primary drivers of the solar power-generation business, said Ball, whose Stellar Sun is the state’s largest installer of solar panels. But even with tax breaks and utility credits, growth has been slow.
“It took us nine years to get 50 net metering systems in Arkansas,” he said. “Today we have [about] 350.”
If you include all the government, residential, and private business solar panel installations, the total generating capacity comes to about 5 megawatts.
“That is making .002 percent of the electricity we use,” he noted. “It’s a very low number. Some states are 10 percent, 15 percent. It’s all about policy; they’ve embraced it and want to develop solar energy.”
Ball was involved in drafting the net metering law in 2001 and said it has been improved over the years, but there are ways Arkansas can promote solar more effectively. For instance, Louisiana took Arkansas’ law and added a 50 percent state income tax credit (up to $12,500) for installing solar panels.
“Their systems pay back quickly, and now they have thousands of net metering systems in Louisiana,” he said.
Arkansas Electric Cooperatives Corp.
With more than a million customers served by its 17 member utilities, the biggest challenge currently for the Arkansas Electric Cooperatives Corp. is the integration of renewable energy into its grid, said President and CEO Duane Highley.
“It’s affecting us in terms of cost and reliability as we adapt to bring that new resource, and I’m talking for us in Arkansas primarily about wind and solar energy,” he said.
While reliability is a key concern, since those renewables can have intermittent productivity, the question of whether renewables will impact user rates is at the top of his mind.
“We have great wind energy sources from Kansas and Oklahoma. We can actually bring energy to Arkansas for lower than the cost of coal and save money on consumers’ bills,” Highley said.
But there’s also the cost of building additional transmission lines to meet capacity needs, a cost exacerbated because “the wind happens to be blowing hardest in areas not a lot of people live,” so there’s a lack of existing infrastructure.
“There have to be additional high-voltage transmission lines built to create that superhighway to get [the power] to where the people need it,” he said.
Another factor going into customer costs is the fact that while the company serves about one-third of the state’s population, that’s spread out over two-thirds of the state’s land mass. They average about seven customers per mile of transmission line, compared to 30 or so for urban utilities.
“It’s amazing to me that we’re able to deliver that energy even to the folks who live in the most remote rural areas [at rates] comparable to what people get in cities,” he said.
Combining its wind power suppliers with the hydroelectric generators at dams in Oklahoma, Missouri, and Arkansas, Highley said the company gets 11 or 12 percent of its energy from renewable sources and “that’s just going up over time.”
Senior Director of Operations for Arkansas
Having done “a little bit of everything” during his 41 years with the Dallas-based SourceGas, Terry England is quick to identify what’s having the greatest impact on its operations in northwest, north central, and northeast Arkansas: “pipeline integrity requirements,” he said.
The company owns roughly 5,600 miles of transmission and distribution pipelines serving about 100 communities in the state, many of them put in 40 to 50 years ago in what were then open fields. Now, suburbs have sprung up where there was once just grass.
“We’re having to go back and replace [lines] through established yards and urban areas,” said England. “The challenges are quite daunting, but that’s really what’s driving our industry right now.”
There is not a quick fix here. England noted that the company is on a five-year plan to replace its transmission infrastructure, and a 20-year plan for its distribution infrastructure.
“We’re generally outsourcing through large pipeline contractors, and our internal staff is managing the project,” he said.
Even working with seasoned professionals, laying replacement lines alongside existing infrastructure can be tricky.
“You have to be very careful while you’re laying in the same right-of-way not to damage the existing line while excavating around the other utilities,” he said.
Replacement work didn’t stop during the long winter Arkansas experienced this year, except for a few snow days, but England said the warming weather will make things a little easier.
“We probably have six jobs currently on the books to tie in [to the system] that are in the ground, waiting on the weather to moderate,” he said. “You don’t want to take the chance of shutting down a system and having something go wrong and lose a town. We are strategically scheduling those in the warmer weather to make the conversions from the old system to the new system.”