CFOs Speak Out: Utilities: Not Interested

Deck: 

Stephen I. Chazen, Senior Executive VP and CFO, Occidental Petroleum

Fortnightly Magazine - October 2005

Energy experts have long speculated that PUHCA was a big barrier for oil majors consolidating with the utilities industry. Do you find the power utilities industry more attractive now with the repeal of PUHCA? And what are your views on further convergence?

Stephen I. Chazen: I think it is unlikely. I don't think the problem was PUHCA. Running power plants is really not what oil companies do. And you also have-even though you are allowed to do it-you do have the rate regulation problem. Most oil companies don't like any more government regulation than they currently have. I think it is pretty unlikely except as an ancillary activity. I don't see an oil company wanting to buy a Consolidated Edison or something.

I do see that Occidental Petroleum owns 2,100 MW of power plant. What type of plants do you operate?

SIC: Those are mostly related to our chemical plants. Those are cogeneration facilities. Their purpose is to make our chemical business more efficient, as opposed to just because we like being in the power business. … Our chemical business is one of the largest buyers of electricity on the Gulf Coast. What we do is take the electricity and turn it into chlorine and caustic soda, similar to Dow's business. And so that is a big business for us. Power is a major cost of that business. It is important for us to control our costs, so we have a power-marketing business. And then we also use a lot of electricity in our West Texas operations, which have a lot of pumps. … Our major variable cost is power.

Do you use your power plant as an entry into power marketing?

SIC: We do, of course, sell the excess electricity from those plants, and it is part of our trading operation-mostly tied to our natural gas business. I don't see us looking for more power facilities.

How does each Occidental business contribute to the bottom line?

SIC: It would be 85 and 15 [percent] between oil & gas and the chemical business.

How about the energy-marketing business? What percentage does it contribute?

SIC: I can't tell you … because [sales are] netted back. It's a fairly sizeable activity. But it is related to our electricity needs, mostly in the Gulf Coast, in marketing the excess power that we have. For example, in a time like now, where natural gas prices are high, we might find it to our advantage to not run the chemical plant and just sell the electricity that we produce.

You say that the chemicals business is not a natural ancillary business to oil. Then, would you say it is just the regulation that you find unattractive about the utilities industry?

SIC: It's the regulation more than anything. It isn't that you couldn't do it. I don't think the holding company act was what kept people from our business away from it, . It would have if they would have thought about it. But the thought never comes to mind. I just don't see us wanting to be in the rate-regulated business nor the retail business. For us it would have to be related to our business rather than being in the power business.

From an oil perspective, let me try a scenario on you that has been suggested in a post-PUHCA environment. An oil-and-gas major achieves virtual vertical integration by gathering the LNG from overseas and bringing it to its terminals in the United States, delivering via pipelines they own to unregulated gas-fired power plants they own, then selling this power to wholesale or even to retail customers.

SIC: That's not unreasonable. For example, we have a permit to build an LNG receiving terminal at Ingleside, [near] Corpus Christi, Texas. We have a cogen facility there, and we use a lot of electricity there. So, we'll use some of that gas to turn into electricity to power the plant and sell the excess. It wouldn't be whacky to say, 'Well I'll build a bigger electric plant there because it is easier or better to transport the electricity then it is [to get] the gas out of Corpus Christi. And then, we can use the heat from the chemical plant to gasify the LNG and save some money and operations. FERC has granted us a permit to build a terminal there.

How big do you think the LNG market can become for Occidental? What conditions would have to exist for you to expand your operations to include LNG?

SIC: One Bcf/D [billion cubic feet per day] is what we're looking at. … The purpose [of building the LNG facility] is to make our chemical business more efficient, not to be in the LNG business. … If it turned out that the [LNG business] was better, we would expand our power facility there. The question really is, you've got this gas, what are you going to do with it? If it turned out that it would be more economic to turn it into electricity and ship it as electricity, rather than ship it as natural gas, we'd do that.

The big question about creating a global gas market has been how to avoid the political dependence issues involved in oil. Is there a way to do that?

SIC: No, there isn't. The shipping countries can't eat the gas or the oil. It is a codependency. It isn't just that we are dependent on their oil. They are dependent on our money. Especially for LNG-they have a lot of gas but really no market except for the developed countries, like the United States, Europe, and Japan. If they withhold it, so what? They really hurt themselves. There are a lot of things that the United States is dependent on. It is never going to be independent for energy as long as we are in a fossil-fuel cycle. If we could somehow make it out of solar, that would be different. But that is a long ways away. So, there is a lot of gas in this world from a lot of different sources. It isn't just OPEC countries. West Africa, Malaysia, Indonesia, Venezuela-there's a lot of choices for us, and there's a lot of gas for us.

Gas futures for the winter months were, at press time, around $12/MMBtu. How will LNG moderate U.S. natural gas prices in the future?

SIC: It will, once it's significant. You have the terminals that are up right now, and they are only running half. So, there is not enough supply of LNG yet to matter. If there was, they'd be running full. So, right now it can't do much. But it will over time moderate [natural gas prices]. I do think the volatility will still be quite high, because the shippers will want to ship the thing on a regular pattern. So, they will be shipping at times when the demand is less, so the gas will have to go into storage. I don't think it will make it less volatile, but on average there will be lower volatility.

Do you believe the $70 per barrel oil prices will moderate? If so, over what time period do you expect it to moderate?

SIC: Yes. Seventy is more than the long-term price. I don't know whether it's $35, $30, $40, or $50, but I think $70 is beyond what one would reasonably expect. I think a series of circumstances right now has created this high price. As the circumstances subside and a little more production comes on in the next year or two, you'll see a decline certainly from these levels.

Do you think oil's best days are ahead of or behind it? Is natural gas the next big thing?

SIC: Gas is certainly the next big thing. There's a lot of gas, and it is easy to get. You don't have any risk of finding it. Gas is really important, especially for the large companies, the Exxons, the Shells and the BPs, which have enormous resource bases. But as far as finding new oil, that's pretty hard stuff today. Most of the oil is controlled not by the companies but by the countries. The places with oil are controlled by governments-not by Exxon or Shell. So, the Exxons or Shells and BPs are using their engineering expertise to move the product, find it, or transport it. But as far as finding goes, most of all big companies, including us, are focused on exploiting known resources.

What is it about the cultural differences between oil and utilities that you believe prevents them from converging?

SIC: I really don't see a large convergence, except possibly this LNG theory, where you say, 'OK, I'll build a power plant near the LNG terminal to convert the gas into more useable form. But I don't think anyone is going to go out and buy Reliant Energy to do that. … I don't think the [utility and oil business] are natural fits. I really don't. I think the skills of a utility management are different than the skills of an oil management. … I don't think those are related industries. I don't think the skill of selling electricity to someone's house is really the same as the skill of an oil company. We are users of energy. The energy business uses a lot of energy. To that extent, you have to manage it. I'm not sure anyone is going to want to go into the power business, except as a small part of something to make something else work. I could be wrong, but I don't see anybody wanting to do that.