Brief Outlook to American Energy Industry

Gullen emphazies that the biggest challenge to energy sector reform is the political apparatus. Dr. Gullen talked to TURKOFAMERICA about energy policy, energy investment opportunities and the challenges and changes in energy sector reforms.

Could you tell us about yourself?
I am an energy economist with degrees in economics from Bosphorus University (B.S., 1990) and Boston College (Ph.D., 1996).  I studied oil markets for my dissertation and moved to Houston after graduation.  I have worked as an energy economist since 1996, first at the University of Houston and now at the University of Texas at Austin (although I am based in Houston).  The Center for Energy Economics is part of the Bureau of Economic Geology, the largest research unit within UT-Austin.  We focus on energy value chain economics, policy and regulation.  We undertake research relevant to industry participants and provide training.  As part of our work, I travelled to Nigeria, Angola, Ghana, India, Bangladesh and Mexico among others; and trained hundreds of energy sector professionals from about 40 countries.

What areas are you studying and focusing on?
Our workload depends on our project pipeline.  Currently, I am working on renewables portfolio standards in Texas and elsewhere in the U.S. (and the federal RPS proposal).  But over the last few years, I worked on many other projects.  Here are some examples: economics of CO2-EOR value chain in Texas, impact of cap-and-trade legislation on the Texas economy, performance of national oil companies, implementation challenges associated with Gas Master Plan in Nigeria, economics of developing a secondary gas market in Ghana, institutional challenges of newly established energy sector regulators around the world, and global coal industry trends and their impacts on South Asian economies.  

Can you little bit tell us about the electricity market design in the US and how will impact on community’s life?
I studied electricity markets in many jurisdictions but I know the Texas electricity market the best.  The restructuring law in Texas passed in 1999 (Guide to Electric Power in Texas we produced was used as a resource during legislative deliberations); and the competitive retail market started in 2002.  We have produced reports on its progress. 

Texas has one of the most successful competitive electricity markets in the world.  There are many reasons for this success but one is central: the legislation that restructured the market was developed with input from all key stakeholders.  As a result, it was much less of a political bill than those seen in other places. 

For example, in California, they wanted to have benefits of competition but did not want to make it easier to build generation or transmission and they continued to protect retail customers with price caps much lower than wholesale market prices.  This kind of political trickery does not pay: does anyone remember the governor of California at the time of energy crisis?  He used to have presidential ambitions.  Today, the California government is bankrupt.  Texas is a business friendly state with constrained government: our legislature meets only every other year and only for about five months.  Given that electricity is a political commodity, it helps to keep politicians away while the competitive market gets on its feet.  

In many countries, restructured markets fail or do not live up to their potential because tendency of politicians to interfere is high especially during election times; they often hold on to state utilities with their inherent inefficiencies; regulatory agencies that are supposed to be independent are not (often, governments control their budget); investment decisions are often too lucrative to be left to the market.  The Turkish electricity market suffers from similar shortcomings.

What are the energy investment opportunities in the U.S.? Which energy areas could be interesting for Turkish investors?
Clearly, the current administration and Congress are keen on spending large sums of money on renewables, smart grid (e.g., installing smart meters) and energy efficiency.  There are federal loan guarantees, production tax credits, investment tax credits, and some state incentives to support these technologies.  It is not clear that all of this support will help establish some of these technologies, but when there is “free” money from the government, companies are lining up to get their share. 

There is excitement about smart grid but most politicians will not support charging customers real time prices (e.g., $1 per kWh at peak summer afternoon hours and 8 cents per kWh at night when demand is very low); without this kind of pricing, we will not get the benefits of so called smart grids.  There is also some support (or at least promise of support) for carbon capture and sequestration.  Unfortunately, nuclear energy that could provide some of the cheapest electricity in the long-run with almost no emissions does not get any attention.  The industry has high capital costs upfront and needs to improve its fuel recycling practices; it could have benefited from some of the loan guarantees.  

What are the challenges and changes in energy sector reforms?
The biggest challenge to energy sector reform is the political apparatus.  I already discussed elsewhere some of the missing links between policy decisions and realities of the energy industry.  Technologies get supported because some politicians believe they will get investment in their jurisdiction so that their constituencies can get jobs and raise the tax base.

In such an environment, fundamental economics of energy projects and markets are often ignored.  Worse, with the policies they pass, politicians create a large number of unintended consequences: take the case of corn ethanol.  It uses too much land, water and fertilizers; as a result of support given to the industry in 2005 and 2007, depletion of water reservoirs in the Midwest has been alarming; fertilizer run-off to the Mississippi River created the largest dead zone in the Gulf of Mexico; and allocation of land to corn raised prices of corn, soy and other commodities, which raised feed costs for animal farmers, which all contributed to food cost inflation.  But, most importantly, corn ethanol is not more efficient than gasoline and it does not necessarily reduce emissions. 

The only reason to support corn ethanol is to support farming interests, and at that, not necessarily small farmers but large companies such as ADM; helping the country become energy independent is just empty rhetoric.  It is the same perverted system around the world.  Energy sectors around the world are always distorted by irrational, politically (interest group) driven policies that, on average, end up increasing the cost of energy to consumers.  There is large amount of rent associated with this very large industry; it is just too tempting for politicians to allow markets to decide who gets what portion of the rent. 

How do you see Turkey’s energy policy and how Turkey is strong in the Turkic world?
Like any other country with limited natural resources, Turkey needs to diversify its energy sources to increase reliability, reduce costs and minimize environmental impact.  In addition to importing oil and natural gas, exploration and development of local resources should be encouraged.  From that perspective, a modern petroleum law that recognizes Turkey’s current resource potential (limited) and includes fiscal terms that encourage risk taking investors to explore for oil and gas seems desirable.  As for imports, diversification of import sources (as large a number of producing countries as commercially feasible) is a general principle to follow.  From this perspective, I am not sure if Nabucco is a pipeline that makes commercial sense; the risk-reward equation has to make sense.  Could Nabucco be a bargaining chip between Europe and Russia? 

Renewable resources such as wind and solar, and geothermal should of course be pursued; but everyone needs to be realistic: at current technology and cost structure, these alternatives cannot provide the energy an industrialized, growing economy needs in a reliable manner.  Nuclear and coal should not be forgotten.  The challenge is to create a stable and transparent framework, mostly based on market signals, that can allow the development of energy projects where and when they make the most sense (balancing economics, environment and security dimensions).  Ad hoc decisions do not make policy.  

What is the future for the specialty of economic geology especially projects that you work with Bureau of Economic Geology?  
Carbon capture and sequestration is an important area; but also unconventional oil and gas resources.  The world has plenty of coal and is not going to stop using it just because Al Gore wants it to.  Look at how the cap and trade provisions in the Waxman Markey bill have been watered down to garner the support of representatives from coal states.  China, India, South Africa and Australia will continue to use coal; Kevin Rudd, who, like Obama, promised carbon regulation during his election campaign has postponed any such bill, having realized how much Australia depends on coal-fired generation and coal exports.  So, making carbon capture and storage in geologic formations for long periods of time technologically feasible and economically viable is a key challenge.

The world is not running out of oil and gas.  In fact, we are finding more all the time.  We just need to make sure that resources are economically and technologically recoverable.  Few years back, natural gas prices soared and everyone thought that the U.S. would need LNG imports to meet the rising demand in the face of declining production; new import facilities were built but then producers in the U.S. started producing unconventional natural gas resources such as shale gas from the Barnett Shale (an area heavily researched by BEG scientists).  Estimates for shale gas, tight gas, coal bed methane in the U.S. are huge; similarly for shale oil.  But, environmental regulations at the state and federal levels block most development.  There is plenty of conventional resources offshore but again environmental opposition is blocking development.  

There is also gas hydrates.  The resource base is immense: one estimate is 200,000 trillion cubic feet.  Just recently, there were major discoveries offshore Texas in the Gulf of Mexico (again BEG researchers are involved).  Japanese have successfully produced natural gas from hydrates in Canada but in small quantities.  The technology needs to be scaled up; but the potential is there.

After climate and energy, what do you think is the most important environmental issue facing the nation?  
Climate change is not ranked high in my list of issues; in fact it is pretty far down.  Millions of people dying today in developing countries is a much more significant problem than the uncertain cost moving people inland in distant future if sea level rises enough.  Depending on whose statistics one looks at, there are anywhere from a billion to billion and a half people without access to electricity in the world.  Many more have limited, unreliable service.  Not to mention the lack of access to modern fuels such as propane (or LPG).  Millions die in developing countries (especially in Africa and South Asia) due to maladies that could be prevented with development based on reliable energy.  Switching to propane cookers from charcoal could save many who die from lung diseases.  Electric pumps could help clean water and prevent deaths due to water borne illnesses.  It is unfortunate that the developed world is trying to dictate developing countries what kind of energy they can use due to climate change concerns.  Some call this eco imperialism; sounds pretty fitting to me.