There has been a flurry of commentary on the web and on Atomic Insights as a result of a recent Financial Times interview of Jeff Immelt, the CEO of GE, that ran under the headline of GE Chief: Nuclear ‘hard to justify’. The article provides an informative insight into the motive for Immelt’s dismissal of the reality of a growing nuclear revival but that explanation comes towards the end of the piece:
Analysts estimate GE’s nuclear revenues, from a joint venture with Japan’s Hitachi, at an estimated $1bn, or less than 1 per cent of annual global sales.
Of course, typical news skimmers who do not do much critical thinking might never get to that piece of information. Instead they’ll just read the lede and the first paragraph or two, which provides a completely different impression about the almost total absence of nuclear energy in the long term plans and investment decisions for GE. (I hope most readers will understand that a business that brings in less than 1% of revenue probably does not rate much more than a slide or two during a quarterly board meeting at a conglomerate like GE.) Here is how the article begins:
Nuclear power is so expensive compared with other forms of energy that it has become “really hard” to justify, according to the chief executive of General Electric, one of the world’s largest suppliers of atomic equipment.
“It’s really a gas and wind world today,” said Jeff Immelt, referring to two sources of electricity he said most countries are shifting towards as natural gas becomes “permanently cheap”.
“When I talk to the guys who run the oil companies they say look, they’re finding more gas all the time. It’s just hard to justify nuclear, really hard. Gas is so cheap and at some point, really, economics rule,” Mr Immelt told the Financial Times in an interview in London at the weekend. “So I think some combination of gas, and either wind or solar … that’s where we see most countries around the world going.”
Since I do not live in the same rarified world as Jeff Immelt, I do not get much chance to “talk to to the guys who run the oil companies”. Fortunately, I live in a connected world in which publicly held oil companies produce quarterly earnings calls with analysts and post those calls in accessible locations on the web for anyone to hear. Interestingly enough, the oil companies are providing investors and analysts with a different perspective that does not include any plans to provide “permanently cheap” gas. Cheap gas is not good for their bottom lines; they much prefer selling expensive gas to as many addicted customers as possible.
I recently listened carefully to ExxonMobil’s second quarter 2012 earnings call (so you would not have to) and gained several valuable insights about their current operations and their long term strategic plans. Here is a brief segment that provides a completely different impression about the trajectory of future gas prices than the one provided by Immelt. The responder from ExxonMobil is David Rosenthal, Vice President of Investor Relations and Secretary for ExxonMobil, the first question comes from Paul Chen(sp?) but I did not capture his employer.
Paul Chen: Given the low natural gas prices over the last 12 months in the US, if the natural gas price stays at the two to three dollar per mcf range, is there a circumstance that will force you guys to look at your proven reserve booking from the XTO? How does the accounting work from that standpoint?
David Rosenthal: You know Paul, (chuckling) if we step back just a little bit, obviously that is a very large resource that we acquired in the XTO acquisition. Some of it is booked to proved reserves, but a whole lot of it is really in the resource base. When you look at prices and the volatility of those prices and what is going on, I don’t think, when you look at our outlook going forward, you know, that we see ourselves really getting into the issues that you’re talking about. Without getting into any, you know, specifics on accounting and reserve reporting, you know, I’m confident that if you look at that resource and what we’ve got booked now and the conservative nature with which we tend to book proved reserves, I’m not expecting there to be any issues in that area.
Paul Chen: So should we assume that for the ceiling test you would be allowed to use your own internal long term price data?
David Rosenthal: Yes, If you look at that ceiling test, as far as I know you do use your own long term expectation for those prices.
Later in the call, there was a another question the unconventional natural gas resources that ExxonMobil acquired in 2010 when it purchased XTO. That question was asked by a different Paul, but I did not write down his last name.
Paul: If I could just follow up on Paul Cheng and it’s kind of related. You were saying that there would very, very unlikely be a write down be a write down related to XTO because I guess what you’re implying is that you were very conservative in booking what is essentially a very, very large resource?
David Rosenthal: Yeh, I think it is a couple of things, Paul. It’s the conservative nature with which we book things to proved reserves and its also our outlook for natural gas prices. You know if you look broadly and look at our energy outlook, you know we don’t have an outlook over the long term that prices are going to remain at current levels. And that is consistent with our investment plans; its consistent with our energy outlook and it’s really consistent with the long term way that we are going about developing these resources.
Paul: Ummm, okay, David, I think I understand. I was just wondering if the SEC, going back to that, allows you to use your own long term planning assumptions for nat gas prices as regards to bookings?
David Rosenthal: Yeh, that’s correct.
So, you could take your natural gas price predictions from Jeff Immelt, who runs a company that has large divisions selling wind turbines, natural gas drilling equipment, and natural gas fired gas turbines. Alternatively, you could listen to ExxonMobil, a company that is one of the world’s most respected producers of oil and natural gas. ExxonMobil also has a strong record of strategic success; it is a company that has managed to book annual profits exceeding $40 billion dollars in recent years and made a $16 billion profit during the second quarter of 2012, despite a temporary drop in natural gas prices in the United States.
There is no doubt whose advice I am taking and which company I respect as a formidable competitor with an admirable understanding of the challenge and rewards of supplying as much of the world’s energy market as possible. I just wish that ExxonMobil planners would stop steadily working to liquidate the company through quarterly stock repurchases that have been averaging about $5 billion for a number of recent quarters and planned divestitures that are now so common that they do not qualify to be reported as special events in financial statements.
If I could “talk to the guys that run the oil companies”, like Jeff Immelt apparently does, I would advise them to deploy a portion of their massive capital resources into carefully selected efforts to develop nuclear energy technologies. The strategically minded leaders of a company like ExxonMobil should be able to understand that such an investment could sustain them as a world leading energy company for decades to centuries into the future.
Oh what the heck, I’ll even give those leaders a hint on where they might want to start looking. Disclosure: I attended the event described below as a holder of one of the hundreds of recently created high-tech jobs at B&W.
Ribbon Cutting Event Held
at B&W mPower™ Fuel Technology Center
(LYNCHBURG, Va. – July 30, 2012) –The Babcock & Wilcox Company (B&W) (NYSE:BWC) was joined by Representative Bob Goodlatte (VA-6) and Bob Sledd, Senior Economic Advisor to the Governor of Virginia, for a ribbon-cutting ceremony today at the new B&W mPower™ Fuel Technology Center (FTC) in Lynchburg, Va. The advanced manufacturing technologies B&W will use to produce nuclear fuel for its B&W mPower small modular reactor (SMR) will be developed and qualified at the FTC. Longer term, the technologies developed at the FTC give B&W the ability to support the manufacture of fuel for other reactors.
This newly dedicated facility marks the third major infrastructure development project in Virginia related to the B&W mPower reactor, including the establishment of a dedicated design office in 2010 and an Integrated System Test facility in 2011.
The FTC has three primary missions:
- Develop and demonstrate key fabrication technologies and processes needed for the planned manufacture of B&W mPower reactor fuel and fuel-related components
- Fabricate production-representative prototype fuel assemblies and individual components in order to support the fuel design, testing and licensing process
- Serve as the materials test facility for engineers to evaluate the mechanical performance of both complete fuel assemblies and individual assembly components
Christofer M. Mowry, President of Babcock & Wilcox mPower, Inc., said, “Bringing a viable, proven SMR design to market requires an investment in facilities needed to qualify and manufacture reactor components. B&W is proud to add this dedicated facility to our robust B&W mPower development infrastructure. Our operational testing and manufacturing facilities, design maturity and unparalleled depth of industry partnerships are important reasons why the B&W mPower reactor is receiving strong interest from customers both domestically and abroad.”
Representative Goodlatte said, “B&W has a long history of nuclear manufacturing innovation, and today’s ceremony demonstrates how the company continues to stay on the cutting edge of energy technology development and deployment. The fact that this new facility will add more than a dozen high-tech jobs to the hundreds already created by B&W to develop their SMR program clearly demonstrates how a U.S. company can keep good-paying jobs at home and further develop our nation’s advanced manufacturing infrastructure.”
To date, B&W has invested more than $5 million in the FTC. The facility includes state-of-the-art robotics, inspection and welding equipment. No nuclear material is used at the facility.
Headquartered in Charlotte, N.C., The Babcock & Wilcox Company is a leader in clean energy technology and services, primarily for the nuclear, fossil and renewable power markets, as well as a premier advanced technology and mission critical defense contractor. B&W has locations worldwide and employs approximately 12,700 people, in addition to approximately 10,400 joint venture employees. Learn more at www.babcock.com.
Cautionary Statement Regarding Forward Looking Statements
B&W cautions that statements in this release that are not historical fact may constitute forward-looking statements, including statements relating to the use of the B&W mPower™ Fuel Technology Center. These forward-looking statements involve a number of risks and uncertainties, including, among other things, delays in or adverse changes relating to the funding B&W mPower research and development efforts and adverse changes in the supply of or demand for nuclear power. If one or more of these or other risks materialize, actual results may vary materially from those expected. For a more complete discussion of these and other risk factors, please see B&W’s filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2011. B&W cautions not to place undue reliance on these forward-looking statements, which speak only as of the date hereof, and undertakes no obligation to update or revise any forward-looking statement, except to the extent required by applicable law.