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Nissan Opts for City Electric Car, not Hybrid
As reported in today’s New York Times Carlos Ghosn the CEO of Nissan and Renault stated that Nissan will produce an all electric car with a range of 100 miles (U.S.) or 50 miles (E.U.) for release in 2010 - 2012. Ghosn believes the plug in electric hybrid is a mistake and that his all-electrics will be profitable, not a “loss-leader.”
How can a mere consumer-observer like myself question the judgement of the reigning guru of the global auto industry? Still…if I were on a lot and had a choice of an all electric for $30,000 that could go only 100 miles before needing to be recharged or a $40,000 hybrid that would go 40 or 50 miles on the battery alone and then 300 miles more when the gas motor kicks in to re-charge the battery - I don’t know.
Maybe it depends on whether the car is a secondary, only-around-town vehicle or if it needs to do everything. If I had two cars I might have one of each so maybe there is room for both. But if I had only one car, it would have to be the PHEV. I certainly am not going to wait for some battery exchange infrastructure to be built and then count on it being wherever I need it.
All this assumes gas cost well over $6 a gallon, probably closer to $10. That’s what I am anticipating to happen starting around 2010 and it must be what Ghosn thinks is likely too. I doubt he’d sell a lot of limited-range electric cars if gas stays about where it is or just creeps higher and certainly not if gas goes back to $3.
On a different subject, Ghosn mentioned that the automobile industry’s center of gravity is moving from Detroit to Tennessee. With all three Detroit based American car companies in danger of bankruptcy, it sounds like a permanent move. Here’s the full report:
Nissan Says Electric Cars Will Be Quickly Profitable
By NICK BUNKLEY
Published: July 23, 2008
FRANKLIN, Tenn. — The electric cars that Nissan Motor plans to start selling by 2010 will have varying capabilities depending on a given country’s driving patterns, but all will be priced competitively and will generate profits, company executives said Tuesday.
Nissan’s chief executive, Carlos Ghosn, said that any electric car the company sold in the United States would need a range of at least 100 miles between charges to be practical, but that European drivers could make do with about half that range. Tolerance for the time it takes to recharge such a car may vary widely as well, he said.
One aspect that Mr. Ghosn said would remain constant, however, is that the cars would produce zero tailpipe emissions, unlike some vehicles being developed by rivals that have range-extending gasoline engines to power the car after its battery is depleted. Building cars powered by alternative fuels but that still use oil is “unsustainable,” he said.
“I want a pure electric car. I don’t want a range extender. I don’t want another hybrid,” Mr. Ghosn told reporters after a ceremony to dedicate Nissan’s new North American headquarters in Franklin, an affluent suburb in the hills south of Nashville. “It’s not going to be zero emissions in certain conditions. It’s going to be zero emissions.”
In May, Mr. Ghosn asserted that Nissan would, within two years, become the first automaker to sell a mass-market, zero-emission vehicle in the United States. The company plans to sell such cars globally by 2012.
But Nissan does not intend to reach those milestones merely for show, said Dominique Thormann, its senior vice president for finance in North America. In an interview, Mr. Thormann said Nissan would not sell the cars unless it could make a profit immediately, at an affordable price.
“Everything that we develop, we develop for profits,” he said. “We make money on all our cars. We do not have loss leaders.”
To help in its development of electric cars, Nissan said Tuesday that it would work with the state of Tennessee and its largest electric utility, the Tennessee Valley Authority, to study and perhaps install infrastructure like charging stations. The automaker has begun similar efforts in Denmark, Israel and Portugal, but the United States presents a far greater opportunity for Nissan to market electric cars.
Separately, General Motors said Tuesday that it was working with the nonprofit Electric Power Research Institute, which represents more than 30 large electric utilities in North America, to encourage development of electric vehicles. G.M. is developing the Chevrolet Volt, also for introduction in 2010, which can go 40 miles on battery power before switching to its gas-powered engine.
Nissan is opening its 450,000-square-foot headquarters here in Franklin two years after it pulled up stakes in Southern California for temporary quarters in downtown Nashville. And overseas automakers in the South, particularly in Tennessee, are growing rapidly. Last week, Volkswagen of Germany selected Chattanooga as the site of its first United States car plant since the late 1980s.
Nissan, Mercedes-Benz, Honda, Toyota and Hyundai also have factories in the region. Meanwhile, the Detroit automakers have been laying off thousands of workers and closing plants across the Midwest and other parts of the country.
“The arrival of the auto industry in Tennessee has transformed our lives,” Senator Lamar Alexander, a Republican, told Nissan employees during the dedication ceremony, which was followed by country music, tours of the energy-efficient building and a pie-baking contest. “You put the South on a path to become the new center of the American auto industry.”
Tags: peak oil energy investments
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16 responses so far ↓
1 James Philippi // Jul 23, 2008 at 2:17 pm
The right tool for the right job! No one car will work for every person, every time. I would like one of each, but $30,000 for an all electric is way too much. I’ll just keep driving my PHEV!
2 paultaut // Jul 23, 2008 at 8:03 pm
Zenn Cars are currently eing sold at 38 dealerships throughout the country. If EEStor provides the tech upgrade, their cars will will have a range of 250 miles, top speed of 80 mph and recharge in 5 minutes. For $30,000 it would be a bargain, they do not project what the cost would be.
However, they have a patented drive train and indicate the ability to retro fit current cars. So, I’m actively rooting for them.
If the upgrade is successful, sales would begin by the end of 2009.
I do not own shares of the company, yet. Hopefully the idiocy driving down the prices of all inovative alt. energy tech companies pushes Zenn below $5 again.
3 pmiller // Jul 24, 2008 at 6:18 am
The “battery exchange” infrastructure isn’t going to happen. It doesn’t make any sense to swap battery packs.
There are two things that will solve your dilemma:
1) There is no reason to restrict the range to 40 miles for a plug-in and 100 miles for a pure electric, except that it is all they want to put in at this point because of weight and cost. A 1999 GM EV-1 went 120 miles on a charge with NiMH. There is no reason why that car today wouldn’t go 250 miles on a charge with Li-Ion.
2) If you had chargers at your destination, you dramatically increase your driving range. If you commute 40 miles each way, you may be uncomfortable with a 100 mile range car. If you could plug in at work and have a full 100 miles for each leg of your trip, that fear abates. There is electricity near virtually every parking lot, and wiring in chargers is a very small fraction of the cost of battery exchange centers.
When you look at the numbers, it is extremely rare to drive more than a couple of hours without a sizable stop in the middle that could be used for charging.
I chuckle when people argue that the use pattern of an electric car has to exactly mirror that of an ICE car or nobody will accept it. If you flipped it around and tried to sell an ICE car to somebody with an electric, they would laugh at you if you told them they could have twice the range (300 miles vs. 150 miles) and could refill in five minutes, but the trade-off was a trip to a special store to fill up with gas every other week, a trip to a special store to replace your oil every four months, much higher maintenance costs, it will cost you about 7 times more to drive per mile, your garage will smell and will get dusty with brake pad dust and will drip oil and transmission fluid on the ground.
Would you buy one of those?
4 Robert Essian // Jul 24, 2008 at 6:50 am
Jim, seems to me your logic makes the most sense. The stress of not having infrastructure in place would cause me to not go all electric.
A general question; Would I be correct if we have a glut of gasoline because of demand destruction here at home to assume that the refiners would sell this overstock on the world market to recover their costs in producing high priced crude.
5 Paul // Jul 24, 2008 at 7:13 am
The reason why a “reigning guru” of the auto industry comes to a different conclusion is that he knows what the average customer can afford. Cars are not only sold to the wealthy. A PHEV costs $15000 more than a comparable conventional car. The average customer may not be able to affort this upfront, but she (barely) can afford to pay this amount over the lifetime of the car in higher fuel cost. Here is another quote from an insider:
Bosch: Bernd Bohr, Head of Automotive Section: “We estimate that in 2015 worldwide 2.5 million hybrid cars and 0.8 million electric cars will be produced, from a total of 80 million cars. Plug-in hybrids are not an ideal solution due to weight and cost. Diesel cars with 30% higher efficiency than petrol cars will increase market share, which is already 80% in France”. (In most of Europe petrol and diesel costs about $10/gallon).
Unless you take affordability into account you will come to wrong conclusions.
What will happen is a shift to diesel cars (added cost about $1500). In a second wave, dual fuel (petrol/natural gas) combustion engine cars (added cost $3000) could become popular. All electric and PHEV will remain a niche segment for the wealthy for a long time.
6 pmiller // Jul 24, 2008 at 7:58 am
The projected cost of electric cars is high because they are not currently mass-produced. There is no reason why a pure electric car will not be cost-competitive (if not cheaper) than an equivalent ICE car with volume. It is a huge mistake to compare the cost of an ICE car using existing plant infrastructure in runs of 100’s of thousands, with electric cars largely hand-built in runs of a couple of thousand. That is not an apples to apples comparison.
Look at what has happened to the price of flat screen TVs. Initially they were a boutique item and were very expensive. It was a huge investment to build a plant to make them. Now, just a few years later, they are a mass-produced mainstream product and have dropped in price by80% to 90%. Expect similar drops in price for batteries, motors and regenerative braking components which will knock the $15,000 price difference right off.
There are reasons why auto “gurus” don’t like battery electric cars. Look at the long-term tests of the Toyota Rav4EV. They have lasted much longer than originally projected, with dramatically lower maintenance required than an ICE RAV4. That would translate into a staggering loss of revenue for Toyota if a large number of cars sold had the same characteristics. Longer service life with dramatically reduced repairs does not fit in with the business plan of current automakers. Don’t believe for a minute that what the “gurus” say is not in the self interest of maintaining the current status quo.
7 pmiller // Jul 24, 2008 at 8:03 am
BTW, which sounds better, a diesel at a 30% better efficiency than gas which still requires importing oil, or a Toyota RAV4EV which at current gas prices is 85% cheaper per mile than gas, is environmentally much cleaner than diesel and doesn’t use a drop of imported oil.
8 KV // Jul 24, 2008 at 9:23 am
Business Week article: Should oil be cheap? Link:
http://www.businessweek.com/magazine/content/08_31/b4094000658012_page_3.htm
Who sets the oil price? When is it not cheap?
9 Paul // Jul 24, 2008 at 12:07 pm
Auto gurus might have a hidden agenda and mass production will lower cost.
That’s why I quoted Bosch, who makes money from and knows a lot about batteries, electric motors, regenerative braking systems as well as ICE components. They are not publicly traded so their statements don’t have to please anyone. Their low penetration estimates may well haven taken the above factors into account.
At the same price, an electric car with reasonable range sounds much better than a diesel car with only 30% better efficiency. But prices are not the same and the American (non-luxery segment) consumer is the most price sensitive in the developed world.
This is a statement on the cost of a mass produced electric car:
General Motors: Carl-Peter Forster, Head of GM Europe: “An electric car from GM (European version of the Volt) will become available in Europe in 2012. Its price may be in the order of Euro 10,000 higher than comparable combustion engine models”.
10 pmiller // Jul 24, 2008 at 12:44 pm
Bosch is a huge auto parts manufacturer, which is poised to take a huge hit if battery-electric takes off. in particular they specialize in diesel. I wouldn’t call them unbiased.
Bohr is also into fuel cells, which is what the large automakers have pushed for a decade as a ruse to hold off electric cars. That is a sign to me that his views are crafted to suit his company more than general economic reality.
The amount that oil is subsidized should also be considered. High cost of oil aside, you need to also consider costs to stabilize the middle east and africa as well as straight up subsidy cost in tax breaks and such to stimulate new oil production. Add to that the fact the pollution generated per mile for battery electric versus ICE is dramatically lower, with the largest benefit right were people actually live and breath (and drive), and electric would fare much better on a truly equal playing field.
11 KV // Jul 27, 2008 at 7:14 am
Here is the reality of high oil prices. Think what would be the condition of our nation if oil went to $2o0 or $500 as some wish here.
Shoshana Zuboff July 14, 2008, 3:27PM EST text size: TT
Welcome to the Frozen Economy
Not since the Depression have financial difficulties so immobilized spending and credit. Listen to the talk at a diner in Maine
by Shoshana Zuboff
The polar ice cap may be melting, but the U.S. economy is frozen, starting right here in my small town. Gradually rising levels of dismay at the gas pump and in the supermarket gave way to paralytic shock last week when “lock-in” notices from the local fuel company arrived. This year’s advance price for home heating oil is nearly twice what people paid last year. A collective gasp of disbelief from my tough, resourceful Maine neighbors echoed across the meadows and up the rocky coast. Many claimed they would never sign the contract. “What’s your alternative?” I asked a friend.
“I don’t have one,” he muttered.
In the days that followed, a new quality of dread settled over the place like soot, as people weighed their options. Heat or food? Gas or electricity? Medicine or mortgage payments? What to give up? What to cut back? The conversations were everywhere. In the supermarket, I heard one man tell another: “When I was a kid, you woke up, went into the bathroom, and broke up the ice in the toilet. Now my kids will have to do the same. America is moving backward.”
My neighbors are like deer caught in the headlights: frozen in fear as something sinister, implacable, and wholly unanticipated lurches toward them. A reckoning has begun to unfurl like a dark flower, slowly at first, then gathering urgency and force. This is not a short detour after all, but an untraveled road to an unknown place from which there is no return, no escape…and we are not prepared.
Spending Paralysis
The economic crisis has been triggered by what economists call “structural shifts” in the global supply and demand for commodities, coupled with the meltdown in the mortgage markets and the ensuing credit squeeze. But this crisis is now moving into a whole new gear, creating a new set of economic conditions that have yet to be named. Call it “the frozen economy.”
As pain reaches deep into the daily lives of ordinary Americans—irrespective of their creditworthiness—it will trigger unforeseen consequences for every corner of the marketplace. Nearly two-thirds of Americans already say they are cutting back on nonessentials, according to a new survey by Information Resources. But what’s nonessential? Heat? Asthma medication? Shoes for your kids? A new yoga mat? At the same time, 57% of Americans interviewed last month by the Survey of Consumer Confidence reported that their financial situation had worsened—the poorest response since 1946, when the survey began. More than two-thirds of gross domestic product depends on consumer spending. But when the grass roots are frozen, nothing can grow.
The statistics tell a dramatic story, but people tell it better. So I went to Moody’s Diner to listen.
Comfort Food
Moody’s is our sanctuary of sameness, where regulars come for the $3.89 breakfast special—two pancakes, two eggs, two links—and tourists to satisfy a hunger for something that goes beyond food. Built in the 1920s on Maine’s principal north-south route, it was a haven for loggers, truckers, and rusticators in an age before cholesterol. Now it’s a fold in time. The yellowed linoleum counter, green vinyl swivel seats, scarred wooden booths, and worn tabletops have welcomed countless stacks of blueberry pancakes, thousands of fragrant chicken croquettes with gravy-covered mashed potatoes, a sea of shrimp stew, and enough chocolate cream pie to feed a small country.
Moody’s welcomes us back to the world of childhood, of Grandma’s kitchen, when all was innocence and order. This is no postmodern nostalgic wink, just the healing comfort of a nearly complete absence of change. Only the Support Our Troops in Iraq poster, with photos of local boys, suggests a new century.
At least, that’s what I thought until the other day, when I sat down at the counter. Three working men in the booth behind me wondered about alternative energy. Wind? Solar? Pellets? The very notion was mysterious, and it wasn’t clear how to figure it out. “We have to do something,” they said. “But what?”
Next to me, Shirley and Irene recalled how their parents coped the last time no one could afford heat, during the Great Depression. Back then, three generations moved into Grandma’s farmhouse for the winter. “It was the only way they could survive. Now it looks like we may have to do that again.” Irene looked dazed. “I feel sick about it. We don’t know what to do.”
Seventy-three-year-old Arlie Fretner sat in his usual spot, the last seat at the counter, with his back to the wall. “I don’t know what to do, or what to think, or what direction to go in. It looks like those folks in Washington don’t know, either. The whole system has just seized right up. There’s nothing I can compare this to, except how my people talked about the Depression.”
Running Scared
“What about the next President?” I asked. “Will he be able to help?” They all looked at me with a mix of tenderness and pity, as if I had just spit up on my clean shirt. “The government should assist us,” Arlie said, “but we’ve given up on that. They want to pacify us, not help us.”
Robert had been listening quietly. For decades, he taught shop at the local high school and trained many of the skilled carpenters around town. Now he runs a small power-products business and helps out his son’s logging operation. Few men are more respected in this community. “People are asking themselves, ‘Will things go back to the way they were, or is this a fundamental change?’” he said. “Everything hit us at once. Now we are running scared for the winter. My business is off 75%. People want the products, but they’re afraid to make a move, because they have to save everything to heat their homes. We have to choose between heat, gas, food, and medicine. Most of us have never lived through a time like this, where we can’t afford the basics of a decent life. It’s hard to believe that this is America.”
Robert is living in the frozen economy, where paralysis reigns at every level. Psychologists have long observed a curvilinear relationship between anxiety and performance. Without anxiety, there is apathy. A good dose of anxiety motivates peak performance. But more anxiety and the whole thing morphs into paralysis. The way I see it, we’ve blown right past anxiety into brand-new territory, where people can’t make choices because there aren’t any good choices to make. They are paralyzed—frozen in place.
Credit Seizure
Our public and private institutions are facing their own version of this new Big Chill. Treasury Secretary Henry Paulson, speaking in London earlier this month, told his audience that the financial markets had not yet adapted to new circumstances. “Working through the turmoil will take additional time, as markets and financial institutions continue to reassess risk….” They, too, are uncertain where to turn, having seen the Dow’s dismal June performance, when it lost the greatest percentage of its value since June 1930.
General Motors (GM) executives, having squandered these past decades on shamelessly obstructing the development of fuel-efficient engines, now see their share price at a 50-year low. Their solution? Lay off other employees…again. No peak performance there.
The G8 leaders appear powerless and irrelevant. At the U.S. Federal Reserve, the curtain has been ripped aside, and the once omniscient wizard looks startled and uncertain. Keep rates low to support growth? Raise rates and try to stem inflation? You know the banking sector has seized up when federal funds lend at 325 basis points less than a year ago, while 30-year mortgages are two full percentage points higher. Frozen.
Squeezing Budgets
Every aspect of the economy seems to be caught between fiercely opposing forces, leaving no good choices but plenty of ice. Prices are up: Dairy products and bread have jumped 15% over last year, eggs 26.7%, and poultry 73%, according to the Bureau of Labor Statistics. Gasoline is 36.7% more than a year ago, according to the Energy Information Administration. Health insurance premiums have increased 91% since 2000, according to the Commonwealth Fund. Meanwhile, real hourly earnings are falling—down 0.8% from a year ago, according to Bloomberg Economic Indicators.
There are more opposing forces: Consumer borrowing is up, while home values have fallen precipitously and mortgage delinquency rates are reaching record levels. The U.S. trade deficit continues to rise, while the cost of shipping a standard container from China has tripled since 2000, and many goods now cost more to transport and distribute than to produce. GDP is rising slightly, but the amount we can afford to buy with what we produce is growing at a pace that’s even slower, by a full percentage point, than real GDP, according to the Dallas Fed. Home prices have fallen back, but the Conference Board indicates that the number of people intending to purchase a home in the next six months is at a 25-year low.
Americans are not alone in their shock and bewilderment. Demonstrations and riots over the rising cost of food and fuel are spreading from Asia and Africa across Europe.
Memories of Depression
Civilizations can prosper or decline. This is no coin flip but a consequence of how well societies perceive and adapt to economic, social, and environmental ruptures. In 1980, still in the grip of the last energy crisis, Americans signed on for “Morning in America.” The promise of Ronald Reagan’s candidacy, and of every President and Congress since, has been to humor our fears with a message of eternal sunshine—that everything is as it has always been. We’ve been lulled into escapism by opportunistic leaders. We chose to be pacified. Now decades have been lost while we’ve kept our heads in the sand. Most Americans alive today cannot recall the Depression—the last great shattering of our economic life—and what it felt like to be frozen. Will the economy mark the onset of our lingering decline, or will it finally rally us from denial?
As the economy ices over, the next President will confront a challenge that can be compared only to the one Franklin D. Roosevelt faced nearly 80 years ago. Discontinuous change will require a bold reexamination of our social contract and the rules of wealth creation in a global system. Thawing the frozen economy will entail reinvention of our public and private institutions, especially as they bear on health, education, finance, and energy. These are themes I plan to address in my next columns. In the meantime, here’s my advice to the candidates: Start at Moody’s Diner. Lose the cameras. Bring a notebook.
Shoshana Zuboff is the author of The Support Economy: Why Corporations Are Failing Individuals and the Next Episode of Capitalism. She was the Charles Edward Wilson Professor of Business Administration at Harvard Business School.
12 KV // Jul 27, 2008 at 7:15 am
Forgot to add the link. It is from Business Week.
http://www.businessweek.com/managing/content/jul2008/ca20080714_683791.htm?chan=top+news_top+news+index_dialogue+with+readers
13 Robert Essian // Jul 27, 2008 at 10:57 am
KV, your article gave me chills and took me back to many events that took place in my own life.
Respectfully, I would like to ad that with good leadership these things that seem so dismal actually become the back bone of the family. It will be remembered with pride as the good years. We are a strong family (American people and their households) we just need leadership and direction for change…Thank you for sharing this incredible article.
14 KV // Jul 27, 2008 at 10:05 pm
Robert Essain,
Thanks for reading the article, however, it is the Business Week that published it, and was written by Shoshana Zuboff. I only posted here.
Most all of us have either directly or indirectly experienced hardship, whether due to family matters or due to matters of national import, or both. Those who survived, can look back and try to look at silver lining. You and I fall into that category. However, those who did not survive, or did not come back whole physically and mentally, are the ones we forget forever. Of course, life only looks at survival and not much more. We will survive as a country (the land was there before we came from world over), but the cost is going to be immeasurably high, to be born by our children. This will steal their dreams and psyche.
15 KV // Jul 28, 2008 at 12:54 am
SemGroup Bankruptcy
I am posting the Wall Street Journal article, and, it is worth reading to understand what is hidden from most of us. Yes, Jim, it was speculation that gutted this company.
Wrong-Way Oil Bets Slam an Energy Firm
SemGroup’s Downturn
Roils Traders, Creditors;
Financiers Hold Stakes
By SERENA NG, PEG BRICKLEY and CAROLYN CUI
July 25, 2008; Page C1
The rapid fall of energy company SemGroup LP has startled participants in the oil markets, left creditors struggling to understand how the company’s trading went wrong and attracted the attention of federal authorities.
Until now a little-known, though large, closely held partnership in Tulsa, Okla., SemGroup transports, stores and distributes crude oil and refined products. It filed for bankruptcy protection this week after losing more than $2.4 billion on energy contracts it had entered into. Exactly what drove the company to that fate remains unclear, but clues have started to emerge amid court hearings and other ripples from the implosion.
Amid news of the losses, one of SemGroup’s affiliates, publicly traded SemGroup Energy Partners LP, on Thursday said it has received a letter from the Securities and Exchange Commission, which is conducting an inquiry into the company and its recent disclosures about parent SemGroup’s liquidity issues. SemGroup Energy also received grand jury subpoenas from the U.S. attorney’s office in Oklahoma City that require it to produce financial and other records.
It was also hit with two potential class-action lawsuits. SemGroup Energy said it intends to cooperate fully with authorities.
(Meanwhile, the Commodity Futures Trading Commission charged a Netherlands-based global trading fund in its probe of oil-markets manipulation. See article.)
Some analysts estimate that SemGroup handles oil volumes representing around 2.5% of what the U.S. consumes. It counts prominent private-equity firms and hedge funds as shareholders, including a fund owned by private-equity firms Carlyle Group and Riverstone Holdings as well as hedge fund Ritchie Capital Management.
The company said in court filings that $290 million of the losses it sustained were due to trading done through SemGroup by a firm owned by its former chief executive.
SemGroup had large “short” positions on crude-oil contracts, which were essentially bets that oil prices would fall. As part of its business, SemGroup uses these contracts — which commit the company to sell oil at fixed prices at future dates — to hedge its inventory and future oil purchases. But given the whopping size of SemGroup’s losses, some analysts and creditors suspect the firm may also have been making speculative trades not directly tied to its core business.
If those suspicions prove true, unsecured creditors of SemGroup who are owed more than $1 billion say they may be able to recoup damages stemming from the trades.
Andrew Oram, an analyst at Moody’s Investors Service, said SemGroup’s bankruptcy-filing documents “brought to light additional large hedging liabilities and other unusual items that had not been reflected” in the company’s previous disclosures.
Susheel Kirpalani, an attorney representing bondholders, said trading oil futures for profit wasn’t supposed to be in the ordinary course of the firm’s business — a distinction that he said could affect his clients’ right to recover. “I don’t think the company was supposed to be doing trades for financial profits…and just betting on where the market price was going to go.”
A spokesman for SemGroup declined to comment Thursday.
News of the company’s woes sparked a debate this week over what impact its positions in oil futures had on the recent drop in oil prices in recent weeks. The firm’s collapse also highlights the challenges facing many energy companies in today’s volatile markets.
Oil prices have swung this year, surging 51.4% before tumbling nearly 14% since early July. Oil marketers such as SemGroup typically have to post cash or collateral to back their short positions. If prices rise, they may be asked to put up more collateral, which can strain their cash reserves.
SemGroup was founded in 2000 and has a complex corporate structure. According to regulatory filings, a fund owned by Carlyle Group and Riverstone Holdings has a 29.3% stake in SemGroup, while hedge fund Ritchie Capital Management owns a 25.2% stake. SemGroup’s management owns most of the remaining shares. Spokesmen for Ritchie and Carlyle/Riverstone declined to comment.
SemGroup generated revenue of nearly $15 billion in 2006, and also serves customers in Mexico, Switzerland and Vietnam, according to its Web site. In the first half of 2007, SemGroup posted profit of $51.6 million, a 58% drop from a year ago, partly due to $122 million in unrealized losses on derivative instruments.
The SemGroup Energy Partners affiliate listed shares on the Nasdaq Stock Market in July 2007. SemGroup Energy, which operates oil pipelines and storage facilities, is not a party to the bankruptcy proceedings but derives a large portion of revenues from its parent, which owns a 49% stake.
When SemGroup filed for bankruptcy, two of its hedge-fund creditors, Alerian Capital Management and Manchester Securities, took control of the general partnership of SemGroup Energy. Shares of SemGroup Energy have fallen 67% since the start of last week. As of 4 p.m. Nasdaq composite trading Thursday, they were at $7.72, off 28 cents.
Prior to last week, many bond investors and creditors of SemGroup were unaware of problems at the company. SemGroup publicly disclosed it was having liquidity issues on July 17; two days earlier it informed some lenders of its troubles in a private phone call. The developments caused its bonds to dive in value to 11 cents on the dollar from 97 cents.
Spurned creditors are now questioning the activities of a trading company owned by SemGroup’s co-founder and former chief executive, Thomas Kivisto. Mr. Kivisto, a former college basketball star at the University of Kansas and energy marketing veteran who once worked at energy titan Koch Industries, stepped down from SemGroup’s top post last week and went on administrative leave, according to court documents. A message left at a number that appeared to be his in Tulsa wasn’t returned and a spokesman for the company said he didn’t have contact data for an attorney.
According to SemGroup’s bankruptcy-court filings, the company found itself without enough cash to cover margin calls and on July 16 handed its trading account with the New York Mercantile Exchange to Barclays PLC, a move that forced SemGroup to recognize losses exceeding $2.4 billion. A Barclays spokesman declined to comment. Another $850 million of unrealized losses were incurred through over the counter trading, documents show.
Mr. Kivisto “was trading through SemGroup so SemGroup was ultimately liable” to cover the losses, SemGroup attorney Martin Sosland said at a hearing in the U.S. Bankruptcy Court in Wilmington, Del., on Wednesday.
16 You be Quick // Jul 28, 2008 at 3:22 am
Can anyone tell me where are the electricans are going to come from? It takes four years to learn a trade.
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