March 2009 Vol. 236 No. 3


New Energy Practice Leader Reflects On Industry

Lew Bullion, Senior Editor

Paul O’Rourke recently was named head of the energy practice for worldwide expert services firm LECG. He has more than 30 years of experience in energy consulting.

His work includes extensive experience in North America, Europe, Middle East, and Asia Pacific. Based in the firm’s office in Cambridge, MA he has managed energy practices at Putnam, Hayes & Bartlett, CRA International, and Booz Allen Hamilton since 1985.

P&GJ: Where did you grow up and when did you become interested in your discipline as a career?

O’Rourke: I grew up in Grand Rapids, MI and moved to California for my senior year in high school. My father received a great job offer in San Francisco, so the whole family moved to the Bay Area. After two years, my parents moved back to Detroit after another promotion for my dad, but I stayed in California to finish my undergraduate work at Stanford in chemistry.

In ninth grade, I needed to write an essay on what I wanted to be when I grew up, and I chose aeronautical engineering, only because it was near the front of the index cards in the school library. Although I spent a lot of class time with engineers, ultimately I tended more toward economics and finance in my graduate studies at the Wharton School, University of Pennsylvania.

P&GJ: What was the career path that led to your position with LECG?

O’Rourke: I’ve managed and grown consulting energy practices for the past 30 years, initially as a young associate at Booz Allen & Hamilton, and later at well-known economic and management consulting firms like CRA International and Putnam, Hayes & Bartlett, Inc. I had seriously considered semi-retiring in spring 2008, but Bill Hamm (head of the Economics Services Business Segment at LECG) and Michael Jeffrey (CEO) convinced me that LECG was re-defining itself in new and innovative ways, and I wanted to be a part of that transition.

P&GJ: What brought you into the energy industry?

O’Rourke: In the late 1970s, I was interested in understanding how public policy intersected with energy issues. In the U.S., we had gone through curtailments and embargoes, we had delays and cost over-runs at nuclear plants (and shortly thereafter TMI-2), and we had a growing sense of the importance of conservation and renewable energy to reduce our dependence on foreign oil.

During my first year at Booz Allen, I worked on a dizzying array of public sector and private sectors engagements, ranging from helping to draft white papers and options analyses for federal agencies that led to five major pieces of energy legislation in 1978, to working with the Coca Cola Company and Ryder Systems Inc. on how to hedge their price risk for power and diesel fuel. I also helped implement a number of federally mandated programs within state agencies.

P&GJ: The petroleum industry is known for its cyclical nature. Where are we in terms of the next cycle?

O’Rourke: As national oil companies assume greater roles in production, the major oil companies will have to re-define their role in meeting our energy needs. We see a broad range of strategies being developed and deployed – some of which rely on well-proven past competencies. But will scale and scope economies be sufficient to allow the majors to maintain their leadership position, or will the basis for competitive success shift away from the legacy skills that the majors have guarded protectively? The dramatic drop in oil prices after the massive increases earlier are very similar to the declines that followed the $100 oil frenzy in the early 1980s.

Markets react to these kinds of price increases. In both situations, recessions lowered world demand for oil (causing the decline in prices) and more efficient capital investment kept oil demand from quickly returning to the same levels when the world economies recovered. Of course, the wild cards in recent years have been demand from the BRIC countries (Brazil, India, Russia and China), coupled with the relatively volatile movements in foreign exchange. These two forces may continue to contribute to price volatility.

P&GJ: How have you seen the pipeline business change in recent years? What kinds of changes have you seen in pipeline management?

O’Rourke: The consolidation of the pipeline industry (that dominated the ’90s) has dramatically reduced personnel levels. The focus of the newly combined companies was more on the financial engineering and exploiting scale economies, rather than focusing on the operating side of the business. Pipelines saw that restructuring allowed them to increase throughput and operating efficiencies.

Now that some of the “convergence” and “roll-up” mergers have slowed, pipelines face the same aging infrastructure problems found elsewhere in the energy industries, with the same difficulties in attracting the limited pool of skilled engineering personnel.

P&GJ: How difficult has the regulatory climate become for pipeline and operators? Do you feel the industry is over-regulated by government or can it properly police itself?

O’Rourke: This is a complex question that requires a simplifying assumption. On the physical side of the business, most people would probably agree that the pipelines have been good corporate citizens and have followed the spirit of the laws leading to the current regulatory climate.

However, on the financial (or trading side of the business), the dilemma facing “self-regulation” is that one “rogue trader” may choose to ignore corporate policies and create an economic and regulatory nightmare for a company. The generic response is that more regulation is called for. However, the better response is to allow the pipelines to address these problems directly by developing their internal controls to ensure the corporate policies are followed (this is an area in which we are investing to expand LECG’s capabilities).

P&GJ: What key challenges lie ahead for the pipeline industry, and are operators doing enough to meet them? (Biofuels, manpower, etc.)

O’Rourke: The outlook for the growth of gas use in power seems positive, particularly if the new administration succeeds in its “green” efforts, and if the resulting rules disadvantage coal technologies, relative to gas.

The capital crisis may slow development of new power plants, creating a situation where this “backlog” can best be filled by new gas-fired plants which are both less capital-intensive and speedier to construct than coal or nuclear plants. However, the pipeline industry needs to develop ways to foster the power industry’s ability to commit to contracts to support the necessary pipeline expansions.

The shift to producer-backed pipeline expansions needs to be balanced with market-area contracts for the LDCs and power plants. This issue is compounded by the fact that many of the promising production areas are dominated by independents whose ability to provide the necessary financial guarantees for pipeline expansions compete with the capital needed to fund drilling operations.

P&GJ: What are some of the more challenging projects that LECG is working on today?

O’Rourke: As a global consultancy, LECG’s clients and specific issues do vary somewhat by geography. Global warming has become a major issue for our clients, and we are trying to help them understand what challenges and opportunities lie ahead for energy companies, major energy consumers, and transportation companies (e.g., airlines, railroads).

In North America, perhaps the most visible work that we have under way relates to making wholesale power markets more efficient and providing the services and support to market participants they were designed for. Bill Hogan and Scott Harvey (colleagues in Cambridge, MA) have been at the forefront of this work for the past dozen years.

P&GJ: How has the consulting business changed? Are operators more demanding, and do they want you to assume some of the risks today?

O’Rourke: Generally, clients expect us to be more vested in the outcome of the work. They want more than glib answers and pretty pictures – they want actionable, fact-based plans that will produce results. We have traditionally conducted our work with clients on a “time-and-materials” basis, but clients are increasingly demanding some element of a success fee structure, in which the consultant stays on to implement his/her recommendations and participate financially in the success or failure of the venture.

Success fee structures have their own set of problems as clients have discovered over the years, but generally I see a growing interest by clients in structuring fees around some notion of successful implementation of a strategy.

P&GJ: How might the recent U.S. election results affect the industry?

O’Rourke: Our new president has sent a clear mandate that “business-as-usual” won’t cut it. We need to move quickly and comprehensively to address the challenges of global warming and reliance on foreign sources of oil. That means we need to invest in new technologies, new sources of renewable energy, and overhaul the regulatory process so that nuclear energy can quickly contribute to meeting our growing energy demand.

At a more detailed level, I think we’ll see an increased effort by Washington to create incentives for national “electric highways” that will move power across much longer distances with lower parasitic losses. At some point, Washington will have to start thinking about how to change the way that we have traditionally dealt with Canada for importing hydroelectric power and with Mexico for importing and exporting gas to and from U.S. markets.

P&GJ: What is your opinion of Biofuels?

O’Rourke: It is an important element of addressing renewable energy sources, but it is insufficient by itself to make a major impact on replacing fossil fuels, unless substantial infrastructure investments are funded and or someone finds a way to extract more scale economies from production. There needs to be a more comprehensive perspective of the unintended effects that certain biofuels may have. A good example would be the impact ethanol demands placed on the food chain with the attendant price increases.

P&GJ: What are the chances we will actually see an Alaskan natural gas pipeline built?

O’Rourke: It will likely happen, but the devil is in the details. What route will the pipe follow and what markets will get the gas? If it comes down through Canada, how much gas will end up being dedicated to extraction of heavy crudes from tar sands? As with all the other options that we have available, we need to understand where, how and to what extent Alaskan gas can help. The pipeline clearly needs to fill in one piece of the puzzle, but it needs to be evaluated within a more holistic framework that encompasses economics, engineering, technology, political reality and public policy.

P&GJ: What are some activities you enjoy sharing with your family away from work?

O’Rourke: My fiancé and I share a 40-acre horse farm, and I recently planted some test grape vines in an attempt to grow wine grapes in a reasonably temperate microclimate in southeastern Massachusetts. We’re also planting a small orchard of fruit trees. Both the orchard and the vines will be organic, in that we will use organic alternatives to fertilizers and pesticides. We also plan to put up a windmill to help pump water for the horse barn, orchard and grapes.

P&GJ: During your travels, have you had any particular experiences stand out?

O’Rourke: I have travelled all over the world, as many career consultants do, and the memories that stand out relate to the time that I spent in Asia Pacific. I began to see the U.S. in a very different way. When you’re in Europe, Asia and the Middle East, you begin to understand how that part of the world views America and Americans. It really opened my eyes to how much work we had to do in order to re-establish our credibility with the world.

Paul O’Rourke can be reached at 617-761-0121, PO’

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