What a difference a year makes ... or does it?
As 2016 began, the Arkansas energy industry faced deepening trends: Fossil fuels were under siege and renewable energy was on the rise. Electric utilities were shunning coal generation in favor of cheap natural gas and emissions-free nuclear and renewable generation. Government regulatory forces reinforced all that.
A year later, an oil- and coal-friendly Trump administration is taking power in Washington, promising a real shake-up with far less federal regulation and a cabinet stocked with traditional energy champions, hydraulic fracturing believers and climate change skeptics.
Led by ExxonMobil CEO Rex Tillerson as the choice for secretary of state, Donald J. Trump’s nominees for key positions include Oklahoman Scott Pruitt, an avowed foe of the Clean Power Plan, to lead the Environmental Protection Agency. Texan Rick Perry is poised to lead the Department of Energy, one of the three federal departments he proposed eliminating when he was running for president.
Still, Arkansas energy observers caution against expecting a huge shift.
“None of us have any idea what will really happen with Trump,” said Alan Mantooth, distinguished engineering professor at the University of Arkansas.
Utility leaders, infrastructure builders and researchers think the new administration’s policies will have an impact, perhaps in tandem with price-raising production reductions by OPEC and Russia, but they say much larger economic forces hold sway. “There’s a certain inertia in economic realities,” Mantooth said.
Discussions with nearly a dozen Arkansas observers yielded this consensus: A sea change in energy is unlikely, big coal isn’t coming back, and fracking in the Fayetteville Shale area — where drilling came to a standstill a year ago — may be revived only at the margins. Renewable energy may well lose some incentives and federal support, but long-term corporate trends and cost realities favor it.
“From an Arkansas perspective, I’m not ready to expect big changes from Day One in the Trump era,” said Kathy Deck, director of the Center for Business & Economic Research at the University of Arkansas. “The energy sector, like others, is just so large — there is never just one thing. Different forces interplay. There is this idea that regulations will be less burdensome, but that may not affect things as much as many other factors, most notably prices.”
Because Arkansas wells employing hydraulic fracturing yield just natural gas, not oil, neither Deck nor Arkansas Oil & Gas Commission Director Larry Bengal expects a major revival in the shale fields of north-central Arkansas. Bengal noted a slow two-year decline in oil and gas production in Arkansas, and an abrupt halt in new gas well drilling a year ago.
Drilling of traditional oil wells may get a small boost in 2017 as oil prices tick up, and exploration and production companies like Murphy Oil Corp. of El Dorado can hope for a return to profitability after a run of record losses. But a major fossil-fuel resurgence also seems unlikely. Murphy Oil officials declined requests for an interview.
Rajesh Sharma, a professor and renewable energy specialist at Arkansas State University in Jonesboro, summed up a popular line of thought: “Trump may be more supportive of the oil and gas industry and can help in terms of leases, permits and less regulation, but that does not really influence how much it costs to produce oil here.”
Even though Murphy stock has doubled from a depth of under $16 last January and revenue has stabilized since the oil giant reported a $2.27 billion loss for 2015, Sharma expects no return to the good old days until oil prices rise to over $70 a barrel.
“The OPEC deal can help stabilize the price of oil and may increase it a bit, but most experts believe there will not be a significant increase [this] year.” West Texas crude was trading last week at just under $53 a barrel. A moderate rise in natural gas prices is also considered unlikely to shift long-term trends.
“The recent slight increase in price resulted in a small increase in activity,” said Bengal, “with a small number of previously drilled wells being completed and a few new wells being drilled in the second half of 2016.” He added that while he expects a “more positive environment” for development in 2017, “any substantial increase in drilling activity in Arkansas” would await “a sustained price increase” for gas. Prices have surged somewhat to around $3.50 per million British thermal units, but they remain far less than a third of what they were before the shale-gas revolution flooded the market (the price was $13.50 per million Btu in October 2005).
Electric utility chiefs like Rick Riley and Kurt Castleberry of Entergy Arkansas and Duane Highley of Arkansas Electric Cooperative Corp. said low gas prices are keeping Arkansas’ electricity bills some of the lowest in the nation. They noted that coal plays its smallest role ever in electricity generation in the state and said regional transmission agreements provide a link to vast supplies of gas-generated power that’s cheap and likely to stay so.
“There are such large proven reserves of natural gas, and we’ve improved our ability to get it at an economic price,” Deck said. “It’s hard to imagine a big price increase, because production could be brought back online at any time.”
Entergy Arkansas CEO Riley said the investor-owned utility derives 69 percent of its power from nuclear plants, including Nuclear One near Russellville; 24 percent from natural gas; only 4 percent from coal; and none from crude oil. He predicted that scrapping the Obama administration’s Clean Power Plan wouldn’t directly affect two aging coal plants in Jefferson and Independence counties.
“Nearly 70 percent of Entergy’s power comes from emissions-free nuclear, and we already have a very clean generation mix,” he said. The gas-fueled electricity derives partly from the Hot Spring Energy Facility, a 620-megawatt natural gas unit in Malvern that Entergy bought for $253 million in 2012; and partly from MISO, the regional transmission organization that Entergy joined in late 2013. MISO, shorthand for the Midcontinent Independent System Operator Inc., oversees the regional power grid and operates one of the world’s largest real-time energy markets.
Renewables Still Important
On the renewable front, Entergy, which serves more than 700,000 Arkansas customers, reaps 2 percent of its electric power total from the Carpenter and Remmel hydroelectric dams, and remains committed to plans to build the state’s largest solar power array, a 475-acre unit 7 miles southeast of Stuttgart. NextEra Energy Resources of Juno Beach, Florida, will build and operate it under a 20-year contract to sell the power to Entergy. The 81-megawatt array will provide only a small fraction of the company’s capacity, but Castleberry said it would reduce the demand for energy from fossil-fuel generation sources and save customers $25 million over 20 years. The project is expected to come online in 2018.
Castleberry, Entergy’s director of resource planning, said the utility’s recently approved efficiency plan and a commitment to install “smart meters” will pay off in fewer emissions by saving large amounts of power. Riley said some Entergy units are engineered to burn either coal or oil, but because gas generation is cheaper, “we don’t burn any oil.”
“For many years coal was an integral part of the generation mix, but last year it was down to 4 percent,” Riley said. “It had been 20 percent. Even though we don’t burn oil, it’s good to have that capacity as a hedge against any rise in natural gas prices. We’d like to keep coal generation as long as it’s practical. It’s hard to say how long that will be right now, but by the end of the next decade those units will be about 50 years old.”
In a now-scrapped haze-reduction deal with the Sierra Club, Entergy had agreed to close its White Bluff plant in Jefferson County by 2028. It may be ending its life about that time regardless.
Highley agreed that the Trump effect on Arkansas electricity consumers might be minimal. As CEO of AECC, the large generation and transmission company that provides service to all of the state’s 17 distribution cooperatives, Highley is involved in electrical service to 1.2 million Arkansans. “There is a case for business as usual, because gas generation was already reducing carbon emissions, and Arkansas is now served by regional power markets” — MISO for Entergy customers and the Southwest Power Pool for cooperative members and others. SPP is headquartered in Little Rock, where Indiana-based MISO also has a major operations center. “These market efficiencies allow sourcing the lowest cost of generation, and they allow access to renewables from a greater distance away. All this allows more cuts in emissions.”
And while Trump ran on a list of pro-energy ideas like increasing federal oil and gas leasing and “hitting reset on the Clean Power Plan,” Arkansans said his eventual policy goals are opaque, and that the president-elect has proven flexible on even core campaign issues.
“Judging by some appointees, you expect him to be friendly to fossil fuels, but that doesn’t necessarily mean they’ll not do things beneficial to renewables; it’s way too early to tell,” said Mantooth, who spent part of the winter break at an energy conference in Wyoming.
Deck put it this way: “I think there’s an enormous amount of uncertainty.”
Big Projects Predicted
Mantooth and others foresee Trump’s team clearly favoring large infrastructure projects, particularly industry-financed energy ventures like pipelines and power lines.
“We’ll probably see fewer holdups on things promoting commerce,” Mantooth said. “Pipelines and things like that — including the Diamond Pipeline — are likely to go through.”
The Diamond project, a $900 million underground oil pipeline for shipping crude from Cushing, Oklahoma, to near Memphis, has faced fierce environmentalist opposition. The state Public Service Commission gave Diamond Pipeline LLC of Houston its approval in late August, and the Trump administration is not expected to pose hurdles.
Michael Skelly, president of Clean Line Partners of Houston, doesn’t know “exactly where Trump is going to land,” but says “he talked a lot about infrastructure during the campaign. Both candidates did.”
Skelly sees opposition to the Clean Power Plan as “probably a net negative” to his ambitious project, a $2 billion-plus transmission line to carry wind-generated Oklahoma power across Arkansas to Tennessee. He also knows that Arkansas’ congressional delegation in Washington has vowed to renew its fight against his Plains & Eastern Clean Line project now that they’ll have a Republican ally in the White House.
But he expects an equilibrium in Trump’s America, citing the president-elect’s infrastructure focus and his choice of Perry, who oversaw major initiatives to distribute wind power when he was governor of Texas. “He has nominated somebody as secretary of energy who understands exactly what our company is trying to do. About $7 billion in new transmission projects got built in Texas [under Perry].”
Skelly said Trump has softened his claim that climate change is a hoax, and noted that Secretary of State nominee Tillerson has called the climate an issue that must be dealt with. “So wherever Trump does land on renewable energy, we think he’s going to move on infrastructure. He likes projects. He’s a builder, and that’s what our industry does. We build stuff.”
The offices of U.S. Rep. Steve Womack and Sens. John Boozman and Tom Cotton, all Republicans from Arkansas, told Talk Business & Politics in mid-November that they were revisiting legislation to block the Clean Line under the theory that the DOE’s participation in the project is a federal overreach. But Skelly, who expects construction to begin late next year, doubts the outcome will be much different from last year, when bipartisan Senate support for Clean Line sidelined the legislation.
“I think regardless of what you think of the merits of a particular project, most people agree that changing the rules in the middle of the game isn’t great public policy,” Skelly said.
Mantooth said the administration is likely to support commerce-building projects, including the Clean Line, which Deck has said could have a $665 million economic impact on Arkansas during construction.
“It’s an example of building out infrastructure, and though it’s a renewable-based project, these are the kinds of projects that could fly through,” Mantooth said. “If this were 10 or 15 years ago, I might have more doubts, but the world is a different place now for renewables.”
On the local level, County Judge Robert Griffin of Independence County also sees a “different thought process” emerging. His county is home to a few fracking wells and one of the state’s largest coal-fired power plants, Entergy’s Independence plant at Newark, but he’s a forward thinker on energy.
“You must take into account solar as a viable option at around $50 per megawatt, and the rapid increase in mandated miles per gallon in manufacturer fleet requirements,” Griffin said.
Those higher standards on new cars are part of the changing energy world, he said. He sees the Entergy plant itself as an old-energy example, but with few of the old complaints. He lives downwind but has no problem with emissions. “In touring the plant, you can eat off the floor.”
He couldn’t predict whether fracking is likely to return, beyond saying that “the industry did not leave due to administrative reasons; it left due to an oversupply of natural gas.” He said he would leave crystal-ball gazing to the experts, but he does expect regulatory flexibility.
Highley, the Arkansas Electric Cooperative Corp. chief, is optimistic beyond the energy sector. He expects his customers to get inexpensive electricity, with rates trending lower even after the expense of a $408 million sulfur-scrubbing system at the coal-fired 528-megawatt Flint Creek Power Plant in Gentry (Benton County).
He says the overall business outlook bodes well for Arkansas and for Trump.
“We have low unemployment in Arkansas, and consumer confidence is up nationwide. There’s some wage growth, along with low inflation and interest rates that are still pretty low. Trump has the table set nicely for success. He’ll probably claim credit, but a lot of good was already happening.”