An Upside to Low Crude Oil Prices — International Operations May Face Fewer Risks

By Terry Hallmark, Instructional Assistant Professor, Honors College

As the saying goes, trying to predict long-term crude oil prices with any precision is the business of fools and liars. I try hard not to be either, so I’m not going to predict crude oil prices here. However, for the sake of argument I will say this much: it’s reasonable to assume we are in a period of sustained low crude oil prices in the $40-$60/barrel range, and that will likely last awhile. I have no idea exactly how long, but I’d guess at least five years – maybe 10 – and longer still before the world sees $80/barrel crude oil. We may never see $100/barrel crude oil again, absent some cataclysmic geopolitical development.

Oil prices are one of many factors that shape the host-country environments in which international oil companies (IOCs) operate. Over the years, as oil prices have gone up, the above-ground risks that threaten oil company operations have tended to go up as well (e.g. political violence, regime instability, adverse contract changes). It stands to reason: when crude oil is worth more, attacks by insurgents or terrorists hurt IOCs and the governments of oil producing countries more. This is not to suggest that oil price is the sole driving force behind above-the-ground risks – it’s only one piece of a much larger puzzle – but I got to thinking: what effect, if any, might today’s low crude oil price environment have on above ground risks in the near-to-medium term?

The initial efforts at oil industry-specific risk assessment by exploration companies focused mostly on identifying the potential nationalization or confiscation of company interests by foreign governments. This was a response to the emergence of “resource nationalism” and a rash of expropriations of oil sector interests between 1960 and 1976, as well as the expropriation of all foreign oil company holdings in Iran after the 1979 revolution. Countries came to understand that they possessed a valuable commodity and wanted to control it.

Beginning in the mid-1980s, the relationship between foreign operators and host-country governments changed. The governments realized the uncompensated taking of oil company assets severed ties to the funds, expertise and technology needed to sustain their petroleum sectors and secure economic growth. Further, there was a general turn toward free-market economics and progressive petroleum laws to make exploration more attractive to foreign companies. These moves were, in large measure, a response to generally low oil prices.

But even though oil prices were low, so long as the geology looked promising, acreage was open and fiscal terms guaranteed an acceptable rate of return, oil companies were willing to explore for oil almost anywhere in the world. Nationalizations and expropriations slowly faded from the scene, and oil exploration companies and analysts alike began to speak in terms of a “post-nationalization” operating environment.

As expropriations and nationalizations became a thing of the past, other threats materialized. During the 1990s, a mix of less-than-completely democratic governments in lesser developed, oil-producing countries (which frequently filled their coffers with oil earnings at the expense of the citizenry), sizable new discoveries and rebounding crude oil prices all came together to spur countless attacks on oil installations, pipelines and personnel by rebels and political activists in Latin America, Africa, Asia and elsewhere. The work of the political risk analyst shifted from trying to predict if, and when, an uncompensated taking of an IOC’s interests might occur to trying to figure out when and where attacks might take place, who or what was the likely target or targets, and whether the attacks might shut down operations or force the evacuation of personnel – and then whether the attacks might ultimately destabilize the host-country government.

Something unexpected happened in the early 2000s. Resource nationalism, along with expropriations and numerous other adverse contract changes (increases in “state take” – royalty and tax rates), re-emerged. The reason was jacked-up crude oil prices, along with the nationalist or leftist ideological leanings of the host countries. Unlike the earlier nationalizations and expropriations that claimed oil assets the host countries believed were theirs, this new batch of takings were more akin to an “oil weapon” used to punish adversaries and advance a broader foreign policy aimed at securing certain geopolitical or geostrategic ends.

Consider Venezuela. While President Hugo Chavez did not execute a complete expropriation in one fell swoop, he did implement several adverse contract changes that amounted to creeping expropriations. For example, in 2004, with prices hovering around $40/barrel, Chavez raised taxes on a handful of heavy oil projects. In April 2005, with crude oil prices near $60/barrel, Venezuela announced existing operating agreements would be converted to joint ventures. Two years later, as crude prices trended upward to $80/barrel, Venezuela took operational control of the holdings of BP, ChevronTexaco, ConocoPhillips, ExxonMobil and Statoil – so that Venezuelan state company PDVSA could secure a minimum 60 percent stake in projects in the Orinoco Belt.

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Volvo’s Electric Car Announcement: Turning Point or Nonevent?

By Earl J. Ritchie, Department of Construction Management

Volvo’s recent announcement to have all new models “electrified” beginning in 2019 has received wildly enthusiastic responses from the environmental and electric car communities. Response in the business and automotive press has been more muted. Many articles have pointed out that other manufacturers are introducing electrified models and the move to electrification is driven largely by European emissions requirements.

The decision has been a great PR move for Volvo but carries some risk and will have little impact in the broader auto market.

What the Volvo announcement actually means

Volvo did not say they would do away with fossil fuel powered cars. The planned model mix would include pure electrics, plug-in hybrids and conventional hybrids. The latter two run on a mix of fossil fuel and battery power. They will continue to sell existing fossil fuel powered models to the end of their model life.

Not including numerous engine and trim variants, Volvo has six models on the U.S. market. The luxury SUV XC90 is available as a plug-in hybrid, which adds an electric motor to the standard gasoline engine. Two additional models will be available as hybrids in the 2018 model year. Given normal model life, gasoline engine models will likely be available through 2025.

What the announcement means to the market

There are at least 35 electric or hybrid models already available from other manufacturers, with dozens of forthcoming models announced. The Volkswagen Group alone plans more than 10 models next year and more than 30 by 2025.

Volvo is a niche player with well under 1% of the market, both U.S. and worldwide. Given their small market share and the number of competing models, Volvo’s overall impact is likely to be insignificant. They may continue to have a significant presence in limited markets, such as in European plug-in hybrid sales where Volvo currently has about 5% market share.

The announcement as a symbolic act

The Volvo announcement has been called historic, a landmark, a major move, the beginning of the end of the internal combustion engine and similar dramatic phrases. It has certainly been an effective attention-getting device for both Volvo and the media.

However, forecasts of dramatic increases in the share of electric vehicles resulting from the European Union’s carbon reduction targets have been around for some time. Visions of the market range from forecasts of “modest levels” of electric vehicle market share to proposals to completely ban gasoline powered cars.

Predictions of a shift to electrification due to EU emission regulations and proposed bans by Germany and France have received extensive press coverage. The Volvo announcement is unique in coming from a mainstream auto manufacturer. A similar announcement by a major car manufacturer, such as Volkswagen or Toyota, would be much more significant.

Green Parasites, or How We Can Learn to Take Advantage of Nature

By Rafael Longoria, ACSA Distinguished Professor of Architecture

Before air conditioning became ubiquitous, designing with the local climate in mind was not a virtue but a necessity. Passive design – taking advantage of the cyclical nature of the sun and maximizing natural ventilation – was widely practiced centuries before that phrase was coined. In Houston and similar climates, cooling southeasterly breezes were encouraged to flow through the inhabited section of buildings during the hot months, while northerly winds were blocked during the colder months. And solar orientation had to be carefully considered in order to live more comfortably.

That gradually fell out of favor as air conditioning – so comfortable, at the touch of a button – took over. But growing environmental concerns and simple economics are bringing a renewed interest in passive design.

Every spot on the earth receives sunlight at a particular angle that changes continuously following a fixed pattern, repeated every year as our planet revolves around the Sun. These recurring angles are easily predicted for any given day and time, simply by knowing the latitude of a particular place.

Project Row Houses (Latitude 29.731855°N) has provided a living laboratory for marrying art, sustainability and utility. The organization, a community-based arts and culture nonprofit in Houston’s Third Ward neighborhood, has hosted many artists in their house-galleries over the past 20 years; in 2001 it invited architects from around the country to make installations that reflected on their built environment.

Felecia Davis, now an architecture professor at Penn State University, conceived a memorable project, “One Week, Eight Hours,” that recorded the movement of sunlight along the interior surfaces of one of the row houses over the length of a week. Making graphic the patterns that most people rarely notice, the project highlighted not only natural phenomena, but also the history and experiences of those who once lived there.

Kim Tanzer and I included Davis’ project in our book, “The Green Braid: Towards an Architecture of Ecology, Economy, and Equity.” As Davis wrote: “The houses are very small, 31 x 17 feet wide typically, with front and back porches that are cut out of the main volume. … The name ‘shotgun house’ was coined because it was said a bullet could pass through the clear view from the front door to the back door without hitting any interior walls. They are quite simply built and recall a housing building type in Western Africa brought to the United States as a remembered building method by African slaves.”

We can learn much from these modest buildings. The window placements of traditional shotgun houses encourage cross ventilation that functions well even when the interior doors are closed. The close proximity of the row houses to one another, while a significant challenge to privacy, shade the neighboring walls and create narrow airflow corridors that accelerate the wind at precisely the right place to pull out air through the side windows, thus creating a cooling breeze across any room when the windows located on opposite walls are open.

During the Fall of 2016, University of Houston graduate architecture students were challenged to design what eventually came to be labeled as Green Parasites — devices that can easily be attached to existing buildings to improve their energy efficiency by maximizing the potential benefits of sunshine, wind or rain. Since the Project Row Houses galleries on Holman Street have large front windows facing southwest — and facing southwest is the most challenging orientation for windows in places with exceedingly hot days, like Houston — these buildings are ideal to demonstrate the performance of the sun-shading devices designed by the architecture students.