Technology Development Network

Abengoa Another Solyndra?

In January of 2015, Abengoa was able to raise $328 million by selling shares in its US division.  In spite of reduced Spanish subsidies for renewables and crude oil prices that had cratered in November, 2014, it appeared that Abengoa was still flying high.  Then, in November 2015, after Gonvarri announced it would not be investing 350 million Euros in Abengoa.  In November, 2015, Abengoa announced serious cash problems and initiated insolvency proceedings.  This has led some to speculate that this is another Solyndra.

Although this is yet another government subsidized, alternative energy company that has gotten into financial trouble, that is about where the similarities between the two stories end.  Many months ago I did a piece on Solyndra.  You may want to review that (click here).  I was not even remotely sympathetic toward Solyndra, citing a plethora of stupidity and very shady dealings.  I do not see Abengoa being of the same nature.  If we could do an omniscient audit we would likely see some major blunders, a few dashes of hubris here and there, but, unlike Solydra, Abengoa actually delivered on many of its promises and can point to some pretty impressive accomplishments.

Among those many accomplishments is the Solana Generating Station near Phoenix, AZ.  Although not without its detractors, Solana has achieved about 30% of its production goals and has not defaulted on payments of its $1.4 billion in DOE loan guarantees.  The jury remains out on a final judgement, but this is nothing like the Solyndra debacle.

So what happened to Abengoa?  Why are the sharks circling and many predicting its demise?  Why has KPMG recently said that Abengoa needs $496 million in equity very soon to avoid bankruptcy and $100 million Euros before December 30 just to stay in business?   

It will take some time for the dust to settle on this story, but it appears to me that Abengoa may be the victim of several conspiring factors that hound subsidized industries.  Developing new technologies is an expensive undertaking, fraught with many risks – not the least of which are government fickle in the face economic uncertainty.  Abengoa was relying substantially on subsidies from the Spanish government.  In 2013 the Spanish economy was in shambles.  The economy had never recovered from the collapse of the international real estate market in 2008 – yet another government subsidized debacle.  In late 2012, Spain was forced into austerity measures by the international banking community.  By 2013 the Rajoy Government felt that they could no longer afford to support renewables with subsidies and ended the program.  This dramatically changed Abengoa’s cash flow.  The situation was further exacerbated by an increase in taxes on renewables that went into effect in October 2015.  And don’t forget the collapse of oil prices that have hit new lows in late 2015.

Instead of taking corrective action back in 2008 or even 2013, Abengoa continued an aggressive strategy of development in the face of weakened cash flows.  In order to continue its work on some 250 international projects, the company increased its debt and aggressively sought equity funding.  This “doubling down” on financing growth increased their risk – especially of economic collapse if strong cash flows did not materialize soon enough.  That seems to be the situation that Abengoa is in today.  They have some interesting and potentially profitable projects, but it looks like they will probably have to sell off some of their best opportunities just to stay afloat. 

Some are blaming Abengoa management and two CEO’s have stepped down since 2010.  Some blame the government of Spain and talk about suing the Spanish government for failing to continue its support for alternative fuels.  One could hold that the US initiated scam on the world – the real estate mortgage bubble – set in motion irresistible economic woes that worked itself out in many, unpredictable ways.  There is some merit to all these positions, but I think this overlooks the powerful, corrosive forces of government intervention.  When governments get involved the whole process of balancing risks and rewards is skewed.  I wrote about this extensively in my eBook:  Oil Shale, Treasure Trove or Pandora’s Box?  (click here to see at Amazon.com). 

When governments get involved in subsidies, supports, grants and loans for industrial processes, clear thinking about profitability versus costs and risks goes out the window.  The whole calculus on ROI is skewed toward making lousy bets on harebrained schemes.  A few of these bets miraculously workout and become enshrined on bookshelves across the globe.  Some can be “forced” into looking like they will work for a while, but, in the long run they are like playing the slot machines.  The stats catch up with the players and the house wins.  Because many of the schemes are not economically sustainable, many bankrupt the supporters and impoverish those who are not nimble enough to get in and get out quick – especially the taxpayer.  It is little wonder that our world is littered with the derelicts of government backed failures.  That is just sort of the nature of things

Is Abenegoa another Solyndra?  Not in the sense of being another scam.  That would be a totally unfair assessment.  Nevertheless, in some sense it is another Solyndra.  The same powerful forces that cloud vision and judgement were probably at work.  These forces tend to drive management to make poor decisions and take inordinate risks.  I’m in favor of governments and non-profits investing in basic and even applied research that can be the basis of new industries.  These should be those basic technologies that can be shared widely.  They should be funded at moderate, sustainable rates and NOT be associated with the madness of financial frenzies.  Governments should refrain from subsidizing industrial and commercial entities and stay away from the craziness of the financial casinos.  Rarely does anything good come of that and frequently taxpayers end up being bilked by the financially shrewd. 

110%

I think it was probably in Mrs. Perkins 5^th grade class that I first became aware that I was not much of a “team player” – at least not as Mrs. Perkins and others viewed “teams.”  At that age I had overcome much of my language arts problems and had started to show some reasonable aptitude for learning.  Learning was never very easy for me, but I had come to grips with the need to learn and to put in the requisite effort to succeed. 

Mrs. Perkins had come up with the bright idea that we were going to write a story in “teams.”  We were assigned randomly into groups of four or five and told that we needed to write a story.  We were going to meet every day for a few days and then turn in our story.  She would read them aloud and then the class would decide which one was the best.  With such simple rules, what could possibly go wrong?

Well...in my group we had two of my kickball buddies and the ditzy, class blonde.  The guys immediately announced that they were going to do us a favor and not do anything.  They thought it their best contribution to the project to do nothing but kibitz – they were probably right.  The ditzy blonde knew “exactly” what she wanted to do.  She wanted a story about a princess, a horse or a rabbit but would prefer if we could work in all three into a comic tragedy about a good witch’s lost love.  Then everyone turned to me with that look of, “well....of course...if you want a decent grade...YOU’LL have to do all the work...smarty pants.”  This was the first time that I felt perhaps “team-work” wasn’t all it was cracked up to be.  It did not go well. 

That was the first of many experiences where I have seen “team” defined as a group of ne’re-do-wells and knuckleheads latching on to a minority of over-achievers to accomplish the mediocre.  Much later I looked into this phenomenon in some depth.  I was working with a team of bright and dedicated individuals to design a computerized Operational Management System for a large laboratory group.  We had “discovered” that one of the biggest problems in the organization was the definition of “done.”  It seemed that many considered a project that was about 80% complete as being “done.”  That is to say, once about 80% of the identifiable tasks were complete progress just stopped.  Most just considered it “done” and went on to something else.  This resulted in a huge backlog of projects that were “done” but not so “done” as to be billable to clients.  Our main job turned out to be identifying and tracking those 20% mundane tasks that had to be finished before the laboratory could bill the work. 

One of the surprising lessons learned from this job was the tremendous resistance we encountered from workers and managers alike.  Not only did workers resent being “outed” for not getting things really complete, even managers were nervous about pressuring workers to get things really “done” – even though they knew that their business was suffering as a result.  There seemed to be a consensus that somehow 80% complete ought to be “complete enough.”  Managers were inclined to try to circumvent the problem by reorganizing, hiring more people or devising complex automation schemes to somehow make getting 80% of the tasks completed good enough.  In this particular computer project the scope of the job grew as we struggled to eliminate or automate simple tasks that workers just didn’t want to do and managers just didn’t want to require them to do.  Some of the tasks included:

• Proof reading reports
• Double checking any manual entry of data
• Running simple manual tests like pH, color and odor
• Contacting clients to get details or billing or report distribution
• Actually producing an invoice

There were an incredible number of hair-brained schemes to try to get the computer system to do all of these tasks.  The scope of the project drifted and the costs exploded.

It was during this project that I determined that there is within our society a concerted commitment to 80%.  Many think that it is just too hard to get that last 20% and are unwilling to do put in the effort.  They leave it to the few “over-achievers” to close that gap.  They will even stand back and watch them do it, quietly laughing up their sleeve at them.  The 80%-ers are the first and most vocal supporters of “team efforts” and why wouldn’t they be?  How else can things get done around them unless they associate with those who simply can’t help themselves and finish the job?  And, of course, it is even better is to strive to be the “team leader” and dole out the assignment while sitting atop the ant-farm.

This is fundamentally counter to the classic American notion of hard work and individual responsibility.  It is a new type of “aristocracy of the lazy” that runs counter to 19^th century American egalitarianism.  That egalitarianism can be illustrated by a myth that grew up around the “Deutschheim” area of central Missouri.   This was an area that was settled by German immigrants fleeing the political and economic chaos of the 1830’s and 1840’s in Germany.  Germany was a hodge-podge of tiny nations run by a plethora of petty princes.  Both peasants and intellectuals had little economic opportunity in this semi-feudal society.  Germans left this mess by the hundreds of thousands and created new communities in the upper Mississippi River watershed (especially Ohio and Missouri Rivers).  In the larger cities they formed centers of learning and in the smaller towns and villages they applied new agricultural methods to the loamy soil of the Mississippi flood plain.  Although not without their share of hardship, for the most part these communities prospered and few could boast of the deprivation that later immigrants often endured in the Great Plains.

The myth tells of a petty prince that immigrated to Washington, MO, expecting the residents to support him in a manner similar to what he had received back in the “old country.”  In uncharacteristic callousness the prince was allowed to freeze to death on the streets of Washington.  Later, these same peasants and intellectuals stormed the armory at St. Louis to hold Missouri actively in the Union in defiance of a Missouri Constitutional Convention’s vote for neutrality in the American Civil War.  It was German immigrant sentiments against slavery and especially idle aristocracy that kept Missouri and the largest stash of arms west the Mississippi out of the hands of the Confederacy.

For most of our history, laziness has been abhorrent to much of American culture.  Nevertheless, the culture of entitlement has always been with us.  We have never lacked for those few who would take their leave on the backs of others.  It is often these few who precipitate the great crises and upheavals that mar the history of free societies, whether it be conflict over trampled rights or financial chaos deriving from outrageous speculation.  Acceptance of 80% is always a losing proposition fraught with conflict and impoverishment.  Success in business and all social activities has always been and always will be predicated on closing the gap between 80% and 100%.  Laziness and sloppiness always brings with it failure and heartache.

But if 80% to 100% is the difference between failure and success, why consider 110% -- the title of this article?  For me the difference between 100% and 110% is the difference between success and meaning.  A complete effort is needed to be successful.  That pays the bills, keeps the trains running and keeps the currency strong.  These are all good and bring comfort, but they do not bring meaning.  Meaning in life is determined by what is done BEYOND success.  Look at any great man or woman and you will see that their greatness was not in paying their bills on time.  Greatness is measured by what is done beyond that.  Wealthy names like Vanderbilt, Gould and Morgan tend to fade from our memory, but names like Rockefeller, Carnegie and Gates tend to endure because of what they did beyond success.  We don’t, for example, remember Churchill for salvaging the finances of Blenheim or even for winning the Nobel Prize for Literature, but we do remember him for his tenacious opposition to tyranny when it was not even popular to do so. 

Those that give only 80% often rob themselves of success that they might have otherwise had.  To be sure, in the vagaries of life it sometimes happens that they are awarded undue merit for the efforts of others.  But of this we can be sure, they fall far short of life’s truest goal – meaning.

Royal Dutch Shell Abandons Shale Play

Peter Voser, CEO, has announced that Shell will not be immediately pursuing shale gas or liquids.  The company is taking a $2.2 billion (yes…with a ‘b’) write-down (see Reuters).  Shell had heavily invested in North American shale properties and seemed poised to be a big winner in the shale game (sort of a pun).  They had a patented process for extracting the oil in-situ and significant reserves in place.  So what happened?

When first doing research for this posting I expected to find that Shell was the victim of unusual market conditions.  We will discuss those here and they, no doubt, came into play.  Nevertheless, I wonder if something more fundamental could have been happening.  Not being on the inside of this long-term project (started in the early ‘80’s) it is hard to say, but I wonder if this may have included some technological and managerial hubris.  We will talk about that also.

First let’s deal with market conditions.  These affect all alternative and even conventional fuel plays.  We are now seeing, and can expect to see for 10 to 20 years, a glut of natural gas.  Back in the ‘70’s natural gas was in short supply and the global fortune-tellers were saying we needed to run a pipeline to Jupiter’s moon Titan to get enough methane to survive.  Prices went from cents per MMBTU (i.e. “million BTU” – a measure of energy content) to a whopping $2.50 per MMBTU.  Then deregulation stabilized domestic well-head prices at right around $2.00 per MMBTU for about 15 years. 

In around 2000, weakness in the US dollar, unsettled international conditions and investor speculation caused all energy prices to fluctuate pretty wildly.  Both oil and gas tended to fluctuate together.  The new buzz word was “fungibility.”  There was a naïve belief that one fuel was as good as another fuel.  Although there is some interchangeability between natural gas and oil, they are quite dissimilar.  They can both be used for heating homes and running industrial furnaces, but only oil is an effective source of transportation fuels.  With the shrinking of US manufacturing and chemical industries, the domestic market for natural gas has significantly weakened compared to the market for transportation fuel.  In this new era a MMBTU of natural gas is not as valuable as a MMBTU of oil.  A barrel of oil contains about 6 MMBTU and costs around $90 to $100.  The price for 6 MMBTU of natural gas is only around $18 ($3 per MMBTU X 6). 

This disparity is feeding on itself.  As producers go after crude oil, they often find that natural gas is in the way.  This is especially true with coal seam formations and tight sand and shale formations.  These formations produce high ratios of very light hydrocarbons like natural gas.  Nevertheless, the amount of heavier hydrocarbons can be increased by new techniques in horizontal drilling and hydraulic fracturing.  Often enough oil can be produced even from traditional high natural gas content formations to be profitable.  Unfortunately the natural gas that is also produced has to be dumped onto an already weak natural gas market. 

When producers can, they will put the natural gas in a pipeline and sell it.  This adds to the glut and tends to drive down natural gas prices.  Far too often this is not practical.  Pipelines are just too far away from the gas well.  Furthermore, given natural gas prices, transporters of natural gas are not keen about extending pipelines.  When this is the case the producer will often just burn the natural gas in a flare.  At this writing the state of North Dakota is lit up like a Christmas tree with burning gas flares (see “Natural Gas Flaring in North Dakota” and "Oil Companies Sued for Waste of Natural Gas" ).  Until pipelines get constructed, this valuable resource will just add to the planetary CO2 burden without any useful benefit.  A sad state of affairs.

The result of all of this is a new and quite different energy market.  Natural gas is, and will remain cheap.  It is, however, scattered over a very wide geography making the logistics of gathering a challenge.  Solving these logistical problems could be a big opportunity.  Schemes that make methane and other very light hydrocarbons will not fare well over the next 20 years.  They will be plagued by competition with cheap natural gas. 

Schemes that convert methane to more valuable products could be major winners – especially if the scheme solves logistical problems.  Schemes that involve small plants that make a product that can be used in the oil and gas industry could be one such play.  There are these types of ideas out there.  Stites & Associates, LLC, is working with three such companies on a development basis.  If you are interested in contacting one or more of these companies and learning more about their technologies, please feel free to contact Ron Stites at [email protected].

We have seen that the market conditions really have changed the landscape for energy players.  Not every play is still a good play.  So, is this what killed Shell’s play?  I think only partially.  Probably more important was just the complexity of their approach.  Shell’s technology depended on heating the shale to a high temperature (650F to 700F) in place (“in-situ”) for several years.  This had to be done without causing severe environmental damage.  All previous schemes involving underground fires had long been rejected as too dangerous.  Hence, Shell planned to heat the shale with electric heaters that they put down drill holes.  This is clean, but not very efficient.  It was going to be especially hard to do this in wet shale formation.  The only practical way to do this was to first remove most of the water from the formation. 

The only way to dry out a formation is to pump the water out while blocking new water from getting into the formation.  The plan was to drill wells around the perimeter of the shale being produced and freeze the water around the perimeter creating underground “freeze walls.”  The plan was to use liquid ammonia as a refrigerant to create the “freeze walls.”  After the “freeze walls” were in place the water inside the perimeter would be pumped out of the formation.  Additional wells would be drilled to place the electric heaters in the shale formation.  Then the shale would be heated.  The oil and gas formed by heating the rock would then be recovered from the wells that had been used to remove the water.

Although this sounds pretty crazy at first blush, Shell was actually able to show that they could do this.  They demonstrated this on a 30 foot by 40 foot property in Colorado.  On their Mahogany property test site 200 miles west of Denver they were able to produce 1,700 barrels of oil from their 30 by 40 plot in a few years.  With these data and armed with some 70 patents, it was pretty easy to fall prey to all the hype surrounding shale oil. 

I suspect that the whole project collapsed under the weight of its size and complexity.  Once a detailed plan was put together for testing this approach on a 160 acre site, the immensity of the project had to become much clearer (see “Plan of Operations" ).  When this 160 acre scale is extrapolated to a really large, commercial scale, infrastructure issues begin to appear.  There wasn’t going to be enough electricity on the Western Slope of Colorado to run the heaters at full scale.  It was probably going to require the construction of a coal fired power plant.  That was highly unlikely in the business and coal unfriendly state of Colorado. 

These infrastructure issues would have added to the overall risk of the project.  When these additional risks were added to known risks such as constructing underground “freeze walls,” extracting and upgrading new products, marketing those new products and remediating the site(s); it is little wonder that Shell would begin to have second thoughts about such an ambition and complicated plan.  It would not have taken much in the way of overall market changes to have tipped the scales in favor of mothballing the project. 

Was there technological or managerial hubris?  It is hard to say, but a $2.2 billion write down is a lot for any company.  Heck, that’s almost real money for the US government.  Hindsight would tell us that this project really had a lot of technological, logistical and even political risks.  Given all these pretty obvious risks, it is hard to see how they could have failed to see the dangers and not mitigated their losses.  Where was the guy who asked the tough questions?  Do companies not employ such people anymore?  They should.