Adding value to the fuel chain
Senior Vice President
Amoco Power Resources Corp.
I am pleased to welcome the delegates participating in Power-Gen International `98; and looking forward to the opportunity to represent Amoco Power Resources at this important conference.
One of the questions raised by some people regarding the oil majors is whether or not we will continue to be interested in the electric power business as our basic business gets tougher. That is, as the price of oil falls and funds get short, will the oil companies cut power from the capital budget? In my view, just the opposite will occur. As the price of oil falls, it becomes more important for us to garner value from existing gas reserves. One of the best ways to achieve this is to increase the role of gas in power generation.
In this sense, a fall in oil prices increases rather than decreases our interest in power. It also has an interesting side effect. In general, oil companies take a conservative approach to financing. As a AA and AAA company we have excellent access to low cost capital in terms of balance sheet financing. The result is a reluctance to employ project finance. However that approach is beginning to change. In terms of financing by commercial operation, as oil dries up as a source of capital, oil companies (with the need to monetize gas) will begin to look more like traditional players in the IPP business.
As an integrated oil company, Amoco`s approach to the power business is somewhat different from that of a traditional IPP or utility. Our focused strategy is to pursue power projects where Amoco has a natural gas presence. We provide value by going for projects where we have near term or future linkages, or where we have the expertise or resources to benefit the project. We`re also flexible enough and have the financial strength to stay with a project when the linkages come together, fall apart, and come back together again. We can take more risk to jump-start a project and our strong balance sheet and credit rating allow us to employ different project financing options.
Included in our strategy is a strong interest in developing cogeneration projects within Amoco facilities; however, our development efforts are not limited to equity fuels or company facilities exclusively. Our aim is to participate in markets where we believe we can add value to the projects and customers. Currently those markets include Latin America, North America, the Middle East, and Europe.
Employing this strategy has brought Amoco success in several places. One example is our steam enhancement cogeneration project at Amoco Canada`s Primrose heavy oil operation in northeast Alberta, Canada. With our partner CU Power International, we`ve taken the project from financial close to first fire in just over one year. The 200 MW equivalent facility produces one million pounds of steam per hour of high-pressure steam for injection and 84 MW of electricity. The new facility cuts greenhouse emissions by an estimated 47 per cent while adding a much-needed source of electricity to the Alberta grid.
In the United States there is increasing pressure towards creating a decentralized competitive electricity market that will create opportunities for companies who can correctly interpret the scope and pace of deregulation. Regulators and legislators across the country – at both the state and federal level – are continuing to investigate how best to free the markets to deliver lower cost power and innovative new services to consumers.
One of the current difficulties to creating workable markets in the United States continues to be the vertical integration traditionally inherent to the utility business. Much as telephone innovations increased dramatically with the breakup of the Bell System, I would expect consumers to see dramatic improvements and product innovations as electric utilities are vertically deintegrated. This is not a trivial task, but one that requires serious thoughtful and careful implementation.
As a result, it is no longer a question of if deregulation will occur, but rather when. Nine states have passed restructuring laws and a number of states will join them over the next five years. Amoco Power is working with clients to develop power projects that will take advantage of the growing merchant power market.
I believe there is money to be made by the major oil companies in this business, if we do it right. I believe APRC has unique potential as a partner and provider in the IPP business. We think strategically, we have access to natural gas, we have the financial strength, and we have a proven track record.