Howard Dean, Ed Gillespie agree: Energy policy needed

According to the Ernst & Young Business Risk Report 2010, the country's uncertain energy policy is the No. 1 risk to the oil and gas industry. Actually, the move wasn't a monumental one as this risk ranked No. 2 in the same survey last year, topped only by "access to reserves: political constraints and competition for proven reserves."

I see a theme here.

Ernst & Young points to the "vague outcome" of the Copenhagen climate conference in December 2009 as one factor. Yet another: the energy policy decisions further complicated by the tragic Gulf of Mexico oil spill.

Political factors that might limit or prevent access to reserves and an uncertain energy policy that hinders the ability of oil and gas companies to plan, invest, and respond to the laws of supply and demand have a tight grip around the industry that provides the country with its energy needs.

At Ernst & Young's Energy Executive Insight Session recently, I had the opportunity to hear a debate between Howard Dean, Former Chairman of the Democratic National Committee, and Ed Gillespie, Former Chairman of the Republican National Committee.

As politicians do, each stated their case for victory in the coming elections. However, both agreed on one thing: the need for a cohesive and comprehensive energy policy.

Governor Dean believes the country hasn't had an effective energy policy in 20 years, partly because the topic isn't well understood in Washington, partly because the industry itself isn't unified.

Different constituencies – wildcatters, super majors, enhanced recovery companies – are working against each other instead of together. Dean noted the coal industry as one example. "The biggest opposition of the oil and gas industry outside of the government is the coal industry," said Dean, referring specifically to shale development in the unconventional resources space.

Will natural gas be a bridge fuel because of its clean-burning properties and plentiful supply? Gillespie, who does work with the Natural Gas Alliance, thinks so. "Natural gas is looming in a big way in the energy debate," he said. "It's inevitable we'll see more reliance on natural gas – maybe in our autos," he continued.

While Dean disagrees about natural gas in the automobile industry – he feels electricity has leapfrogged the fuel in that regard – broadly speaking, he sees the US as having the ability to use all forms of energy. The question is in what order and how do we do it? The technology is there, but the marketplace is distorted. This is where an energy policy is needed.

"No matter what happens with the election, the parties will have to decide they WANT to pass something," commented Dean.

Can the energy industry to come together and write an energy plan?

Chesapeake due for 'Major' upgrade

The face of the energy industry is changing. It is cyclical. It has happened before, and it will happen again. Certain independent exploration and production companies didn't survive the credit crisis.

Those names are gone from the radar; that's one change. Another might be the way we think about some of the large independents.

"Never stop thinking," offered Kenneth A. Hersh, CEO of NGP Energy Capital Management, at IPAA’s Private Capital Conference in Houston on Thursday.

Hersh reminded the crowd that the oil and gas industry is not immune to the conditions and phases that other industries have gone through, and that now is a time to maintain discipline, push forward, and perhaps change the way we perceive the industry.

The best example of the changing times, he said, is the changing of the 'majors,' and perhaps even, the 'super-majors.' ExxonMobil is a non-disputed supermajor. Ten years ago the company had an enterprise value of roughly $50 billion spread throughout the world.

Today, while companies like Chesapeake, Devon, and Apache are all, in fact, independents, they really should be considered majors, he said. Each carries an enterprise value of over $40 billion, and inflation and other generational considerations aside, the companies are certainly in the league as the Exxon of a decade ago -- bigger when you consider the scope of the companies in North America alone.

What do you think? Is it time for the industry to lump these companies in with the Exxons and Chevrons of the world?

With the price of oil creeping upwards, are we in danger of a new recession?

With the price of oil creeping back up, folks in the energy patch are beginning to breathe cautious sighs of relief. While higher costs per barrel generally have positive effects on the industry, how high is too high?

New research by Wall Street energy business analysts, Douglas-Westwood LLC, suggests that when oil consumption costs exceed 4% of US GDP, recession almost always occurs. And in general, a sustained rise in the oil price of 50% or more has always been followed by a recession.

"In every case when oil consumption breeched 4% of GDP, the US suffered a recession and indeed, the current US recession began within two months of oil hitting the 4% threshold, most recently, when oil reached $80 a barrel," said Steven Kopits, managing director at Douglas-Westwood.

Another factor is the maximum rate of adjustment for the economy, which appears to be about 0.8% of GDP per year. That is, the economy cannot shed oil consumption instantaneously; society needs time to adjust. When the economy is adjusting at full speed, it will tend to struggle. Adjustment will tend to be characterized by recession, inflation or generally low GDP growth.

"Our research suggests that a return to $80 oil could kill the present recovery and trigger a new recession – today's oil prices means we are again teetering on the edge," he added.

While last year's $140/barrel oil proved fruitful for the industry, the benefits were short-lived and companies were left struggling in the depths of the recession. An increase in the price of oil is needed to get companies and the economy back on track, but at what price do we risk a new recession?