How Will Immelt's New Advisory Role Affect Big Oil?

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by: Sean Daly

Jeffrey Immelt’s appointment to lead the President’s Council on Jobs and Competitiveness has been met with great trepidation on the Left.

The choice irks. After all, as former Labor Sec. Robert Reich and Joe Klein suggested this weekend, GE (NYSE:GE) is a company that has closed dozens of plants throughout the US in recent years and now receives most of its profits from foreign shores. According to Scott Paul of the Alliance for American Manufacturing:

There is no swifter way to alienate working class voters than to name an outsourcing CEO to lead your jobs strategy.

Other pundits are upset by the choice because they see GE itself is something a poster-child for rent-seeking and rampant “financialization” -- a company that used its good name as a manufacturer to conjure up shadow-bank, speculative wizardry and then (nearly) blow up. In late 2008, GE had covertly lobbied to get its financing arm included in a bank-only bailout program that would ultimately insure up to $139 billion of its debt.

Rorty Bomb’s entertaining piece published Monday is a great example of this more “moral” argument against the company, but MIT’s Simon Johnson could have made the same point. For these writers, GE is like AIG (NYSE:AIG), one of the tainted.

In contrast to these outspoken critiques, the environmental lobby has been strangely quiet on the Immelt pick. Should the Eco-Left also expect disappointment like their Labor-Left brethren?

In a word, yes. With Immelt suddenly at the President’s ear, the oil patch has a true advocate. It’s not immediately apparent, as GE -- as a corporation -- is so often draped in wind turbine imagery and “eco-imagination” memes. But this is a company that just dropped $4.5 billion on two oil field equipment companies – all within the past three months. It has strange bedfellows in the energy sector and a long history of affiliations.

For example, GE and Bechtel Corp. go way back, with a successful partnership spanning decades. In 1999, they jointly formed PSG International, a pipeline company for developments in Central Asia and Africa. They have a “formal alliance” in the “coal gasification” space and have built many power plants together.

Bechtel and TransCanada (NYSE:TRP) also go way back. Bechtel Canada helped link the oil fields of Alberta with the Great Lakes in the late '40s. It built the world’s deepest underwater pipeline at the time beneath the Straits of Mackinac. It constructed TransCanada’s epic, 2,300-mile pipeline back in the late '50s. The two companies practically grew up together.

As a trio, the companies have cultivated a fruitful tri-partite alliance. In 2007, GE, Bechtel, and TransCanada developed the first poly-generation facility in Canada, best considered a “dual purpose center” that produces electricity and fertilizer for profit and also captures carbon for greenhouse gas reduction.

Often GE helps with infrastructure financing on the front end, and the servicing on the back. Last year, GE’s Oil & Gas PII Pipeline Solutions group completed its largest inspection project ever, helping to evaluate 537 miles of TRP’s natural gas pipeline. In October, GE was selected to perform inspections on Bechtel’s latest handiwork, TransCanada’s completed Keystone pipeline.

With each a goliath in its own right, the alignment of their core competencies of construction management, equipment/financing, and pipeline can make for some impressive bidding. Stalking big projects together, the three amigos can roll up important work worldwide.

So, now that he has the President’s ear, what will be Immelt’s take on Keystone XL?

The contentious 1800 mile pipeline is presently awaiting a decision from the administration. It is the latest love-child of BBFs Bechtel and TransCanada. This is a project that is a “shovel ready.” It is bigger than the Alaskan Pipeline. One study boasts that the pipeline would create 15,000 “high-wage” manufacturing and construction jobs in 2011-2012 in the U.S. It will contribute $5.2 billion in state property taxes over the life of the pipeline and -- according to some booster -- trigger a profit renaissance in the US refining industry.

Oh yeah, and one more thing: the proposed pipeline is maligned by every environmental group in the US and Canada. Not only is it polluting of water and air, but the project may set back the clock on renewable energy by a decade.

So, which way does a Jobs and Competitiveness appointee vote? Yes or no?

How about the chief architect of GE’s “Eco-Imagination” mission statement? Any thoughts?

Or that profit-driven CEO of a company with close ties to Bechtel and TransCanada? Any pressure to vote a certain way?

A Fellow Traveler

In many ways, GE has been on the same reverse pilgrimage that Obama now finds himself.

As the recession choked off green tech spending and cap-and-trade died in the Senate, General Electric has had to switch gears. With the high-minded enterprises lacking traction, the firm has been finding new purpose in its oil and gas businesses. It’s been doubling down in the space with the ambitious multi-billion dollar acquisitions of Wellstream and Dresser.

Jeff Immelt now says he would like to have GE’s oil industry revenue increase to $15 billion by 2015, up from $10 billion in 2010. The WSJ has speculated that other companies Oceaneering (OLL) will be rolled up soon, as the company seeks to push into undersea robotics and further into oil services.

Shelve those “eco-imagination” press kits. Dirty oil has been redeemed. The “patch” is now a critical part of the company’s future, with deepwater and the oil sands in particular as the perfect “difficult milieus” in which GE can flaunt its technological edge. GE’s oil services head, Claudi Santiago, wants to pry out market share by bringing an "aviation mindset" into the oil industry, with improvements in remote sensing, monitoring and diagnostics.

Why does GE’s pragmatism remind me of the President’s recent policy shift? In both we see the brisk imperatives of survival seeming to undercut a larger, more high-minded narrative.

That is precisely what so galling to writers like Reich or Klein. The Immelt pick substantiates the Republican storyline -- the country simply needs jobs and “we need to get businesses confident” again.

Democrats had set out an entirely different narrative: that for two decades corporate power grew too confident and unchecked. This has led to union decline, income inequality, and outsourcing, all of which have eviscerated the middle class. Cheap borrowing and leverage only masked this collapse in real wages.

The New Deal 2.0 rhetoric of Obama’s first year operated according to this narrative. It promised to reset the foundation stone of US economic prosperity on a more secure footing – less Hummers and NINJA loans, more “shovel-ready” infrastructure, green jobs, and sustainable growth.

And, on the surface, the American public in late 2008 was ready for a return to nobler values. Had it not forsaken the humble expectations of earlier generations in a spasm of excess and magical thinking? During the boom, those Levittown capes and humble redwood picnic tables – they would not do. Let there be “Great Rooms,” and granite countertops, and expansive decks of Brazilian ipe or teak.

A “chicken in every pot” was replaced by a “Le Creuset on every Viking range,” but the crushing debt and foreclosure carnage had left the price tag too high. As Highway 1 of the exurbanite paradise piled up with wreckage, Americans sought an off ramp.

But over the past year, the American public grew tired of its own mea culpa. And New Deal 2.0 never gained traction. As the President himself said ruefully on November 12, “There is no such thing as ‘shovel-ready’.” The Democratic narrative quickly became another casualty of “recession fatigue.”

So the old narrative had to be jettisoned, ironically, just as the actual economy was gaining traction and the economy was growing. It came five months too late to help him last November, but Obama would have to -- at the very least -- look pro-active if he were to take credit for this growth. By 2012, it might well be “Morning in America” and he’ll survive the election.

Obama’s Dick Morris?

The appointment of Immelt comes -- I believe -- after a period of intense brainstorming during the Christmas break.

Two recent events may have solidified the choice. Last month the two worked together on a competitive lending package for a large Pakistani locomotive purchase order. The US government essentially had to loosen its protocols in order to help GE get the order and stymie a more generous Beijing offering. This obviously triggered a serious decision about exports and lending, and about US competitiveness vis a vis China.

Second, Obama had been reading a Reagan biography over the holidays, obviously focused on that post-’82 election period. Immelt has called Reagan a “personal hero” and probably has spoken to the President on the issue. In fact, Tuesday’s State of the Union had many similarities to a speech by Immelt at the Reagan Library back in March 2010, which tied any future American renaissance to “exports, exports, exports.”

GE will be the lead sponsor of celebrations marking Reagan’s 100th birthday this June, donating $10 million for the events. Striking an interest and affinity for Reagan may help the President catch some of that pixie dust. At the very least, it will allow him feel a bit less uncomfortable when the “Gipper” nostalgia cranks up in May.

Immelt’s new role as high-profile jobs paladin may appear at odds with running a multinational, but the administration knows that. The President might actually be in need of a high profile business leader who can take the barbs and arrows when the administration starts doing unpopular, un-Democrat-like things.

Things like voicing support for Keystone XL. Yes, oil is not explicitly mentioned in the “manufacturing, trade, and innovation” by-line but Immelt has a major knowledge of the Alberta oil sands build-out and he’s not going to fain disinterest on the topic.

Keystone XL ties into the President’s new “exports” mantra. It will be the first direct pipeline from Alberta’s oil sands to the shoreline refining hubs of the Gulf of Mexico. Unlike the Illinois and Cushing, OK termini, which are landlocked without access to foreign markets, these Texas and Louisiana ports can route into the international markets. Like I mentioned in an earlier piece, this will mean very a profitable diesel export into Europe.

Gulf Coast refiners -- like Valero (NYSE:VLO), Tesoro (NYSE:TSO), and including divisions of Exxon (NYSE:XOM) and Chevron (NYSE:CVX) -- that had structured their operations based on the expectation that the light-heavy split would steadily widen have recently been hurt by the fact that it hasn't. Petroleum from the oil sands could alter that. According to Trish Curtis, an analyst at EPRINC:

If the production of several hundred thousand barrels of additional blended bitumen has any effect on the crude spread, it will be to widen it. . . . To what extent is difficult to estimate, but...if it opens the spread by $1 or $2 per barrel it will have significant (positive) implications for the profitability of U.S. refiners.

Three days ago, it was revealed that Sinopec (NYSE:SHI) is offering to help Enbridge (NYSE:ENB) build the proposed Northern Gateway, a pipeline that would take Alberta’s oil west to a tanker port on the Pacific. The Chinese energy giant is offering $100 million to fund the project, which would direct the oil to refiners in Asia.

This appears as a shot over the bow to the State Department. If the oil doesn’t go to the US, it will go to Asia. It is putting State Sec. Clinton in a very difficult position. She is coping with the broad geopolitics of Keystone, but does not want to disappoint an important constituency that expects more than lip service to Green. This is an awkward, but pivotal choice for the administration.

A hard-charging economic advisor like Jeffrey Immelt might alter both the dynamics and the perceptions of these types of decisions. Unlike Volcker, the retiring éminence grise, or the personality-challenged Larry Summers, Immelt has his own star power.

In a December 15 address, GE CEO Jeff Immelt declared that 2011 will be the year GE goes “back on offense.” It was a fine speech and one that probably helped him get his new plum post. Whereas the new Chief of Staff William Daley and NEC head Gene Sperling both come with muted banking backgrounds, Immelt brings a far broader range of business experience. As a non-banker, he could articulate a more forceful pro-business, export-driven policy to the general public.

Unlike many Democrats, he could also voice a less strident view on Big Oil and the Alberta oil sands --not only because of the “social capital” GE has on green issues but because of the genuine technological innovations the company has made on pipeline inspection equipment and pollution control. He may be the only top-tier Obama advisor who can articulate these issues in their finest detail.

Disclosure: Author long GE, XOM and VLO