By David Wagman, Managing Editor
A cosmetics scare in China and a 28,000-foot-deep hole in the Gulf of Mexico. Both have implications for the North American power industry.
First, news reports said that Proctor & Gamble skin care products faced a consumer scare in China in September. P&G pulled the cosmetics after Chinese authorities said they found potentially harmful chemicals. Consumers seeking refunds staged a near-riot at a Shanghai hotel.
Seems that P&G isn’t the only company to face recent consumer trouble in China. In August, Dell was hit with a class-action lawsuit over laptops allegedly containing the wrong processor. And General Mills had to apologize last year after a Chinese news report claimed its Haagen-Dazs ice cream cakes were made in unsanitary conditions.
In a Great Leap Forward from Chairman Mao, it now seems China’s growing middle class is showing more concern with lifestyle issues than Party line doctrine. (Mao’s Little Red Book never mentioned Haagen-Dazs, did it?) The important thing is that as incomes rise, people have more time to worry about lifestyle and environmental issues.
That means we probably will hear more from China’s middle class related to electric power generation. Chinese coal-fired power plants have a long history of being big polluters. They lag well behind U.S. generators when it comes to clean coal technologies and emissions reduction. A push to clean up Chinese power plants, egged along by a feisty middle class, could open opportunities for North American equipment suppliers. It also could mean challenges for power providers who increasingly compete with Chinese power providers for environmental controls and other technologies. Renewable energy may also see a lift in China to meet demand from an environmentally aware middle class.
The hole in the bottom of the Gulf of Mexico is also interesting, but in a different way. It seems to bolster one theory for “the end of oil” (and natural gas). In September, Devon Energy, Anadarko Energy and BP Exploration said they found a potentially big source of oil (and natural gas) in around 7,000 feet of water some 28,000 feet below the Gulf floor. The resource could turn out to hold from 3 to 15 billion barrels of oil. Work aimed at better defining just what was found is slated for 2007.
Talk quickly turned to lower gasoline prices and a possible resurgence of natural gas-fired power generation. Don’t count on either.
To understand why, let’s step back. One theory of peak oil says there always will be plenty of petroleum and natural gas. The rub is that oil and natural gas will grow too costly to pull out of the ground, at least compared with other energy sources. We’re already seeing substitutions and market reactions to fuel costs. When gasoline prices jumped this past summer, interest reemerged in fuel efficient cars and scooters. In California in 2000, conservation exceeded all expectations after electricity prices soared. Some forms of renewable energy today are quite competitive with fossil fuels, in part due to renewable and petroleum cost curves moving into closer alignment.
(One anomaly was the power industry’s natural gas burn last summer. Associate Editor Teresa Hansen’s feature article in last month’s Power Engineering concisely explores that dynamic.)
Drilling 35,000 feet below the surface of the Gulf of Mexico is one expensive hole. So, too, will be the cost of completing wells and bringing oil to market. If the exploration partners move their project forward it will be because long-term oil prices are expected to remain high enough to recover their enormous sunk costs.
How enormous? Chevron is working in deep water in the Gulf and expects to spend $1.8 billion before getting a single drop of oil to sell beginning perhaps in 2008. News reports say the company could spend an additional $1.7 billion to bring that field up to full production.
Two of the oil industry’s big research and consulting firms, John S. Herold Inc. and Harrison Lovegrove & Co., reported in September that the industry continues to spend a lot of money to barely eke out new sources of oil and natural gas. Reviewing 2006, the report said, “Costs continued to march upward, with lifting costs gaining 35 percent while production volumes inched up only 1 percent. Finding and development spending surged 36 percent, but for the second straight year proved and proved developed petroleum liquids reserves were essentially unchanged.” In other words, exploration companies spent one-third more money just to hold things steady.
For long-term power planners that may confirm notions that oil and natural gas prices will continue trending upward. As evidence, Chesapeake Energy said it would temporarily shut-in about 100 million cubic feet per day of net natural gas production, some 6 percent of its production, until natural gas prices recover.
Coal, nuclear and renewables all would seem to do well in this sort of price scenario, especially over time horizons that stretch 20 years and beyond. And as for the Chinese cosmetics scare? One can only imagine the economic force behind a fully energized (and nicely exfoliated) Chinese middle class.