The Secret to Judge Posner’s Amazing Productivity [Gaille Energy Blog Issue 70]

Last September, 78-year-old Richard A. Posner retired from the United States Court of Appeals to focus on writing.  Even while serving as a full-time judge on the Seventh Circuit and part-time law professor at The University of Chicago, there is no question that Posner has been among the most productive writers ever.  Posner has authored more than 50 books and 500 scholarly articles.  As a judge, he’s heard oral arguments in over 6,000 cases and written more than 3,300 opinions deciding them.

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Photo by Nathan Webster for the New York Times

I met Judge Posner in 1995, when I was a first-year law student at The University of Chicago Law School.  He hired me as his research assistant, and I spent the better part of two years supporting his work.  Each week, he would give me a wish list of sources for whatever he was writing. In the days before the Internet, this meant scurrying between campus libraries, sometimes in sub-zero temperatures. I also cite-checked his articles and books—ensuring that his words accurately reflected the underlying sources.

A few days before my graduation, I asked Posner, “What is your secret to productivity?” His explanation was remarkably concise.  I’m going to share it later, but first, it’s important to acknowledge certain qualities (that he did not mention) contributing to his productivity.

  • Raw Intelligence. Over the course of my career, I’ve been blessed to know many brilliant academics and jurists.  These include Nobel Laureates Ronald Coase and Gary Becker, University of Chicago Professors Richard Epstein and Cass Sunstein, and U.S. Court of Appeals Judges Michael McConnell and J. Harvie Wilkinson III.  All of them were born with incredible intellectual firepower. At Chicago, I was able to watch them spar at Law & Economics Workshops. Even among such luminaries, Judge Posner stood out. But intelligence is like wealth.  It suffers from diminishing returns.  As Charlie Sheen’s character Bud Fox quipped in the movie Wall Street: “How many yachts can you water-ski behind? How much is enough?”  At some point, being more intelligent ceases to meaningfully increase productivity.  Although Judge Posner has boasted, “I am fast, I cover a lot of ground,” even he is limited by how quickly he can write.
  • Sacrifices/Discipline. Productivity requires discipline.  Human beings cannot manufacture more time, and productivity is a function of time management.  As Judge Posner has explained in many interviews:

“I don’t do much.  I don’t take vacations.  My wife and I don’t go out often. Sometimes for dinner or the theater, but not often.  So I work weekends, nights.  I have lots of time and I write.” “When you’re just talking with your friends about trivia, what’s the point?” “I don’t go to cocktail parties.”

Sacrificing such leisure activities helped Posner create time for writing.

  • Structure. Structure also advances productivity.  The Posner I worked with liked his routines.  He got up at the same time every morning, went to the courthouse, and either heard cases or wrote judicial opinions.  Afterwards, he often met with his research assistants or taught courses at The University of Chicago Law School.  Then he went home and wrote until dinner, followed by more writing until 11:30 at night, when he would take a walk with his wife before going to bed. On the weekends, he’d exercise and keep writing. He wrote seven days a week.

But none of the above was mentioned in Judge Posner’s answer to my question. In fact, he expressly disavowed having any routine.  Posner does not have a quota of pages to write each day.  Nor does he block off specific times for writing.  Rather, Judge Posner said the secret to his productivity is integration.  He integrates writing into the very fabric of his life. Writing fills every gap when he is not doing something else.  Writing is the background default, seven days a week, 365 days a year.

I remember being surprised by his answer.  It’s funny how a few words can change how one thinks.  Until then, I viewed time as being walled off between work and leisure. I had been more of a separator than an integrator.  Once my day’s work was done, I disconnected from it.  I didn’t work when I was on vacation.

But Posner’s answer changed me, and I transformed myself from a separator to an integrator. Twenty-three years later, I continue to benefit from Judge Posner’s advice.  Not having artificial boundaries has increased my productivity. When I have extra time, I fill it by working on client matters or writing books and articles.  The extra hours earned from integration have added up over the years.  Counterintuitively, integration also can be liberating.  I don’t worry about going on vacations, being out of the office, or getting calls on the weekends—because I expect to be working at some point.  Instead of work stacking up, it gets addressed on a continuous basis.

Ultimately, productivity is all about time.  A television miniseries about Henry VIII recently showed the King, late in life, having dinner with his closest friend, the Duke of Suffolk.

King Henry VIII: In these last days Your Grace, I have been thinking a great deal about loss. What loss Your Grace, is to man most irrecoverable?

Duke of Suffolk: His virtue.

King Henry VIII: No, for by his actions, he may redeem his virtue.

Duke of Suffolk: Then his honor.

King Henry VIII: No, for again he may find the means to recover it.

Their conversation could go on and on.  Fortunes can be lost and recovered.  The same is true of health.  While people are irreplaceable, there can be new loves, friendships, children, and grandchildren.

Duke of Suffolk: Then I cannot say, Your Majesty.

King Henry VIII: Time, Your Grace. Of all losses, time is the most irrecoverable, for it can never be redeemed.

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Curious about whether such a conversation actually took place, I consulted Alison Weir and Margaret George, authors of Henry VIII biographies.  Both confirmed there is no such historical account.  Even so, the story does resonate.  Think of how careful we are to protect our loved ones, health, bank accounts, homes, and reputations.  Are we as careful about our time?

Maybe you do not want to spend your background time as Judge Posner does, writing books and articles.  But when minutes or hours become available, how do you want to spend them?  Perhaps the universal lesson from Judge Posner’s secret to productivity is that we need to make a conscious decision about how we spend the margins of our lives.  If we fail to do so, we risk letting time irretrievably slip away.

About the Gaille Energy Blog.  The Gaille Energy Blog (view counter = 70,158) discusses issues in the field of energy law, with periodic posts at Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development,and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.

Offshore Pipelines: Visiting the Allseas Solitaire [Gaille Energy Blog Issue 69]

I recently had the opportunity to tour the Allseas Solitaire pipe layer as it was constructing a natural gas pipeline between the United States and Mexico.  The Allseas Solitaire is 1,302 feet long, longer than a Nimitz class aircraft carrier.

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The Solitaire travels with a fleet of smaller vessels that ferry pipe, personnel, and supplies to and from shore.  As our helicopter approached, new pipe was being loaded onto the Solitaire’s deck from a support vessel.

The helipad is perched on the front of the Solitaire, and notwithstanding gusty 35-mph winds, the pilot made the landing look easy.

Our tour commenced with the living quarters for Solitaire’s approximately 500-member crew, which included a cafeteria, hospital, and basketball court.  Then we made our way to Solitaire’s bridge, which offered panoramic views over the vessel.

Views from the Bridge

The walls of the bridge were lined with video monitors showing locations throughout the Solitaire, as well as underwater views of the descending pipeline.  The underwater cameras regularly captured schools of large fish swimming by.

Next on the tour was the rear deck, where stacks of newly loaded concrete-coated pipe were awaiting assembly.

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Subsea pipes are coated in concrete to provide enhanced stability. The below figure (from ShawCor) illustrates how concrete coating is applied to the underlying steel:

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The pipe is fed from the deck into the firing line, where pipe edges are bevelled in preparation for welding. Crews of welders working at different stations then simultaneously connect several pieces of pipe together.  The firing line is very hot, and personnel wear air conditioned suits to keep them cool in the demanding environment.

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The Firing Line

Once the new pipe segments are connected, the Solitaire moves forward, allowing the new section to gradually exit the vessel and descend to the seafloor.  This pipeline lay technique is called the S-lay.

The “S” refers to the shape the pipe forms between the vessel and the seabed as it is laid.  In the S-lay method, single lengths of steel pipe (joints) are welded, inspected and coated in a horizontal working plane (firing line) on board a pipelay vessel. As the vessel moves forward, the pipe gradually exits the firing line, curving downward through the water until it reaches the touchdown point on the seabed. As more pipe is paid out – under its own weight  it assumes the “S”‑shaped curve.  The curvature of the upper section of the pipeline (the overbend) is controlled by a stinger, a steel structure with rollers protruding from the end of the firing line to prevent buckling of the pipe . The curvature in the lower section of the pipeline (the sagbend) is controlled by pipe tensioners, caterpillar tracks that grip the pipe. The amount of tension is one of the most important factors in the capabilities of an S-lay vessel.  Allseas Web Page.

The S-lay is illustrated below:

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Below was my view as the pipe exited the Solitaire.

When I first arrived at Vinson & Elkins and started working on global energy projects, I was fascinated by the industry’s extraordinary engineering and technology.  I still am.  Every new project presents the opportunity to learn something new. I remind my students at Rice and Chicago that success in the energy industry often requires being a polymath. One has to develop an understanding of many different fields.  After all, how can you effectively negotiate a pipeline contract if you don’t understand how a pipeline works?

About the Gaille Energy Blog.  The Gaille Energy Blog (view counter = 69,529) discusses issues in the field of energy law, with periodic posts at  Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.

A New Frontier: Energy and Initial Coin Offerings (ICOs)

This is a guest blog authored by William Brumfield, an Associate at GAILLE PLLC. Will was a Cafaro Scholar at The University of Chicago Law School, where he earned his Doctor of Law Degree.  He received his Bachelor of Arts degree in French with Highest Honors from Southeastern Louisiana University.  

If you are not familiar with the cryptocurrency world, you may want to consider acquiring at least some surface-level knowledge.  Even now, with Bitcoin and most other cryptocurrencies at a relative low point, the combined market cap of all cryptocurrencies exceeds $300 billion (down from its January 2018 high of over $800 billion).  This, after beginning 2017 with a total market cap of under $20 billion.  While much has been written about a (or the, depending on your perspective) crypto bubble, it seems established, now, that crypto is more than a passing fad, and will remain with us, even if in diminished form, for some time to come.

I concede that there are many legitimate reasons for continuing widespread unfamiliarity with cryptocurrencies.  The purchasing process is complex and usually involves multiple websites; securing your “coins” involves a stream of wallets, passcodes, and seed phrases; and the market is frighteningly volatile.  Further, the bulk of the cryptosphere exists entirely online, with a physical presence marked mostly by a modest (but growing) number of Bitcoin ATMs, technical conferences, and hardware wallets.  As a millennial who has generally been an early adopter of technology, even I find myself sometimes uncomfortable with the lack of tangibility, and surprised by the inundation of terminology, concepts, and possibilities.  But I posit that the initial frustration and continuing challenges are well worth it.

One of the more interesting aspects of the cryptosphere is the Initial Coin Offering, or ICO.  “In an ICO, a quantity of the crowdfunded cryptocurrency is sold to investors in the form of ‘tokens’, in exchange for legal tender or other cryptocurrencies such as bitcoin or ethereum. These tokens are promoted as future functional units of currency if or when the ICO’s funding goal is met and the project launches.”  Wikipedia.  Over $12 billion has been raised through ICOs, with the vast majority of activity arising in 2017 and 2018, as shown below.

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In the energy space, a disproportionate number of (semi-)established coins are electricity- or renewables-focused; Power Ledger, for example, which raised $13 million during its ICO and now has a market cap of $120 million, is an Australian coin that describes itself as a peer-to-peer marketplace for renewable energy.  The petro (or petromoneda) is a state-sanctioned Venezuelan cryptocurrency purportedly backed by the country’s oil and mineral reserves.  And a group of established oil and gas companies, including BP and Shell, plan to launch a blockchain-based platform for energy commodities trading by the end of the year.

There are a variety of oil and gas-focused coins in the pipeline, but few have yet gained traction or a particularly large portion of market share.  One, partnered with law firms Goodwin Procter and King & Spalding, is actively circulating a private placement memorandum amongst Texas investors, describing itself as an energy investment vehicle.  Although it mentions potential uses of blockchain technology—smart contracts and automated dispute resolution, among others—its focus is on using the coin as an investment vehicle, with the blockchain elements as trimmings. Its founders pitch their offering as “the first blockchain-based capital market for energy exploration and development” and as a “superior way to capitalize energy projects.” In other words, the ICO’s primary driver is similar to that of any energy equity placement—raising capital from individual investors to acquire, develop, and operate assets.

The ICO regulatory landscape remains murky, but utility tokens, which have an implicit use or value (now or in the future), are considered safer from SEC intervention than such security tokens, which are more akin to buying stock in a company that investors hope will be financially successful.  The Howey Test, deriving from a decades-old case, Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293 (1946), but still employed today, “considers an instrument to be a security if it displays certain features, like whether profits depend on the actions of a third party or whether the instrument represents an investment in a common enterprise. … If an instrument can prove that it’s a ‘useful item’ in itself—like a barrel of oil or a golf club membership—then it can escape classification as a security.”  Joon Ian Wong, “Is ethereum a security? The answer could upend the crypto world” (Quartz, May 3, 2018).  Classification as a security, of course, leads to a host of regulatory consequences.

Unregulated ICO offerings are facing increasing skepticism from investors due to their mixed track record.  The ICO scene is ripe with scams and ill-conceived ventures. reported in February 2018 that 46% of 2017’s ICOs had already failed, with another 13% classified as semi-failed. lists 107 “dead” coins that were scams.

Further, the Wall Street Journal recently unearthed hundreds of “questionable” coins—coins with founders who could not be independently identified or verified, some even with stock photos, or whose website or whitepaper plagiarized other, legitimate coins.  Shane Shifflett and Coulter Jones, “Buyer Beware: Hundreds of Bitcoin Wannabes Show Hallmarks of Fraud” (Wall Street Journal, May 17, 2018).  These are only two of a variety of potential signs of a fraudulent ICO.  Others include lacking (or absent) roadmaps and whitepapers; a weak online presence, including on Github (essentially a hub for development and other activity); and hype without substance generally.

Are energy ICOs worth the hassle?  While a troubling number of ICOs in other industries have failed, many have succeeded, and some are thriving.  Ethereum, NEO, and Ark, for example, were launched by ICOs—Ethereum is the second-largest cryptocurrency by market cap, and NEO and Ark’s combined market cap exceeds $3.5 billion.  Notably, all three have behind them communicative, identifiable teams, and promising technology with real and continuous development.

In order for an energy ICO to be successful, its core offering must similarly make use of blockchain technology to offer unique benefits to our industry.  Quasi-security ICOs will struggle to compete against efficient (and more established) equity markets, both public and private.  They are just a variation on something that already exists—not an entirely new application of blockchain technology.

The cryptosphere is a convoluted, scam-ridden, messy, and risky frontier.  But frontiers exist to be conquered.

About the Gaille Energy Blog.  The Gaille Energy Blog (view counter = 67,640) discusses issues in the field of energy law, with periodic posts at  Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.


Time & Patience: Napoleon’s (Hard) Lesson for Negotiators [Gaille Energy Blog Issue 67]

“The strongest of all warriors are these two — Time and Patience.” – Leo Tolstoy, War and Peace

Even if both parties must conclude a deal, we must consider the question of Time—by when does each need to reach agreement.  One party may absolutely need resolution by the end of the month; the other, within the year.  The causes for such Time asymmetries vary greatly.  For example, consider a company that owns a valuable asset but has run into financial problems.  It needs to sell the asset to stay afloat.  The faltering company’s timeline for a transaction is constrained.  It has no Time.  It must sell now.

On June 24, 1812, Napoleon marched on Russia with 680,000 soldiers, seeking to engage and decisively defeat the weaker Russian army.  The Russian’s tactic was to retreat, and as they did, scorch the earth.  Whole towns were burned in their wake, leaving little behind to supplement Napoleon’s supply lines.  The French did not catch up with the bulk of the Russian army until September 7—near Moscow at Borodino—where Napoleon won a narrow victory.

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 The Battle of Borodino by Louis Lejeune 

When their defeat was evident, the Russians abandoned and burned Moscow—heading even further east.  Napoleon walked into Moscow expecting a settlement offer from Tsar Alexander I.  Only none came.  Not until October 19 did Napoleon realize that he was out of time.  His army was short on food, and winter was coming. Napoleon’s retreat back to France left 380,000 of his soldiers dead and 100,000 captured.

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French Retreat by Illarion Pryanishnikov 

As observed by Tolstoy, Napoleon’s defeat was ultimately caused by his miscalculation of the Time asymmetry.  No matter how many soldiers Napoleon had, the Russians had an indefinite Time horizon.  They had thousands of miles of countryside to retreat across. Napoleon’s expectation of an attractive peace offer was unfounded—because the Russians knew that logistics and winter would eventually force Napoleon to leave.

Similar situations often play out in negotiations.  When I was the general counsel of a shale developer, my company had great oil and gas leases with three- or four-year terms—but lacked the money to drill wells needed to extend these leases.  Meanwhile, the clock was ticking day-by-day.  If wells were not drilled, the leases would expire and revert back to landowners.  In such a case, the company’s entire investment in them would be lost.  So along came multi-billion-dollar majors like Hess and EOG to jointly develop the leases—for a price.  But Time was not on our side.  The big companies knew this and extracted concessions.  As painful as those concessions may have been, they were the price of not ending up like Napoleon.

The lesson for negotiators is to always be aware of asymmetrical Time horizons.  If your counterparty in a deal or a dispute has a short Time runway—by which they need resolution—then you will be able to extract concessions.  The size of those concessions will only grow with Time, as your counterparty’s position becomes more desperate.

If you happen to be the Time-constrained party, then realism must prevail.  Do not fall into the so-called “Napoleon Complex,” which is “characterized by overly-aggressive or domineering” behavior (Wikipedia).  It will not fool your counterparty.  Your failure to shrewdly evaluate your shorter Time horizon only will result in your deal deteriorating—or worse.

Napoleon managed to have a second act, but no happy ending.  He was exiled to one of the most remote islands in the world, Saint Helena, where he died at 51.

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About the Gaille Energy Blog.  The Gaille Energy Blog (view counter = 64,950) discusses issues in the field of energy law, with periodic posts at  Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.



LNG vs. Pipeline Economics [Gaille Energy Blog Issue 66]

This is a guest blog authored by Ankur Shah, one of my students at Rice University’s Graduate School of Business.  

Royal Dutch Shell says the world could be grappling with a shortage of liquefied natural gas within a decade due to underinvestment in new projects. The Anglo-Dutch energy giant issued the warning in its second annual LNG outlook, which reports on developments in the booming market for natural gas cooled to liquid form for export. Shell says the market for LNG grew by 29 million tons last year, 30 percent more than previously expected. Trading in LNG reached 293 million tons in 2017, up from just 100 million tons at the turn of the century. At nearly 300 million tons, suppliers shipped enough LNG last year to power about 575 million homes, by Shell’s count.  Tom DiChristopher, Shell warns of liquefied natural gas shortage as LNG demand blows past expectations (CNBC Feb. 26, 2018)

While pipelines between nations and continents have traditionally dominated the international gas trade, they offer limited options for re­balancing dynamic markets.  If circumstances change, their owners can reverse directional flows or adjust capacity (by increasing or reducing compression).  In contrast, LNG can respond to market conditions by sending gas to entirely new markets or spreading deliveries across multiple buyers.

The significance of this flexibility is illustrated by the shale revolution’s impact on the United States LNG market.  The United States switched from importing to exporting LNG (Seeking Alpha, “Latest Trends In The Global LNG Market – A U.S. Perspective” (Apr. 23, 2018).

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Meanwhile, Latin American and African (planned) LNG exports to the United States were diverted to Europe and Asia (see below figure from bp).

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Notwithstanding this flexibility, LNG has faced challenges with respect to its cost profile.

The Cost of LNG

LNG consists of three stages, each of which incurs substantial cost:

  • Step One: Liquefaction Plant

The first step in the chain for transporting LNG is a liquefaction plant. This plant requires an investment of $1.6 to $2 billion dollars for a plant capable of handling 500 million cubic feet per day. Assuming a real rate between 10 to 12 percent, this implies a cost of $1 to $1.30 per thousand cubic feet. Most studies also report costs in that range.  Brito, D., & Sheshinski, E., Pipelines and the Exploitation of Gas Reserves in the Middle East (Baker Institute of Public Policy – Rice University 1997) (the “Rice Paper”).

  • Step Two: LNG Vessels

The second step in the chain is the tanker. LNG must be transported at a temperature of -162 degrees centigrade and requires specialized vessels. These vessels cost $230 million for a 135,000 ton tanker. This is to be compared with a cost $85 million for a 280,000 ton VLCC. The reported shipping rates are $.20 per thousand kilometers or $.32 per mile (Rice Paper).

The below figure provides a further breakdown of vessel costs for various routes:

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  • Step Three: Regasification

The third step is regasification, which typically ranges between “$.35 to $.50 per thousand cubic feet” but can be  “as high as $1.00 per thousand cubic feet” in Japan “due to the high cost of land” (Rice Paper).

The below figure from the Rice Paper shows the variable impact of shipping (Step Two) on delivered price, as a function of distance:

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The Cost of Pipeline Transportation

The Rice Paper also examined the cost of transporting gas 1,000 miles through various sizes of onshore and offshore pipelines under assumes 15-year and 25-year project life, including the identification of the fixed cost as a percentage of the average cost (approximately half of onshore pipeline and three-quarters of offshore pipeline costs are fixed):

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The Rice Paper assumed $40,000 per mile inch for an onshore pipeline and $100,000 for an offshore pipeline (in 1997), but INGAA data indicates pipeline fixed costs are continuing to increase.

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Comparing the Cost of LNG to Pipeline Transportation

The Rice Paper plotted three curves for hypothetical pipeline cost profiles against LNG’s cost curve, revealing likely breakeven points:

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More recent studies show even earlier breakeven points (~700 miles and ~2200 miles for offshore and onshore pipelines, respectively):

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Technology Appears to Be Reducing LNG Costs

While LNG was initially used over very long distances (for which pipeline projects were not economically justified), technological advances appear to be shifting the breakeven toward shorter distances.  The below figure shows how the LNG cost profile declined somewhat from the 1990s to the 2000s:

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Additional technology driving further LNG cost reductions in the 2010s include:

  • More efficient ship designs

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  • Lower United States liquefaction plant costs

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  • Floating liquefaction

Floating liquefaction enables even more flexibility than traditional (onshore) liquefaction because the origination end of the LNG train also can be relocated in response to market or economic conditions.  With respect to offshore gas discoveries, it also may reduce costs by eliminating the need for pipelines to transport natural gas from offshore wells to the onshore liquefaction plant (the floating liquefaction unit can be positioned on top of the offshore reservoir).

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Such technological advances will only further serve to increase global demand for LNG.

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About the Gaille Energy Blog.  The Gaille Energy Blog (view counter = 64,098) discusses issues in the field of energy law, with periodic posts at  Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development,and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.


Does Your Negotiating Style Resemble a Fox or Hedgehog? [Gaille Energy Blog Issue 65]

“The fox knows many things, but the hedgehog knows one big thing.” – Archilochus of Paros, 7th Century, B.C.

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Courses at Yale, Oxford, and the United States Naval War College have used the aphorism of the fox versus the hedgehog to help leaders and negotiators understand various approaches to strategy:

  • The Hedgehog. The hedgehog is relentless in its direct and dogged pursuit of the goal, focusing on the big picture but possibly blowing through process and complexity.
  • The Fox. The fox’s style is collegial, creative, and accommodating, but may be unfocused.

The hedgehog has a “sense of direction” and the fox has a “sensitivity to surroundings,” explains John Lewis Gaddis in On Grand Strategy.

American negotiation styles tend toward the hedgehog.  We often want to cut to the chase, save time, and get to our bottom line.  As a young lawyer, I moved to the Middle East to negotiate deals for Occidental Petroleum.  My mentor broke me out of my hedgehog tendencies in the carpet souks of Oman and the Emirates.  There, I learned the slow dance of bringing the shop owner to his best price over many hours of tea drinking while comparing the quality of various carpets.  The more valuable the carpet, the more time it took to consummate the deal.  My best outcomes were the product of three or four afternoons, spread out over several weeks.

Assume that both a carpet seller and an American buyer have the same bottom line price of $7,000.  The seller is unwilling to accept less, and the buyer is unwilling to pay more.  If the seller opens the negotiation at $10,000, and the American then counters with a “best and final” offer of $7,000, what will happen?  The souk owner will reject the $7,000 and counter with, say, $9,000.  The seller does not find the American’s claim of a “best and final” offer to be a credible one because they have not yet fully discussed the details—where and by whom the carpet was made, the quality of its silk, the number of threads per square inch, and its age.  The seller believes that he will be able to move the buyer from her $7,000 position by delving into the details.  But the American responds, “I told you that $7,000 is my final offer.”  The seller becomes frustrated and disappointed.  He assumed he would do better than $7,000—now, $7,000 is not good enough for him.

I’ve seen the same thing happen in energy negotiations.  Someone tries to accelerate the process with a big move—the so-called “best and final” offer.  Then the offer is rejected and countered.  Even though the “best and final” offer might have been accepted later in the negotiation process, it came too early.  The recipient thinks it can do better.  As such, negotiators need to be sensitive to the timing of their proposals.  The probability of acceptance depends not only on what the proposal is, but when and how it is made.

Another example is the art of suggestion.  Japanese negotiators are masters of leading from behind.  There’s even a word for it: ringiseido.  I spent several months in Tokyo and Kyoto negotiating a series of transactions with a Japanese trading house.  My colleagues there taught me how to suggest proposals privately, allowing them to become the other’s “idea.”  If a hedgehog directly demands a concession in the midst of a Japanese negotiation, it’s less likely to be adopted.  The counter-party could lose face (mentsu).  Instead, the fox indirectly causes the counter-party to become the proponent of the fox’s compromise—so the counter-party gains face (kao o tateru).

The best negotiators are able to blend the resolve of the hedgehog with the adaptability of the fox.  In my courses at U. Chicago and Rice, I teach my students that negotiation expertise is a product of:

  • Inherent Skill. A hedgehog-like focus married to a fox-like ability to discern the other party’s needs and creatively meet them.
  • Experience. Knowledge of what has (and has not) worked before, gained through negotiating more and more deals.

The below quote from the movie Lincoln describes how President Lincoln combined styles to accomplish his goals:

“[A] compass . . . [will] point you true north from where you’re standing, but it’s got no advice about the swamps and deserts and chasms that you’ll encounter along the way.  If in pursuit of your destination, you plunge ahead, heedless of obstacles [like a hedgehog], and achieve nothing more than to sink in a swamp . . . , [then] what’s the use of knowing true north?”

To read more about fox and hedgehog strategies, John Lewis Gaddis’ book On Grand Strategy tracks their evolution across history, starting with the Persian invasion of Greece in 480 B.C.

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Bust of Archilochus

About the Gaille Energy Blog.  The Gaille Energy Blog (view counter = 62,787) discusses issues in the field of energy law, with periodic posts at  Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.

How Will Blockchain Technology Be Adopted by the Energy Industry? [Gaille Energy Blog Issue 64]

The headlines may be filled with stories about Bitcoin and other cryptocurrencies—but it’s the underlying innovation called Blockchain (rather than cryptocurrencies themselves) that is poised to impact the energy industry:

“Blockchain is a special technology for peer-to-peer transaction platforms that uses decentralised storage to record all transaction data. . . .  Essentially, a Blockchain is a digital contract permitting an individual party to conduct and bill a transaction . . . directly (peer-to-peer) with another party. The peer-to-peer concept means that all transactions are stored on a network of computers consisting of the computers of the provider and customer participating in a transaction, as well as of the computers of many other network participants. Traditional intermediaries, e.g. a bank, are no longer required under this model, as the other participants in the network act as witnesses to each transaction carried out between a provider and a customer, and as such can afterwards also provide confirmation of the details of a transaction, because all relevant information is distributed to the network and stored locally on the computers of all participants.”  PWC, Blockchain – an opportunity for energy producers and consumers? (2016).

The following PWC figure illustrates how a Blockchain eliminates the need for a central institution:

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By distributing identical copies of ownership records to many computers around the world, property owners no longer need institutions (such as banks, exchanges, or governments) to verify transfers of property.  The decentralized network itself performs this function by recording information “on a ledger that is distributed across every node (i.e., computer) in a network on the internet, and is structured and encrypted in such a way that it cannot be altered without agreement by a majority of the nodes in a network (which automatically and simultaneously check the change against the ledger)” Deloitte, Blockchain: Overview of the potential applications for the oil and gas market and the related taxation implications (April 2017).   The following figures from PWC illustrate the security feautures of Blockchain technology:

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While it is difficult to predict how new technologies will be adapted, possible impacts for the energy industry include the following:

(1) Petroleum Chain of Ownership

A few years ago, I had the opportunity to spend a day boating through the bayous of West Africa’s Niger Delta.  While doing so, I met a stream of rickety boats filled to the brim with barrels of stolen crude oil.  About 100,000 barrels a day of Nigerian production is stolen, with ~75,000 barrels being transferred to offshore tankers and sold on the global market.  When the Islamic State captured oilfields in Syria, it also found ways to export its illicit oil.  Blockchain technology could make such sales of stolen/sanctioned crude more difficult:

“Blockchain could provide a fully transparent and secure record of the entire supply chain.  Using a distributed ledger, digital tokens can be used to represent the asset being transacted. These tokens can be issued by a trusted authority for the needs of the companies or participating parties; for example, if oil and gas companies used a Blockchain ledger to buy and sell barrels of oil, transactions could include digital tokens named Brent or WTI. These tokens would represent the underlying asset of a barrel of oil and would remain digitally attached throughout its supply chain journey.”  Deloitte, Blockchain: Overview of the potential applications for the oil and gas market and the related taxation implications (April 2017).

(2) Decreased Political Risk

Weak property rights is a significant factor contributing to political instability in the developing world:

“The great economic divide in the world today is between the 2.5 billion people who can register property rights and the five billion who are impoverished, in part because they can’t. Consider what happens without a formal system of property rights: Values are reduced for privately owned assets; wages are devalued for workers using these assets; owners are denied the ability to use their assets as collateral to obtain credit or as a credential to claim public services; and society loses the benefits that accrue when assets are employed for their highest and best purpose.”  Phil Gramm and Hernando de Soto, How Blockchain Can End Poverty (Wall Street Journal, Jan. 25, 2018).

The more secure property rights are for all citizens, the less susceptible a nation is to socialism and other revolutionary movements.  When people have little or nothing to lose (because their property is insecure), political risk is higher.

“If Blockchain technology can empower public and private efforts to register property rights on a single computer platform, we can share the blessings of private-property registration with the whole world. Instead of destroying private property to promote a Marxist equality in poverty, perhaps we can bring property rights to all mankind. Where property rights are ensured, so are the prosperity, freedom and ownership of wealth that brings real stability and peace.”  Phil Gramm and Hernando de Soto, How Blockchain Can End Poverty (Wall Street Journal, Jan. 25, 2018).

Such an effort is already underway in the African nation of Rwanda, where “the first phase of the Rwanda Blockchain project will see the Rwanda Land Registry digitized to ensure control of authenticity. This will use WISeKey’s WiseID suite of mobile applications and digitally store necessary the necessary land registry data to enable authenticity of identification and the validation of assets”  Rwanda Government’s Blockchain Project Gains Momentum (Iafrikan News, Oct. 13, 2017).

(3) Title to Mineral Rights 

United States private mineral rights and leases can be challenging to verify, manage, and transfer.  For example, one Eagle Ford development in South Texas involved the acquisition of ~20,000 acres of mineral leases.  The leasing process required the execution of ~800 different leases, each of which required various documents to establish ownership:

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When all of the leases were signed, the energy company was left managing ~6,000 documents totaling more than 50,000 pages.  Before a well could even be drilled, lawyers then had to comb through the historical chain of title for each lease, ensuring that good title had been acquired.

Fraud is a problem, too.  Brokers have exploited the complexity of the title process to embezzle funds that were supposed to have been paid to the mineral rights owners.  Signatures have been forged, with leases being “sold” without their rightful owners’ knowledge.  Blockchain technology could be used to improve the efficiency and security of mineral leasing.

(4) Peer-to-Peer Energy Transactions 

“Blockchain technology appears capable of enabling a decentralised energy supply system. It may be possible to radically simplify today’s multi-tiered system, in which power producers, transmission system operators, distribution system operators and suppliers transact on various levels, by directly linking producers with consumers.”  PWC, Blockchain – an opportunity for energy producers and consumers? (2016).

The following PWC figure illustrates how Blockchain could disrupt the traditional model:

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PWC’s further figure below provides a helpful overview of possible Blockchain applications in the energy industry:

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Nobel Prize-winning economist Milton Friedman actually predicted the rise of cryptocurrencies before his death:

“I think the internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing but that will soon be developed, is a reliable e-cash.”


The anonymous creator of Blockchain realized Friedman’s vision:

“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”

Perhaps it’s not so much any specific application of Blockchain that will transform the energy industry, but its broader impact on the regulatory state.  Energy companies are both shackled and protected by governments in many ways.  As technology enables individuals to increasingly bypass governments, the status quo that many in our industry take for granted will be disrupted.

About the Gaille Energy Blog.  The Gaille Energy Blog (view counter = 53,849) discusses issues in the field of energy law, with periodic posts at  Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.



Venezuela’s Oil Production Crash: Another Sad Chapter of Socialism [Gaille Energy Blog Issue 63]

When I last visited the Venezuelan cities of Caracas and Puerto La Cruz in 2007, Hugo Chavez was sowing the seeds of the nation’s economic destruction: “Venezuela demanded changes to the agreements made by international oil companies that would give PDVSA [Venezuela’s national oil company] majority control of the projects.  Total, Chevron, Statoil and BP agreed and retained minority interests in their Venezuelan projects.  ExxonMobil and ConocoPhillips refused, and as a result, their assets were expropriated.”  Robert Rapier, How Venezuela Ruined Its Oil Industry (Forbes, May 7, 2017).  Whether they stayed or left mattered little to future investment.  The international oil industry had lost faith in Venezuela, and its capital and expertise would be reallocated to projects in other nations.

The results of such policies are exemplified by Venezuela’s oil production.  The year that Hugo Chavez took power, Venezuela’s oil production stood at ~3.5 million barrels per day.  By the end of 2017, the nation could only manage ~1.7 million barrels per day, and the slope of the decline was steepening:

“Over all of 2017, [Venezuela’s] output was down 29%, among the steepest national declines in recent history, driven by mismanagement and under investment at the state oil company . . . . Generals with no industry experience have been named to run the [state oil company].”  Anatoly Kurmanaev and Kejal Vyas, Venezuela’s Oil Production Is Collapsing (Wall Street Journal, Jan. 19, 2018).

Venezuela’s 2017 production collapse is shown in the following figure from the Wall Street Journal:

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Interviews with Venezuelan oilfield workers on Lake Maracaibo illustrate the extent to which the industry has been plundered:

“[State oil company] workers sat in empty air-conditioned offices adorned with Socialist Party posters.  Roberto, a foreman, said his oil barge had been waiting for three months to sail. Each day something was missing: food, motor oil, a tugboat. His team of a dozen people comes back each day and waits—until it is time to go home.  After two decades in [the state oil company], Roberto earns an equivalent of $8 a month. This Christmas, for the first time, he had no presents to give his seven children. . . . Of [the state oil company’s] 560 speed boats in the lake, only six are operational . . . . Supplies sent by the company to his offshore rig in the lake usually run out days before the end of the shift, he said. To cope, workers ration lunches of boiled plantain or spaghetti with mayonnaise. . . . . In November, [a] rig was attacked at night by nine pirates in balaclavas armed with machine guns. They knocked out two workers with pistol butts, took a female worker hostage and went cabin to cabin, collecting each worker’s valuables, including loaves of bread, before releasing the hostage and leaving.”  Anatoly Kurmanaev and Sheyla Urdaneta, In Venezuela’s Oil Hub, Prosperity Turns to Crime, Hunger (Wall Street Journal, Jan. 19, 2018).

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The rest of the nation’s economy has collapsed alongside the oil industry:

“Venezuela, by the numbers, resembles a country hit by civil war. Its economy, once Latin America’s richest, is estimated to have shrunk by 10 per cent last year – worse even than Syria’s. GDP shrank by 19 per cent. The South American country also has the world’s worst inflation at more than 700 per cent (nearly double that of second-ranked South Sudan), rendering its currency almost worthless. In a country with the world’s largest proven oil reserves, food has grown so scarce that three in four citizens report involuntary weight loss, averaging 19 pounds in a year.”  Max Fisher and Amanda Taub, How Did Venezuela Went from the Richest Economy in South America to the Brink of Financial ruin?  (The Independent, May 21, 2017).

“Parents . . . go days without eating, shriveling to the weight of children themselves. Women line up at sterilization clinics to avoid having children they can’t feed. Young boys leave home and join street gangs to scavenge for scraps, their bodies bearing the scars of knife fights with competitors. Crowds of adults storm dumpsters after restaurants close. Babies die because it is hard to find or afford infant formula, even in emergency rooms.”  Meredith Kohut and Isayen Herrera, As Venezuela Collapses, Children Are Dying of Hunger (New York Times, Dec. 17, 2017).

Venezuela’s outcome is similar to that of other nations that have embraced forms of socialism—only faster.  Over the last century, “the effort to eliminate markets and private property has brought about the deaths of an astounding number of people. Since 1917—in the Soviet Union, China, Mongolia, Eastern Europe, Indochina, Africa, Afghanistan and parts of Latin America—communism has claimed at least 65 million lives.” Stephen Kotkin, Communisms Bloody Century (Wall Street Journal, Nov. 3, 2017).  The difference between the 20th century and now is that technology has made capital and people much more mobile.  Even the poorest residents of Venezuela can access the Internet and compare their plight to others around the world.  Consequently, more than two million Venezuelans have fled the nation (along with their talent and money), and those who remain have found ways to bypass the Venezuelan economy using technologies such as cryptocurrency.

Yet many young Americans still romanticize socialism.  The image below is from a Young Marxist club at an Oklahoma high school.

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And the Communist Manifesto is the most frequently assigned college textbook in six American states.

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What about Adam Smith’s Wealth of Nations?  Just one quote from Wealth of Nations sums up why capitalism works and socialism fails:

“[B]y directing [one’s effort] in such a manner as its produce may be of the greatest value, [each person] intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. . . . By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”

This is how the spread of capitalism around the world has lifted billions of people out of poverty.

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Capitalism is why we have abundant food, medical care, technology, and transportation—and a plethora of comforts and entertainments. Notwithstanding this, “[n]early 45 percent of [American] millennials polled said that they would prefer to live in a socialist country compared to the 42 percent who said they preferred a capitalist one.”  Perry Chiaramonte, Millennials Think Socialism Would Create a Great Safe Space, Study Finds (Fox News, Nov. 3, 2017).  For every young American who pines for socialism, there’s a Venezuelan who would gladly trade places to escape it.


Adam Smith (1723-1790)

About the Gaille Energy Blog.  The Gaille Energy Blog (view counter = 53,386) discusses issues in the field of energy law, with periodic posts at  Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.


Shale vs. Deepwater Exploration Part II: The Risks [Gaille Energy Blog Issue 62]

Last week’s issue on Shale vs. Deepwater Returns [Issue 61] featured the below figure from Hess Corporation:

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Several readers questioned to what extent the figure’s economics reflected different risks, including the chance of success (during exploration) and political risk.  This week’s issue elaborates on such risks based on my own experiences.  At Oxy and several private equity-backed companies, I worked on deepwater projects in Africa and South America—including ventures with ExxonMobil, Chevron, Shell, and BHP Billiton—and as the General Counsel of a shale developer, I participated in several Eagle Ford shale joint ventures—including with EOG and Hess.  This gives me some perspective on the principal risks of deepwater versus shale opportunities.

(1) Exploration Risk.  Deepwater wells can cost more than $100 million each, but the chance of commercial success may only be 1-in-5, or less.  The key to managing exploration risk is portfolio economics—participating in enough wells that the odds should pay off.  For example, by drilling ten wells (each 1-in-5 chance of success), the probability of at least one successful well improves from 20% to ~90%.  My exploration models at Oxy and elsewhere assumed sunk costs of several dry holes in the early years, and the economics of the assumed successful ones had to be robust enough to absorb those early losses.  Practically speaking, this meant that each and every prospect being drilled had to be large enough that it could carry the costs of several failed wells and still achieve the investor’s return thresholds.  The below slide from Kosmos’ investor deck shows varying rates of commercial success in frontier plays (from 0% to about 33%) for companies such as Anadarko, BP, ExxonMobil, Petrobras, Repsol, Shell, Statoil, Total, and Tullow:

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American shale exploration is less risky because the wells are cheaper and the results less binary.  Shale exploration wells typically cost 5-15% of deepwater wells, mitigating losses.  Even a bad shale well usually produces some hydrocarbons, and that oil and gas can readily be sold on the American market.  In contrast, a marginal discovery in deepwater is no better than a dry hole because the capital required to produce it would exceed the value of its production.  Thus, shale investors can be confident that they will at least get some of their money back.

Even so, greenfield shale developments are still exploration.  Just because one method of hydraulic fracturing worked in one part of the Eagle Ford does not mean it will work a few miles away.  What I witnessed in new Eagle Ford developments was a process of trial-and-error.  The operator might drill a vertical well and test the same completion technique at different depths, trying to identify the most productive location to land horizontal wells.  Or a horizontal well might receive three different types of hydraulic fracturing (one in the toe, one in the middle, and one in the heel of the lateral), with each being flowed back independently.

The characteristics of the shale encountered in a well also are compared against a growing database of thousands of samples extracted from other shale wells.  This enables the operator (by analogy) to deploy those completion techniques most likely to be successful—and avoid those that previously yielded poor results in similar shale.  Thus, operators can reduce shale exploration risk using a variety of approaches that are not available in deepwater wells.

(2) Production Profile Risk.  Another challenge of deepwater exploration is the lag time between the drilling of a discovery well and the time when first production is achieved.  The below figure from Kosmos shows how deepwater oil averages 8 years to first production:

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In contrast, shale wells (at least in the United States) can be brought to sales within a matter of weeks.  Shale developers also can optimize the timing of future wells, drilling in periods of high prices, and pausing when prices drop.  The Hess figure below illustrates how companies can time certain wells based on oil price:

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Deepwater projects (subject to some opportunities for phasing) tend to come online all at once and continue to produce over decades—irrespective of price environment.

(3) Concentration/Magnitude Risk.   A deepwater development relies on a few wells (the Hess Guyana development has eight)—whereas a comparable shale development has hundreds.  This creates a concentration risk with deepwater wells.  When one well has an issue, the economic consequences are much higher in deepwater than in shale.  Deepwater wells also can be more challenging to control when something goes wrong, and the human and environmental toll can be much greater.

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(4) Political Risk.  Energy companies also worry about political risk—typically that a government will do something to impair the value of their assets.  Deepwater exploration often takes place in the developing world, where government institutions may be unstable and vulnerable to conflict.  Nonetheless, the perception of political risk for deepwater may be greater than the reality.  Even if the government changes, the new administration may be dependent on the international oil companies to operate the offshore facility and keep the revenues flowing to its treasury.  Deepwater platforms also are usually far from the shoreline.  Militants are less likely to sail 60 or more miles into the ocean searching for a deepwater platform when there are plenty of softer targets on land.

Shale developments, even in the United States, actually may be more vulnerable to political risk.  Shale imposes considerable inconveniences on local populations, with upwards of 100 trucks per hour descending on a single well location.  Drilling density is high, which can fundamentally change the rural landscape and lead to not-in-my-backyard opposition from local residents.

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Environmental activists have targeted shale, most notoriously with the movie Gasland, which showed natural gas leaking into residents’ tap water.

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Such issues have led states such as New York and nations such as France to ban shale development altogether.

Political risk can be tough to predict, though.  Venezuela was the pillar of stability and prosperity in South America before Hugo Chavez took power.  In the United States, oil and gas production is regulated mostly at the state level—thus, political risk varies according to which political party controls which states.  Republican or “red” states tend to support the oil and gas industry while Democratic or “blue” states can be hostile (e.g. the 2016 Democratic Party Platform states: “We believe America must be running entirely on clean energy by mid-century”).  Texas seems to be among the lowest risk states, but even it has been trending blue over the last two decades (particularly in its largest cities):

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Deepwater projects are exposed to political risk in another way—up-front sunk costs.  Deepwater capital costs are front-loaded whereas shale capital costs occur over a period of many years, as additional wells are drilled.  Should political risk increase, shale developers can cut their losses and redeploy capital elsewhere.

While deepwater and shale have different risk profiles, it’s hard to generalize and conclude that one or the other is less risky.  Many risks are project-specific or site-dependent.  What are the exploration risks for a particular set of wells?  Where is the project located?  As Mark Twain once quipped:

All generalizations are false, including this one!

About the Gaille Energy Blog.  The Gaille Energy Blog (view counter = 52,682) discusses issues in the field of energy law, with periodic posts at  Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.



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