In the previous article, I presented my choices for articles that almost made my Top 10 Energy Stories of 2013. In the next two articles I will present my choices for the Top 10. The rankings are mostly in no particular order.
6. The year in coal
The US coal industry has been in decline for several years. The primary factors behind the decline are competition from cheaper and cleaner natural gas, and increasingly stringent government regulations. This year the EPA published draft regulations for new coal-fired power plants that will likely be economically impossible to meet.
For years the coal industry has suggested that economical carbon capture and storage technologies would come along shortly to save the day. But this year the Norwegian government abandoned support for a project that was supposed to demonstrate carbon capture and storage on commercial scale.
US coal producers have been battered as a result. Leading coal producers Peabody Energy Corporation (NYSE: BTU) and Arch Coal Inc (NYSE: ACI) saw their share prices decline by another 30 percent and 40 percent, respectively, in 2013. This was on top of steep declines in 2011 and 2012 that have seen the total market capitalizations of BTU and ACI decline by 71 percent and 87 percent over the previous three years.
No country in the world has decreased coal consumption as much in recent years as has the US. This explains the declining fortunes of coal companies with significant operations in the US. But no country has increased coal consumption as much as China. In fact, were it not for China, global consumption of coal would have decreased over the past five years. Instead, the world continues to set new records for coal consumption.
The US has 28 percent of the world’s coal reserves — the largest share of any country. Given declining US consumption, US coal producers have stepped up exports, and are seeking to expand coal export capacity from the Pacific Northwest to tap into Asia’s growing consumption.
However, there are many obstacles in place, both domestically and internationally. Domestically, environmentalists will pull out all the stops in trying to prevent this coal from being exported. Internationally, Southeast Asia is a very competitive market given the proximity of major coal exporters Australia and Indonesia. Australia is the world’s top coal exporter, with nearly 90 percent of its total exports destined for Japan, China or South Korea.
7. Iran makes a deal
Iran reached an agreement with world leaders to limit its nuclear program in exchange for lighter economic sanctions. The deal freezes or reverses progress at Iran’s major nuclear facilities, halts the installation of new centrifuges used to enrich uranium, and caps the amount and type of enriched uranium that Iran is allowed to produce. In return, Iran will get $4.2 billion in frozen overseas assets back, and sanctions reductions worth about $1.5 billion. The White House reported that $4.2 billion from new crude oil sales “will be allowed to be transferred in installments if, and as, Iran fulfills its commitments.”
In the wake of this deal, some pundits speculated that Iran’s nuclear deal could push oil prices down and threaten the US shale oil boom. But the oil markets don’t operate in a vacuum. What Iran does will impact what Saudi Arabia does, and as each of those OPEC members makes its moves the developing world will continue to increase its demand for oil. Thus, while this deal will increase the amount of available exports, there are supply and demand factors (e.g., OPEC cuts and increasing demand in developing countries) that can easily offset the amount of oil Iran can add to the market. Saudi Arabia will ensure that those supplies aren’t a net addition to the market. Rather, any signals that Iran is ready to cooperate with the world community may take some of the fear premium out of the price of oil.
8. US carbon emissions plummet
The Energy Information Administration (EIA) confirmed what the BP Statistical Review first noted, that US carbon dioxide emissions fell by nearly 4 percent in 2012. The IEA reported that US carbon dioxide emissions fell to the lowest level since 1990, even as global carbon dioxide emissions hit a new high in 2012. The US EPA released a report stating that US carbon dioxide emissions are down 7% since 2005. The primary reason for the decline has been utilities switching from coal to natural gas, which produces fewer carbon dioxide emissions per unit of energy produced. However, there are signs that some utilities are switching back with the recovery in natural gas prices, and many believe that the ongoing drop in US carbon emissions will soon reverse direction.
9. Opening the Arctic
The year opened with one of Shell’s two Arctic drilling rigs breaking free from a tow ship and running aground off the coast of Alaska. Shell sent the two Arctic drilling rigs to Asia for extensive repairs. This event prompted more calls for restrictions in opening up the Arctic to oil exploration. Shell wants to try again in 2014, but Senate Democrats are asking for a delay on further oil exploration in the Arctic.
Nevertheless, oil companies rushed to the north to explore for oil. Norway awarded 24 oil and gas exploration licences to 29 companies, mostly in the Arctic Barents Sea. The licenses were scooped up by international majors like Royal Dutch Shell, BP, ConocoPhillips, Total and Statoil, which the Norwegian government hopes will revive Norway’s falling oil production.
Other Arctic nations are also pushing forward with plans for oil exploration. Russia has aggressively defended its interests there, seizing a Greenpeace ship and detaining its crew after the group attempted to interfere with Russia’s Arctic drilling.
10. A Bad Year for Cleantech VCs
Over the past few years venture capitalists (VCs) have made some very aggressive bets on cleantech. Many of these VCs had made fortunes in the Silicon Valley computer industry, and were confident that a combination of Silicon Valley genius and Moore’s Law quickly lowering cost curves would be the key to their success. Firms like Kleiner Perkins and Khosla Ventures bet big that cleantech would be the next huge wave.
The problem with that is the computer industry and the energy industry are apples and oranges. A VC may be able to afford to fund 50 guys working out of a garage for less money than it takes to build 1 advanced biofuel demonstration plant. As Vinod Khosla is found of saying, VC has lots of misses and a few big hits. But when you are dealing with the energy business, those misses can add up to hundreds of millions to billions of dollars, and sooner or later you start to run out of other people’s money.
The decision to invest in cleantech has been cited as the reason behind Kleiner Perkins’ well-documented fall from grace. While the losses suffered by Kleiner Perkins aren’t public record to my knowledge, some of Vinod Khosla’s are because they involve companies that he took public.
In 2011, Khosla took public Amyris (NASDAQ: AMRS), Gevo (NASDAQ: GEVO), and KiOR (NASDAQ: KIOR). Each of these companies started out trading higher from their IPO, with Amyris gaining more than 90 percent at one point. But the challenges of producing fuels from biomass began to mount, and investors realized that this business is capital intensive. Investor enthusiasm for these companies dissipated as production expectations failed to be met.
Since their respective IPOs, Amyris, Gevo, and KiOR are down 79 percent, 92 percent, and 89 percent. KiOR’s steepest declines took place this year after the company failed to meet production expectations, with the company falling 75 percent in 2013 and warning of possible insolvency if they fail to get additional funding. Investors in just these three companies have seen the combined market capitalizations fall by over $3 billion. With a large ownership share in each company, Vinod Khosla, Khosla Ventures, and his associated funds have undoubtedly suffered enormous losses.
There were a few bright spots in the sector. Notably, Tesla Motors (NASDAQ: TSLA) saw its share price rise by 470 percent between January and October, before recently pulling back to a year-to-date gain of 324 percent. The company’s Model S sedan received a 5-star rating for safety overall and in every subcategory by the National Highway Traffic Safety Administration (NHTSA). This represents the highest designation given by NHTSA. Tesla also beat Wall Street expectations in recording two profitable quarters, aided by the sale of zero emission vehicle tax credits. Finally, the company paid back government loans earlier, silencing many naysayers who expected them to default as fellow electric car maker Fisker Automotive had done.
I will have the rest of the Top 10 out early next week.