Tag Archives: fracking

Hindsight is Foresight Foregone

It’s not that we can’t see the future; it’s that we don’t bother.

Granted, none of us can predict it, nor do I presume that some magic algorithm applied to some special pile of Big Data can ease the Fog of the Future.

In part, it’s laziness. Here in the USA, we’re predisposed to the here and now and me, and the rest will sort itself out.  As indeed it does.  But often not as we hoped.

In part it is because we know from abundant experience that too many pious prognostications by proselytizers of progress have turned to sink-holes of time, effort and money.  So why bother.

In management we have evolved the discipline of ‘risk management’ which is part institutionalized experience and part pseudo-science.  ‘Risk management’ is somewhat of an oxymoron like ‘military justice’, ‘artificial intelligence’ and ‘virtual reality’. It trades on a figment of truth to create the illusion that it is more than it is.

Risk management has some level of foundation in its effort to deal systemically with known and knowable risks, but today’s world is increasingly subject to unknowable risks for which there is no statistical basis of quantification of either loss, cost of prevention or remediation.   But that’s not the real problem.

Many in my profession of accounting and auditing gravitate to the  ‘risk management’ mantra, and strive to incorporate it into their mission statement. After all, if you can’t be a ‘risk taker’, being a ‘risk manager’ or a ‘risk something’ is the next best thing. It’s sexier than mere accounting and auditing.  And besides, there’s plenty of precedent for the need for ‘risk management’ given the losses that businesses have incurred for themselves, and more frequently for others in their carefully contrived relationships.

But, truth be told, even the growing cadre of risk management acolytes have trouble peddling their wares to the C suite where hype and hope too often trump (no pun intended) reality and even the crudest calculations of probability.

Let’s take a few examples out for a test drive:

  •  Does anyone see any problem with Jeff Bezos and Elon Musk and Larry Paige and the other space cadets filling the skyways and byways with their latest magical brain-farts without benefit of adequate regulation and incubation for proof of concept within laboratory controlled settings, much less in the free-fire environment of that freaky place we call the ‘real world’?
  • Is the latest episode of the Theranos melodrama really a surprise?  Or was it the highly probable outcome of a flaky premise sold to incredibly greedy people willing to believe and suspend critical judgment?
  • And let’s not beat unduly on Theranos. It’s just one of a number of Unicorns in the magical kingdom of Silicon Valley and other tech redoubts where people with more money than brains can throw it at the wall, hope that something sticks in the lottery of high-tech chance,  and praise themselves that their failures are really essential tuition and down-payment for future greatness.  In their magical kingdom, failure is virtue.  In the real-world, failure gets you fired.
  • Where is China going, and where is it taking us?  The West lost that gambit four decades ago with an essential, but ill-conceived opening of relations.  The drive of corporate greed for access to a billion consumers overtook any attempt of western governments to modulate the normalization in a manner that would minimize the foreseeable disruptions we have experienced economically and strategically.  Accordingly, China has grown into an unruly adolescent (in modern world terms, its considerable historical lineage notwithstanding).  Given its desperate economic and environmental constraints, and it’s likely belief that its salvation is in expansion, military conflict with its neighbors and the West seems inevitable in the near to intermediate term.  Trump and China should easily understand each other: a coercive bully that believes he\it has a right to dominance on its terms without obligations to others. I suspect that this is in part an act China has found it can get away with because, unlike with Trump, no one has yet drawn a firm line in the land, the water or the air that they are prepared to defend (although we are beginning to with questionable allied support). Corporate executives are now marveling at how they could possibly have lost their technological edge (which they often willingly gave away in many cases for access to that one-billion consumer market)  and now are losing the market itself in a tightly controlled totalitarian environment where the ‘rule of law’ is more a farce than even a mere political fig leaf of cover.  Who’d a thunk?
  • Was the Shell Oil retreat from the Arctic really a surprise,  or merely unfettered stupidity colliding with reality?  When we have so much evidence of failure to properly engineer and install  and monitor and regulate and mitigate such ventures in much less hostile and much more stable environments, what would make any prudent executive or government think that Arctic exploitation would be just another hole in the ground?  Did BP’s experience give anyone in Shell’s HQ pause for concern?
  • How about them GMOs?  Scientists are complaining that the average clod on the streets is unjustifiably suspicious of the risks of GMOs.  But when we look at the recent history of our ‘conventional’ food supplies, the engineering of obesity, the evisceration of regulatory oversight and quality control, is there not reasonable cause for concern by the public of what will next be foisted upon them in the guise of progress at their ultimate risk and cost?  This is actually a case of the person on the street exercising ‘risk management’ in the suspicion that those in the Corporate suite will not. At least, not in the consumer’s behalf.
  • And then there’s fracking; a mindless grab for resources beyond any exercise of prudence, with costs to society measured only in financial terms to date, with studied ignorance of the collateral environmental, social and economic costs beyond the measure of defaulted securities.

There are a number of simple questions that executive management could ask itself and save a lot of grief when contemplating a new venture or circumstance, or coping with an existing or intractable situation  (like Palestine):

  • Has the situation ever happened before, and what can we learn from it.
  • Are there any parallels, if not direct precedents, to this situation that can give us a clue of dynamics and outcomes?
  • Do we understand the context (historical and present circumstances) of our intended act, and do our assumptions take that context into account?
  • Have we tested our assumptions about what should happen if we take this action?
  • Have we defined performance standards for our expectations that will give us quick feedback if we’re going off the rails of our expectations.
  • Have we asked ourselves how the opposition/competition/stakeholders/regulators are likely to respond, and have we taken appropriate steps to address reasonable concerns.
  • What could possibly go wrong, and what’s the worst that could happen….?
  • ….and if it does, what are we prepared to do about it?

These are so simple, they don’t even deserve to be sexified as ‘risk management’.  They’re basic management, or even common sense.  Yet the frequency with which they are ignored and often even disdained by the supposedly educated meritocracy has numbed us of any sense of amazement.  Rather, it has implanted a cynicism and contempt and suspicion of all forms of authority: legal, moral, scientific, political, religious, social that accounts more for the rise of Trump, Sanders and Br-Exit than any conventional political explanation.

We could go on, but I’ll trust the point is made, if not accepted.  In the corporate, government and personal world, risk-taking trumps risk management more often than not, and often with predictable consequence.

It’s not that our capacity for foresight is so bad.  It’s that we don’t bother to seek answers we know we’re probably not going to like. And when they’re thrust upon us, we often find ingenious ways to ignore them rather than to deal with them.

So, to say that hindsight is 20/20 because we have the benefit of knowledge that is not previously available is at best half the truth.  As often as not, we just don’t give a damn.

*  *   *

Word of the day:  de-escalate.

Onward

20160710

 

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What Kind of Hole Are You In? And Why?

The familiar line goes: “When you’re in a hole, what’s the first thing you do?”.  And the follow-on is: “Stop diggin'”.  I beg to differ.

“Stop diggin'” is the third thing you might do, contingent on circumstances.

The first thing one must do is to recognize that one is in a hole.  Known in military and managerial  jargon as ‘situational awareness’.

The second thing one must do is to ask “Why am I in this hole”.  Call this contextual understanding, which ought to be an integral part of situational awareness, except too few leaders bother to get to this point before rushing to action.

The third thing one must do is to ask: “What am I going to do about it?”  Strategy.

So let’s get back in the hole, and ask ourselves these questions:

What is my situation?  Oh, I’m in a hole.  And what kind of hole?  Is it a fox hole?  A grave? A sinkhole?

If I’m in a fox hole, why am I here?  Heavy fire? Approaching tornado? Evading detection?  I may want to keep digging.

If it’s a grave, and I’m still cognitive, I might want to ask the unlikely question of why I’m investing effort in digging a grave.  For myself? For someone else?  Just to have one handy?

If it’s a sinkhole, I’d better call for a rope or a ladder p.d.q.

The moral of the story is that not all holes are bad.  Some are of necessity, Some are of circumstance.  But how we need to deal with them depends on why we got there and what is the imperative to get out.  A sinkhole poses more immediate need for action than a foxhole, and a grave may be beyond discretion.

Except for the grave, sooner or later we’re going to have to leave the hole, whatever it’s raison d’etre.

The relevance of this mental meandering is that we find ourselves in a number of holes today, apparently without situational awareness, contextual awareness,  or strategy.

In race relations in the United States, and religious and ethnic strife around the world, we are apparently electing to dig ourselves graves, not only for the newly deceased, but for the society at large which refuses to confront the futility of its values.

In our economies, we are struggling to dig foxholes, unaware that our actions are really grounded in sinkholes.  Greece, for some reason, comes rushing to mind, although I also have an uncomfortable feeling about the Chinese for much more complex reasons.

In Clim-Ergy, we are have achieved a curious dyslexia, creating  sinkholes and believing they are safe ground, as in nuclear energy and fracking, and building higher on vulnerable seashore destined for sea level rise.

In the Middle East, we have created a sinkhole, and in a desperate effort to fill it with bodies and other resources, have managed to make it deeper.  Everyone in the neighborhood is busily digger each other’s metaphorical graves, oblivious to the truth that the graveyard is itself a sinkhole of their own collective election.

An exploration of holes would not be complete without the most famous of holes: the black hole.  It’s fame lies in its mystery.  It is a construct about which we can speculate, but of which we do not definitively know.  We can detect its dimensions,  hypothesize its mass, but we remain largely clueless of its dynamics.  Observing one from the outside, we can sense its power to draw matter into it with no apparent escape.  We observe it with awe, as external observers, but with no apparent appreciation that it is our own ultimate destination and destiny.

Metaphorically, it reminds me of our economy, and perhaps our greater society.

There are a number of other holes we might ponder, physical and metaphorical, but with the benefit (or detriment) of this meditation, I leave it to the reader to continue his/her personal quest for enlightenment.  However, I would advise proceeding with a shovel and ladder,  just in case.

Onward.

20150621

Fracking Idiocy

Having dealt in my prior two posts with Climate Change idiocy, (and there’s so much more fertile ground to be tilled on both sides of that subject) I’d like to turn my attention today to Saudi America’s continuing delusion of energy independence.

The news of late in the energy arena continues to be of energy abundance and resultant low consumer prices, with some necessary casualties in the oil patch.  Peak Oil is dead.  Fracking will set us free.  Except in Denton, Texas and a growing number of Texas towns that see fracking as an insidious oppression, joining folks in Pennsylvania, and Ohio, and North Dakota and other places where the wildcatters have run roughshod, aided and abetted by local officials whose greed is comparatively modest in scale, but no less deleterious in effect.

Being an accountant, I try to marshal my humble skills to understand events as they are, and not as they are presented. Among the core tenets of accounting is the principle of substance over form.

So what is the substance of our current fracking bonanza?  Have we unleashed unlimited energy wealth?  No.  Hydrocarbons are still a ‘non-renewable’ resource in the sense that we are depleting them far faster than natural processes can replenish them, and at some point, we are bound to hit a wall.  That it may not be in our lifetime does not absolve us of the moral and ethical obligation of stewardship for future generations. (Moral obligation. Such a quaint notion.)

Do we have an abundance of energy?  No, we have simply found a way to exploit a limited resource faster than before. And in absence of any regulatory discipline of the markets, save the Saudis who are NOT our friends, we have driven down the price of a precious resource by exploiting it unconscionably and creating an illusory abundance.

But aren’t the low prices of the  moment good for consumers and the greater economy, even at the expense of the oil industry?  Yeah,  like sub-prime mortgages and liar loans.  But what about the blow-back that will follow, when the closed-in wells and abandoned rigs don’t snap back to production as fast as prices in the inevitable shortage that will follow?  Remember the boom/bust of the 80s. Or any other period in the history of the industry, which is riddled with boom/bust. And, at the risk of stating the obvious, how long can the consumer expect to benefit at the expense of the industry whose own foolishness has made that benefit unsustainable for both?

Another thing that accountants like to do is to match revenues with expenses.  As I have maintained in prior blogs, if we were to do so with the extractive energy industry, energy prices would be much higher than they are, and we would be conserving much more than we do.  The price of oil and gas does not reflect the burden on the inadequate infrastructure that bears the strain of the current boom and will likely be left severely depreciated without adequate economic recovery when the bust occurs.  It does not reflect the costs of social and environmental degradation, which the industry will not likely clean up before it leaves town. It is consuming water at a voracious rate, frequently in places where it is competing with agriculture and basic human consumption for priority of an exceedingly scare resource.  And while water is a renewable resource, that is not the case for much of the millions of gallons of fracking cocktail that are being permanently sequestered deep in the earth because it is too toxic for recovery and recycle by natural or technological means.  Unless of course another New Madrid quake manages to un-sequester those wells back to the surface, or close enough for unpleasant consequences.  Even folks in Oklahoma and Ohio are beginning to have second thoughts.

No, we don’t match revenues with expenses in the near term, or over the long haul. The energy industry is taking the profits up front, and deferring the knowable costs and plausible long-term contingent risks for others to bear; and in many cases, the ‘others’ bear the costs disproportionately to the benefits they hoped to derive from royalties, or jobs, or tax base or whatever other mirage was flashed in front of them.

Most interesting is how fracking seems to elude serious scrutiny for the economics that underlie the current surge in production.  It is generally known that fracked wells deplete much faster than conventional plays, and that for a company to continue to generate growth in revenue, it must continue to frack new wells faster than the older wells are depleting.  This is often referred to as the Red Queen Syndrome, the need to keep running faster and faster just to stay in place.  It is not a winning game in the long run.  This is a form of ‘kiting’, a term in auditing for a particular type of serial fraud that usually ends badly for the perpetrator and his victims.  Or one could call it a Ponzi scheme and still be close to the truth.

I have to wonder if the major producers backed away from a significant push into fracking because they saw too clearly both the economic folly and the potential long-term contingent liabilities that would befall them with their perceived deep pockets.  Hit-and-run wildcatters don’t worry about the long-term.  So where do the majors go to replenish their depleting reserves?  Deep ocean.  The Arctic.  Russia, a fun place to do business if you don’t have the stomach for Iraq.  Do they take these risks because there’s an abundance of oil and gas to be had under reasonable conditions?  No.

So it may be true that the earth has an abundance of hydrocarbons waiting to be exploited.  But when you add the true costs of exploitation, in every sense of that word, you no longer have cheap and abundant energy.

We have the technical capacity to rape the planet from pole to pole.  That is not in question.  The question is what will be left that is worth the energy.

Onward.

20141202

 

Clim-Ergy: A Strategic Rubik’s Cube

The news of late in the climate and energy circles has been interesting.  Little factoids are entering the collective consciousness, like meteoroids piercing the upper atmosphere, burning brightly, and burning out.  But leaving in their fading trace the unsettling question: what else is up there waiting to come down, and where will it land?

We in the northeastern US have been celebrating the one year anniversary of Sandy not only with remembrance of the event, but with the discomforting realization that the way back is not nearly as quick or easy as one might have wished.  For public officials with any degree of comprehension, it is also a harbinger of things to come.

The headlines out of the IPCC in September obsessed over the 95% certainty among scientists that humans are significant contributors to global warming, the stuff that may cause more Sandys, and Colorado floods, and contagious Australian wildfires, and Sister Sandy killer storms in Europe, protracted drought in Texas where frackers are competing with farmers for scarce water that will become too little for either, and…the beat goes on.

But the real news in Climate circles is not the 95%, but the talk of a carbon budget: the global maximum of emissions that the planet can endure before ‘going postal’ (as we used to say before workplace and public space violence became trendy and went viral).  As scientists and policy makers debate the limits and timing of reaching a climatic point of no return, the news from disparate perspectives becomes increasingly foggy.

–  We hear that CO2 emissions are increasing at a declining rate, which gives false comfort because it is attributed to switch to natural gas, increased energy efficiency, and a moribund economy, and is largely limited to the United States, which is becoming a diminishing factor in the global carbon budget. What happens if the world economy recovers?  But right now, THAT does not seem to be an imminent prospect.

–  A chorus of voices are still singing the praises of frack-gas and the US’s ‘game-changing’ energy independence, as if that’s in the bag.  But off-stage, a growing chorus of voices are raising concerns that should have been addressed from the beginning regarding various levels of pollution and emissions. Fracking is reaching a critical mass and age that is manifesting its true self in ways that can no longer be concealed by corporate PR and governmental concerted ignorance.  While the fracking data is still fragmented and subject to active partisan dispute, it is accumulating, and will likely resolve to some credible consensus on environmental impact in the next five years.

–  Meanwhile, in parallel with the environmental questions on fracking technology, the question of fracking’s ultimate productive and economic viability is beginning to emerge, as the folks at the now defunct blog, The Oil Drum, suggested that it would. Growing, if disputed, evidence is suggesting that fracking is displaying the ‘Red Queen Syndrome’: that in order to sustain production levels, it must run ever faster to add new wells in order to compensate for the rapid decline of earlier wells.  In other words, increases in drilling activity will add to a declining increase in aggregate supply until the cumulative demand of capital to sustain is no longer justified by the productive results.  That becomes ‘problematic’, as they say, because in business and public policy circles the operating assumption is that cheap gas will fuel a prosperous and growing future.  What happens IF you kick that leg out from under the economic stool.  (Forget the environment, it’s not important.)

–  But, speaking of the environment and aside from natural gas, there is the growing sense that whatever we do in the USofA with our hypothetical abundance of gas, other major players are retreating from their positions in carbon reduction (Canada, Britain, Australia most prominently), which suggests that the global increase in CO2, if momentarily in hiatus due to an economic time out, will march on again whether the economy grows appreciably or not.    The energy budget will collide with the carbon budget if renewables cannot take up the slack, which, by most responsible and credible projections, they will not in sufficient time.

While the remnants of the British Empire retreat from commitments to reduce carbon, Germany and Spain are trying to work off a hang-over from their binge spending on renewables that have created economic dislocations in their energy markets, and in Spain’s case contributed to distress in its public finances.  A cautionary tale to those who would rush headlong into renewables transition without clearly thinking through its economic ramifications in transition. The common thread between the situation in Europe with energy economics dislocation and the depression of gas prices resulting from the fracking boom is that in both cases, government or industry forces rushed headlong into a perceived opportunity without contemplating long term consequences. In one case, government regulation failed; in the other, the market failed. In both cases, foresight and discipline failed. In the end, we’re collectively poorer.

Meanwhile, Shell, as one prominent fossil fuel energy company, seems to be suffering multiple personality disorder.  It has retreated from some fracking investments, to try again for the more secure? prospects off Alaska’s coast, from which it retreated last year. What a difference a year makes. Either they are dismissing last winter as a spell of bad luck, or they’ve vastly improved their capacity to deal with bad luck, or they’re convinced that the Coast Guard has vastly improved its capabilities to pull their sorry assets out of trouble, if needed.  Good luck.

Still from another cubical, a Shell executive opines that the US has oversold the potential of fracking and been perhaps a tad overexuberant in pursuing and promoting its potential. But, that’s just one man’s opinion.  And yet another Shell executive, former Chairman Hofmeister, allows that ‘everybody knows that some fracking wells go bad’. This could win the 2013 award for understatement, but let’s not rush to judgment.

Meanwhile, a few degrees south of the Arctic, Brazil’s wunderkind files for bankruptcy, doing potential serious damage to the myth of Brazil’s presumptive energy future (a parable of relevance to the US?)  Now there’s nothing particularly newsworthy about the fact that oil exploration is risky business for big guys and little guys, and there’s nothing newsworthy about some self-styled capitalist buccaneer overplaying his hand, but the intersection of the two, and its ripple effects on Brazil are instructive of what can happen when greed, desperation and hubris are mixed and shaken in an economic cocktail, as is also occurring in China and Russia now. And Clim-Ergy will likely produce many more such situations.

–  Consistent with the above, it is notable that a group of scientists has urged environmentalists to look more kindly on nuclear energy as an antidote to continued and growing reliance on carbon based fuels, and a last-ditch strategy to curb CO2.  That’s kind of like asking a chronically ill person to consider treatment by a witch doctor, because the local medical facility has been closed.  Mind you, I have nothing against nukes.  It’s a clean fuel, if you ignore the waste.  By the way, what ARE we doing with that stuff?

As I write this blog, Super Typhoon Haiyan has just whacked the Philippines, and is lining up Vietnam in its sights.  Imagine what a comparable storm retracing Sandy’s path might do with 147 mph winds. But Sandy was a freak.  Won’t happen again.

*  *  *

So, where does all of this net out? What’s the bottom-line, as they say? Here are a few random inferences:

1.  In five years, environmental concerns with catch up with fracking. It will be greatly circumscribed in its application by the tougher and relevant regulations that should have guided it from the beginning. (Yes, ladies and gentlemen, we are capable of fore-thought. We just choose not to use it too often.  Although, Dick Cheney certainly did.)

2.  At about the same time, a critical mass of drilling and statistical history of productivity will have been attained, and will show that frack-gas nirvana is a mirage.  If environmental factors don’t constrain its development, economic factors will.

3.  As a consequence of #2, natural gas prices will rise significantly over current fantasies of future affordability, causing a rush back to the drawing board to rethink business and public policy realities in the context of that energy reality.  Even a continuing limp economy may not be enough to offset the impact of demand relative to supply.

4.  Within five to ten years, the cumulative economic impacts of natural events will convince the 80% of the population who currently prefer to sit on the fence that the Ignorati on Clim-Ergy, both on the Left and the Right, must be ignored, and SOMETHING must be done to address the trajectory of events that are beyond rational dispute, even if they still defy nice, neat statistical categorization and correlation based on provable science. Something must be done, but what?

5.  But by then, it will be too late.  We will be locked into a trajectory that will take decades and more likely centuries to work out. It may already be too late, but we will have worsened it over the next ten years by frantic and ignorant efforts to sustain the economically unsustainable at the expense of the environment. The consequence will be an ironic form of poetic justice when the environment renders payback in stark economic consequences.

6. Equally frustrating will be costly and ineffective responses engaged in desperation. An equivalent brain-trust to the one that will get us there, will try to get us back with visions of geo-engineering solutions, but with no greater capacity or will to consider unintended consequences of our consistently myopic, short-term thinking.  The only safety brake on our natural group-think tendency for collective incompetence will be the fact that we won’t be able to afford these schemes, if we can agree on them. We will squander precious funds on token efforts that will not scale to effect.

*  *  *

Of course, many ‘pragmatists’ will read these words and dismiss them as Chicken-Little-sky-is-falling nonsense. On the other hand, we KNOW that other civilizations before us have collapsed, which is to say that on some level there is historical precedent which makes the scenario possible. We may just do it on a far grander scale because ‘we have the technology’.

Meteorites happen.  Mankind can make it happen.  In the end, the result’s the same.

In the mean time, don’t let The Future get you down. Party on, Dudes and Dudettes! Par-tay on!

Onward.

20131106

Frack This: Perverse Incentives – Part 2

A funny thing happened on the way to Saudi America: The Market collided with reality while intoxicated with wishful thinking.  This post from Bloomberg confirms what skeptics of the fracking frenzy warned.

In fairness, the article does not conclusively prove the point posited by experts not in the employ of the extractive industries that decline in yield of fracking is inevitable based on known historic trends in such fields. But it gives some substance to the argument and deserves further attention before we toss Peak Oil into the trash-heap of history.

Enhanced drilling is not a new phenomenon, I first heard of it in the eighties.  Horizontal drilling is the new improvement that has enhanced the economics of drilling in otherwise challenging plays. Unconventional extraction has not found ‘new’ resource as the industry so often likes to imply.  Rather, it has made known resource more available on a technical basis, but has not necessarily made it sufficiently economical.

The steep decline in well yields, the dependency on water resources that are inherently scarce in many of these basins, and the risk of long-term environmental contamination from the toxic cocktails these technologies depend on are intrinsic risks of fracking. But the drop in energy prices is a foreseeable and preventable one. It’s an issue of seeing what you want to see, or not.

The buccaneers of the energy industry followed the typical gold rush/ land grab psychosis that so typically creates the boom-bust cycles in this industry.  ‘Let me get there first, stick as many tubes in the ground as I can, suck as much out as fast as possible, and worry about the consequences after.”  Forget that the end market was not prepared for the sudden rush of supply.  Now as always, it’s about pumping as much out as possible and cornering today’s market. Forget that you’re pushing a non-renewable resource that does not have ready replacement.  Forget that your feeding frenzy is pushing that precious resource at a depressed price due to its temporary market glut.  Ignore that you’re making diminishing returns per unit; make it up in volume! Perverse incentives.

But in fairness to the energy entrepreneurs, they are not alone.  Local and state officials are as desperate as the EEs are greedy.  Grab those royalties. Grab those jobs. Grab those taxes, no matter what the cost in infrastructure, social structure or environmental rupture.  Don’t be too persnickety about environmental hazards. You might kill the goose that lays the golden egg.

It’s not like we haven’t seen the social and economic consequences of imbalanced growth in the past. Examples abound.  And the typical response of Chamber of Commerce boosters is to argue for more of the same until ‘the market balances itself’.  That process generally turns out to be unpleasant.  But the perverse incentives of near term growth at the cost of long-term sustainability are always too tempting to The Leadership.

Nor are ‘the little people’ exempt.  The payback of a well lease is a lot more certain than a lottery ticket.  But the hazards and risks of loss are a lot greater than a buck.  But what could possibly go wrong?  Toxic cocktail anyone?  Would you like that warmed at your faucet? Perverse incentives. We see what we want to see.

Perverse incentives up and down the food chain render responsible civic decision-making futile.  Too many parties are co-opted along the way.  And unfortunately, even the voices of opposition take positions that are self-defeating.

For example, to oppose fracking on principle is as foolish as to support it on principle; or for that matter attacking or supporting climate change in the abstract..  Don’t fight fracking per-se.  Fight its negative elements on their merits.

–   Demand that government require drillers to conform with the Clean Water Act. Exemption is automatically suspect of reason if not integrity.

–   Require them to disclose the ingredients of their fracking cocktails and then assess their known risks.

–   Place a fee on drilling to assure adequate funding of independent inspection and monitoring of drilling and production activity, and basic research to better understand and anticipate the long-term geophysical implications of an activity that has no statistically significant track record…yet.

–   Stop the land rush. Pace the development so that communities and infrastructure can evolve at a sustainable pace and create a ‘long term annuity’ rather than a short-term windfall that will likely be squandered.

–   Stop the gold rush.  Regulate the pace of development consistent with the pace of end-market capability of absorbing product at a price that fairly covers all appropriate costs of production (including waste management and effects of environmental degradation) as well as risk and return on investment.

–   Stop the flaring.  It is wasteful of a precious resource. It is environmentally harmful. It is done to escape the appropriate costs of containment (and the benefits therewith), and indicative that the industry is hell-bent on pushing a product at the lowest (and irresponsible) cost in order to seize short-term profit at whatever cost.  Stopping flaring will conserve resource and increase cost of production. Increasing production cost to cover its rightful responsibilities will increase the price to reflect truer value.  Increasing price will cause conservation (and curtail some otherwise level of waste) to a net social and environmental benefit, and not necessarily at an economic  detriment (except to the greedy).  That’s how a rational market should work.  Wish we had one.

In the end, fracking, or climate change, or any other paradigm must be judged and adjusted based on the merits of their component parts, and their net effect.

Apparently the land grab frenzy to corner the market on frackable real estate, combined with a recent decline in the yields of said property, combined with a glut of supply in the market is a confluence of events that benefits no-one in the long run.  But when have we ever cared about the long run.

So the folks in Williston, ND may want to hold onto their momentary embarrassment of riches, and reserve them for cleaning up the downside of Paradise Lost.

No-holds-barred, free market unregulated competition. Kind of like no-holds barred, extreme martial arts. Great fun for the winner. Great fun for the spectators, unless the bodies of the losers land in your lap.

*  *  *

Separately, but related, I would like to acknowledge and express my regrets at the passing of the blog, The Oil Drum (TOD), from active to archival status. It has been a source of insight to me in recent years, as was another blog, Oil Depletion Analysis Center (ODAC).  ODAC terminated last year for lack of financial support. But TOD has chosen to step down for a very different reason.  It has concluded that it has said all that needs to be said in principle about Peak Oil.  The issue of precise timing in the media world of instant analysis and constant second guessing from ill-conceived opinion is secondary to the fundamental geological truths and market probabilities that have not changed, and have not been vanquished by fracking.  Merely delayed.

So the various contributors have chosen to disperse to other venues, having said what they felt needs to be said, and letting that archived word stand as testament in their behalf, as the future unfolds.

I, on the other hand, still have a few random mutterings to share.

Onward.

20130825

What’s Your End-Game

We will begin today’s offering with a paraphrase of Shakespeare’s famous quote on greatness:

Some are born to the future;

Some achieve the future;

Some have the future thrust upon them.

End-game.  A fascinating and often overlooked concept in personal life strategy and organizational strategy, and an extension or, more appropriately an immersion, into a specific facet of last week’s more general exploration of anticipating and planning for one’s future.

At the end of a personal or business venture, including life itself, how do we expect to conclude affairs before we turn the lights out for the last time? This question has presented itself to me in a number of scenarios recently, but an opinion piece of fracking motivated me to pull all the disparate snippets together.

Defining one’s end-game is somewhat like drafting a prenup for a strategy; before you become wedded to it, consider under what circumstances you may choose to divorce from it.

End-game does not necessarily define ‘The End of it All’. It could define the end of a job, a career, a relationship or commitment on a personal level.  It can define the end of a product line, a facility, a research program, or conditions for liquidating the entire entity.  It can be defined by parameters of choice, parameters of historical experience (life cycle for similar technology) or parameters of necessity (contractual covenants, declines in market share, loss of stakeholder support).

End-games are best contemplated and defined at or near the start of a venture, and preferably while there are still options.  Zero based budgeting and sun-setting provisions in contracts and legislation are examples of tactics to stimulate end-game strategic thinking.

All of this sounds obvious, and yet it is often ignored on both the personal and professional level.

Let’s take Obamacare and the notorious ‘death panels’.  We’ll ignore for the moment that the insurance industry has already been running those on a non-elective basis, and that the fear-mongers who ranted about Obamacare’s so-called ‘death panels’ were among the most aggressive in seeking to cut benefits of any kind and thus hasten the inevitable.  The premise in Obamacare was to give people the information and opportunity to make informed decisions about how to approach an event none of us will avoid (Ray Kurzweil’s fondest hopes for the Singularity notwithstanding), and many of us have not adequately prepared for.

The future financial plight of many Boomers is also an example of individual end=games not considered, but with considerable collective consequences for society.  Even those who diligently planned an end-game for their retirement years have found their assumptions savaged by an economy built on treachery and deception.  Even the best end-games must be revisited and revised, but they are better than no end-game at all.

The end-game of quantitative easing is on many minds, but with little clarity. At least it’s on the radar. Even when Bernanke tried to clarify the criteria, the audience managed to muddle them with some degree of concerted ignorance.  Denial is not among the ten best tactics for end-game strategy development.

What are Microsoft’s and Apple’s end games? Does Microsoft have one for its Office line?  Does Apple have one for a pincer movement between Samsung in hardware, and Amazon in content and distribution?  Did Polaroid or Kodak have end-games? Should Exxon-Mobil?  What is Obama’s?

What is Williston and North Dakota’s end game for the decline of frack?  A long way off, perhaps, but inevitable? Are they studying those who have gone before them? Are they conserving today’s budget surpluses for tomorrow’s infrastructure repairs and retrenchment and social fallout from the economic frenzy?  Or do we just let the good times roll?

What are the electric utilities’ end game for a grid that is physically decaying and a distribution model that is being disrupted by renewables?  Will they dig in their heels, or adapt?

What is Detroit’s end game from bankruptcy? Is it unmitigated disintegration, or are there seeds of rebirth to be nurtured, and by whom?

As I monitor the evolution of climate change, with specific focus on vulnerable coastlines and their populations, I observe the end-games that are playing out in New York and New Jersey, as some people struggle to cope with a reality that has been thrust upon them, and others struggle to deny the same reality.  In Connecticut, which was comparatively brushed, but not battered, we remain largely in denial, especially in the halls of government.  We are going through the motions, but we are not really coming to grip with the future.

Stephen Covey famously advised: “Begin with the end in mind”.  Once you have defined your destination, filling in the blanks between where you are and where you hope to be (or may have to be) becomes much easier.

Not easy, but easier.

Onward.

20130728

Is Clim-Ergy like Y2K?

Yes.  But not for the reason climate deniers allege.

Climate change deniers and peak energy cynics often claim that these contemporary issues are urban fantasies, hoaxes, or, worse yet, conspiracies of gullible Chicken-Littles and manipulative one-worlders to undermine paradise as we know it. The supporting ‘fact’ of this analogy is that Y2K, for most people, was a non-event. If you weren’t an accountant or an I.T. professional or in the information bowels of a major corporation, it probably seemed like a non-event.  Gratefully, the world did not end at Midnight. Indeed, it barely seemed to skip a beat!  Case closed.

Except, that’s not really as it was, and the similarities between how society handled Y2K and how it is handling Clim-Ergy should give us pause. Allow me to elaborate.

I first heard of Y2K in 1975, while working as an internal auditor for a major multi-line insurance company.  As we were concluding an audit of data center operations, the I.T. auditor on our team was telling me how technology was likely to change over time. He mentioned the Y2K dilemma in passing with the memorable closer that “by the end of the century, most, if not all, the affected systems will be replaced by then.”

Didn’t happen.  The next time I encountered Y2K was 1995 when, by chance, I read a journal article on the risk and the state of unpreparedness facing the world community.  I was quite surprised by this revelation, and a bit disturbed.  First, I knew how long it takes major corporations to implement a major IT system on a good day, and that putting a gun to their head for accelerated implementation generally goes badly.  Second, I knew that, contrary to my colleague’s firmest expectations, there were still a lot of legacy systems surviving in major corporations, supporting pretty front-end interfaces with old COBOL code held together with the electronic equivalent of chewing gum and baling wire, while supporting applications programmers hummed mantras invoking higher technology spirits to keep the crappy code running ‘until we can replace it.’ Third, a whole new platform of software had evolved in the Win-tel world with the introduction of PCs into the business environment.  Did they bother to avoid the problem? No. They followed standard practice.  So much for heads-up, progressive remediation.

For the next two years society in general and the business community in particular appeared to be playing ‘Who’s On First’. If there was a hero in the Y2K drama, it was Alan Greenspan.  About three years before ‘The Event’, he decreed that any bank which was not Y2K compliant by a specific date would be closed or merged with a capable institution.  Finally, someone in a major sector had taken  charge with a clear deadline and explicit consequences.

What followed next was interesting; a cascading series of epiphanies among various industries and institutions. The insurance and investment communities fell in line with the Fed. The SEC required public disclosure of anticipated Y2K costs and the registrants’ capability for timely remediation of issues. The legal profession smelled potential blood for litigation, and insurers devised new liability products to manage risk. As individual companies became comfortable with their own level of remediation and survivability, they began to realize that they were only as secure as their supply chain and customer base, and so began seeking written assurances from business partners that their systems were also Y2K capable.

There were two tracks to the Y2K dilemma.  One was the transaction track involving systems that process monetary and operational transactions and events in which date fields are critical.  The other was the embedded chip track. Embedded computer chips were made in the millions by thousands of vendors over the course of three decades.  Some were custom chips designed for a specific machine with specific capabilities.  Many were ‘generic’ chips, off-the-shelf devices with basic capabilities that could be programmed in a variety of applications for a variety of purposes. Many of those chips had date capability, whether it was actually used in a specific application or not.  Documentation was not always good.  Many manufacturers had gone out of business or were acquired over time, with technical specifications lost or irretrievably buried in archives.  Problem: which chips having which capabilities were alive in which critical applications?  Like heart pacemakers, nuclear power plants, aircraft, ya-di-ya-di-ya?

The typical corporate public response was “No Problem!”  But privately many corporations struggled to identify and isolate potential risks, and to devise contingency strategies to deal with failures and maintain continuity of operations.

i sensed that by August, 1999, business in general felt it was pretty well prepared with remediating transaction systems, and had isolated areas with embedded chip risks to the point that they could respond with workarounds  that could contain problems.  But nobody could know for sure until The Ball dropped at Midnight.

Was Y2K real? Yes, but it was contained because it was successfully remediated by society as a whole at the last-minute.  Whatever glitches may have occurred were minimal or were effectively concealed from obvious effect.  I personally encountered three Y2K glitches; two before The Event, and one after.

One of the glitches had to do with the run-and-gun implementation of an ERP system by a client.  Because of the haste of implementation, it was largely installed Off the Shelf (OTS) with minimal customization. As a result, some functions and data fields were not effectively mapped between the old system, which had to be retained, and the new system; a costly but necessarily redundancy. My role was to devise a bridge in Excel between the old data format and the new record format, and keep it working until the software vendor could install a patch. Four months of billable time for one month of incurred work, because the client was in a critical business, and chose to keep me on stand-by.

In fact, one of the other effects of Y2K that was not widely reported in the general press but was acknowledged in the business press was the need for remedial consultancy after The Event to fix numerous serious glitches in ERP systems that were implemented in haste.  While much was made of the dot-com implosion and its impact on the economy, I would offer that an equal drag was the post-Y2K remediation costs, and business opportunity costs resulting from the diversion of Y2K resources from more productive applications.

*  *  *

One of the technology wizards at consultancy Cap-Gemini projected that Y2K would cost the world $1.3 trillion to remediate.  Mind you, that’s when a trillion was real money.  Today it will only buy you a one-country war without remediation. I didn’t run the official adding machine tape accumulating the actual costs, but the number sounded credible based on what I knew major corporations and institutions were reporting for expenditures (and I assume that in many cases, the majors were under-reporting for the same reasons that no company likes to discuss its security breaches). I would guess that the total breaks down as follows:

– One third went to fix the intrinsic problem.

– One third was paid in premium rates and overtime to old dis-interred COBOL programmers to fix existing code, or to big ERP software providers for run-and-gun last-minute implementation of ERP systems when management concluded that timely remediation of existing software would not be possible, or would hold great risk.

– One third went to contingency planning, generators in case of power failures, overtime for all-hands-on-deck drills and event staffing, audits of remediation efforts, liability insurance, legal work, revenue lost from curtailed operations on the eve of The Event.

In other words, about $800 billion of worldwide cost, was for nothing.  If we had addressed the Y2K dilemma in a responsible, proactive manner over the twenty-five years between the time I first heard of it and the time the ball dropped on Time Square for The Event, we could have saved enough money to fund another small war, or maybe infrastructure improvements.

But here is the more fundamental point of this exercise.  Humankind created the technology that led to Y2K, and failed to control it until the last-minute. Leadership procrastination and arrogant complacency led us to the brink of a potential calamity.  It took the imminence of a crisis to galvanize organizational action that could have and should have occurred much earlier in the supposedly rational managerial mind.  Does it sound like any other quagmires that come to mind.

Now here’s where Y2K differs from Climate Change and Energy Transition. We created the information technology.  We understood its mechanics and impacts for the most part, except we kind of got sloppy with the embedded chips.  By contrast, we did not invent climate, and we barely understand its mechanics. We proceed to impact a system we do not yet understand with the same arrogant complacency about consequences.  Similarly with the energy transition in general, and fracking in particular.  We are replaying the institutional incompetence and irresponsibility of Y2K with these current paradigms, and let’s not forget our management of the economy as a whole.

Nor should we stop with Clim-Ergy. How about nano-tech, and genetic engineering, and geo-engineering. How many of us really believe that these technological frontiers are any better managed by our corporate and political gun slingers than was Y2K?

Or how about cyber-security? Do you believe that the institutional corporate sensibilities that led to Y2K, and that have perennially short-changed investment in computer security over the evolution of this technology are any better equipped today to protect their enterprises and the greater society’s stake in them from criminal or nation-state assault?

If this assessment sounds exceedingly cynical, at least it is founded on ample precedent.

*  *  *

One group of computers did not suffer risk of exposure to Y2K. Those were Apple p.c.s and systems running on variations of the Unix operating system. But while they were not vulnerable to Y2K, there is some concern that they face a comparable dilemma in Y2038. This too was known in 1995, but recognized at the time as a ‘deferable issue’.

Not to worry.  We’ve got 25 years to go til then, and besides, “most of today’s systems will be replaced by then“.

In any case, I’m not the least worried. I anticipate that my personal operations will terminate before then.

Beam me up, Scotty. There’s no intelligent life down here.

Onward.

20130602