WUEG October 2015 Newsletter


October 2015

October 2015 Newsletter

For comments, questions, or letters to the editor, please email

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Special Report | Energy Capital Markets

Minefields of Oil: Navigating Energy Debt in a

Segmented High Yield Market

Akshat Shekhar – VP, Membership Development Committee

In a bond market where yield-chasing investors

have pushed down rates across the board, the

high-yield and distressed markets have recently

seen sizable yield spikes as lenders perceive

significantly more risk. The shift has been driven

by energy companies, particularly oil and gas E&P,

which now make up a third of the distressed debt

space. And a third of these energy companies’

bonds trade over 1000 basis points over

government securities, a common level to indicate

distress. The median E&P bond now trades at a

distressed level; energy now makes up 13 percent

of the high-yield space; and energy junk bond

funds are down 20% over the last year in terms of

returns. Even “safe” firms like the Brazilian quasisovereign

Petrobras are seeing inverted yield

curves characteristic of expected default. These

sector-specific changes are occurring in the

backdrop of a pessimistic overall high-yield bond

market, with an average yield of around 7 percent,

the highest since the United States’ ratings

downgrade in 2011.

After a 2014 characterized by crowded inflows of

capital, it seems that lenders and bond fund

investors finally want to get paid for the risk they

take on. No doubt, some of their concern is

warranted; energy defaults have risen above a rare

3 percent level, with the market pricing in even

more for the future. SandRidge Energy, Goodrich

Petroleum, Swift Energy, Halcon Resources, and

Energy XXI have all seen their stock prices slashed

by 90 percent or more over the past year. All have

bonds trading with yields in at least the twenties

and thirties, resembling more the scoring output of

a high-octane football offense than a metric fit for

Morningstar databases. The largest private US

E&P company, KKR-owned Samson Resources,

recently filed for Chapter 11 bankruptcy, on the

whartonenergygroup.com 1

October 2015

heels of peers Quicksilver Resources and Sabine

Oil doing the same earlier in the year. Macro

headwinds are seemingly unending, with a billionbarrel-per-day

supply glut punishing expiring or

undercovered hedge positions.

To understand how the E&P sector got to this

point and how it may move forward, it helps to

understand what fueled the shale revolution. Even

in good times, as analyzed by Jim Chanos, marketleading

wildcatters did not cover their capital

expenditures with operational cash flow. Their

returns were driven by financing cash flow

delivered by cheap capital, spurred by great

commodity price economics, seemingly endless

untapped reserves, and clever project financing

structures that maximized return of capital. Shale

production was the prototype of success in

American capitalism, with creative financing and

innovative technology pushing operational costs

down exponentially. Rig count exploded as lenders

and owners demanded more tax-deferred drilling

and production above all else.

potential upstream divestiture, and Suncor has

been rapidly increasing its hostile bid efforts for

Canadian Oil Sands.

Further relief may come, surprisingly, from lenders

themselves. Banks were loath to cut limits on their

senior lines of credit in a recently concluded round

of semi-annual reviews, as most firms held off on

drawing on those lines due to the negative market

signaling effect. Underwriters have generally

responded to missed interest payments with the

introduction of strict covenants on leverage,

independent operational and engineering analysis,

more extensive asset recourse, and prohibitions

against asset sales rather than pushes for

bankruptcy or out-of-court restructuring.

However, this relative leniency may give way

should the debt picture continue to get worse.

Already, a sixth of crude and gas producers see

interest payments higher than 20 percent of

revenues, a dangerous level given the industry’s

history of fluctuating margins.

“Macro headwinds are seemingly

unending, with a billion-barrel-per-day

supply glut punishing expiring or

undercovered hedge positions”

Though seemingly all those tailwinds have

reversed, the operational efficiency theme has

endured; even with rig count down almost 60%,

producers have cut their costs so that production

has actually increased 6 percent this year and

projects to drop only low single digits next year.

That may help firms stave off defaults and missed

payments, or at the very least, seem attractive

enough for an upstream asset or company sale to

their better-positioned competitors with stronger

balance sheets and available M&A firepower.

Debt-laden Occidental spinoff California Resources

has dramatically cut capex in preparation for a

There are also some opportunities for new

injections of capital, even if not very attractive

overall. Depressed stock prices mean issuing

equity is expensive and may be vetoed by a

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October 2015

shareholder class already worried about their

residual claims without the prospect of dilution.

Sky-high yields make traditional underwriting

difficult, though lower order in the capital

structure may present appropriate risk-adjusted

returns for new mezzanine, unsecured debt, or

private equity. Goodrich and Halcon have survived

by offering debt swaps with instruments

convertible into equity that can participate in any

upside scenarios for 50 cents on the dollar, but

similar firms have had trouble persuading their

lenders to bite at something similar.

In short, though there are survival opportunities

for shale E&Ps, none of them represents a perfect

solution. The debt capital markets have stiffened

from their previous liquidity, which fueled the rise

of the shale revolution just as much as technology

did. New production will likely bank on unproven

reserves, and the industry faces a long road of

asset sales, consolidation, and severe cost-cutting




The Economist


Global Apollo Program

Griffin Hyde – Member, Corporate Development Committee

One of the most frequent discussions regarding

clean energy in academic and professional circles

is: Is it economically feasible? Many people, if not

most, want to see the success of clean energy, but

classical economics tells us that it will not be

preferable to traditional energy sources, namely

fossil fuels, until it is cheaper. This is the goal of the

Global Apollo Program, a plan formed by a

coalition of scientists and industrialists based in

Britain to be proposed at the United Nations

Climate Change Conference in 2015. Endorsers of

the plan include such noted figures as former UK

Government Chief Scientific Adviser Sir David

King, Director of Columbia University’s Earth

Institute Jeffery Sachs, and BT’s Chief

Sustainability Officer Niall Dunne, among others.

These people hope that the 21 nations presenting

at the Paris conference will agree to spend an

annual average of 0.02% of GDP on R&D for the

next 10 years to make renewable, clean energy

economically sustainable worldwide by the year

2025. Their inspiration, and the namesake of this

program, was the U.S. Apollo program in the

1960s. When President John F. Kennedy promised

to put a man on the moon within that decade, he

spurred an explosion of publicly funded R&D. What

began as the pipe dream of space travel quickly

became reality, all because of the technological

growth fueled by this spending. This same catalyst

at different points throughout the 20th century

produced the computer, semiconductors, the

Internet, genetic sequencing, broadband, satellite

communications, and nuclear power.

These innovations have already found or are on

their way to commercialization. Lowering the

costs of sustainability is largely a matter of

improving and scaling technology in the

production, storage, and transport of clean energy.

If the same innovation and commercialization

were to happen in these sectors as in previous R&D

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October 2015

projects, it would help to phase out fossil fuels and

their associated environmental externalities.

Even for those with a cynical outlook on

renewables, the prospect that an international

government coalition can come together to

recreate the success of the Apollo program in the

field of renewable energy must provide some hope

that it will become competitive in the next 10


Read more about the Global Apollo Program here.


Global Apollo Program

The Guardian

Demand Response on Wholesale Markets

Thomas Lee – Senior Member, Academic Committee

On October 14, the Supreme Court heard oral

arguments for two related cases, FERC v. EPSA

and EnerNOC, Inc. v. EPSA, on regulating

wholesale energy markets. Under review is the

Federal Energy Regulatory Commission’s (FERC)

Order 745, which mandates that end consumers

participating in demand response (DR) be

compensated at the wholesale electricity price, i.e.

the locational marginal price. This order was

reversed in 2014 by the Court of Appeals for the

D.C. Circuit, but remains in effect while FERC is

appealing this decision.

Demand response (DR) refers to end consumers

deliberately reducing their electricity consumption

from normal patterns, in response to peak load

times of high prices or system instability. The

major benefit of DR is peak shaving, i.e. avoiding

the higher marginal costs and higher emissions

from peaking generation plants. In addition,

reducing peak demand load also reduces

congestion on the transmission and distribution

networks, thereby lowering the congestion

component of the wholesale price. Together, these

two effects decrease power prices; according to

simulations by the Brattle Group, a 2% reduction in

PJM's peak load can reduce wholesale prices by 5

to 8%. In addition, shifting peak load to other

times also makes the ramping slope shallower,

helping to alleviate the “duck curve” problem

caused by increasing renewables penetration.

These two cases are ultimately about the

difference between wholesale and retail markets.

Specifically, DR programs can be triggered by

either the utility or the independent system

operator (ISO). Utility-triggered demand response

occurs strictly on the retail side: the rebate rates

are determined by each utility and can be related

to time of use (TOU) rate structures. On the other

hand, the ongoing legal debate involves whether

non-utility demand response is considered

“wholesale” and subject to FERC jurisdiction.

The Supreme Court’s decision has several different

implications. First, there would clearly be winners

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October 2015

and losers in industry. Suppliers of aggregated DR,

such as EnerNOC or the new San Francisco-based

startup OhmConnect, would be disadvantaged if

the D.C. Circuit decision were upheld. Conversely,

upstream utility companies whose revenues are

mainly from power generation, such as those

represented by the trade group Electric Power

Supply Association (EPSA), would benefit. Second,

removing demand response from the wholesale

market means there are fewer total generation

sources bidding for inclusion in the generation

stack, which ultimately decreases the revenues

paid out to all generation sources including

conventional power plants. Thus, for aging coal

and nuclear power plants on the verge of early

retirement, the exclusion of DR may help increase

these power plants’ capacity utilization and save

them from shutting down. This effect would

change the demand for new energy infrastructure

construction. Finally, DR benefits the environment,

by decreasing emissions overall and improving

renewables’ integration into the grid; removing DR

from wholesale would counteract these effects.


Washington Post




Petrobras Scandal Derails Hopes of Restoring

Brazil to Investment Paradise

Mark Rinder – Member, Academic Committee

In late 2014, the most dramatic phase of Operation

Car Wash commenced when three hundred police

conducted raids of companies across six states in

the economic powerhouse of Brazil. Twenty-three

executives from high-profile engineering and

construction firms were arrested for using bribes

and collusion to drain state-owned oil company

Petróleo Brasileiro (Petrobras) of billions of dollars.

To make matters worse, President Dilma Rousseff,

who had just barely won reelection, chaired

Petrobras’s board from 2003 to 2010. Even in the

early stages of the investigation, the scandal was

shaping up to be among the biggest in Brazil’s


Almost one year and fifty complicit high-ranking

politicians later, the Petrobras corruption scandal

is beginning to quiet down, with a parliamentary

commission clearing President Rousseff of

impeachment charges. However, the damage

inflicted on her administration’s reputation and her

country’s financial health is far from subsiding.

Rousseff has been getting heat for Brazil’s

impending pension crisis, controversial

preparation for the World Cup and the Olympics,

and inability to tackle corruption. The newest

scandal has only exacerbated her public image

debacle, sending her approval ratings plummeting

down to 10 percent. As Brazil’s political stability

becomes less reliable, the country’s promise for

economic growth become less certain as well.

From a purely financial perspective, Petrobras has

further ensnared Brazil in its severe recession,

which has damaged hope for this developing

nation’s economic dominance. In just one year,

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October 2015

Petrobras has seen its credit rating fall to junk

status, its market capitalization drop from $220

billion to $30 billion, and its legal troubles pile up

as Pimco, the Gates Foundation, and other

plaintiffs open large suits against the gas giant.

The firm has written off approximately $17 billion

in losses from overvalued assets and graft. The

significance of Petrobras’s fall from grace cannot

be understated: 13 percent of Brazil’s GDP comes

from its energy industry, of which Petrobras

controls 85 percent. Compounded with a devalued

Real (R$), high unemployment, and low global oil

prices, the effects of the scandal have created a

perfect storm for Brazil’s economy.

Besides deflating prospects for the success of the

BRICs, the Petrobras saga should also serve as a

cautionary tale for energy investors and

government bureaucrats alike. State-owned

energy companies that lack strict corporate

governance are not sustainable for investment or

success. Countries appropriate energy

commodities with the intent of barring foreign

manipulation or ensuring public welfare, but for

many LDCs, these mild goals are rarely preserved

(China will provide Petrobras with $2 billion in

financing over 10 years). Instead of preserving

sovereignty and equality, energy state-owned

enterprises (SOEs) damage accountability and

encourage misconduct. When a government owns

a majority stake in a company, firm executives are

encouraged to please and forge close relationships

with the politicians who fund their operations. As

the incestuous connections between company

leaders and government officials grow stronger,

the ease of successfully getting away with

corruption becomes obvious: those responsible for

auditing the firm can choose to conceal illicit

activities from government oversight. While

corruption is certainly possible in private

enterprises, SOEs reduce the degrees of

separation between self-serving parties and make

wrongdoers more immune to effective monitoring.

In developing economies, the risk of corruption

within SOEs is especially high due to a lack of

reliable corporate governance. Countries like Brazil

rarely hold companies accountable for their

actions and typically refrain from prosecuting

wrongdoers. In the case of promising (or oncepromising)

developing economies like Brazil’s,

energy investors should consider whether concrete

action has been taken to address faulty legal and

corporate systems. Without improvement in the

way companies are operated and held accountable

in less-stable markets, energy SOEs in developing

countries are not safe for investment.

In the wake of the Petrobras scandal, an anticorruption

commission has pledged to implement

new legislation to improve corporate governance

and tackle illegal behavior. Whether these

promises materialize into real progress is still to be

determined; whether the changes are vital to

restoring investors’ trust in Brazilian energy is



Wall Street Journal


New York Times

The Economist


whartonenergygroup.com 6

October 2015

Sustainable Startups

StoreDot: Can an Alternative Energy Startup

Reinvent Smartphones?

Emma Dong – Member, Academic Committee

Technology startups have been booming as the

idea of horizontal integration across Silicon Valley

entices entrepreneurs. Companies like Apple and

IBM entered the tech industry with the goals of

leading the markets of personal computers and

computer chips, respectively, and they have since

developed into frontrunners of their fields. Doron

Myersdorf founded StoreDot in 2012 with the

intention of developing a novel phone battery that

would reinvent the way we use our phones.

StoreDot is a startup run out of Tel Aviv University

in Israel that uses chemically synthesized organic

molecules to create a FlashBattery that could be

used smartphones and electric cars. Testing to

date shows that these batteries are 90 times faster

and last 4 times longer than a traditional battery.

The smartphone FlashBattery fully recharged a

Samsung Galaxy S4 in 60 seconds, and the electric

car battery can provide 300 miles of charge in 5

minutes. StoreDot claims that using a biological

semiconductor as opposed to a lithium-ion battery

yields safer, more cost effective, and more

environmentally conscious results.

StoreDot currently has over $66 million in funding

from sources including Samsung’s venture capital

division and Russian investor Roman Abramovich.

However, although the technology of these

batteries is being optimized, it may not be

successfully utilized in the consumer market.

Predicted Consumer Reception of

StoreDot’s FlashBattery

Projected costs of these batteries are 30% more

than traditional models even though the substrate

in the battery is cheaper and contains more readily

available materials than lithium-ion batteries.

Thus, utilizing this technology would result in a

$100 increase of a phone’s retail price. StoreDot

has been leveraging the capabilities of the organic

quantum dots to produce more vibrant displays

and higher color intensity to attract consumers. As

a result, their product offers prolonged battery life,

faster charging abilities and more vibrant displays.

These are 3 qualities that companies recognize

that consumers prioritize: every Apple and

Samsung phone update has included

improvements in these areas. However, StoreDot

is marketed as a flash memory device and focuses

on utilizing quantum dot technology to improve

supercapacitor and battery function. Therefore,

the advancements StoreDot’s technology adds to

battery life are irrelevant because most consumers

upgrade their smartphones before the battery of

their phone has completely discharged.

Additionally, StoreDot’s improvements to screen

quality are uncompetitive because they don’t align

with the current trend of improving pixel count in

image resolution. The push to improve resolution

since Apple’s implementation of Retina Display

has resulted in research solely focused on

optimizing displays through pixel count, making

StoreDot’s color quality technology

uncompetitive. As a result, the only significant

contribution StoreDot’s FlashBattery makes to

consumer quality is decreasing charging speed to

maximize the amount of time users can spend on

their phones. However, this can result in an

additional $140 tagged onto the retail price of a

smartphone when cheaper alternatives like

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October 2015

external batteries that retail for as low as $5

provide the same benefits.

Feasibility of Horizontal Integration

For StoreDot’s FlashBattery technology to be

implemented, it would have to horizontally

integrate by monopolizing the cell phone battery

industry. Otherwise, there would be no way for an

individual manufacturer to justify a 15% increase in

retail price.

However, it is unlikely that StoreDot’s FlashBattery

could be used in smartphones across the board

because Samsung already has a large share of

StoreDot, since Myersdorf was formerly a

chipmaker at SanDisk. If Samsung were to use

FlashBattery in its phones, they would be

increasing the price of a commodity in an elastic

market by 15%, and consumers would choose buy

phones from other manufacturers like Apple or

Sony. Based on past behaviors of firms, Samsung

may buy StoreDot solely to prevent another

company like Apple from acquiring the

technology. Or it may use the engineers from

StoreDot to assist in the development of their

current battery technology. A similar situation

occurred in 2012 when Apple bought Anobit, a

flash memory company in Israel, for $390 million.

Meanwhile, Apple used the acquisition to utilize

Anobit’s engineering team to develop Apple’s

existing flash memory control system.

Although the technology behind StoreDot’s

FlashBattery delivers what consumers want from

their cell phones in charging capabilities,

FlashBattery will have difficulty sustaining in the

market because it creates upwards of a $150

increase in retail price of phones.


Business Insider





Bolivar’s Sword: Venezuela’s Economy Breaks

Under the Yoke of Government Interference

Charlie Gallagher – VP, Academics Committee

Venezuela, as John Goodman once said in The Big

Lebowski, is entering a world of pain.

When oil was $110 per barrel, balancing

Venezuela’s budget was already a concern, as

costly populist social programs coupled with an

inefficient state-run oil company prompted

questions about the country’s fiscal responsibility.

With $50 oil prices here (and here to stay),

Venezuela is in serious trouble. Lower oil revenues

in the depressed price environment have

implications for its fiscal budget, its national

income, and the national economy. Ninety-six

percent of Venezuela’s exports come from oilrelated

sectors, with oil revenue making up 45% of

its 2013 national budget. Its state-run oil company

– recently plagued by allegations of shady dealings

– teeters on the brink of insolvency. In the 1990s,

the late Hugo Chávez turned Petroleos de

Venzuela (PDVSA), at the time a leading oil

company, into “a piggy bank for his free-spending

populism…scar[ing] off foreign investors.” By

setting such a a precedent, foreign firms are less

inclined to develop projects in Venezuela given the

risk of expropriation, mandated production levels,

and other intervention. Additionally, disastrous

price controls have made things worse; the

government has subsidized gasoline prices for

years, costing Caracas about $12.5 billion per year.

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October 2015

Further, by controlling output and cutting imports,

Venezuela desperately lacks even the most basic

necessities, such as food and medical supplies.

Two-thirds of its food is imported and shortages

have caused government agencies to deploy

fingerprint machines to limit how much people can

buy at the grocery store at one time. Worst of all,

these policies burden the economy by deterring

foreign investment and sabotaging the private


It seems that, regarding these irresponsible

macroeconomic policies and fiscal mishaps, the

chickens have come home to roost. In order to

combat the widening budget deficit in the face of

low oil prices, the government is turning to the

printing press. The Venezuelan bolívar is 1000

times weaker than it was in 1999. Inflation now

approaches 200% annually; hyperinflation lurks on

the horizon. State-sanctioned currency exchanges

are being circumvented. Unofficial currency

exchanges set up in neighboring Colombia attract

smugglers of price-controlled goods, such as

gasoline. A dollar’s worth of bolívars could buy

enough gasoline in Venezuela to sell across the

border for $5,000, and opportunists are making

use of these black-market exchanges.

Beyond hyperinflation and food shortages comes a

looming depression. Venezuela’s economy is

expected to contract by 7% in 2015, compared to a

5% expansion in 2012, with a steady diet of ratings

downgrades pushing the national debt towards


In order to turn things around, painful but

necessary liberalizing reform must be undertaken.

Venezuela should remove price and currency

controls, overhaul its state-owned oil company,

and reduce the budget deficit. The upcoming

elections in December give an opportunity to usher

in a new era of liberalization. Removing price

controls results in the true market equilibrium

price; that way, producers who shouldn’t be

producing don’t, and Venezuela can achieve higher

productivity. And protecting the bolívar from true

market forces only delays the inevitable and

mitigates the government’s legitimacy (given the

emergence of black market exchanges). While

these are politically challenging given the immense

short-term burdens of austerity and economic

reform, Venezuela will have to endure these

measures to ensure economic success in the longrun.

Open, free markets for goods (like gasoline)

and currencies (the bolívar) will once again bring

foreign investment to Venezuela when it needs it

most. It will bring about a desperately needed

competitive sector unrelated to oil that isn’t ruined

when commodity prices come down. Most

importantly, it will show Latin America that the old

ways must be abandoned, or else suffer a world of



The Economist


Focus Economics

BBC News


Wall Street Journal

whartonenergygroup.com 9

October 2015

Investment Services Regulation: MiFID II and Energy

Trading Firms

Frank Geng – Member, Academic Committee

In November of 2007, the EU implemented the

Markets in Financial Instruments Directive (MiFID)

in an attempt to increase investor protection and

competition in investment services. The law

institutes harmonized regulation by targeting the

investment intermediaries, as well as organizations

trading financial instruments within 31 EU memberstates.

Recently, in light of the financial crisis, the

EU has revised MiFID and is preparing to rollout the

new changes in the restructured MiFID II in January

2017. Under numerous exception carve-outs, many

energy firms had initially managed to exempt

themselves from MiFID coverage. But with the new

amendments, these exemptions have narrowed,

and now energy trading firms should understand

the implications of regulatory impact.

Under the original MiFID framework, most firms

dealing with commodity derivatives had enjoyed

exemption from numerous rules as they did not

pose a comparable systemic risk. MiFID II will close

many of these exemptions, effectively

recategorizing these energy trading firms as de

facto financial institutions. The amendments will

still leave room for organizations that provide

investment services for commodity derivatives, but

only if they are considered an “ancillary” portion of

the company’s core business.

However, for many companies, acting as marketmaker,

high-frequency trading, and hedging, are

standard procedure for optimizing physical energy

assets. If these trading arms become too large, the

law will disable the financial strategies of many of

these firms.

Similarly, a recategorization may potentially put

the impacted firms under the crosshairs of the new

European Markets Infrastructure Regulation

(EMIR)—a regulatory body that enforces even

stricter guidelines for over-the-counter trades

(OTC) reporting and risk mitigation. Energy forward

contracts, for example, if considered OTC

derivatives would make hedging, cash, or rate

planning much more difficult. More specifically,

having to enforce MiFID II and EMIR compliance

would trigger a flood of legal, technical, and

strategic restructuring that may not necessarily aid

the objective of harmonized regulation and simply

hinder these firms’ core business processes.

In short, MiFID II deals with three key areas: firm

governance, consumer protection, and trading. As

demonstrated, it will most likely be the trading

provisions that energy traders will be most worried

and affected by. The broader umbrella coverage of

OTC derivatives and algorithmic/HF trading will no

doubt cause plenty of structural headaches.

Perhaps the greatest challenge, however, to these

firms will be to their ability to adapt to a shifting

regulatory environment. What these potentially

impacted firms need to do at this time is

unfortunately not well-defined. But in principle, it is

a need for understanding. What this means is

perhaps a shift towards proprietary trading on

formal regulated markets (where there is regulatory

certainty), revamping compliance specialist teams,

and revisiting their Energy Trading and Risk

Management systems. Most importantly, given the

whartonenergygroup.com 10

October 2015

evolution of MiFID and other regulatory

frameworks, energy trading firms need to be

flexible. The EU is in the midst of a legislative and

policy movement towards unification and

standardization of its financial and capital markets.

MiFID II in principle will still attempt to increase

cross-border investment efficiency—it just might be

in a way that unnecessarily disrupts domestic

investment and institutional processes for energy

companies that shouldn’t be considered strict

financial institutions.


Financial Conduct Authority

Energy Trading Central & South Eastern Europe

Official Journal of the European Union



The Future of Clean Diesel and Volkswagen

Sam Collins – Member, Academics Committee

Amid growing evidence, Volkswagen admitted in

early September to cheating emission regulations.

500,000 US cars were affected, but that number

balloons to 11 million cars globally. The software

was installed to meet emission standards without

sacrificing horsepower in real world driving. The

repercussion will cost the company tens of billions

of dollars forcing them to sell a brand or two which

leads many to wonder what motivated the

manufacturer to cheat.

For years, VW and Audi have spent more R&D

dollars than any other automotive company[G1] .

VW’s focus was on clean and powerful diesel

technology. Around the same time, their

competitors, Toyota and Honda, started

developing electric drivetrains which

outperformed VW in terms of sales and

performance. Also around this time, the

government set new [G2] CAFE standards

(corporate average fuel economy) equivalent to 55

MPG by 2025 and 36 MPG by 2016. Faced with stiff

competition and stringent regulations, the

company was forced to ‘innovate’, and the end

results were [G3] catastrophic.

The effects of the report detailing VW’s cheating

rippled throughout the industry as regulators

turned their attention to BMW and other

manufactures. Other companies were also found

with inconsistent emissions results when

comparing EPA testing to real world driving, but

most of these results can be attributed to real

world variables and the nature of emission testing.

One would think that a hit on conventional fuel

would trigger a spike in hybrid or electric cars, but

the opposite has been true. Since the scandal,

Tesla (NASDAQ: TSLA) stock prices have fallen 30

points, and small efficient cars like the Camry and

Accord haven’t seen a bump either. The reason

behind these lack of stock upticks [G4] can be

attributed to shifting consumer demand.

Since September of 2014, pickup, SUV, and

crossover sales has grown 24%, 19%, and 35%

respectively further emphasizing the shift in

consumer preferences from efficient small vehicles

like the Camry and Accord whose sales numbers

whartonenergygroup.com 11

October 2015

dropped 2.6% and 13% respectively. VW who was

already dealing with stagnant sales (.6% growth in

sales excluding Audi and Porsche), should be even

more concerned given that every other major

company is outperforming VW’s growth by a factor

of nearly 7 in the US. To make matters worse, their

diesel sales, which account for 25% of all cars sold,

will no longer be sold in the US. This scandal has

hurt the company tremendously, but it also paints

a troubling picture of the future of personal


In 2008 when gasoline peaked at 145 dollars a

barrel, the company began cheating to inflate their

MPG numbers to compete with hybrids vehicles.

Sales of high MPG cars rose, and the

manufacturer's fleet MPG rose with it. Now that

gasoline is cheaper, people are buying inefficient

CUVs and trucks lowering the fleet MPG. If

manufactures are going to comply with

government regulation, people’s purchasing habits

will have to change. This scandal has shown that

diesel isn’t a solution for cars, so it will be

interesting to see what new technologies develop,

and if it will be enough to meet government

standards by 2016 and 2025.


Wall Street Journa



US News

How Bright is the Future for Electric Cars?

Arnab Sarker – Member, Academics Committee

At first glance, electric cars appear to be the ideal

alternative to gasoline-powered cars. They are

quieter, have a lower negative impact on the

environment, and are cheaper to operate than

their fossil fuel-powered counterparts. Yet the

reality of making electric cars economically

competitive is much more complicated. With gas

prices already down over 33% from a year ago and

continuing to fall, consumers have less of an

incentive to purchase electric cars.

Even though this decline in demand has occurred

recently, the relatively low demand for purely

electric cars compared to gasoline-powered cars is

not new; the electric car industry must resolve

several major problems before consumer demand

for electric cars puts enough cars on the road to

make a significant impact on the environment.

One of the biggest issues concerning electric cars

today is that their batteries cannot hold enough

charge to compete with the driving range of

gasoline-powered vehicles on a full tank. Most

electric cars can only drive between eighty and one

hundred miles on a full charge, which is not

enough for most drivers to have peace of mind as

they go about their day. This has led to tension,

especially in California, amongst electric car drivers

who use charging stations. In California, the state

has provided many incentives to purchase electric

cars, including rebates and tax breaks, but they

have not added a sufficient number of charging

stations to keep up with the rate at which electric

cars are being added to the road. Drivers have

been caught cursing at each other and keying each

other’s cars over the use of charging stations, as

whartonenergygroup.com 12

some drivers may unplug other vehicles to get

power for themselves.

Technological problems are not the only downside

for electric car owners; they face economic

drawbacks as well. Although it is cheaper to

operate an electric car than a gasoline-powered

car, the resale value of electric cars has plummeted

in the several years. A 2012 Chevy Volt that was

purchased for $42,021 is now worth $12,997 in

2015, so its price has decreased by 69%. Similarly,

the price of a used 2012 Nissan Leaf is 72% less

than its original value and the price of a used 2012

Chevy Cruze is 54% less than its original value.

These steep price decreases are primarily the

result of tax credits on new models, which force

sellers to lower the price on their used electric cars.

This may be great for buyers, but it is deterring

many consumers from purchasing new electric


These drawbacks do not necessarily mean that the

electric car industry is doomed. In Norway, for

example, electric cars are becoming more popular

than elsewhere in the world, with 66,000 electric

October 2015

vehicles on the road. Additionally, with Apple and

Google both joining in on the efforts to make a

more practical electric car, the technological

advances required to increase battery life may

come in the near future. As a result, if electric cars

start to become a larger share of the automobile

market, it is possible that government tax credits

will slow down or stop, causing the resale price of

used electric cars to become closer to their actual

value. Some consumers are also purchasing

electric cars, which don’t have the small driving

range of purely electric cars, although they

produce some harmful emissions. These

consumers could potentially be looking at purely

electric cars for future purchases, but don’t

consider them practical right now. Electric cars

may eventually become major players in the

automobile industry, but they have many hurdles

to face before that becomes reality.


Huffington Post

New York Times

Wall Street Journal

Low Oil Prices Are a Wake up Call to Tar Sands


José Del Solar – Member, Academics Committee

Fort McMurray is a quaint town of roughly 60,000

people nestled deep in the Canadian boreal forest.

Yet this unassuming Alberta hamlet receives a lot

of bad press, known for emitting two thirds of

Canada’s yearly contribution to global greenhouse

gases. It is also known as the driving force behind

Canada’s economy as investment its oil sands—the

second largest reserve of oil in the world after

Saudi Arabia—has boomed over the past few

decades. However, with plummeting oil prices,

extracting oil from the tar sands is no longer

economically viable. The town’s unemployment

has increased, its population has decreased, and

cost-cutting has become the its main focus. While

low oil prices have certainly posed a problem to

Canada, they act as an important reality check.

Not only is extracting oil from tar sands extremely

unreliable, but the environmental consequences

are incalculable.

The oil sands industry has seen better days, as

future projects are being postponed and current

projects are being halted. Most notably, Norway’s

energy giant, Statoil, canceled a multibillion-dollar

oil sands project last year amidst falling oil prices.

Most of the oil sand operations in Fort McMurray

take over half a decade to simply get to the point

where they can start producing. The extraction

whartonenergygroup.com 13

October 2015

process is extremely expensive, requiring heavy

machinery and large production facilities, and the

oil extracted from the sands is considered lower

grade and thus sells for cheaper—in the end, the

energy you can get from burning a barrel of tar

sands oil only hardly exceeds the energy inputted

to produce it. The sands require $80.06 a barrel to

recover shipping and other costs plus a 10% return

on investment, so for now, investment has been

shifting from Alberta to Canada’s offshore and

shale reserves as oil-sand operators simply wait for

prices to rise. Currently, it is certain that nobody

should invest in the sands, and even if prices rise in

the future, investment shouldn’t. For one, the fact

that production is only feasible under high oil

prices makes investing in the sands far too risky.

And President Obama’s veto of the Keystone XL

pipeline earlier this year has only darkened the

sand’s economic outlook.

in the heart of the world’s largest forest, the Boreal

forest, known as the largest oxygen producing

ecosystem for its huge diversity of species. In order

to simply access the sands, thousands of acres of

forest are deforested yearly. Extracting the oil

does even more damage. Removing the sand from

the ground destroys the possibility of flora and

fauna returning to the area for hundreds of years,

and even more destructive is the process of

converting the sand into usable oil. About four

barrels of water for every barrel of oil are

superheated, pumped through massive containers

of the sand, contaminated, and then pumped into

large ‘tailings ponds’, creating the largest toxic

impoundments in the history of the earth. And, as

the fastest growing source of emissions in Canada,

it has played a key role in making Canada the third

largest greenhouse gas producer per capita. But

the incentive to not invest in Canada’s oil sand

because of its environmental destructiveness is

more than just a moral one. Alberta’s regulation of

oil-sand operators has become stricter recently as

the province increasingly comes under attack for

the environmental consequences of the operation,

and regulation is only expected to increase.

The incentives to divest in oil sands are clear, and

given the current oil prices, there is no better time

to do so than right now.

The environmental consequences and the

tightened regulation that will accompany them of

extracting oil from the tar sands are just as much

of a reason not to invest. The oil sands are located


Wall Street Journal

Financial Times

Financial Post

The Economist

National Geographic

On Earth

whartonenergygroup.com 14

The Oil War of Attrition: The Battle for Market

Share and OPEC’s Existential Crisis

Max Isenberg – Senior Member, Academics Committee

October 2015

After the tumultuous and sudden drop in the price

of oil in the last months of 2014, the major oil

producers of the world entered a staring contest.

While continuing to produce at lower prices would

severely impact profitability, cutting back supply

(and consequently raising the price) would

effectively be conceding market share. In the

beginning of 2015, prices did recover partially, as

the major foreign oil producing countries seemed

able to hold out as smaller, fragmented shale oil

producers in the United States cut back on their

own output. However, the oil markets had not

actually turned a corner.

Mirage of Recovery

Despite a $15 rebound this summer, various

factors pointed to this break being short-lived.

While the small shale wildcatters faced higher

production costs than larger players, their size also

enabled new players to quickly jump back into the

market when prices seemed to have begun

recovering. Additionally, part of the price increase

was driven by temporary impediments to oil

production in Libya caused by protests. The

impending return of Iran to global trade and the

unexpected ramping of production in Iraq (which

has reached relative stability after significant

upheaval) has added to the supply glut and driven

prices even lower, crossing below $40 for the first

time in over 5 years in August.

Clutching to Market Share

With oil again hovering around $45, there is far

greater reluctance by any party to cut production.

Libya, Iraq, and Iran are all looking to establish

their own slices of the oil market, which, for

geopolitical reasons, had been significantly

hampered; this has meant pumping oil and

undercutting their OPEC partners to gain a greater

portion of world oil production. Amidst stagnating

global growth, only Asia has experienced

meaningful increases in demand, increasing

competition for the right to supply this market. In

particular, Russia and Saudi Arabia have entered

both a price and investment competition to solidify

their regional positions. This has led to an

unprecedented level of outright competition

between the members of the cartel. Historically,

the Saudis could compel its partners into setting a

price or were willing to unilaterally cut its

production to stabilize and raise prices for

everyone. Now, however, the urgency for each

country to hold its own market share has

superseded the cartel’s interests, keeping prices

low for months to come.

In addition to the infighting, a continued

depressed price has had the effect of keeping US

and other high-cost producers at bay. US oil

production has consistently fallen from its June

peak, and private companies such as Shell have

shelved megaprojects in the Arctic and elsewhere,

reducing future supply expectations. Whether

these longer term changes can reverse with

another pop in oil prices remains to be seen, but

the damage to OPEC already caused by the

prolonged prices seems to outweigh the benefits

of delayed Western competition. The fundamental

cartel relationship has been challenged, and unless

whartonenergygroup.com 15

October 2015

the larger countries can bully the smaller

producers to fall in line, OPEC’s bargaining power

and influence on global oil prices may have been

shattered. With its power waning over the past

decade with the emergence of alternative sources

of oil, OPEC may be on its last legs. If it cannot

reverse the damage done through this vicious

period of competition and incoordination, its

relevance will dissipate.

The environmental consequences and the

tightened regulation that will accompany them of

extracting oil from the tar sands are just as much

of a reason not to invest. The oil sands are located

in the heart of the world’s largest forest, the Boreal

forest, known as the largest oxygen producing

ecosystem for its huge diversity of species. In order

to simply access the sands, thousands of acres of

forest are deforested yearly. Extracting the oil

does even more damage. Removing the sand from

the ground destroys the possibility of flora and

fauna returning to the area for hundreds of years,

and even more destructive is the process of

converting the sand into usable oil. About four

barrels of water for every barrel of oil are

superheated, pumped through massive containers

of the sand, contaminated, and then pumped into

large ‘tailings ponds’, creating the largest toxic

impoundments in the history of the earth. And, as

the fastest growing source of emissions in Canada,

it has played a key role in making Canada the third

largest greenhouse gas producer per capita. But

the incentive to not invest in Canada’s oil sand

because of its environmental destructiveness is

more than just a moral one. Alberta’s regulation of

oil-sand operators has become stricter recently as

the province increasingly comes under attack for

the environmental consequences of the operation,

and regulation is only expected to increase.

The incentives to divest in oil sands are clear, and

given the current oil prices, there is no better time

to do so than right now.




New York Times



U.S. Department of Interior Cancels Lease Sales in

Arctic after Shell’s Disappointing Exploration

Sheetal Akole – Senior Member, Academics Committee

A month after Royal Dutch Shell Oil decided to

halt drilling efforts in the Chukchi Sea off the coast

of Alaska, the U.S. department of the Interior

announced that it was cancelling new lease sales in

Alaska and would not be extending Shell’s lease in

the region (which was set to expire in 2020).

The company began drilling earlier this year after

the Obama administration gave Shell conditional

approval to drill of oil. Shell had initially attempted

to drill in the area, but broke off efforts in 2012 due

to safety concerns. Shell was looking to regain

some of the billions of dollars it had spent on

federal leases and other preparations over the last

few years.

While Shell had initially proposed the “drilling of

up to six wells within the Burger Prospect , located

in approximately 140 feet of water about 70 miles

northwest of the village of Wainwright”, they were

only able to drill one exploratory well this summer.

The Burger J well was drilled down 6,800 feet and

was thought to have been located in a basin that

had a sizeable reservoir of petroleum.

whartonenergygroup.com 16

October 2015

However, Marvin Odum, president of Shell USA,

said in a statement that they got “a clearly

disappointing exploration outcome for this part of

the basin”; now, the Burger J well will be sealed

and abandoned. Other factors that contributed to

Shell’s decision: large expenses and contentious

regulatory climate in the area. Shell’s

announcement caused their stock price to drop

from a high of approximately $87 a little over a

year before to around $45 per share at close on

September 28th, 2015.

The Chukchi Sea, the area in question, has been

known for its icy, dangerous conditions that make

drilling tough and would make oil spills even more

difficult, messy, and expensive to clean up.

Activists and environmentalists have been fighting

proposed drilling in the area for years, and were

pleased with Shell’s decision to exit the area. In

addition, lower crude oil prices have driven down

oil and gas companies’ need to pursue expensive

drilling sites.

The potential risks and economic difficulties have

disincentivized other oil and gas E&Ps from

producing in the region. The Bureau of Ocean

Energy Management commented they had

received no expressions of interest in the Chukchi

Sea lease sale, proposed for 2016. Other areas in

the Arctic Circle have also lost the interest of

drillers, with only one nomination for the Beaufort

Sea sale for 2017. This lack of nominations and

interest has driven the U.S. Department of the

Interior to cancel both of these future oil and gas

lease sales. State officials were disappointed by

this announcement, as it restricts their ability to

profit off of their rich natural resources and

believed the decision creates a “burden on [their]

economy”; on the flip side, environmentalists were

pleased and view this as a great victory in their

fight against climate change. For major oil

producers such as Shell, ConocoPhillips, and

Statoil, however, this means another

disappointing loss in an already difficult economic




Petroleum News

General Electric’s Rebound: Diversification

and Moving Forward

Connor Lippincott – Senior Member, Academics Committee

To say that General Electric has had a good few

weeks would be an understatement. The

multinational energy conglomerate has seen its

stock rise 27% in the past two months from $23.27

to $29.70, attracted a $2.5 billion investment from

Nelson Peltz, and just beat its projected third

quarter earnings by almost $3 billon. A move out of

the financial industry and reinvestment in its core

industrial units have led to a bright future for

General Electric.

whartonenergygroup.com 17

October 2015

One driving factor behind investments is GE’s

movement away from financial services. As one of

only four “Nonbank Financial Company

Designations” on the Federal Reserve’s list of

Systemically Important Financial Institutions (SIFI),

the company is subjected to stress tests and

increased capital ratios, along with additional

regulations. For the past few years, GE has slowly

decreased its holdings in the financial market, and

just announced its intentions to be taken off of the

SIFI list. This coincides with the announcement

that the Federal Reserve approved the application

for Synchrony Financial, formerly GE Capital Retail

Finance Corporation, to spinoff as a stand-alone

bank. Earlier this week, they also sold $30 billion in

commercial lending and leasing businesses to

Wells Fargo.

The removal of GE from the SIFI list, while

theoretically liberating, does have some risk. They

would be the first company to be taken off the list,

and the exact cost of the action is unknown. While

most experts predict the move will be approved,

the Federal Reserve may take the opportunity to

continue to enforce strict regulations until the

move is finalized. Despite approving a temporary

reprieve from some SIFI regulations, the Fed

scheduled an additional stress test for Jan. 1, 2018

and that ordered “risk-based and leverage capital

requirements” be met by Jan. 1, 2016.

With a more lightly regulated future on the

horizon, Nelson Peltz, an “activist investor” whose

Trian fund has $12 billion in assets, invested $2.5

billion into the company, netting him a 1% share.

Though he has a history of attempting to make big

moves (for example, attempting to break up

DuPont), his suggestions for GE are fairly tame. He

wants the company to borrow $20 billion to buy

back shares, a little more than the company would

like. However, CEO Jeff Immelt has stated that his

and Peltz’s views are completely in line for the

future of the company.

Along with the encouraging financial sector news,

the company’s commitment to innovation in the

energy sector continues to generate positive

attention. As electricity generation continues to

shift from coal to natural gas, GE committed $2

billion to the development of the HA gas-turbine.

This is a Winnebago-sized turbine, top of its class

in efficiency and size. After a botched launch of a

top-end gas turbine in the mid-2000s, there have

already been 19 purchases ahead of the

commercial debut next year. Monte Atwell, a

general manager in GE Power & Water, said that

they would be able to “generate about the same

amount of power for about half the fuel” in

reference to a deal with New Jersey’s PSEG Power.

GE is also creating a company called Current to

house developing energy businesses. It will focus

on providing energy efficiency and renewable

generation to larger commercial customers, from

hospitals to retail stores to cities. The company

had been quietly incubating solar power, energy

storage, and electric vehicle components of the

new business. Starting at $1 billion in revenue, the

company expects to reach $5 billion by 2020.

A move out of the financial industry and a

commitment to energy and its core industries

seem to make sense for GE. Though oil and gas

equipment services saw a 16% revenue drop in

2014, the increases in aviation, energy, and water

kept revenue almost even. With the release of the

H-series gas turbine, that revenue drop should not

continue. GE seems to be on the right path for



Wall Street Journal

New York Times


whartonenergygroup.com 18

October 2015

Methane-Hydrates: A Frozen Natural-Gas Reserve

Josh Haghani – Senior Member, Academics Committee

In 2001, according to the Department of Energy,

there were 192 trillion cubic feet (Tcf) of natural

gas buried in the United States. At a 25 Tcf annual

consumption rate, those reserves of natural gas

should have been fully depleted by 2010. Today US

natural gas reserves stand at 862 Tcf. So much for

expert forecasts! Not only do we have natural gas

security, but we have an abundant supply of a

“clean” source of energy. Burning natural gas

emits half the greenhouse gases that burning coal

does per unit of energy, and sulfur/particle

emissions are significantly lower.

This source of energy is not a free lunch, as mining

of methane hydrates could cause a methane

runaway release. The greenhouse effect of

methane in 23 times larger than that of CO2. Large

scale methane release could be catastrophic for

global temperatures, and might start a feedback

loop by increasing ocean temperatures and

melting more methane hydrates repeatedly.

If you thought the shale gas revolution was big

news, then you haven’t been made aware of an

even bigger potential source of natural gas found

in icy deposits along continental shelves in the

deepest parts of the ocean: methane hydrates.

Methane hydrates (also known as clathrate) are

formed when methane buried in the sediment at

the bottom of the ocean is released and comes in

contact with cold (39F) water under high pressure

(50 times greater than atmospheric pressure).

Under these conditions, a water crystal cage grows

around the methane, producing methane hydrates

that look like ice.

The US Department of Energy has stated that

methane hydrate reserves could be 100 times

greater than shale gas reserves. A more

conservative estimate is 10 times greater than

shale gas reserves, but even this conservative

estimate means there is an absolutely massive

amount of energy currently stored at the bottom

of our oceans.

Although it is very difficult to harvest methane

hydrates, it is not impossible. In 2013, the Japan

Oil, Gas and Metals National Corporation

(JOGMEC) successfully collected natural gas from

frozen methane hydrates 50km off the Japanese

coast, in the Nankai Trough. This specific reserve is

estimated to hold over a decade’s worth of Japan’s

natural gas consumption. At the moment, low

shale gas prices are deterring investment in

methane hydrate exploration and recovery

technologies, but it is safe to say that this you’ll be

hearing more about this frozen energy source,

which could make the shale revolution look like a

damp squib in comparison.



whartonenergygroup.com 19

October 2015

SEPTA’s Sustainability Options

Jose Toro Perdomo – Senior Member, Academics Committee

Diesel exhaust emissions from trucks and buses

are a major source of pollution in most urban areas

in the country. For this reason, the Environmental

Protection Agency (EPA) has progressively

increased emission standards for buses, trucks and

other engines. As a result, SEPTA have been

forced to increase the standards of its 1,400-bus

fleet by: decreasing the average life of the bus fleet

by replacing its buses more frequently, buying

more efficient diesel, and buying hybrid-diesel

buses. The latter solution has been marketed as a

“clean and green solution” to Philadelphia’s

emission problem. In reality, SEPTA are taking the

minimal-effort option and less expensive route in

the short term, introducing hybrid-electric buses to

the fleet.

The other alternative, natural gas buses, has some

high fixed costs but in the long run, is both cheaper

and “cleaner”. There are also some problems with

the hybrid-electric technology: the battery is not

reliable and needs to be replaced every ten years

(which is very expensive) and the emission cuts are

not as high as the manufacturer guarantees (the

Toronto Transit Commission actually discontinued

their expansion of hybrid-electric fleets because

the emission benefits were not as great as they

were lead to believe [10% cut vs. 30% promised

cut]). SEPTA’s fleet of hybrid-electric buses cut

emission of fossil fuels just enough to meet with

EPA standards, but so much more can be done if

there is enough determination to cut SEEPTA’s

carbon footprints and to have a more efficient

transportation system.

Natural Gas buses run on compressed or liquefied

natural gas (CNG and LNG), depending on the

manufacturer. The buses have a canister of LNG on

the roof, which can be easily refueled at a refueling

station. In order to support a LNG or CNG bus

fleet, SEPTA would have to have access to LNG

and have refueling stations that can be quite

expensive to build (2 million dollars per station).

Despite these high fixed costs, natural gas is

obviously cheaper than diesel and it is also easier

to obtain, particularly here in Philadelphia, a city so

close to the Marcellus Shale. Cities like Los

Angeles and Washington have implemented

natural gas vehicles to their transportation

systems and they have already seen a return on

their investments. Countries that have big reserves

of natural gas, like the United States, have

exploded in production of natural gas vehicles

(NGV); 15% of the cars in Argentina are NGV and

the taxicabs in Buenos Aires, the capital, are all


Philadelphia has a ready supply of natural gas, but

SEPTA has made no indication that the are

interested in NGV technology for the future.

Although the start up costs are high, introducing

an LNG fleet to SEPTA will both decrease fuel cost

and decrease environmental impact. It is an issue

worth exploring and SEPTA should consider

moving towards this change.




Wall Street Journal

whartonenergygroup.com 20

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