For this post, Dr. Blanchard will likely accuse me of opposing energy. I plead economics.
Regular readers of the Madville Times know that the proposed Hyperion oil refinery in Union County is unlikely to materialize for lack of business case. Now a real economic analyst backs me up and says Hyperion may not be viable:
In Hart Energy's opinion, the Hyperion refinery project may not represent a viable refinery expansion project based on projected market economics and supply/demand requirements. The U.S. refining industry cannot support the additional capacity and is not likely to provide the required return for the investment. The incremental product supplied by the Hyperion refinery is not required to meet demands of the U.S. or of the Midcontinent markets. Some rationalization of smaller U.S. refinery capacity is anticipated, but surplus U.S. Gulf refineries will retain a strong competitive position in local markets and incrementally in the Midcontinent market [Terry Higgins, Hart Energy Consulting memo, 2011.04.26].
Cody Winchester does us the favor of getting Hyperion's wishful response. The Houston oil dreamers' first response is to shout "Greenpeace!"... as in Kenny Bruno, former Greenpeace activist and current campaign coordinator for Corporate Ethics International, which commissioned the Higgins memo. Current oil industry mouthpiece Eric Williams argues that Hyperion could produce cheaper oil for the Midwest than we get from shipping the oil to the Gulf for refining, then shipping it back to our local Cenex for our pick-up trucks.
Williams fails to mention that oil producers have little interest in keeping that oil here in the Midwest, where we already have a supply glut that depresses prices for North American oil. Oil producers want to send all that oil to the Gulf so they can clear the Midwestern glut and make big money with their oil on the international export market. It's not Greenpeace blocking Hyperion; it's greenbacks.
The economic viability is a matter for investors and lenders to be concerned with. There is not a single start-up (big or small) for which a case can't be made that questions viability. In fact, there is not a single mature company (public or private) for which a case can't legitimately be made that the future is questionable.
Business has inherent risk and uncertainty subject to changes in the economic environment, misguided management (wrong vision for the time), and competition.
In about 1983 (during an ag crisis) while in business school, I had an assignment to pick a public company, use any publicly available information with footnotes (no personal assessment) to write an analysis with two conclusions- company will prosper and company will fail or fall on hard times.
I picked John Deere and have periodically re-read what I wrote because one was severely wrong (stock has gone from $2 a share to $78). What I essentially missed was three things:
1) The ag crisis was short-term. The demand for food and the use of food for fuel significantly changed the viability of food production.
2) Farm consolidation created demand for more expensive machinery. I had made the point the current machinery in the field had a life cycle that would diminish future demand for machinery.
3) The vision and capability of the management. This was my most significant "miss" because many of Deere's competitors did fail/get merged despite they too operating in the positive development's of #1 and #2.
And, in the analysis they would prosper, I missed the mark because I didn't grasp the value of new technologies Deere was incorporating both in their product but also their manufacturing. Like Catepillar which also prospered greatly, Deere's commitment to modernization led to greater efficiencies in everything they did.
Three points:
1) The author of this study might be right and he might be wrong. If he was omniscient, he would probably not be spending his time doing this type of analysis.
2) His focus is rather narrow (supply/demand questions) that doesn't incorporate other factors. In the case of Hyperion- application of new technologis. Oil refining has not had a new "greenfield" plant come online in decades. Whether it be Hyperion or someone else, there is going to be new plants in the next decade which will have significant economic advantage just through new efficiencies from new technologies that would transcend even a bad supply/demand environment. In fact, sometimes such conditions are opportunities for greater short-term and long-term success vs. less efficient competitors.
3) Just as I was able to write two analyses of Deere's future (both logically supported), Higgins was able to write one that supported the prior position of who commissioned his work. If Higgins was worth his salt, he could also write one that opposed them. The fact he was commissioned by people with an agenda does not give confidence it is objective. Not accusing Higgins of anything nefarious. The "art" of business analysis is not science nor is he omniscient.
For the record Cenex is an owner or part owner in two refineries one in Montana and one in Kansas. And since Cenex is a patron owned cooperative I guess you and I both own a tiny share of a far away oil refinery. https://www.cenex.com/portal/server.pt/community/4refineries/456
Troy your talk of 1983, John Deere and the farm crisis got me reminiscing. 1983 was the year I finished serving our country in the Marine Corps and began farming full time. At that time I used a tractor that had a cab but no AC, heater or even a radio. My planter and grain drills while functional were absolutely no frills. Now my planter and drill have monitors that warn me of problems as soon as they happen and most amazing of all my tractor not only has AC, heater and a radio but through the use of GPS technology steers itself so accurately that a laser shot down the length of a mile long row is never more than an inch from the row. My combine can tell me the yield as I'm combining and can transfer the data to my laptop. Where I can produce maps for each field to better identify fertility problems.
I have no idea what the next 30 years will bring but the last 30 have been amazing.
I would hope, Nick, that the next thirty years would get that tractor to pull that planter and play Mozart using half the fuel, or cellulosic ethanol, or electricity, or something else that won't require Hyperion's pollution in Union County.
Troy, I appreciate both your analysis and your reserve in not accusing Higgins of nefariousness. Now, let's see Hyperion make a stronger case. If their only pitch is "technohope," their viability remains questionable.
And can you really call a focus on supply and demand questions "narrow"? Seems to me that's pretty much where the whole business model starts: will people buy it? Can we make enough? Again, open an investor's meeting with, "Now let's look beyond supply and demand," and wouldn't you expect prospective investors to clutch their wallets a bit more tightly?
All of the oil going through Keystone 1 is under contract and is spoken for. Could someone tell me where the proposed Hyperion refinery plans on getting their oil to refine?
GreenPeace still hanging banners from symbols of hypocrisy and colonialism:
http://www.democracynow.org/2011/12/5/greenpeace_activists_detained_after_risky_stunt