I noticed a headline a couple of days ago that really got my attention – $90bn natural gas deal with Japan. For the last couple of days, I have been thinking about how to explain why that particular headline means so much to me and to the rest of the world as we discuss and plan our energy future. For me, it illustrates why it is so important to “follow the money” in order to understand the words that flow from all directions when it comes to energy supply issues and prescriptions.
Even though I deal in big numbers on a regular basis in my day job, that is truly an astounding figure to associate with a single deal. It is roughly 2/3 of the entire US Navy budget for a year. That budget pays more than a million salaries, operates about 283 ships, dozens of bases, purchases dozens of complex aircraft and pays to build 8-12 ships.
There must be tens of thousands of stakeholders associated with a $90 billion deal that have major incentives for ensuring that it goes through as planned, with as few hurdles and detours as possible. The inevitable result of efforts to bring this deal to fruition is a stronger, multi-front effort to discourage the use of nuclear energy instead of burning natural gas.
Please read the following excerpt from the article announcing the deal before you dismiss my theory. If you have ever been involved in any kind of large project sales effort, or if you are part of a company that tallies sales wins and losses, or if you simply have an understanding of human behavior, this should help to convince you that I have a reason for making that claim.
Managing director of Chevron Australia, Roy Krzywosinski, said the contract — the largest LNG supply agreement yet made in the Australian market — was a milestone in the Wheatstone project, as it underpinned demand for production.
“For Wheatstone it’s all good news — we’ve got the gas, we’ve now got the market and we’ve got partner alignment to move the project forward,” he said.
“TepCo is among the most experienced LNG buyers in the world, and its willingness to commit to such significant offtake volumes demonstrates its confidence that the Wheatstone project is moving forward.”
Mr Krzywosinski said the deal was a boost for the Wheatstone project, which was set to go to the Chevron board for final development approval in 2011 ahead of production starting in 2016.
TepCo is the biggest consumer of LNG in Japan, accounting for about one-third of the country’s imports, and bought 20 million tonnes of LNG over the 12 months to the end of March.
Japan imports most of its energy needs and has been ramping up its use of natural gas for power generation following the 2007 closure of the Kashiwazaki Kariwa nuclear power plant, the world’s largest nuclear electricity generator. (Emphasis added.)
Chevron, ExxonMobil, and Royal Dutch Shell are all working hard to develop large natural gas fields that are not connected to the world’s major energy consumers via pipelines. In order to get this gas from the source to the market, the companies are making huge bets on the complex and energy intensive technology required to turn the gas into a liquid that can be transported in ships. The economics of these projects only work when the developers can sign up credit worthy customers for long term contracts. Those contracts specify a certain pace of LNG deliveries and payments that will be large enough to support the repayment of the invested capital equipment that must be erected.
The physical capital equipment required to establish LNG fuel delivery systems include on and off shore drilling rigs, local gathering pipelines, refrigeration trains, storage tanks, port facilities, tankers, and reception ports with regasification systems. I recently wrote about a single LNG project that ExxonMobil is developing in Qatar that has a total quoted cost of $30 Billion. I thought that was huge, until I learned about this $90 BILLION Chevron project. The Wheatston project, located north Western Australia, will be an onshore gathering site for several off-shore and on-shore gas fields.
The key to the initial development of any massive capital investment is convincing lenders that you have a steady stream of income that will enable you to pay back the loan. Therefore part of the initial effort to develop a major project like Wheatstone is to establish the basic attractiveness of the product being sold and to convince customers that it is absolutely the best solution for their ongoing needs.
If you have not heard that natural gas is a “clean”, “low-carbon”, “abundant”, “reliable” energy source that can be burned in relatively inexpensive equipment, then you have been living in a bubble, isolated from the drumbeat of advertising and public relations efforts of the oil/gas industry. If you have not heard that gas is a lot easier, quicker and cheaper than building nuclear power plants you have not been listening to cheerleaders like Al Gore, Tim Wirth, John Podesta, Joe Romm, Amory Lovins, or Big Gav (a prolific blogger who often writes anti-nuclear pieces that appear on The Energy Collective, but who also writes a lot about the economic development potential from projects aimed at exploiting abundant gas resources in his native Australia.)
Please ask yourself – would a project like this even be considered if there was less fear about nuclear energy? The earthquake that led to the shutdown at Kashiwazaki-Kariwa did little damage, but all seven reactors were shutdown for nearly two years because of the difficulty inherent in proving a negative to “conservative regulators”. The first unit to be restored, Unit 7, started up 22 months after the quake. Even today, about 30 months after the earthquake, five of the Kashiwazaki-Kariwa reactors are still shutdown while inspections are being completed. Just imagine how difficult it must be to prove that nothing happened to the miles of piping and wiring, thousands of tons of building materials and thousands of components that make up seven large nuclear power plants. (Note: this paragraph was updated on December 11 after I received a comment that provided more complete information about the status of the Kashiwazaki-Kariwa station.)
No oil or gas processing facility shaken by an earthquake, despite the fact that they also are composed of high temperature, high pressure piping carrying potentially hazardous material, would have to prove that every component was in perfect condition before being allowed to return to productive operation. Instead, the owners would do an inspection, looking for obvious damage that might affect safety. Following that inspection, which might take a few days or even a week or two, the operator would start up the plant using normal procedures, perhaps supplemented by some additional inspections.
The only reason that nuclear energy is treated differently is because people are unreasonably afraid.
People do not fear things that they do not understand unless they have been carefully taught to be afraid. Teaching fear takes repetition over many years, an effort that requires a substantial amount of patience and financial support. I think that effort to teach people to fear nuclear power has been at least partially motivated by the amount of money that would either be lost or not made in the first place if more customers decided that it is better suited for meeting energy needs than other options like natural gas.
Of course, it is not enough to simply establish your product as an initially attractive solution. Even after the project gets financed the developer needs to undertake continuing effort to prevent customers from determining that there are better ways to meet their needs; defection is always a risk even if there are early termination fees involved. That effort will involve a multi-pronged approach to keeping the deal attractive, part of which will involve efforts to ensure that the competition continues to look less attractive.
Take a hard look at some of the current advertising campaigns between Verizon and AT&T with regard to cellular phone networks and then go and read some political, journalistic and web discussions on the issue. You will learn a lot about the powerful and emotional arguments that are often based on carefully selected “facts”. Those arguments are an almost inevitable result when there is a lot of money and market share at stake. The same concepts apply to the energy industry, except for the fact that the stakes are far higher.
The effort to retain customers whose purchases have provided the basis for a $90 billion investment will be intense. If the income flow supporting capital repayment gets interrupted or reduced because of competitive options, many negative things can begin to happen. Most fiscally responsible people understand that calculus and know how stressful it can be if the source of income supporting a major debt falls or completely dries up before the debts are repaid.
It is clear to me WHY those who sell the gas have a strong motive for making it as difficult as possible for their customers to be wooed by energy supply competitors who can offer a zero carbon, vice “low-carbon” fuel choice. The difference in cost and effort between operating a nuclear power plant that only needs a couple of truckloads of fuel every 18-24 months and operating a natural gas fired power plant that might require one third of a BILLION cubic feet of gas every day is very clear; the only way to sell the gas is to make it as hard and as costly as possible to build and operate an atomic fission alternative that would replace the need to buy natural gas.