We caught up with Charley Maxwell, the life-long oil industry analyst viewed by Barrons’ magazine as their energy guru, and asked him for a few minutes of his time. He shared that and much more with Steve Andrews.
ASPO: So here’s the deal—we’ll make you the Energy Czar tomorrow. Your focus is on the year 2015. Where would you put your investments, either private or public incentives? Where would you put your chips? Where would you double down?
Maxwell: We’re not going to have to help the oil industry. They already have all the help they need. I wouldn’t take away what they have but I wouldn’t add to it.
It’s a little difficult to answer because there are two different kinds of money we’re talking about: what will industry spend and where should government spend? Because if the industry is going to spend money on shale gas, which it is, then the government doesn’t have to spend any money there. Shale gas is a natural answer to the near-term energy problem; it’s one of the big answers we’ve got.
In effect, by 2015 we’ve got five fuels that we’re talking about here: oil, gas, coal, and nuclear. And the fifth one we’ll call a “fuel,” which is energy efficiency and conservation. It acts like a fuel. It gives you more work done at lower energy volumes. So in that situation you have really got Hubbert’s peak operating to keep you from using the oil alternative. The obvious easy answer politically is to import more oil, but there’s not going to be any place to import more oil from. And the costs are going to be higher and higher, so we’re stalled out on that one. But you go on with oil; you don’t stomp on oil because that would increase the size of your problem immensely, very quickly, and without any reasonable basis. You just can’t emphasize it because it isn’t a solution; it’s just a maintenance story.
So then you go over to nuclear and you don’t have the time. You can try to summon up anything you want but if you don’t get it for 10 years…the vulnerability is going to be right here between 2011 and 2021. That decade is going to, I think, be the maximum vulnerability; that’s when we’re going to take it on the chin. So nuclear can’t get there in time. We should be doing something on nuclear for days ahead, but it won’t help us during the upcoming decade unless we started it today and we aren’t going to start it today because the public is not yet ready for it. One wag said we should have a national referendum on nuclear, and everyone should be required to sign their name and give their street address and telephone number, so that if you vote no you have to turn off your lights at 6 p.m. and if you vote yes you get to keep them on until midnight. Then you revisit the referendum a year later and see how well you do second time around. So we can’t turn to nuclear in that time frame, though of course we have to turn to nuclear eventually.
So oil flat, nuclear nothing new, coal nothing new until we break through on both sequestration costs and clean-burning coal methodology. So until you get those two changes, we can’t do anything with coal, which leaves you with the last two—natural gas and energy efficiency.
Shale gas is going to be huge. Right now, shale gas is probably 15% of US production, though it’s thought to be just at 8% or 9%–the figures are behind the reality. If you are a traditional up-and-down driller and that’s all you know, you’re probably finished because for the next two or three years it doesn’t look we’re going to have gas prices high enough to keep you solvent. So a lot of drillers are going to either change over to shale or they aren’t going to drill. The average today is around $6.50 [per mmcf] for ma- and pa-type vertical drilling, which is about 40% of the total gas industry. The incremental money is all going to flow into shale gas drilling and that’s where all the growth will come from, though the regular drilling will still be bigger for a while. And the growth is going to be huge. Exxon, BP and the others are not pursuing the shale gas option, so you’re talking about a whole new group of companies: XTO, Chesapeake [Mr. Maxwell is a member of their board], Devon, Southwest Gas, Apache – that’s the kind of mid-size independent that you’re talking about. The independents are substantially under-costing the majors on natural gas. The majors are better suited to the projects like the $17 billion Qatar project or the Sakhalin projects where no independent can compete with them.
That said, the first thing you have to struggle with is that 99% of transportation fuel comes from oil. In the industrial sector, you have a nice mix, but not in the transportation sector. So how do we make the change? There are two ways to do it. You use batteries that are charged by utilities—mostly using coal, nuclear and natural gas. And the second one is using compressed natural gas [CNG]. At first, the players will be fleet operators. Then after that the government will force GM and Chrysler to make cars for individual drivers that use natural gas, and Honda will volunteer since they already have a CNG car. And I think Toyota will come in to be competitive and to show how green they are. I think there will be a lively business developing. For the big truck fleets that represent a lot of volume, you’ll see 40 stations installed on the route from Los Angeles and New York and Seattle and New York. So you’ll have the two choices—batteries and CNG. And CNG will use up a lot of that extra natural gas.
Then on the conservation side, to give you one example, we think that the savings from co-generation are going to be greater than the total of wind and solar, at a quarter of the cost. So co-generation is an area I would emphasize. But there are lots of other areas: insulation of houses, new types of appliances—like a breakthrough 43-inch screen that can use just 35 watts of electricity, vs. 350-400 watts for the standard plasma or LCD screen. We’re going to see military applications that will be self-sustained for long periods of time. We’re going to see a lot of this. And when you don’t use a barrel you don’t just save that one barrel, you save about 1.4 barrels because you don’t have either to use the barrel or process it and transport it, store it and so on. And it will be the same with the smart grid which will save huge amounts of electricity.
So, if I were the Energy Czar, I would put the money into subsidies, efficiencies and conservation, plus money in the R&D that are required to bring them about. I don’t think you have to put money into shale gas because it will attract a lot of money.
We’re all very interested in these subjects for long-term reasons. I do find that there is a huge amount of misinformation out there. People have no idea what the problems are, and that we have to find our way out of this morass by solving natural gas and conservation problems because we’re not going to allow ourselves the luxury of doing it with nuclear.
ASPO-USA: I asked about 2015, so I’ll stick with that, because your answer would probably be a lot different for 2030 and 2050 and 2100.
Maxwell: The answers would be different the farther out you go. Let’s look at heating oil. The burning of heating oil is the lowest possible category of use for a complex hydrocarbon. That we do it, to the tune of 2.5 million barrels a day during the winter, is a very harsh judgment on us; we act as if we have all the oil in the world and it is just going to go on forever. A higher use is to create work in engines, or to use ground-source heat pumps that cut heating use by over 50% compared to what we use now.
ASPO-USA: So a lot of your money would be spent on R&D to achieve breakthroughs and to make them cheaper in order to stimulate massive demand.
Maxwell: Yes. We’re living this nightmare, and these steps would help move us forward.