The Economic Consequences of Restrictions on Domestic Energy Exploration; Next Generation Biofuels; Devon Energy Reports 2009 Financial Results

America’s reliance on foreign energy will grow by 19 percent over the next 20 years, expanding the transfer of U.S. wealth to the Organization of Petroleum Exporting Countries (OPEC) by more than $600 billion, according to a report by the National Association of Regulatory Utility Commissioners.  The two-year study broadly examined the social, economic and environmental impacts of continued restrictions on developing America’s oil and gas resources.

“The study highlights the importance of developing our domestic petroleum resources in an environmentally responsible manner,” said American Trucking Associations Vice President Rich Moskowitz. “Continuing restrictions on the development of U.S. energy resources will adversely impact our economic well-being and our national security.”

The study predicts the economic results of maintaining current restrictions on accessing America’s federally owned onshore and offshore energy resources. The results, when compared with the effects that could be expected from a reasonable energy policy on federal energy resources, will include:

•Import costs for crude oil, petroleum products and natural gas will be $1.6 trillion higher;
•Imports from OPEC nations will be 4.1 billion barrels higher, resulting in increased payments to OPEC of $607 billion;
•U.S. production of crude oil will be 9.9 billion barrels lower;
•U.S. production of natural gas will be 46 trillion cubic feet lower;
•Energy-intensive industries will produce nearly 13 million fewer jobs;
•Housing starts will be 200,000 fewer;
•Annual average natural gas prices will be 17 percent higher;
•Annual average electricity prices will be 5 percent higher;
•Real disposable income will be a total of $2.34 trillion less;
•Energy costs to consumers will be $2.35 trillion higher;
•Gross Domestic Product will be $2.36 trillion lower.

The American Trucking Associations is a member of the Consumer Energy Alliance, which was among the public sector and private sector organizations that contributed energy experts’ information and analysis for the NARUC report.

The report was assembled by experts from the Science Applications International Corp. and the Gas Technology Institute and provides the most up-to-date assessment of America’s oil and natural gas resources. Utilizing the National Energy Modeling System, the study renders a quantitative summary of the jobs, revenue and number of housing starts that Americans should expect to surrender in the future under the restrictive energy policies currently in place.

To view the executive summary of the report, click here.

Next Generation Biofuels: Market Drivers, Growth Opportunities and Regulatory Change

Over 80% of the world’s primary energy supply is currently derived from coal, gas and oil (collectively known as ‘fossil fuels’), which are used to generate electricity, power, energy and heat for industrial, commercial, domestic and transportation purposes. The world’s dependence on crude oil for transportation is particularly marked, with the International Energy Agency (IEA) estimating that fuels from crude oil currently supply about 96% of the worldwide energy demand for transport purposes.

As the world’s population grows and developing countries look to expand their economies, this insatiable demand for fossil fuels is unlikely to show any sign of easing, with oil and gas accounting for 60% of the world’s increasing energy demand between now and 2030. Furthermore, with most significant reserves of fossil fuels unevenly distributed throughout the world, energy security is set to become an increasingly critical economic and political issue over the coming decades. Real or perceived disruptions to the global supply of fossil fuels — notably crude oil — are likely to grow in frequency and cause wild fluctuations in the price of energy, as they have done so in the past. However, one of the most pressing reasons for seeking alternative sources of energy and fuel lies in the form of ‘climate change’.

The combustion of fossil fuels releases carbon dioxide (CO2), a potent ‘greenhouse gas’ (GHG), which are considered by some to be responsible for ‘global warming’. According to the IEA, if no changes are made to the world’s existing energy economy, related emissions of CO2 will grow marginally faster than energy use, meaning that by 2030 global CO2 emissions will be more than 50% higher than today. Over two-thirds of that projected increase in emissions is expected to come from emerging economies, such as India, China — both of which are set to rely heavily on coal-based power stations to drive their rapidly developing economies.

The combination of biomass and biofuels accounted for around 26% of the world’s total renewable energy production in 2008. Second generation biofuels have been developed due to limitations of first generation biofuels, primarily that the resources used threatens food supplies. Second generation biofuels production processes include a variety of non-food crops such as waste biomass, the stalks of wheat, corn, wood and miscanthus. Second generation biofuels use biomass to liquid technology, such as cellulosic biofuels from non-food crops. Third generation biofuel primarily references fuel derived from algae. Algae fuel is not yet commercially available or viable due to cost constraints, but through various laboratory experiments promising results have been obtained. In 2008, the US Department of Energy noted that algae can produce 30 times more energy per acre than land crops such as soybeans.

North American Onshore Proved Reserves for Devon Energy at Record 2.6 Billion Boe; Drill-Bit Reserve Additions More than Double Record Production

Devon Energy Corporation reported that 2009 full-year and fourth-quarter financial results as well as its 2009 full-year oil and gas production from continuing operations has reached an all-time high. In addition, Devon reported record-high proved oil and natural gas reserves at December 31, 2009.

“2009 was a pivotal year for Devon as we began repositioning the company to focus entirely on our high-return, North American onshore natural gas and oil portfolio,” commented J. Larry Nichols, chairman and chief executive officer. “We grew North American onshore production by more than six percent in 2009 and replaced more than twice our production with the drill bit at very attractive costs. We expect to receive after-tax proceeds of $4.5 billion to $7.5 billion as we divest our offshore and international properties this year. This will further strengthen our rock-solid balance sheet and enable us to accelerate growth across our U.S. and Canadian asset base.”

In accordance with accounting standards, Devon’s year-end reserve reporting pertains to the company’s continuing operations, which include its Gulf of Mexico properties. Following is a discussion of proved reserves pertaining only to Devon’s North American onshore assets.

Devon increased North American onshore estimated proved reserves by 20 percent to a record 2,641 million oil-equivalent barrels (Boe) at December 31, 2009. The company added 669 million Boe to its North American onshore proved reserves from all sources. Costs incurred applicable to North American onshore properties were $3.3 billion.

Successful drilling (extensions, discoveries and performance revisions) accounted for 492 million Boe of North American onshore proved reserve additions. The company invested $3.2 billion of associated drill-bit capital during the year. Revisions related to changes in oil, natural gas and natural gas liquids prices increased 2009 North American onshore proved reserves by 176 million Boe.

North American onshore oil and gas production increased more than six percent to 220 million Boe in 2009. The reserve life index (proved reserves divided by annual production) for the North American onshore properties is approximately 12 years.

Proved developed reserves of 1,869 million Boe at December 31, 2009, represented 71 percent of total North American onshore proved reserves. Proved undeveloped reserves were 29 percent of the total. Year-end North American onshore proved reserves included 653 million barrels of crude oil, 9.4 trillion cubic feet of natural gas and 419 million barrels of natural gas liquids.

Related Links: IBISWorld industry reports

Oil Drilling & Gas Extraction in the U.S.

Global Oil and Gas Exploration and Production

Petroleum Refining in the U.S.

Rail Transportation in the U.S.

Natural Gas Distribution in the U.S.

Study Show Global Companies Still Failing to Report Strategies and Potential Impacts From Climate Change

 Investors Call on SEC to Take Steps to Improve Company Disclosure

Climate change-related disclosure continues to be weak or altogether nonexistent in SEC filings of global companies with the most at stake in preparing for a low-carbon global economy, according to two major studies released today by Ceres, Environmental Defense Fund (EDF) and the Center for Energy and Environmental Security (CEES).

The reports’ findings highlight the need for the Securities and Exchange Commission (SEC) to respond to repeated investor requests for formal guidance on climate-related disclosure companies should be providing in securities filings.
“These findings are a clarion call for quick SEC action to require better climate risk disclosure from publicly-traded companies,” said Mindy Lubber, president of Ceres and director of the Investor Network on Climate Risk.

“Climate change is a bottom line issue and investors have a right to know which companies are best positioned for the emerging clean energy global economy.”
“Corporate climate disclosure falls far short of what CalPERS and other investors need to carry out their fiduciary duties,” added Anne Stausboll, chief executive officer of the California Public Employees’ Retirement System (CalPERS), the nation’s largest public pension fund and one of 18 investors that petitioned the SEC in fall 2007 to issue climate disclosure guidance.

“We call on the SEC to ensure that information regarding climate change effects, including regulatory and physical impacts, are accessible and delivered to investors.”

The two new studies – an in-depth look at SEC filings in 2008 as well as a multi-year longitudinal study – show companies are seriously deficient in meeting the needs of investors:

 The study found overall limited disclosure: 59 of the 100 companies made no mention of their greenhouse gas emissions or public position on climate change; 28 had no discussion of climate-related risks they face; and 52 failed to disclose actions and strategies for addressing climate-related business challenges. Even more telling, the very best disclosure for any of the 100 companies could only be described as “fair,” and only a handful of companies achieved this ranking.

Reclaiming Transparency in a Changing Climate by CEES, Ceres and EDF reviews over 6,000 SEC filings by S&P 500 companies from 1995 to 2008. While the study finds some modest improvement in climate risk disclosure since 1995, in 2008 75% of annual reports filed by S&P 500 corporations failed to even mention climate change and only 5% articulated a strategy for managing climate-related risks. Available at www.ceres.org

Climate Risk Disclosure in SEC Filings finds that while some climate related disclosure was common in the electric power, coal and oil & gas industries, most filings in these sectors lacked the level of detail that investors require. Many companies in the insurance and transportation sectors failed to provide any disclosure on climate-related risks and opportunities whatsoever.

“While disclosure among companies with high exposure to climate risk is increasing incrementally, the vast majority of companies in this study have still not quantified for investors key impacts to their business. Companies in certain industries like utilities have disclosed qualitative information on regulatory risks related to climate change, but very few of the 100 companies studied disclosed the physical risks, business risks, and litigation risks they face,” said Beth Young, senior research associate at The Corporate Library.

“Transparency and accountability are the hallmarks of a fair marketplace,” said Fred Krupp, president of the Environmental Defense Fund. “As the nation responds to the challenges of global warming, investors have a right to know which businesses are forging innovative solutions for the Twenty-First Century and which are lagging behind. The Securities and Exchange Commission must do its part to reclaim a fair marketplace that protects the interests of all investors from Wall Street to Main Street.”

Reclaiming Transparency in a Changing Climate finds a troubling pattern of silence on climate-change-related issues in filings across major sectors of the economy.

“To effectively build the new energy economy, investors need to know who’s planning for the future and who isn’t,” said Kevin Doran, co-author of the report. “Investors should not have to guess at the meaning of corporate silence.” Based on review of over 6,000 10-K filings spanning more than a dozen years, the report finds:

“Despite the clear imperative for prudent oversight, the SEC has failed to protect investors from enduring inadequacies in corporate disclosure concerning the material risks and opportunities posed by climate change.”

The study assessed climate risk disclosure for three broad categories using the Global Framework for Climate Risk Disclosure as a guide. The categories studied include:

(1) emissions and climate change position
(2) risk assessment
(3) actions to address climate risks and opportunities.

Specific key findings for the five sectors studied include:

Electric Utilities: Disclosure was widespread but minimal. None of the 26 companies studied achieved a “Fair” rating on disclosure of emissions and climate change position, only 3 out of 26 companies (12%) ranked “Fair” on climate risk assessment, and only 2 out of 26 companies (8%) provided “Fair” disclosure of actions to address climate change. Nevertheless, the electric power sector ranked higher than the other sectors and had three of the highest disclosing companies in the study — AES, Xcel, and PG&E.

Coal: All six coal companies surveyed included some disclosure of climate change issues in their 10-K filings, though only one achieved a “Fair” score in any of the three categories analyzed. Coal companies’ strongest disclosure was in the area of risk assessment; five of the companies provided disclosure in this category that was rated “Limited” or “Fair.” Rio Tinto provided the best disclosure, including valuable information on emissions, while Yanzhou Coal Mining Co. performed the worst overall.

Oil and Gas: The majority of the 23 companies studied provided some disclosure on climate risk assessment, but disclosure was weak with none ranking “Fair” and 22 out of 23 (96%) scored as “Limited” or “Poor.” Twelve out of 23 companies (52%) provided no disclosure on actions to address climate change, while 17 out of 23 companies (74%) disclosed no information on their emissions or climate change position. Apache, Exxon Mobil and Anadarko were noted for particularly weak overall disclosure, while Shell scored best across the board.

Transportation: Only 5 of 19 (26%) disclosed their emissions or their climate change position, and none were ranked as “Fair” for this disclosure. General Motors was the only company to provide information on past emissions from its operations, while not a single company disclosed emissions associated with vehicle use. More companies provided disclosure on climate risk and actions to address climate change; however, the disclosure was weak with only 3 companies scoring “Fair” on climate risk assessment and 2 scoring “Fair” on their actions to address climate risks. Honda, Daimler and General Motors scored the highest overall.

Insurance: Although prudent risk assessment is the basis for a viable insurance industry, the 27 companies studied in this sector provided the least disclosure compared to other sectors. Eighteen (67%) had no mention of climate change or related risks anywhere in their SEC filings; 24 out of 27 companies (89%) omitted disclosure on actions to address climate change, despite the wide range of opportunities for new, climate-related insurance products. The handful of companies that did provide more informative disclosure — Swiss Re, Munich Re and Zurich Financial — were all non-U.S. companies.

The Corporate Library report concludes that, despite the clarity of climate science and the host of policies being enacted to combat global warming’s ill effects, climate-related disclosure in SEC filings still falls short.

Furthermore, climate risk disclosure in SEC filings is insufficient to meet investors’ needs largely because the SEC has failed to take actions to highlight its importance. Although pressure from investors has clearly had some effect upon companies’ disclosure practices, companies are unlikely to comprehensively disclose climate risks and opportunities in SEC filings in the absence of clear guidance from the SEC.