Goodbye to Cindy Dong

This morning I said goodbye to Cong (Cindy) Dong, a Ph.D. student from China University of Petroleum School of Business Administration in Beijing, who has been visiting me for the past year through a prestigious grant from the China Scholarship Council. During her time at the University of Alberta, Cindy attended doctoral seminars with our Ph.D. students and participated in my Department’s paper development workshops and visiting speaker series.

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Using BP Neural Networks to Prioritize Risk Management

Today, my latest article was published in the open access journal Sustainability. The article — Using BP Neural Networks to Prioritize Risk Management Approaches for China’s Unconventional Shale Gas Industry — was co-authored by Cong (Cindy) Dong (a Ph.D. student at China University of Petroleum School of Business Administration, currently visiting me at the University of Alberta), Xiucheng Dong (China University of Petroleum, School of Business Administration), Joel Gehman (University of Alberta School of Business), and Lianne M. Lefsrud (University of Alberta, Department of Chemical and Materials Engineering).

China has become the top energy consumer in the world. At the same time, China is facing intense international and domestic pressure to reduce the greenhouse gas and other emissions resulting from its primarily coal-based energy system. Given these twin pressures of increasing energy demand while controlling emissions, the development of China’s shale gas industry has emerged as a strategic national priority.The shale gas resource distribution in China is illustrated in Figure 1. Seven provinces—Sichuan, Xinjiang, Chongqing, Guizhou, Hunan, Hubei and Shanxi—account for 68.9% of the nation’s total reserves.

Figure 1. Shale gas resource potential in China’s provinces (trillions of m3).

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Risk, Sustainability and Oil Sands

I was recently invited to to give a talk on risk and sustainability at the CSPG-AAPG Oil Sands and Heavy Oil Symposium: A Local to Global Multidisciplinary Collaboration. The symposium is being jointly sponsored by the Canadian Society of Petroleum Geologists (CSPG) and the American Association of Petroleum Geologists (AAPG), the two predominant petroleum geology organizations in North America. It will be held in Calgary at the Metropolitan Centre on October 14-16, 2014.

According to the organizers, the conference is expected to attract 500 geologists from Canada and the U.S., plus representatives from other heavy oil producers in China, Venezuela, and Russia. The topics of discussion will include the international nature of oil sands and heavy oil resources, the geology and characterization of producing deposits, technological advances, and sustainability.

My talk will be part of a session on regulatory and sustainability issues, being co-chaired by Kevin Parks and Travis Hurst. I’ll be speaking on work that I have been doing with Michael Lounsbury, Lianne Lefsrud, and Chang Lu that looks at multiple perspectives on risk, with a particular emphasis on cross cultural understandings of risk. Our analysis finds that technical, financial and perceptual understandings of risk are seldom sufficient to explain how societies decide what is risky, what is safe, and whether and how to proceed.

Update: A copy of my presentation is below. Additionally, a short companion paper is available through SSRN.

US Nuclear Power Update

According to the World Nuclear Association’s Weekly Digest first concrete was poured on two new US nuclear power reactors — the Summer 2 and the Vogtle 3. I previously discussed some of the dynamics behind this nuclear “renaissance.”

The concrete basemat for South Carolina Electric & Gas’ (SCE&G) Summer-2 reactor has been poured in a 51-hour operation. Three days later that for Vogtle-3 was undertaken in 41 hours. The pours had been delayed for months because of discrepancies between construction plans and the original design documents. The NRC approved license amendments earlier this month that allowed the concrete pour of the 1.8m thick foundations to proceed. These are the first such construction starts in the USA in three decades. SCE&G is building two Westinghouse AP1000 reactors at the Summer site, each 1117 MWe net. Southern Nuclear is building another two AP1000 units at its Vogtle site. Reactor pressure vessels and steam generators for all units will come from Doosan in South Korea. The four units are expected to enter commercial operation in 2017 and 2018 in each case. There are also four Westinghouse AP1000 reactors under construction in China, at Sanmen and Haiyang, the first two of which are expected on line next year.

This comes on the heels of the February 2013 decommissioning of Duke Energy’s 860 MWe Crystal River PWR in Florida due to damage to the containment structure sustained when new steam generators were fitted in 2009-10, under previous owner Progress Energy. Its 40-year operating licence was due to expire in 2016. Some $835 million in insurance was claimed. Additionally, Dominion Energy’s 566 MWe Kewaunee PWR in Wisconsin is due to be decommissioned in May 2013, after 39 years operation.

For more, see Nuclear Power in the USA.

Of Markets, Regulated and Deregulated

I’ve been studying the history of nuclear power for some time now. With that in mind, I found Fortune’s November story on “Southern’s Big Nuke Bet,” in which Geoff Colvin interviewed Tom Fanning, CEO of Southern Company, to be quite interesting. In the article, Fanning responds to the following question from Colvin:

[Geoff Colvin:] A couple of other utilities have decided to get out of nuclear. Constellation got out of plant development earlier this year, and NRG pulled out of its nuclear project in Texas. Is this just a case of differing business judgments, or is there something else?

[Tom Fanning:] It goes back to scale, credit quality, and credibility. When you think about the challenges that a small company will face building a $14 billion deal, that gets rather daunting.

The U.S. really is divided into two electricity markets. Some years ago many states deregulated, and they have what’s called merchant markets, where the price for electricity is largely set a day ahead or week ahead or month ahead. Remember this is going to take 10 years to build, and it’s going to be the largest capital asset in your portfolio, and you’re going to need to run it 30 to 50 years to earn that money back. Putting that magnitude of capital in a deregulated merchant market is exceedingly risky. Thankfully, Georgia Power operates in a vertically integrated regulated market where legislation and regulation are stable and constructive and will support this over time.

In other words, the major reason Southern Power is able to undertake the construction of a new nuclear power plant is because it operates in what looks a lot like a planned market. This is a point that some in the U.S. seem to ignore. For instance, in an article for the Heritage Foundation, Jack Spencer claimed that federal loan guarantees were not essential to the continued development of nuclear power in the United States, but that instead, free markets could be counted on to intervene in the government’s place.

But rather than being driven by “market” forces, history reveals time and again that the construction of nuclear power plants depends almost exclusively on state intervention. For instance, in recent years, EDF, Rosatom and China have been three of the most active developers of nuclear power projects worldwide. All are essentially state entities. As of January 2010, the French government owned 84.48% of EDF. While Rosatom and the Chinese nuclear industry are entirely owned by their respective governments.

Meanwhile, in the US, the nuclear “renaissance” is now essentially limited to Southern Company’s planned Waynesboro, GA facility. Of the other approximately two dozen applications submitted over the past few years, none are being actively being pursued at this time. By comparison, not only has Southern Company received $8.2 billion in loan guarantees from the federal government, as the interview above makes plain, the economic viability of the project additionally hinges on the fact that Georgia remains a regulated energy market, meaning that the ultimate costs of the project (whether the currently projected $14 billion, or more) will ultimately be borne by Georgia electricity ratepayers. This effectively offers the company a state-level guarantee on top of its federal loan guarantee.

In short, the preponderance of the evidence from both the US and the rest of the world suggests that heavy governmental subsidies, loan guarantees and/or liability exemptions — either explicitly or de facto — are essential to the development of nuclear power. By comparison, all of the literature I have read on the topic suggests that the market has yet to build a single nuclear plant.

Strategic Social Responsibility

Some interesting sound bites in a recent New York Times article on a large desalination project in China. Although the $4 billion Beijiang Power and Desalination Plant is “a technical marvel,” “the desalted water costs twice as much to produce as it sells for.”

“Someone has to lose money,” Guo Qigang, the plant’s general manager, said in a recent interview. “We’re a state-owned corporation, and it’s our social responsibility.” In some places, this would be economic lunacy. In China, it is economic strategy.

For more in-depth coverage, see Water World’s report on the Chinese desalination market.