November 28, 2021 § Leave a comment

Perhaps the question ought to be how well we are being allowed to manage the transition.  When President Biden attempted to put the arm on OPEC+ (Organization of Petroleum Exporting Countries plus Russia) to increase production to dampen oil prices, he was accused in some progressive circles of acting in opposition to his avowed climate change goals.  No matter that in a country beset by inflationary pressures, any relief for the consumer ought to be welcome.  The oil market is elastic.  Only increased supply, at constant demand, will reduce prices.  Unable to persuade OPEC+, President Biden took the unprecedented step of coordinating with several net importing nations in releasing oil from strategic reserves.  The US will release 50 million barrels, only about 8% of the reserve.  This too was criticized from many angles. 

The one criticism I found most interesting was that US refineries would not want the stuff because the release was from the more sour (high sulfur) crude containments.  The argument was that they would need hydrogen for desulfurizing (true) and that rising natural gas prices made the hydrogen (mostly derived from natural gas) prohibitive (not so true).  The US may be the one country not having a natural gas supply issue, provided producers choose to respond to the relatively high prices.  One factor in favor of so doing is that shale gas wells have a short payback period due to high decline rates (rate of drop in production).  Consequently, an investment in shale gas is not a bet on the long term prospects of the commodity.

Also, the LNG business will continue to grow to feed Europe, Japan, China, India, to name a few dependent on it.  The relative lack of it is why the prices are at unprecedented highs in those countries.  In other words, LNG will be an important customer for decades for new natural gas.  Another parenthetical point on what US refineries want: they do not want US shale oil because it is too light and too sweet(!), and they have expensive kit going idle if all they refine is shale oil.  This is one reason that the US imports 4 million barrels a day of heavy crude from Canada (and only 0.4 million from the Saudis).  The SPR release oil will blend in just fine.

The moral of this particular episode is that while long term carbon mitigation goals must be set, if they cause significant privation in the short term, the current public support for carbon mitigation could dwindle, making it harder for those goals to be bolstered with necessary policies.  Take the current explosion in natural gas prices worldwide, but mostly in the net importing nations.  European governments are scrambling to protect the public from crippling heating bills this winter.  In this scenario, investors shunning fossil fuels do not serve the common good.  The argument is made that investors are leery of taking positions in areas that are in decline.  Natural gas may be the one fossil fuel that will see growth in the short to medium term, and eventually take longer to decline than oil.  In part this is because over 90% of essential backup of renewables comes from natural gas.  As noted in a previous blog, this will continue until we solve the storage problem at scale.

An important consideration for investors is the payback period, and to a degree the allowable amortization period.  The latter is a policy matter for governments.  The US has a long-standing policy favorable to producers (essentially a subsidy), which is debatable in its merit because of the broad swath.  But were it to be used in targeted areas, the use of public funds could be supportable.  In any case, some mechanism must be found to incentivize investment in the bridging areas.  This applies also to vehicles.  We are a very long way from electric vehicles being in the majority.  The auto industry ought to continue to invest in innovation in the efficiency of IC engine based vehicles.

The concept of bridging to a greater goal must not only be tolerated, but ought to be considered essential.  Renewables have intermittencies, which will require fossil fuels to fill the gaps, for at least a decade and change. Today we are faced with the inescapable prospect that additional solar or wind places incremental demand on natural gas. This is an uncomfortable truth that must be faced until cost effective sustainable alternatives take a hold.

Vikram Rao

November 28, 2021



November 14, 2021 § Leave a comment

The family in the title is, of course, the scientific community.  As reported in many places, including the New York Times, Moderna and the National Institutes of Health (NIH) are feuding regarding patent rights and inventorship of the key patent applications covering the Moderna version of the mRNA vaccine for Covid 19.

Lightly discussed in the press, but mentioned as a further point of contention, is that the NIH has a seminal patent for enabling the action of mRNA based vaccines.  The Covid 19 virus (SARS-CoV-2) has a structure resembling a crown, hence the name corona virus (see figure).  Note the spikes jutting out beyond the main body. This is composed of the spike protein. When the mRNA is introduced into the body it produces the spike protein, mostly in the liver.  However, merely being produced is not enough, because what matters to the immune system is not just the sequence of the protein, but the shape. Left to their own devices the produced proteins wouldn’t fold into the signature spike shape, so tricks are needed to nudge them in the right direction.

SARS-CoV-2 transmission electron microscopy image, courtesy NIAID-RML

To achieve this, NIH and university collaborators arrived at a method of covalently stabilizing the produced protein using a divalent sulfide bond.  The resulting “closed structure” is sufficiently like the SARS-CoV-2 spike protein as to stimulate the production of antibodies providing immunity from the disease.   A more scientific discourse on what was done is in a recent Nature paper.

The technique described above applies to all corona viruses.  The patent US 10,960,070, which issued just in March this year, covers all viruses with spike proteins.  The importance of this is twofold.  Firstly, any variant of the mRNA approach for addressing Covid 19 appears to need this technology to be effective.  More on that later.  Secondly, one concern continues to be that more corona virus mediated diseases are likely, particularly if the animal to human transmission with SARS originally from civets in 2002, MERS reportedly from camels in 2012, and now Covid 19, likely from bats, broadens to other species.  Were this to happen, it appears we have the technology to quickly produce mRNA vaccines to combat them.  Even this time around, the time scale of vaccine production was unprecedentedly short.

Now, back to the main dispute between Moderna and the NIH.  Facts not in dispute are that the NIH funded Moderna to the tune of USD 1.4 billion (yes with a b) to develop the vaccine.  This was a company that had never commercialized any product previously. NIH also provided experienced collaborators.  Three of them, Drs. Graham, McLellan, and Corbett, were inventors on the technique described above, and Graham was the lead inventor (in the eyes of the law all inventors are equal, but it is customary to have the largest contributor be named first; accordingly, the patent is referred to as the Graham patent).  Also, seemingly not in dispute is that US 10,960,070 is vital to the efficacy of any mRNA-based coronavirus vaccine.  Certainly, the creators of the other mRNA vaccine, Pfizer-BioNTech, licensed the patent.  Curiously, Moderna did not, and yet nobody is arguing that they are not using the technology in their vaccine technology.  My not very expert read of the claims in the patent is that the claims are strong and hard to work around.

If Moderna is using US 10,960,070 and not licensing it, why has the NIH not taken infringement action?  One explanation could be that the four-year collaboration certainly commenced prior to the March 2021 issuance of the patent, and until early this year, there was no certainty of issuance.  But it did issue.  Ordinarily, that would lead to some legal resolution.  Muddying matters is that NIH scientists collaborated and quite possibly the “background” technology, comprising the technique underlying the NIH patent was offered for non-exclusive use. This is normal in collaboration, but often includes “normal and customary” royalties in the event of commercialization. Perhaps it did not in this case. 

Now to the essence of the dispute.  NIH claims that the three scientists mentioned above ought to be named inventors.  The Moderna spokesperson says, “the company was legally bound to exclude the agency from the core application, because “only Moderna’s scientists designed” the vaccine”.  On the face of it the legal aspect is correct.  Being a collaborator is not sufficient.  Inventorship has the higher bar of direct contribution to at least one of the claims in the patent. This is a fact issue.

In context, the Times story states that the patent office “role is simply to determine whether a patent is warranted”.  While that is the case at this stage, if the validity of the patent is placed in dispute, inventorship is something that plays an important role.  Leaving out (provably) legitimate inventors can render the patent unenforceable, although the bar for proof is high. These days, the lowest cost means to challenge a patent is to appeal to a federal body through the Inter Parte Review (IPR) process.  Aside from being cheaper than conventional litigation, to date the IPR process has been substantially more challenge friendly than the courts.

Inventorship does not automatically grant ownership rights to the employers of the named inventors.  But it is usual for the patent to be co-owned in these cases, especially when both entities have invested in the discovery.  US 10,960,070, for example is assigned to NIH, Scripps, and Dartmouth.  Yet, the reporting has it owned by the NIH.  As is usual in these situations, there must be a side agreement on respective rights.  Absent that, each co-owner has the legal right to do what they want to with the property, which gets to be a mess. 

There is a hint in the reporting that part of the impetus for the NIH asserting co-ownership in the recent Moderna patent application is the desire to make it available to poorer countries.  If it did so by licensing, there is the risk of the licensee improperly executing, thus bringing disrepute to Moderna’s offering.  I have faced this in my career and always required safeguards, which would not be possible if Moderna was not directly involved in the licensing. The better resolution to this dispute is a royalty share rather than rights to license by the NIH, and an agreement for Moderna to make the vaccine available at lower cost to those poorer countries.  AstraZeneca is reputed to have done that.  When the Gates Foundation invested in CureVac (Germany) they made such a provision a condition.  The NIH ought to have done so at the outset.  In all fairness, the civilian bosses at the time may not have felt that way.  Now that horse has all but bolted*.

A feel-good story has turned into a horror show.  The poster child for public-private partnerships has become Exhibit 1 in the short course on how not to conduct collaborative innovation.

Vikram Rao

November 14, 2021

*”I drove my Chevy to the levee, and the levee was dry” from American Pie written and performed by Don McLean (1971)


November 7, 2021 § 3 Comments

A recent New York Times story cautiously lauds a Russian effort in Siberia to provide heat to a seaside community from a floating nuclear reactor.  Two concepts are in play here.  One, which is common to all forms of electricity production, is the use of the relatively low-grade heat of the working fluid following turbine operation for electricity.  In some cases, this is known as combined cycle.  The energy in the heat can often be nearly as much as that in the generated electricity. This part is not new.  The relatively new bit is that the reactor is a small one on a barge and could reasonably fall in the classification of small modular reactors.

Small modular reactors (SMR’s) have been around for about two decades, but none are in commercial operation.  My first encounter with these was about twenty years ago.  A couple of scientists from the Los Alamos National Laboratory came to visit me at Halliburton.  They claimed to have an SMR with about 30 MW output of electricity.  The key features were that they were safe from runaway by the very nature of the nuclear design and that the whole unit could be placed underground in a chamber.  The fuel rods would need to be replaced only every 5 years, with a future target of 10 years.  The location of the reactor made it relatively immune to terrorism.  This was necessary in part because the intent was to distribute them in communities.  The modularity would enable mass production.  And unlike conventional nuclear installations, everything would be built in central locations and subassemblies would merely be put tother on location.

I wanted to use the concept in heavy oil recovery in Canada.  Steam is conventionally generated on site by combusting natural gas and is essential for inducing mobility to the viscous oil underground.  The steam plant is a big CO2 generator and is in large measure responsible for the high carbon footprint of heavy oil.  In my concept, the lower grade steam after power generation from the SMR had ample sensible heat for use downhole.  The Los Alamos concept became the company Hyperion, but simply did not get off the ground for our use. 

Now several players have the joined the fray, including large ones like Toshiba and Westinghouse.  A big issue will be societal acceptance.  Not in my back yard (NIMBY) will be replaced by NNIMBY, with the first two words being No Nuclear.  Education on the safety of these compared to the old ones at Chernobyl and Three Mile Island will be key.  It will still be a struggle in some countries.  Germany painted itself into a corner by banning all nuclear after the Fukushima Daiichi tsunami disaster. I imagine the ultra-low probability of tsunamis in Germany was not a consideration, just the reported intransigence of the Green Party holding sway. In the NY Times story town residents bathing in hot water from the reactor complex do worry about the source.  The explanation of fluid contact-less heat exchangers appears to be winning the day.

Here is an irony regarding the phobia for water from such a source.  Iceland gets much of its day-to-day use energy from hot water from geothermal sources.  Folks soak in the geothermal pools there and all over California, Nevada and Wyoming. Medicinal properties are attributed. The source?  That giant nuclear reactor at the center of our earth. OK, to be fair, there is a heat exchanger in play.  The heat is conducted through the mantle and only then contacts a water source, which is then transported to the surface via faults in the rock.

The current crisis with unprecedented natural gas prices has people wishing for more nuclear, and bemoaning policies such as those in Germany.  But conventional nuclear is costly compared to solar and wind, especially after the augmentation and storage issues are resolved.  Curiously, US Secretary of Energy Granholm announced at the COP26 meeting that the US believes in small modular reactors.  She plans “to make sure they are less expensive (than conventional reactors)”.  I think that goal is more likely in greenfield situations like India, where some savings would be from not having a grid.  The greatest savings will be from mass manufacture of the sub-assemblies in central locations, with just final assembly on the site.  In traditional nuclear power generation capital represents 74% of the levelized cost (compared to 22% for natural gas).  SMR’s are intended to directly address this cost.

Governments ought to consider enabling multiple emplacements of SMR’s through financing and fast permitting, thus speeding the road to mass manufacture, and steepening the glide path to low costs.  The Indian government did this with LED lighting and now has some of the lowest cost devices in the world.

Vikram Rao

November 7, 2021


November 3, 2021 § 2 Comments

A recent story in the Economistpoints out that fossil fuel is not retreating from the world energy stage any time soon.  Decreasing, yes, but not going away.  This is certainly truer for natural gas than for oil.  But even oil has circumstantially made a reprise appearance due to a complex scenario which we will discuss below.

The world has rushed into renewables without adequately solving the issue of swings in output of solar and wind.  Over 90% of augmentation during slow intervals (rainy and windless periods) is with natural gas fired power.  The battery back up that we hear about is mostly for the 4 to 6 hours in evenings.  Even that almost doubles the cost of solar in some cases.  Storage and augmentation are badly lagging solar and wind installations.  Ironically, therefore, the more we install, the greater the demand for natural gas.  Not helping is that . . . . .

Natural gas prices are at unprecedented highs in most of the world other than the US.  Even in the US, they have doubled in the last few months.  In many parts of the world, including Europe and Asia, prices have been over USD 20 per MMBTU, and as high as USD 30 last week.  In Europe, in June they were USD 8 and a year ago they were USD 4.  This extraordinary surge is attributed to a combination of events, but all underpinned by one characteristic of gas: it is a regional commodity.  Pipelines do not cross oceans.  The only means of transoceanic supply is through Liquefied Natural Gas (LNG).  New LNG supply takes 5 years to go on stream, so it is not the means for a short-term remedy.  The process of liquefaction, transport and re-gas adds between USD 3 and 5 to the original cost.  In net importing nations, LNG will be the marginal cubic foot, so it will set the price, creating something of a windfall for the domestic gas producers.  Look for European gas (and oil) companies to report record profits.  Shell’s shift from oil to gas is looking brilliant.

Europe gets a little over 40% of its natural gas from Russia.  The mere announcement of an intent to increase supply from Russia caused a drop from USD 30 to USD 20 in days.  Then, news of a hiccup increased the price over USD 2 in a day.  This underlines the power wielded by Russia.  We have discussed the use of energy as a weapon of political will in this column in the past.  Putin is unlikely to let this opportunity pass, especially if the winter is colder than usual.

Another odd dynamic is in play in oil.  Much of the crude oil produced in the world has undesirable quantities of sulfur.  In the refining process this is removed using hydrogen.  Also, heavier oils require hydrogen to be “cracked” down to useful transportation fuels.  Over 95% of hydrogen is produced from processing natural gas.  High natural gas prices mean that light, sweet oil is suddenly prized even more than usual because it will not incur those added costs (by and large).  US shale produces such an oil.  Look for shale oil to be in short supply.  We used to think that when this happened, producers would quickly ramp up.  That was before the carnage of the last couple of years, during which small producers sold out to large ones.  Large companies are more measured in their response, and the carnage has reduced investment appetite.  The table is being set for USD 90 per barrel oil.  Two years ago, it was under USD 20.

At current prices gas, on an energy equivalency basis, is much more expensive than oil.  Using a rule of thumb, at USD 25 per MMBTU, gas is more than twice as expensive as oil, which is at about USD 80 per barrel.  I do not recollect ever seeing that in my 40 odd years in the energy business.  In many parts of the world, dual fired electricity generation capacity is using oil instead of gas, thus increasing oil demand. At a time when oil majors Shell and BP have announced strategically planned production decreases and US shale oil interests will be slow to respond unless prodded by the government.  Such prodding, while pragmatic and a plus for the balance of trade, will certainly not play in progressive circles. If this game can be played while still emphasizing carbon mitigation, the US could be positioned to be the swing producer in both oil and gas.  Until oil goes away. Slowly.  Being a swing producer has political heft.  Just look at Russia in the European gas scene.

Governments having been doing much to subsidize and otherwise drive the use of renewables.  They should now put an even greater emphasis on the development of sustainable storage and augmentation means.  Otherwise, they run the risk of a public losing faith in at least the renewable energy arrow in the carbon mitigation quiver.

Vikram Rao

November 2, 2021


September 10, 2021 § 1 Comment

Low-cost energy lifts all boats of economic prosperity. Or on the other end of the spectrum, high-cost energy threatens to sink them, especially if prices rise suddenly. Nowhere is the positive scenario more evident than in Iceland. An otherwise resource poor country, cheap energy has elevated it to the third highest gross domestic product in the world. Unlike Norway, a country at a similar latitude, almost all produce is domestically derived. Greenhouses enabled by natural hot water operate for much of the year.

Iceland has the good fortune to be sitting on the Mid Atlantic ridge between the North Atlantic and Eurasian plates. Surrounded by volcanoes, the earth stresses are such that most eruptions are through fissures, unlike those in Hawaii and other places with typical conical protrusions with violent eruptions. Furthermore, with abundant subsurface water and high thermal gradients (subsurface temperatures that rise faster than normal with depth), hot water rises in the faults and emerges on the surface as geysers, or mere hot water lakes.  This hot water supplies heat for 90% of the homes.  It also is used to produce electricity, although in that case the water is from wells drilled a couple of kilometers. I estimate their cost to produce to be well under 2 US cents per kWh. They charge industry 5 cents and domestic users pay 13 cents. Clearly, tariffs are involved. But this compares to Netherlands and Germany at nearly 30 cents for domestic users.

A recent New York Times story reports a different scenario for the rest of Europe (yes, Iceland is in Europe) in that rising natural gas prices in Europe are slowing the post-pandemic economic recovery.  Natural gas prices are reported to have risen to USD 18 per MMBTU.  The pre-Covid 19 figures used to roughly fall out as follows: the US at USD 3, Europe at USD 9 and Japan at USD 17. The US is still low at USD 5, but that is the highest in nearly a decade. Abundant shale gas has kept the price down, but that industry has been battered by the pandemic, so is probably slow to respond to the surge. Remember also that shale gas driven low energy cost was the single biggest factor for US recovery from the recession of 2009.

What we can expect

On natural gas price, in one word: volatility*.  The USD 18 per MMBTU reported today as the spot price for Europe is probably aberrant.  The price was a third of that a few months ago. Also, most utilities operate on long term contract pricing. The high spot price is almost certainly driven by liquefied natural gas (LNG) import prices.  Drought conditions in countries such as China have reduced hydroelectric output and required augmentation with LNG powered electricity. Parenthetically, yet more evidence of impact of climate change. Usually, the spot price is determined by the price of the last cubic foot of gas imported.  For Europe, that is LNG. The winners here are the Russians with pipeline supplied gas, if the contracts allow escalators.

Again, most LNG contracts are long term and pegged to the price of oil.  In the US, most (all?) are based on the Henry Hub spot natural gas price.  It is multiplied by 1.2 and liquefaction cost of USD 2.50 is added to it. Today at USD 5 prices, LNG would be at USD 8.50, a far cry from the spot price in Europe of USD 18.  And so it goes in the commodity trading market.

I would expect US shale gas drilling to pick up in response to the price.  The smaller players, who are fewer yet after bankruptcies last year, will respond. Now that so many properties are in the hands of the major oil companies, expect their response to be more measured.  In any case, I expect US prices to stabilize and there is no serious risk of prices rising to the point where coal has a resurgence. Unlike in the case of oil, all gas pricing is regional. LNG is the only means of transport between regions and it adds a cost of somewhere between USD 3 and 4 to the produced gas price.

The experts are predicting a colder than normal winter.  If that transpires in Europe, the proverbial Katie will have to bar the door on natural gas prices.

Vikram Rao

September 9, 2021

*Everybody look what’s goin’ down from “For What It’s Worth” by Buffalo Springfield (1967), written by Steven Stills.

Wildfires Are Not Just a West Coast Problem

July 27, 2021 § Leave a comment

The Bootleg Fire (New York Times, July 23, A11) is a public health concern for much of the country. While the devastation from burning property is local, the emissions can travel thousands of miles. These emissions primarily comprise particles of solid carbon (soot) coated with organic molecules. Particles under 2.5 microns in diameter (a micron is one millionth of a meter and a human hair is about 70 microns in diameter) are designated PM2.5 and are more toxic than the larger PM10. This is because they can penetrate deep into the lungs. Regulations worldwide focus on PM2.5.

Smaller particles travel further because they are lighter. The total concentration of particles distant from the fire will be lower than near the source. But these particles will largely be PM2.5, also known as fine particles. Even smaller particles, known as ultrafine or nanoparticles, are a subset of these, and are referred to by scientists as PM0.1, indicating particles smaller than 0.1 microns. Strong evidence points to these particles being even more toxic than the rest of the PM2.5. There are two reasons for that. One is that the size allows them to penetrate individual cells in the organs, carrying their toxic organic payload. The other is that these tiny particles are much more likely to grab toxins from the atmosphere than the larger ones. That makes them more virulent. And finally, these ultrafine particles travel even further from the site of the fires than the fine particles.

For any given size of particle from a wildfire, toxicity of the particle is related to the type of wood and the conditions under which the burn occurs. A recent study concludes that combustion of eucalyptus, ubiquitous in Australia and common in northern California, results in particulate matter that is more toxic than from pine, peat, and red oak. The measures of toxicity in the study were markers for inflammation in the lungs of mice (1).

Fierce, hot burns produce particles with lower toxicity than smoldering burns. The natural reaction from a property protection standpoint is to douse the flames. However, if left to smolder, the detriment is to public health. The reason is that a smolder is relatively oxygen starved and produces more unburnt organic molecules (mostly from the outermost layers of the limb rich in aromatic compounds). These volatile organics then attach to the carbon particles emitted during combustion as soot, making them more toxic. The same lung toxicity study cited above noted a striking increase in toxicity in the smoldering condition (1).

The Bootleg Fire is the third largest fire in Oregon history. The burn area is close to 400,000 acres. To give that context, large fires are classified by statisticians as greater than 1000 acres of burn. Scientists use the metric of area burned rather than numbers of fires. Privation is certainly proportionate to the area of devastation.

Courtesy US EPA 2019 (Wildland Fire Research Framework 2019-2022)

EPA data show that over the three decades preceding 2018, the total numbers of fires have remained essentially constant. Not surprising, since most are caused by human behavior, which, absent intervention, tends to remain constant. Strikingly, however, over the same period, the area burned has nearly doubled (3). This statistic does not include the devastation of the 2020 fire season. Five of the ten largest fires ever in California were in that year. The largest was the August Complex fire, which burned just over a million acres.

The Bootleg Fire is believed to have been triggered by lightning strikes on dry underbrush. The mammoth August Complex fire in 2020 was believed to have been caused by 38 lightning strikes. Lightning as a cause of wildfires has not been in the top four causes, judged by the area burned (2). This is because lightning is ordinarily associated with a thunderstorm, and even 0.1 inches of rain is sufficient to materially reduce the ignition of underbrush. However, with high ambient temperatures increasingly being experienced, “dry lightning” can be produced. The associated rain evaporates prior to hitting the ground.

Until now the dogma has been that the causes of most wildfires are anthropogenic. In California, the four principal causes of ignition were arson, campfires, equipment (such as chain saws) and falling power lines, when the metric was area burned (2). All being related to human endeavor, amelioration was possible. But if the world is moving towards being hotter, the incidences of dry lightning could go up. Death Valley, CA recorded a high temperature of 130 F on August 16, 2020. This was the highest recorded temperature on the planet. August 16 was also the day of the first dry lightning strike associated with the August Complex fire. I am not suggesting causality, but the facts urgently suggest study*.

The literature does not offer promise for direct intervention in dry lightning caused large area devastation, other than controlled burns to clear out the under-canopy vegetation, which is already practiced to a degree. This stark reality applies not just to the fire prone western US, but also to the rest of the country.

Vikram Rao

* ” Lightning’s striking again” in Lightnin’ Strikes, by Lou Christie (1965), written by Lou Christie and Twyla Herbert


1. Kim YH, Warren SH, Krantz QT, et al. Mutagenicity and lung toxicity of smoldering vs. flaming emissions from various biomass fuels: implications for health effects from wildland fires. Environ Health Perspect. 2018;126(1):2018.

2. Syphard, A. D., & Keeley, J. E. (2015). Location, timing and extent of wildfire vary by cause of ignition. International Journal of Wildland Fire, 24(1), 37.

3. US EPA 2019 (Wildland Fire Research Framework 2019-2022)


May 31, 2021 § 2 Comments

This is the story of a minority investor attempting to influence the direction of ExxonMobil to be more climate conscious while being even more profitable. Engine No. 1 (evoking childhood images of the Little Engine that Could) pulled off the improbable.  With less than 1% shareholding, they persuaded major players such as BlackRock and the California State Teachers Retirement System (a major pension fund) to go along.  Two of their slate of four nominees have been elected and another is possibly on the brink.  Management resistance had been acute; much money was spent in opposition.  This was seen as a defeat for the Chairman and CEO.

This is New York Times front page news.  ExxonMobil’s deteriorating earnings performance certainly helped the insurrection.  In a fireside chat with my economist son @justinrao, I was asked whether this would work.  Another NY Times piece opined it would not, and that 2 in 12 directors would simply not have the votes to accomplish anything.  This is simplistic thinking.  A board is not the US Senate (remember the days when senators were collegial and actually listened to opposing viewpoints; well, those days are gone).  Each member of any public board has a fiduciary duty to the shareholders.  They are on the same team.  Usually, important direction setting is given to a subcommittee to research and report on the matter.  The report is debated, and a board consensus is achieved.  If the new members command the respect of the others, and they are not too radical in their approach, change is possible.  The new members are “independent directors”.  For those not in the know, independent directors are defined as those not having a material association with the company.  Certainly not officers.  But also, not employees of the investment groups.  There are shades of gray, but independent directors are seen as not influenceable, hence the term.

All change will have to meet the conditions of duality of earnings growth and some other softer objective, in this case carbon mitigation.  These are early days in the battle for climate preservation.  Relatively low hanging fruit ought to be available.  Were I one of those new directors, I would request scenarios to be produced.  Scenarios are not predictions, they are more in the form of what-if exercises, and particularly useful when strategizing in an uncertain environment. These would be guides to at least a provisional strategic direction which yields good returns while meeting climate change objectives.  The latter would be seen as likely societal outcomes directing company behavior, not ideological. 

The future will almost certainly entail reduction in oil usage, with the only debate centering on rate of change.  Certainly, both Shell and BP are betting on that outcome.  While this is a carbon mitigation direction, from a board perspective it is a demand signal needing response.  In this example, the response would be to plan on oil production reduction while investing in electricity, which will be the “fuel” displacing oil.  ExxonMobil has stated that entering the renewables arenas is contraindicated because they have no edge in that space.  I agree with this view when it comes to production of solar energy.  Not so much on wind, where they could have an edge in the emerging application of deeper water production, for which floating platforms will be needed.  This last is where they have deep expertise.  California has a sea floor that drops off precipitately.  Floating production is very likely.

Rather than participating directly in the production of renewables, they could innovate in the space of filling a critical gap in renewables: the handling of diurnality and peaks and valleys.  Germany derives 40% of its electricity from renewables.  This is an average figure.  On a given day that number could be 15% or 75%.  A recent solar bid accepted in Los Angeles had a direct solar output price of about 2.3 cents per kWh.  But the battery back up added nearly 2 cents to that.  Enabling renewables requires a storage solution.  As evidenced by the LA figure, basic solar is becoming the low-cost standard.  In my view it is headed to commodity status.  The profit will lie in solving storage.  In that area, companies such as ExxonMobil are well stocked in science and engineering talent.  Production of electrolytic hydrogen during periods of excess is one of the candidates.  So, is ammonia. Both are staples of ExxonMobil downstream operations.  They could do this more profitably than most.  

My favorite renewable for oil companies to consider is geothermal energy.  It is fast reaching feasibility at scale.  It is also the only renewable of which I am aware, which is both base load scale and load following.  Load following essentially means tunable to demand.  No storage required.  Most importantly, for oil companies, the core competencies are the same as for oil production.  Furthermore, the personnel laid off due to reduction in oil production could simply be switched to geothermal.

There is profit in renewables, you simply must pick your spots.  The new directors could educate the rest on these points.  As for the CEO, sometimes a win follows a loss.  Sometimes you get thrown into the briar patch*.

Vikram Rao

*How Br’er Rabbit snatched victory from the jaws of defeat, literally the jaws of Br’er Fox. Br’er Rabbit and the Tar Baby, a Georgia folk tale.


April 16, 2021 § 5 Comments

Transportation has bad climate change related PR.  All sectors combined (including aviation) account for about 13% of global CO2 production, whereas just steel and concrete add up to 15%.  Estimates vary, but inescapable is the conclusion that we have not given steel and concrete the attention that we have heaped on transportation to mitigate CO2 production. To exacerbate matters, the world is on an infrastructure expansion spree, including more recently the Biden administration in the US.  More infrastructure equates to more concrete and steel. That is more CO2 emissions.  Unless we do something about it as we have with electric vehicles and hybrid vehicles.

Mitigating CO2 emissions from concrete and steel is more straightforward than from vehicles because they are what we refer to as point sources.  Vehicle tailpipes are distributed, making capture, and disposition of the CO2, prohibitively difficult.  Technically doable with pressure swing adsorption methods, but logistically tricky in release to regenerate the adsorbent and subsequent handling of the CO2.  A decent analogy is NOx capture with urea, requiring canister replacement, a nuisance to many consumers. This difficulty led to alternative non-intrusive means such as the Lean NOx Trap, with the attendant VW deception

First a bit of a primer on iron and steel making.  Iron ore is largely iron oxide and must be reduced to iron.  This is accomplished primarily in blast furnaces, which are shaft furnaces where the reactants are fed at the top and the metal is taken out of the bottom.  The iron oxides are reduced by gases produced from coke, which is a derivative of coal.  The reaction products include iron and CO2.  The iron is then converted to steel by reducing the carbon content and by addition of other alloying elements for properties such as strength and corrosion resistance.  Each metric ton (tonne) of steel produces a staggering 1.8 tonnes of CO2.

The Direct Reduction Iron (DRI) process is a means for reducing the carbon footprint.  The process temperatures are low, and the iron never in a molten state.  The reducing agent is syngas, a mixture of CO and H2.  The combination reduces the emissions to 0.6 tonnes CO2 per tonne steel.  In a variant, hydrogen alone is the reducing agent, and in a further green variant, the hydrogen is from renewable sources such as electrolysis of water using renewable electricity.  However, unlike in the blast furnace process, there is no mechanism for removal of impurities in the ore.  Consequently, only high-grade iron ore is tolerated, and this limits DRI to about 7% of the total market because such ore is in relatively short supply and much more costly.

The most promising route to the greening of steel is through CO2 capture at the blast furnace.  Unlike flue gases from a power plant, blast furnace flue gas is concentrated, typically 30% CO2.  As a result, removal processes are more effective.  Today we are on the brink of capture costs below USD 40 per tonne CO2.  Carbon credits may be purchased in Europe for about USD 55 per tonne.  A recent New York Times story suggests that this will keep rising, with one analyst predicting prices above USD 150.  If a major CO2 producer such as steel or cement is forced to buy credits, the price is certain to go up.  When the capture cost is below the price for credits, the industry has an incentive to simply collect the gas.  However, merely capturing accomplishes little if the gas is not permanently sequestered in what are known as sinks. 

One such sink is subsurface storage in oil and gas reservoirs depleted of the original fluid, or in saline aquifers. While feasible, often with costs lowered by using abandoned wells, debate centers on permanence of the storage and the risk of induced seismicity (earthquakes).  A variant with an important distinction is injection into reactive minerals such as basalt, with the formation of a non-water-soluble carbonate, which certainly is permanent.  However, these wells are more costly because existing abandoned wells are unlikely to be in locations with suitable mineralogy.  The exception to that would be abandoned geothermal wells, which could be proximal to igneous rock from the basalt family.  However, there are not too many of those, and they are geographically constrained.

Mineralization as a genre is being pursued vigorously, with systems already commercial, although the tonnage being sequestered is still low.  Done on the surface in reactors, the resulting carbonate of Na, Ca or Mg can have uses.  Monetization even at small profit still renders the capture cost effective.  Since, in my opinion, capture costs are heading in the right direction, and already at acceptable numbers, the focus ought to shift to sinks with scalability.  Scalability is usefully defined as an aspirational goal of 0.5 gigatonnes CO2 per year by 2040.  But goals short of that are fine if several approaches are proven viable. 

Endeavors to achieve these goals could be materially assisted by appropriate policy action by the various federal governments.  All forms of renewable energy have received subsidies or loan guarantees at some stage in their development.  This has resulted in wind and solar being an established part of the electricity portfolio.  Similarly, electric vehicles have received subsidy support.  The greening of steel and cement ought to receive the same attention.  For example, the Biden administration’s infrastructure bill ought to include provisions for preferential purchase of green steel and cement, at premium pricing. 

Technology is approaching a tipping point for serious inroads into making steel and concrete green *.  Public policy must keep pace.

*For the times they are a changin’ from “The Times They Are a-Changin’” performed and written by Bob Dylan, 1964

Vikram Rao

April 16, 2021


February 26, 2021 § 4 Comments

The title is adapted without a modicum of shame or contrition from a Paul Krugman New York Times opinion piece.  While you will see my engineer’s spin on all this market economics stuff in this piece, his linked opinion is a must read.  At least take in the brilliant title: Et Tu, Ted? Why Deregulation Failed.  The Julius Caesar/Brutus reference aside (inspired, I imagine, by the Ted statement undercutting a principal tenet of Texas energy policy), it is a clear exposition of when free markets fail.  From a Nobel Laureate in Economics, no less.  The Ted mentioned is of course Senator Ted Cruz, whom Krugman in droll fashion describes as R-Cancun.  The press being woefully bereft of scandalous behavior by elected officials (only so much ink you can give to that Congresswoman) is giving the full treatment to Cruz, his wife Heidi (managing director at Goldman Sachs), St. Johns High School (elite private school in Houston) and group chat.

As you know from my previous take on the Great Texas Freeze, Texas has an independent power grid.  It is run by ERCOT, a non-profit agency regulated by the state.  By not crossing state lines, it avoids being regulated by the Federal Energy Regulatory Commission.  This independence from the feds has been fiercely defended by many in current and former elected office.  The regulations, such as they are, were reputedly fashioned largely on concepts laid out by Harvard professor William Hogan. They allow wholesale prices to go up to a maximum of USD 9 per kilowatt hour (kWh).  The average consumer price in Texas normally is around 12 cents per kWh, and closer to 9 cents in winter.  In other words, regulations allow householders to be charged up to 100 times more than normal (wholesale and consumer prices are not directly comparable, but the multiplier is still huge).  Avocados (Krugman’s favorite for the argument I am about to make) doubled in price during a shortage in 2019.  Consternation in Mexican restaurants (and the holy guacamole jokes) aside, consumers could simply eschew the green fruit (yes, it is a fruit, as is the tomato, despite an 1893 Supreme Court decision decreeing it a vegetable!).  Lowered demand and some remedy on the supply side restores prices.  The way it is supposed to work.

But electricity access is not like avocados.  When used for heat in winter it is a necessity, not a choice (even a natural gas fueled heating system needs electricity to run the blowers).  A period without guacamole in the diet would scarcely register on the privation scale whereas sustained frigid temperatures could be life threatening.

But the strongest argument for more regulation ensuring supply is that the supply chain is interdependent.  A turbine operator cold hardening the blades in the expectation of profiting from the high prices during a freeze caused shortage may have fuel supply interrupted, vitiating the business strategy.  In the case of natural gas, the primary fuel for electricity in Texas, the cold hardening would simultaneously have to be done by at least the gas producer, the midstream operator (of the pipeline) and the electricity generator.  Just any one of them doing it may not realize the profit uptick while still incurring the cost.

Texas politicians are in no win positions.  They favor free-market methods but must deal with the fallout from crushingly high electricity bills faced by some consumers.  The tweeted statement by Senator Cruz that led to the Et tu Ted opinion by Krugman was: “This is WRONG. No power company should get a windfall because of a natural disaster”.  The problem with that statement is that it flies in the face of the basic de-regulated model that private companies are incentivized to spend the money to harden for these situations in hopes of high profits during those interludes.  On the assumption that Senator Cruz understands the model, his statement appears to be a repudiation of a tenet of Texas energy policy.  Hence the Et tu (meaning you too)wording in the Krugman piece (Julius Caesar utters Et tu Brute in anguish when he sees that his friend and protégé Brutus is one of the assassinating senators).

Many have taken the position that one cannot spend the money to prepare for the infrequent occurrences.  Hard to argue with this in principle.  However, I will give you the example of El Paso, Texas.  After a freeze in 2011 of similar scale as this one, the state studied the matter.  The city of El Paso simply acted.  They had previously divorced themselves from ERCOT and were joined with the Western Interconnection.  With no compulsion to act as the rest of Texas, they spent nearly USD 4 million to harden their grid to -10 F.  They built a dual fired power station, using oil or gas. This time around, in a city with 680,000 residents, fewer than 1000 customers had electricity black outs for greater than 5 minutes. Since rate payers always pick up the tab, what then was the impact on rates?  The average residential rate in El Paso is 11.11 cents per kWh, compared to the average for Texas of 10.98 cents.  A straight up comparison is difficult, but those figures are not very far apart, 1.1% to be exact.

Was the privation suffered in the great Texas freeze an indictment against free-market models of electricity access?  Probably not.  But economists advising the state must conjure up a framework with built in elements of social responsibility and a greater recognition of the inter-dependencies in the supply chain.  The folks least able to withstand extended loss of power and/or costly energy for survival, need a safety net.  Another such devastating disaster, to borrow another Roman analogy, will have state leaders facing charges of fiddling while Texas froze.

Vikram Rao

February 26, 2021


February 18, 2021 § 14 Comments

Texas prides itself on being the energy capital. The capital (as opposed to the Capitol of the infamous January 6 insurrection) is under siege.  Nature is asserting its might. Unpreparedness sure helps. 

Few know that Texas has its own grid.  The country is divided into three grids: The Eastern Interconnection, the Western Interconnection, and drum roll here, Texas.  Conspiracy theorists may connect this to secessionist tendencies.  Certainly, recent utterances attributed to the former governor Rick Perry don’t help.  He is quoted as saying, “Texans would be without electricity for longer than three days to keep the federal government out of their business,”.  He is referring to the fact that because the Texas grid does not conduct interstate commerce, it is not governed by the rules of the Federal Energy Regulatory Commission.  This from a guy who just a month ago held federal office as the US Secretary of Energy.  

In a Fox channel interview Governor Abbott of Texas blamed solar and wind for the problem.  Small problem: solar is just 1 – 3% of the total and wind is around 20%.  Then his own folks at ERCOT, which stands for Electric Reliability Council of Texas (the reliability in the name is ironic) said it was primarily due to natural gas supply drop.  This makes more sense because gas generators comprise 47% of the electricity produced.  Abbott later walked back the claims and said he meant that renewables could not be the dominant source.  Tell that to Germany, which gets 40% from renewables.  Then Congresswoman AOC trolled Abbott by Tweeting that Texas electricity was 80 – 90% from fossil fuel.  That is not accurate either (coal plus gas come in at about 65%, according to ERCOT).  Just when you think the election silly season is over, you have politicians using their favorite political points scoring issue whenever there is a remote opening for it.

By all accounts, every source of electricity was hampered by the extreme cold, even the nuclear plants.  But, according to the ERCOT leadership, the biggest culprit was natural gas.  Delivered natural gas nearly halved at the most severe stages due to frozen lines.  We know that methane (the dominant component of natural gas) does not freeze till a frigid -182 C.  So, why are natural gas pipelines (these are the main supply lines, not the little ones going to your house) freezing?

I was not able to find any explanation, so I am going to hazard a hypothesis based on other oilfield knowledge.  Almost all supplies of natural gas will be water wet to some degree.  If films of water form, at pipeline pressures of 800 psi or so, temperatures approaching water freezing can cause hydrate crystals to nucleate on the walls.  Again, with the right conditions, these could grow to plug the line.  This routinely happens in undersea gas pipelines.  Those pipelines have a device known as a “pig” which can be made to traverse the line and mechanically clear out the growing crystals.  The other means is to drizzle in methanol, which lowers the freezing point; basically an antifreeze such as ethylene glycol in your car radiator (which too can be used in this application).

Gas hydrates are large crystals of ice with methane in the interstices.  The overall crystal structure looks like a soccer ball.  Richard Smalley, who co-discovered this structure in carbon (a sixty-atom molecule version), got the Nobel Prize for it, in part because finding a brand-new crystal structure of a common element is rare, and in part because carbon in this form has proven to have compelling value in the form of nano materials.  Gas hydrates in the subsurface were once believed to be the next big thing in natural gas sourcing because they are ubiquitous and, according to the US Geological Survey, the total resource exceeds all other carbonaceous fuels combined.  Some probably still are believers.  In my opinion plentiful shale gas has shot down those dreams.  Gas hydrates are also a neat party trick. Take a block of it in a shallow bowl and the seemingly innocuous ice will light up with a match. 

We can conclude from all that we have seen in Texas that industry, especially a loosely regulated one, operates on probabilities.   ERCOT modeling probably predicted such freezes to be infrequent and more geographically scattered, allowing the management with a minimum of disruption.  Not the way it turned out.  Last year a high proportion of the devastating wildfires in California were known to have been triggered by downed power lines.  A cost-effective solution is yet to be identified.  The Lone Star is not alone after all.

Vikram Rao

February 18, 2021

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