Since the interest rate on borrowed money is still very low, a discound rate of 10-15% would be ridiculous. Four percent is more reasonable. And when your do these analyses, you should be able to argue that the future value of the energy you are bringing in will be extremely high. (You can cite a few sources from this site, including Simmons.) That will help your bottom line.

I agree with you joule. But to be exact, it's not so much an expectation of a 15% return on capital. A 15% return discounted at 15% = 0% return. Thus the current crunch is even worse then you describe. The 15% isn't so much arbitrary but has been accepted as the right value (more or less) for as long as I’ve been in the oil patch (33 years). It supposedly takes into account the borrowing cost of capital. Often it's also used as a ranking mechanism when there are more projects then capital.

Gail -- as far as future maintenance costs of wind turbines including decommissioning, the oil patch does handle such matters fairly well. The cost to decommission infrastructure, such as removing platforms and plugging wells, is always used in the economic analysis (future negative cash flow). And for public companies those same forward expenses are also part of the valuation. Some fudging occurs, of course, but the SEC and capital sources typically require certified estimators to generate these numbers. Your point does make me wonder how inclusive some of the cost estimates for the various alts take into account (or don't) those future deducts from cash flow.

Goes back to an old Texas saying: sometimes the cheapest part of owning a horse is what you paid initially. Such matters quickly come to mind as just last week I paid a vet another $200 for my "free” dog I rescued.

yes, I think especially within US corporations the discount rate has too often been set unrealistically high which essentially devalues the future to the point where it is not really being considered after about a decade or two. I believe this has been because of their unrealistically high growth rate assumptions which in today's economy look pretty much unsustainable. By now, many people's expectations have been reset and I'll bet that future discount rates will drop.

Most companies do not use their cost of debt to determine the discount rate but instead use the "after tax weighted average cost of capital" (WACC). This takes into account what they believe is their long term optimal capital mix of debt and equity as well as the cost of each component of capitalization.

WACC = (Cost of equity capital) x (% of equity capital) + (after tax cost of debt capital) x (% of debt capital)

Publicly owned entities often use a much lower discount rate than private corporations to reflect the longer term life of their assets. There has been much debate about which discount rate to use in valuing the future costs of climage change and several economists have argued for a very low discount rate... just above 1% to take into account the impacts on future generations.

I am all for lower discount rates which are much more realistic in the way they take the distant future into account.

Interesting observation. I happened to be in Alaska during the construction of the pipeline. At the time I voiced concern regarding the life expectancy of the line and how it would be dismantled and removed at the end of its service. No one seemed to have satisfactory answers to my questions. Since its completion there have been a number of serious maintenance problems, including significant leaks. I question the soundness of the TAPS to transport an increase in oil flow possibly resulting from ANWR reserves. Chances are that it would require a major overhaul of the entire pipeline.

WNC,

I work for an oil company, I am actually at work on the North Slope of Alaska as I write this, I have worked up here for 28 years, and I am a corrosion supervisor for the Kuparuk and Alpine Oilfields, a few km west of Prudhoe Bay where the transit line leaks ocurred in 2006. So... I think I am as qualified as anyone to describe the situation up here.

I beg to differ about the oil companies being unwilling to do what it takes to keep the "pipeline" operational indefinitely. The industry is spending millions of $ inspecting and repairing the infrastructure here. It is a constant battle but I think we are doing a pretty good job. I believe where the industry got into trouble was we underestimated the life of these assets, especially when oil prices were low back in the late 80's and throughout the 90's. We thought we would be shutting down soon after 2000, but that didn't happen and now we think we will be here until 2040 or later. This was a worldwide problem not unique to Alaska- it happened in the North Sea too. There is certainly some embedded damage (corrosion)from those days, but we have been catching up over the last decade with an agressive repair program, and I have not much trouble getting the budget I need to keep doing this.

As far as the Trans-Alaska Pipeline which (I think) you are refering to (this is NOT the transit lines that leaked in 2006), that is operated by a different company (Alyeska) but they are taking good care of it too. It probably won't last indefinitely (what will?) but it will certainly last for decades longer. We have a much larger problem finding the oil to keep it operational as the big fields (mostly Prudhoe and Kuparuk) are in steep decline and the smaller fields aren't making up for it. There is still a fair amount of oil up here, but not the huge fields. So... Peak Oil is alive and well here in Alaska too.

Our biggest problem of all is the high cost of doing business here, particularly taxation from the State of Alaska and environmental regulations, but those are another issue entirely.

regards,

AlaskaMark