Archive for the ‘Energy’ Category

Shale oil resists as Saudi attack fails and oil glut may last till 2017

May 29, 2015

Shale oil production in the US seems to have resisted the Saudi attack. While some of the smaller wells have decreased and even stopped production, they can restart very quickly if and when the price is right. US inventories are extremely high, but perhaps of more significance in the long run is that with the pressure of low oil price, shale oil production costs have come down drastically. The Saudi attack on shale has only forced cost cutting measures which the shale industry had not bothered with when prices were high.

Wells which were thought to have a break-even oil price of $60/brl have come down to $40 and those thought to have been at $40 are now closer to $20. Of course they are a long way from Saudi production levels of about $3/brl, but it is the Saudi attack which has now improved their competitive position. Europe – when it eventually gets past its debilitating green lobbies – will be able to take advantage of the much improved and streamlined shale oil production process. Shale oil with a production cost around half of that from the North Sea could provide a bigger boost for the England economy than North Sea gas provided for Scotland.

Saudi shale war

Saudi shale war

It is still a bit of a mystery as to why oil price has stabilised above $50 when inventories are so high. It is probably because OPEC was expecting to take greater market share – which they haven’t – in a recovering Chinese economy – which has not yet happened. The pressure on price is downwards and the current stability is probably temporary. It is likely that oil price is in for almost 2 years at a price averaging around $45/barrel or less.

US oil inventories may 2015 (EIA)

US oil inventories may 2015 (EIA)

ReutersThe North American oil boom is proving resilient despite low oil prices, producer group OPEC said in its biggest and most detailed report this year, suggesting the global oil glut could persist for another two years. A draft report of OPEC’s long-term strategy, seen by Reuters ahead of the cartel’s policy meeting in Vienna next week, forecast crude supply from rival non-OPEC producers would grow at least until 2017.

Sluggish global demand for oil means the call on OPEC’s crude will fall from 30 million barrels per day (bpd) in 2014 to 28.2 million in 2017, effectively leaving the group with two options – cut output from current levels of 31 million bpd or be prepared to tolerate depressed oil prices for much longer.

….. Brent crude has collapsed from $115 a barrel in June 2014 due to ample supplies amid a U.S. shale oil boom and a decision by OPEC last November not to cut output. Instead the group chose to increase supply in a bid to win back market share and slow higher-cost competing producers.

But shale oil production has proved to be more resilient than many had originally thought. “Generally speaking, for non-OPEC fields already in production, even a severe low price environment will not result in production cuts, since high-cost producers will always seek to cover a part of their operating costs,” the OPEC report said.

…… since 1990, most of the forecasts concerning future non-OPEC oil supply have been pessimistic and often erroneous: “For example, non-OPEC production was once projected to peak in the early 1990s and decline thereafter.”

 

EC looking for GE concessions to approve Alstom acquisition

May 12, 2015

UPDATE!

The New York Times also reports on the potential anti-trust issues and GE’s readiness to make some accommodations for EC concerns. However my take away from the NYT article is that GE is warning the EC that Alstom and the European Union have more to lose than GE has if the deal does not go through:

In now dealing with the European Commission’s antitrust office, Mr. Immelt has not forgotten the harsh experience of his predecessor, Jack Welch. In 2001, Mr. Welch failed to win approval for a proposed $42 billion takeover of Honeywell International after objections were raised by Mario Monti, the European antitrust commissioner at the time.

Mr. Immelt was worried enough last week that he met with Ms. Vestager in Brussels, where he also gave an address at the American Chamber of Commerce highlighting Europe’s economic potential. In that address, Mr. Immelt said young Europeans were “awesome” and “amazing,” but he emphasized that Europe needed investment to gain competitiveness and beat unemployment.

Speaking to reporters later, Mr. Immelt said his meeting with Ms. Vestager was “very constructive” and he described her as “a good leader.” G.E., he said, was engaged in “a process” with Brussels, and would “take the process where it goes.”

If G.E. is unable to convince Ms. Vestager of the merits of its case, the next step could be a so-called statement of objections, as soon as next month — formal charges that would outline the commission’s specific antitrust concerns. G.E. and Alstom could avoid that step by offering remedies sooner, perhaps proposing to sell parts of the gas turbine business in Europe.


My expectation was that the European Commision would look for some concessions from GE and would only grant a conditional approval for the acquisition of Alstom’s power and grid businesses.

The EC concerns seemed to be focused on Heavy Duty Gas Turbines (HDGT), and I wrote:

Will the EC approve GE’s acquisition of Alstom’s power business?

…. In any event,  I expect that the deal will go through, but I will not be surprised to see an approval conditional on some assurances from GE regarding R & D centres, R & D jobs and/or R & D budgets in Europe. I think it highly unlikely – and a little meaningless – if the EC were to ask for divestment of Alstom’s HDGT business to a third party (if any such exists). The bottom line is, I think, that Alstom’s HDGT technology has come to a dead-end and can not be developed any further in their own hands. While the business can continue in a diminishing way for some years, Alstom technology has no long-term value except to another party which has access to high temperature cooling technology. To have Alstom continue with the HDGT business as an unwilling and reluctant player does no one any service at all.

This Reuters report today suggests that my expectation may be close to the mark. However it also seems that if the EC demands too much in the way of concessions, GE might walk away. Clearly GE are already getting a little irritated at the protracted nature of the EC approval process. The failure of the deal is not something that Alstom or the EU would look forward to.

The EC decision may also be delayed somewhat beyond August 6th.

Reuters:

General Electric Co said on Monday for the first time it would be willing to consider concessions in order to win European approval to acquire the power equipment unit of France’s Alstom. “We are willing to explore remedies to get this deal done even though again we believe in the merits of the deal,” Steve Bolze, president and CEO of GE Power & Water, the conglomerate’s biggest industrial unit, told Reuters in an interview. Any concessions would have to “preserve the deal economics and our strategic value,” he said. …

… EU regulators typically prefer merging companies to sell overlapping assets or make it easy for rivals to enter the market. GE’s gas turbine competitors include Siemens AG and Mitsubishi Heavy Industries Ltd.

…GE already altered the deal to win the French government’s backing during last year’s two-month battle, in which it fended off Siemens and Mitsubishi. In the interview, Bolze acknowledged the “protracted process” for Alstom, and said GE was focused on “how to move … forward as it makes sense.”

In GE’s first-quarter conference call last month, Chief Executive Jeff Immelt backed the deal’s fit for GE, but said if it “ever would become unattractive, we wouldn’t do it.”

…. GE, which is undergoing an overhaul involving the exit of most of its finance assets, has said it expected synergies from the Alstom deal to add between 6 to 9 cents in earnings per share in 2016. But some analysts have told Reuters they doubt GE’s stock would take a big hit should the deal collapse, with the idea that GE could make up those earnings with stock buybacks or other deals. ……. 

…… EC spokesman Ricardo Cardoso said regulators are waiting for data from the companies before a setting a new deadline to act. The previous deadline was Aug. 6.

The EC will need to be very precise in demanding concessions from GE while ensuring that the deal does go through. Divesting parts of the HDGT business to unknown (and probably non-existent) buyers is probably a lose-lose solution. I expect that GE’s walk-away point will be reached if earnings from the service of Alstom’s fleet of gas turbines is removed from the mix. In fact any conditions set by the EC which dilute future revenues could prove fatal for the deal going through. Assurances about keeping R & D located in Europe and assurances about jobs and even about R & D budgets could be absorbed by a robust business plan. But no business plan can survive if something as fundamental as the revenue stream is adversely affected. And it is the volume of that revenue stream – and not just the margin from those revenues – which is crucial.

Will the EC approve GE’s acquisition of Alstom’s power business?

May 3, 2015

UPDATE! 

Bloomberg: General Electric Co.’s Jeffrey Immelt is set to meet with the European Union’s antitrust chief Tuesday as the U.S. company seeks approval for its acquisition of Alstom SA’s energy business.

The session in Brussels between GE’s chief executive officer and Margrethe Vestager is part of regulators’ “ongoing merger review,” Lucia Caudet, a European Commission spokeswoman, said in an e-mail.


On February 23rd this year the European Commission announced that its preliminary investigation into the proposed acquisition of Alstom’s power businesses by GE had highlighted Heavy Duty Gas Turbines (HDGTs) as a potential area of concern. Therefore an in-depth investigation would be carried out. This investigation was due to have been completed by 8th July but has been extended – apparently at GE’s request – till August 6th.

The European Commission has opened an in-depth investigation to assess whether General Electric’s (GE) proposed acquisition of the Thermal Power, Renewable Power & Grid businesses of Alstom is in line with the EU Merger Regulation. The Commission’s preliminary investigation indicates potential competition concerns in the market for heavy-duty gas turbines which are mainly used in gas-fired power plants.

Since GE already has HDGTs  in direct competition with Alstom’s GT24 and GT26 engines and even with Alstom’s GT11N2 and GT13E2 engines, I expect that the Alstom range of machines will have to be discontinued. (It would be quite irrational for GE to continue to offer Alstom’s portfolio except for a very restricted time period or for some very particular application. It is not much appreciated by a buyer either when a supplier appears so confused as to offer different machines for the same purpose). The discontinuation of some engines is “no big deal”. But, as I have written previously, it would be a shame if the line of technology for HDGTs within Alstom – which carried forward the lines of technology emanating from BBC, GEC, Asea and ABB (including sequential combustion technology) – were to be entirely lost.

I would summarise the EC’s potential areas of concern as being:

  1. If the European HDGT market can be said to be distinct from the global market, then the number of HDGT suppliers would effectively reduce in Europe from three to two.
  2. Reduced competition in Europe could lead to supplier(s) having greater than 40% market share and could lead to an increase in prices.
  3. GE together with Alstom could have greater than 50% market share and not only in Europe.
  4. In Europe, fundamental R & D on combustion, emissions and materials and innovation regarding HDGTs would be hurt, and
  5. Competition in the HDGT service business would be impacted since Alstom currently is an alternate supplier of service to older GE HDGTs (since Alstom was a GE licencee prior to 1999).

The market for HDGTs is characterised by high technological and financial barriers to entry, leading to a concentrated market with only four globally active competitors: GE, Alstom, Siemens and Mitsubishi Hitachi Power Systems (MHPS). The fifth player, Ansaldo, appears to be a niche player with a more limited geographic reach. The margins in the market for HDGTs appear to be higher than those of neighbouring markets for power generation equipment such as steam turbines. 

The HDGTs market worldwide is divided into two frequency regions, namely those operating at 50 Hz and those at 60 Hz. All thecountries in the European Economic Area (EEA) operate at 50 Hz frequency.

Since MHPS seems to be less active in the EEA than in the rest of the world, the transaction would bring together the activities of two of the three main competitors in the EEA.The transaction would eliminate Alstom from the market, leaving European customers without an important competitor of GE and Siemens. Indeed, in the market for the sale of new 50 Hz frequency HDGTs, the merged entity would reach high market shares in the range of around 50 %, both in the EEA and at worldwide level excluding China.

Furthermore, the transaction might significantly reduce R&D and customer choice in the HDGT industry. After the merger there is a risk that GE would discontinue the production of certain Alstom HDGT models and that advanced HDGT technology developed by Alstom would not be brought to the market.

Finally, in the market for the servicing of General Electric’s mature technology HDGT frames, the transaction eliminates competition by Alstom’s subsidiary Power System Manufacturing.

Overall, the Commission is at this stage concerned that the transaction may lead to an increase in prices, a reduction in customer choice and a reduction of R&D in the HDGT industry, leading to less innovation.

I note that GE have taken on a very-high powered lawyer to help in dealing with anti-trust issues,

Sharis Pozen, a former acting assistant U.S. attorney general for antitrust who joined Skadden, Arps, Slate, Meagher & Flom in July 2012, left the firm this month to become vice president for global competition and antitrust at General Electric. Pozen is the latest high-profile Am Law 100 partner to join the in-house legal ranks of the Fairfield, Conn.-based conglomerate, which has tapped Skadden to advise on its pending $17 billion buy of the energy unit of French engineering giant Alstom.

However, my own opinion is that these potential EC concerns are not sufficient to disallow the proposed acquisition. I believe the market concerns are more theoretical than real.

1. While the EC tends to look at market share rather than market size, the EU market currently (before the advent of shale gas in Europe) is so small that it cannot be considered a market distinct from the global market. No HDGT manufacturer could survive on the strength of the European market alone. A simple test question is very revealing. Could Alstom’s HDGT business be sold as an independent stand-alone business to anybody else with only Europe as the designated market? The answer is a resounding NO and, I think, should eliminate any consideration of the European market as being distinct from the global market.

In fact, even with a global market available, the Alstom HDGT business is of little value to any manufacturer who does not already have high temperature cooling technology and who does not already have a heavy rotating machinery manufacturing background. And I don’t see any such parties around.

2. It should be remembered also that Mitsubishi (formerly MHI now Mitsubishi Hitachi Power Systems – MHPS) is absent from Europe as a matter of their own choice – not because they cannot. It is part of the remains of the old “unofficial” arrangement where the Japanese didn’t come into Europe and the Europeans didn’t enter Japan. This “arrangement” for steam turbines, gas turbines, boilers and generators held quite well through till the 1980s but broke down in the 1990s. Note that the Japanese gas turbine market had a special relationship with the US manufacturers with TEPCO providing GE with a protected “home” market for 60 Hz gas turbines. The Westinghouse relationship with MHI for gas turbines was effectively taken over by MHI. The Siemens equity engagement with Furukawa to create Fuji Electric (Fu- for Furukawa and Ji for Siemens in japanese, jiimensu) was ended after WW 2. The ABB (later Alstom) JV for gas turbines with Kawasaki which I headed for a time was only set up in the 1990s and was eventually discontinued.

To enter a new market for HDGTs, it must either be a growing market or it must have a large fleet of existing machines which can be served. Europe provides neither for MHPS at the present time. If shale gas takes off in Europe and the gas turbine market starts to grow (which I predict will happen), it will not take very long for MHPS to enter.  For MHPS the market size and growth for new equipment must be sufficient to justify the cost of setting up the necessary service network. There is no guarantee either that Alstom – without GE – could continue with a product range rapidly becoming uncompetitive against the “J” class machines, without access to high temperature cooling technology. The Ansaldo/Shanghai Electric tie-up is still in its infancy and – in the event of market growth in Europe – would surely become a significant 4th player. (Even a 5th global player could emerge as a consequence of a particularly strong market growth and my guess would be that it could be Doosan or BHEL, Harbin or from Russia). But as far as the EC is concerned, the key point should be that if the market grows there will be certainly three, probably four and eventually five players. And if the market does not grow then the objection is moot.

3. The risk of one player having 50% (or greater than 40%) market share is not to be trivialised but, in my opinion, is not a real threat. When the market (in Europe) has been as low as it has been and only one or two machines are sold in a year it is a quirk of arithmetic that one player may have a 100% market share in one year or that two may have 50% each. Customers are very well aware of the dangers of having only 2 suppliers. The fact is that if the market were large enough, MHPS and Ansaldo and others would be strongly encouraged to quote by the European buyers. We would probably then have a global market share split of GE/Alstom – 30%, Siemens – 30%, MHPS -20, other (Ansaldo, BHEL, Russians, new players ….) – 20%. When a market is small, market share is misleading and meaningless. In a strong market some of the manufacturers of small gas turbines would also try and follow their customers into larger sizes – a “Honda” strategy.

4. R & D is where I began my career and safeguarding innovation is rather special for me. There is a valid point regarding R&D and innovation and I think it would be perfectly justified for the EC to give approval conditional on some kind of assurance from GE that R &D centres (and possibly R & D jobs and budgets) in Europe would be maintained for some period of time. I don’t believe that innovation can be mandated, but I do see a potential benefit for GE – in time – in absorbing and – even adopting – some sequential combustion elements in their mid-range (rather than their largest) engines (see diagrams below). But that is a call for GE to take in about a decade from now. (It is probably just wishful thinking on my part).

Alstom (as BBC) developed the sequential combustion cycle in 1948 and (as ABB) the GT24 and GT26 engines in the 1990s, when GE moved beyond the “F” class machines to their “FA” machines. The choice was a forced one for ABB, and they had to follow the sequential combustion path because they did not have access to the high temperature blade cooling technology which was available to their competitors. All their attempts to acquire such technology from Russia failed. A technology agreement with Rolls Royce gave no technology ownership and had very strict limitations. Sequential combustion eventually converted a weakness into a virtue and allowed ABB (later Alstom) to maintain efficiency and compete with “G” class machines even though they were effectively limited to an “F” class inlet temperature as a maximum. If ABB had not developed the GT24 and the GT26 – in spite of all their early challenges – Alstom would not have acquired ABB’s power generation business after their GE licence was terminated. (In fact the challenges were so large that ABB had to compensate Alstom through the acquisition price for the power business for all the problems that had to be fixed by Alstom in the field).

Taking a very cynical view, ABB had reached the end of their road with GT development when they divested to Alstom. Alstom in their turn made devlopments that ABB could not but have also reached the end of their road for development of sequential combustion technology – again because of a lack of high temperature cooling technology – and wish now to divest to GE.

GT cycles - conventional and sequential combustion

GT cycles – conventional and sequential combustion

Now as GE, Siemens and Mitsubishi have moved on to even higher inlet temperatures, the “G” class has gone on to become the “J” class. (The “H” class was Mitsubishi attempting to use steam cooling for the turbine blades which didn’t really catch on and “I” has been passed over for the designation of turbine class). Alstom, with its limitations on temperature have successfully squeezed the sequential combustion technology to approach a “G+” performance with temperatures slightly lower than a “G” class from the others. But Alstom now also has reached its temperature limits and, I suspect, it was the lack of a way forward for their machines to compete with “J” class machines which has been part of their decision to get out of power generation.

But I like the concept of sequential combustion which is elegant and fundamentally sound and I look forward to the day when maybe it can be applied together with the high temperatures that GE knows how to handle. Then maybe we will someday see an “M” class gas turbine with 1600ºC and sequential combustion?

M Class GT?

M Class GT?

It can be argued therefore that the acquisition is what may actually keep R & D alive instead of it coming to a stop in the cul-de-sac in which it is stuck with Alstom.

And without R & D and high temperatures and new competitive “J” class products, Alstom’s days as a cutting-edge HDGT supplier would have been limited anyway.

5. The older GE machines  are still serviced by GE licencees and former licencees around the world – including in this case by Alstom (for GE machines prior to 1999). This Alstom does by means of a special subsidiary set up for the purpose. This unit – Power Systems Manufacturing – specialises in formerly licenced GE machines and also acts as a “pirate” for Siemens and Mitsubishi machines.

PSM’s product line includes … parts for GE Frame 6B, 7E/EA, 9E and 7FA machines, the Siemens/Westinghouse 501F (SGT6-5000F) engine and the Mitsubishi 501F engine.

Siemens also has such a subsidiary unit – Turbo Care – to service – where they can – the machines of competitors. This used to be a separate Siemens entity but has now been approved by the EC as a JV with the Wood Group. The “pirate” service business is important to each manufacturer – for intelligence and competition purposes – but the volume is quite small. No customer would select a “pirate” rather than the OEM, except for older machines past their prime or perhaps to teach the OEM “a lesson”. The “pirate” business is just not possible on relatively new machines and really only applies to machines installed more than about 10 years previously – when all liabilities and potential liabilities of the OEM have fallen away. No GT owner would take the risk of resorting to a “pirate” for a relatively new machine. A customer would usually resort to “pirates” only when all investment costs have been fully written off and he is no longer looking for – or particularly needs – any performance or availability guarantees. Even design and manufacturing warranties to be provided are strictly limited since the “pirate” has to rely on reverse engineering.  “Pirates” only come into the picture when the perceived risk levels are low.

The EC concern that if PSM is merged into GE, that some competition for the older GE machines will disappear is not correct I think, because for these older machines the competition for service business is far more with other “pirates” than with the OEM. And there are plenty of “pirates” around.

In the long run I judge that this acquisition is good for the customer, may even be good for R & D and even good for Siemens (and also for Mitsubishi). I imagine that any objections from Siemens are more for the sake of form (and because there is no love lost between Patrick Kron and Siemens).

In any event,  I expect that the deal will go through, but I will not be surprised to see an approval conditional on some assurances from GE regarding R & D centres, R & D jobs and/or R & D budgets in Europe. I think it highly unlikely – and a little meaningless – if the EC were to ask for divestment of Alstom’s HDGT business to a third party (if any such exists). The bottom line is, I think, that Alstom’s HDGT technology has come to a dead-end and can not be developed any further in their own hands. While the business can continue in a diminishing way for some years, Alstom technology has no long-term value except to another party which has access to high temperature cooling technology. To have Alstom continue with the HDGT business as an unwilling and reluctant player does no one any service at all.

Time to invest in fossil fuels as China discovers vast new reserves

April 21, 2015

There is a campaign in the western “do-gooding” and deluded “green” community (exemplified by The Guardian) to pressurise investors to disinvest from fossil fuels. Fortunately there is no shortage of investors in Asia who would be only too happy to see the European financial institutions and pension funds selling off their shares in oil, shale and coal producing and using companies. There are few better investments than snapping up artificially depressed energy shares. I am watching closely to pick up any bargains that might appear if this campaign has any impact. So far it has had little effect.

In the 1970s and 1980s the alarmist view was that coal, oil and gas would run out catastrophically. Now that peak-oil and peak-gas have been pushed out into the indeterminate future and further new shale reserves are found, the alarmism has shifted to the use of these resources being catastrophic! The campaign itself is rather idiotic (“leave it in the ground”) and counter-productive, since any success can only shift ownership of energy companies eastwards. Supposedly – but misguidedly – it is about climate but the campaign has no measurable or relevant objectives. (Note that no “climate policy”  ever has a climate parameter as an objective and which can be measured.) It will certainly not reduce the consumption of fossil fuels at all – which will instead continue to grow as developing countries develop. In fact the competitiveness of the fossil fuel using countries will be further emphasised as the “do-gooding” countries entrap themselves into a very high-cost electricity production regime based on intermittent solar and wind energy. (It is worth noting that Germany which has installed more renewable energy than any other European country now has an electricity cost which is the highest in Europe and more than twice that of the US. And yet Germany burned more coal last year than they have ever done! The German Energiwende has been a fiasco for all other than those who have milked the subsidies available)

There is – again fortunately – no prospect of India, China and other developing countries in Asia and Africa reducing their use of all the fossil fuels they have available. If I could I would be investing directly in coal and oil and natural gas and shale gas in India and China and Indonesia. At present I must satisfy myself with some indirect investment.

History will be contemptuous of the irrational demonisation of fossil fuels by the alarmists and the “do-gooders” during the late 20th and early 21st century.

Xinhua reports:

China continued to be increasingly successful at discovering crude oil and natural gas reserves last year, new data from the Ministry of Land and Resources indicated on Thursday.

The country discovered nearly 1.06 billion tonnes of new crude oil deposits in 2014, up from 1.1 billion tonnes the previous year, marking a stable increase and the eighth consecutive year in which the amount discovered surpassed 1 billion tonnes. More than 1.1 trillion cubic meters of new natural gas reserves were also discovered in 2014, a record high.

Of the new discoveries, 187 million tonnes of oil and 474.9 billion cubic meters of natural gas can be exploited with current technology, according to the ministry.

New shale gas reserves discovered amount to 106.75 billion cubic meters, with 26.69 billion exploitable.

This is the first time that proven reserves of shale gas have been publicized since the Chinese government approved the listing of shale gas as an independent mineral resource in 2011.

Discoveries of coal-bed methane, an unconventional gas, amounted to 60.2 billion cubic meters, up 155.3 percent year on year.

shale basins China (The Diplomat)

shale basins China (The Diplomat)

The Indian sub-continent too has large shale reserves waiting to be exploited. The shale basins extend into Pakistan and Bangladesh and offers Pakistan the possibility of actually becoming self-sufficient for energy.

shale gas basins India

shale gas basins India

Fossil Fuels Will Save the World (Really)

March 17, 2015

Matt Ridley has an opinion piece in the WSJ which says many things far better than I can.

The environmental movement has advanced three arguments in recent years for giving up fossil fuels: (1) that we will soon run out of them anyway; (2) that alternative sources of energy will price them out of the marketplace; and (3) that we cannot afford the climate consequences of burning them.

These days, not one of the three arguments is looking very healthy. In fact, a more realistic assessment of our energy and environmental situation suggests that, for decades to come, we will continue to rely overwhelmingly on the fossil fuels that have contributed so dramatically to the world’s prosperity and progress. …….

The article is well worth reading. Fossil Fuels Will Save the World Ridley WSJ

Ground zero is that fossil fuels will eventually be replaced only when a cheaper, more reliable source of energy (electricity production) is found. There is no foreseeable “peak” for fossil fuels and availability is not a constraint. Solar and wind technologies have small, clear niches which they can well fill but practical and affordable energy storage is needed before they can be any significant source of our energy consumption. And Li-ion batteries will not cut it. As Ridley points out they provide about 1% of our energy consumption today while fossil fuels still reign supreme at about 87%. Nuclear power could make a severe dent in fossil fuel consumption, but only if the costs and the construction time due to the regulatory process can be drastically reduced – and that does not seem likely as long as alarmists and doom-sayers hold sway. (I estimate that around 30% of the capital cost of nuclear plants is unnecessary and due to CYA regulations which are driven by fear). Small, safe, pre-approved, modular, fifth-generation nuclear power plants could take-off but that requires many alarmists to give up their faith.

(As an aside, I observe that climate and energy politics have become the politics of fear, but I am an optimist and I expect the pendulum will swing to return to energy politics based on courage. It is a form of cowardice which drives energy politics today where I take cowardice to be actions subordinated to fear and courage to be fears subordinated to purposeful actions).

Perhaps fusion (probably hot rather than cold) will come – but a breakthrough is not in sight (though by definition breakthroughs are never generally in sight). We can fantasise that we will someday be able to tap into the gravitational energy of the solar system (which would be solar energy in another form). I don’t doubt that some new, cheap, energy source or energy conversion technique will appear – but until then fossil fuels will provide the basis for human development. And if we are on our way into a new ice age it is fossil fuel which will ensure our survival.

I dismiss the hypothesis – and it is still only a hypothesis – that man-made emissions of carbon dioxide are of any significance for “global temperature”. In fact the carbon dioxide concentration in the atmosphere (and man-made emissions are a tiny contributor to that) has a very small effect on “global temperature”. Instead it is “global temperature” which has a very large effect on carbon dioxide concentration through the balance of absorption and emission from the oceans and from the biosphere. Carbon dioxide concentration lags rather than leads “global temperature”. The sun and clouds and ocean currents and winds (also driven by the sun) dwarf any effects of carbon dioxide. The hypothesis looks broken considering that over the last 18 years man-made carbon dioxide emissions have increased sharply but “global temperature” has been static. Even the assumed “global warming” that is supposed to have taken place over the last 100 years are to a significant extent “manufactured” by “adjusting” temperature data and choosing weighting and averaging algorithms which are biased to show a pre-determined result. There is a shortage of “science” and far too much confirmation bias in what passes for “climate science” these days.

Japan plans over 13GW of new coal fired capacity till 2025

March 12, 2015

The Wall Street Journal reports on Japan’s return to coal fired power generation following the alarmist – and inaccurate – demonisation of nuclear power after the 2011 Tōhoku earthquake and tsunami which caused the Fukushima nuclear plant meltdowns. And it is still worth remembering that while the earthquake and tsunami claimed more than 18,000 lives, the Fukushima plant incident has caused no direct fatalities.

The reality is that the cost of electricity production in a 2011 government estimate put the “cost of coal power in Japan at ¥7.5, or about 6 cents, per kilowatt-hour including construction and operation. The same report put the cost of nuclear power at ¥9 per kwh, gas power at ¥10 per kwh and oil power at ¥19 per kwh”Seven new large coal plants with a total capacity of 7,260 MW have already been announced and are planned to be commissioned until 2025. And a further 6,000 MW are being currently tendered for.

The same cost structure prevails in India or China or Indonesia or South Africa. Even in Europe without artificial (and pointless) skewing of the market place, meaningless carbon taxes and subsidies for renewable power which are not commercially viable, coal offers the lowest cost of electricity production. The same cost structure would apply also in Australia. In the US coal is only second to gas.

WSJ: Japan is continuing to re-embrace coal to make up for its lack of nuclear energy, with plans for another power station released Thursday bringing the number of new coal-fired plants announced this year to seven.

……….  Kansai Electric Power Co. and Marubeni Corp. informed Akita prefecture on Thursday of their plans to build a new, 1.3-gigawatt coal-fired power station in the northern prefecture of Japan, the two companies said.

If all seven projects including the plant in Akita materialize, they will increase the nation’s coal-power generation by up to 7.26 gigawatts by around 2025. That is equivalent to seven medium-size nuclear reactors.

……. Kansai Electric, based in Osaka, plans to use the Akita project to supply electricity to customers in Tokyo, the only place in Japan where major growth in power demand is expected, a company spokesman said.

The other projects include Chubu Electric Power Co.’s plan to replace an old oil-power station near Nagoya with a 1 gigawatt coal-power station, and a 1.2 gigawatt coal-power station planned byElectric Power Development Co., Osaka Gas Co. and Ube IndustriesLtd. in Yamaguchi prefecture in western Japan.

More projects are likely to be announced as the year goes on. Tokyo Electric Power Co. is holding a tender to build new power stations to replace 6 gigawatts of old oil-power capacity in Tokyo.  ……

The relative cheapness of coal was indicated in a 2011 government report that estimated the cost of coal power in Japan at ¥7.5, or about 6 cents, per kilowatt-hour including construction and operation. The same report put the cost of nuclear power at ¥9 per kwh, gas power at ¥10 per kwh and oil power at ¥19 per kwh.

……… All of Japan’s 48 reactors are offline over safety concerns following the Fukushima nuclear accident, though four of them are expected to come back online later this year.

 

High stocks and continued oversupply mean oil price has further to drop

March 9, 2015

The underlying and driving fundamental remains that there is an oversupply and oil stockpiles are still increasing. Certainly oil exploration has taken a hit with the drop in oil prices and will – eventually – lead to lower production. Certainly the growth of shale oil production in the US has slowed. But the decline in some of this production has only been to turn off the most expensive production rigs. The oversupply has hardly been affected. Industrial growth has not yet picked up enough to balance this oversupply.

Oil price has been relatively stable for over a month at around $60 per barrel and all the talk from Saudi Arabia and the Gulf is about a stabilisation at this level and a recovery of oil price in the second half of 2015.

MarketPulse:

Saudi Arabia’s oil minister said on Wednesday he expected oil prices, which hit a near six-year low in January, to stabilize, signalling cautious optimism about the market outlook. Giving a speech in the German capital, Ali al-Naimi also urged non-OPEC producers to help balance the oil market, saying it was not up to Saudi Arabia to subsidize higher-cost producers and that circumstances required non-OPEC to cooperate.

“Going forward, I hope and expect supply and demand to balance and for prices to stabilise,” Naimi said. “Global economic growth seems more robust.” The comments are a further sign OPEC’s top producer is sticking to its policy to defend market share. Last month, Naimi signalled satisfaction with developments, saying he saw oil demand growing and that markets were “calm”. Oil was trading just above $60 a barrel on Wednesday, up more than 30 percent from a near six-year low close to $45 on Jan. 13.

ABS CBN:

World crude prices are expected to gain this year or at least stabilise at between $50 and $60 a barrel, Kuwaiti Oil Minister Ali al-Omair was quoted as saying.

“Forecasts for the oil price this year indicate that it will gain or at least stabilise between $50 and $60 a barrel,” the official KUNA news agency quoted Omair as saying late on Saturday in Bahrain. The minister said prices are currently supported by conflict in Iraq and Libya and by a drop in sand oil and shale oil output. But that is counterbalanced by slow global economic growth, which is dampening demand, Omair said.

World prices dropped at close on Friday as the dollar rose sharply, making dollar-priced crude more expensive for buyers using weaker foreign currencies. West Texas Intermediate for delivery in April slid $1.15 to $49.61 on the New York Mercantile Exchange, ending near its week-ago level. Brent North Sea crude for April, the international benchmark, dropped 75 cents to $59.73 a barrel in London.

But there is a large element of wishful thinking here. The January price of around $45 per barrel was just testing the waters that we will probably see again later this year. According to “data released by the Energy Information Administration (EIA) shows that crude inventory is sitting at an 80-year high with the United States recently recording its biggest weekly inventory rise in 14 years. Crude inventories are now sitting at 444.4 million barrels, which is more than a year’s worth of production”. Storage capacity in the US is now utilised to 60% compared to 48% at this time last year.

Global economic growth may provide some demand growth in the second half of 2015 and it is possible that oil price will remain at between $50 and 60 for most of the year. But I think it is more likely that we will see another dip to around $40.

US crude oil stocks March 2015 source EIA

US crude oil stocks March 2015 source EIA

 

 

Fossil fuel use still growing and will provide over 80% of global energy in 2035

February 20, 2015

The BP Energy Outlook for 2035 is out.

  • In absolute terms total energy usage will grow 37%.
  • Two-thirds of the increase in demand is met by fossil fuels. Roughly one-third of the increase in energy demand is provided by gas, another third by oil and coal together, and the final third by non-fossil fuels.
  • In 2035 fossil fuels will still provide 81% of the world’s energy (down from 86% in 2013).

It is fortunate that man-made carbon dioxide emissions are of little significance for global warming since man-made carbon dioxide emissions will increase by over 50% in the next 20 years. But it is unfortunate that the global warming/extreme climate lobby will continue to waste precious resources in attacking something quite irrelevant. So far a massive increase in emissions has caused no global warming for over 18 years. perhaps the fanaticism will decline after another 20 years (probably when the current crop of “climate scientists” have retired).

BP Energy Outlook 2035

BP Energy Outlook 2035

Iran prepares to resist Saudi Arabia even with $25 oil price

January 19, 2015

Iran needs $72 per barrel for its budget. That Iran (along with oil shale production) is one of the targets of Saudi Arabia’s oil price strategy seems very clear. They have the lowest cost of extraction and with their accumulated reserves they could probably withstand 5 -8 years with a price lower than $50. However their strategy will be completely nullified if there is growth in demand (for example with an economic recovery in China) before they have brought the shale oil producers and Iran to their knees. The question now is how low the price can go?

Light crude price February 2015

Light crude price February 2015

The Iranians are girding their loins for a battle and are adjusting their budgets to be able to withstand a longer period with relatively low prices. Iran probably wants to avoid precipitating a further fall but I suspect that just mentioning their worst fears – in the present atmosphere – will only ensure that those fears come true. It would seem, from the almost belligerent Iranian stance, that prices will now almost certainly drop to around $25 per barrel within the next 6 -12 months.

Reuters:

Iran sees no sign of a shift within OPEC toward action to support oil prices, its oil minister said, adding its oil industry could ride out a further price slump to $25 a barrel.

The comments are a further sign that despite lobbying by Iranand Venezuela, there is little chance of collective action by the 12-member OPEC to prop up prices – entrenching the reluctance of individual members to curb their own supplies.

In remarks posted on the Iranian oil ministry’s website SHANA, Oil Minister Bijan Zanganeh called for increased cooperation between members of the Organization of the Petroleum Exporting Countries. ……. 

Oil has plunged by more than half since June 2014 to below $50 a barrel on Monday, pressured by a global glut and OPEC’s refusal at its last meeting in November to cut its output. ……. 

OPEC decided against a production cut despite misgivings from non-Gulf members such as Iran and Venezuela, after top producer Saudi Arabia argued the group needed to defend market share against U.S. shale oil and other competing sources. ……… 

Zanganeh said Iran had no plans to cut its own oil production and that it had no further meetings with Saudi Arabia – Iran’s main political rival in the Gulf – since the OPEC meeting.

Last week, Iranian President Hassan Rouhani said countries behind the price fall would regret their decision and warned that Saudi Arabia and Kuwait would suffer alongside Iran from the price drop.

Zanganeh said Iran’s budget should be based on oil at $72 per barrel, but Iran could withstand lower oil prices. “Even if the oil price goes down to $25 a barrel, the oil industry will not be threatened,” the Fars news agency quoted him as saying.

Oil wars: US crude drops below $50 as Saudi Arabia drops prices to protect market share

January 6, 2015

Some stock markets are spooked as oil prices continue to slide, but bringing oil price back to a cost-based price is a good thing in the long term. For too long – almost 45 years – oil producers and their governments have fleeced the consumer. Oil prices have had no relationship to cost of production but have been governed by artificially controlling its scarcity (by the OPEC cartel) and pricing it at the level of unacceptable pain for the consumer. Predatory governments have assisted by taxing oil products as far as they can even for the necessities of living (gasoline, diesel, LPG, fertilisers, pesticides…). If the present oil wars bring the price to the consumer in line with the cost of production – and there is no shortage of oil available to be produced – then it is a fundamentally sound, and long overdue, removal of one of the great, artificial distortions of the market place.

History will show the OPEC cartel to have held back development for 4 decades and to have been an evil thing.

Even if Saudi Arabia is engaged in a multi-pronged war – against shale oil, against Russia, against Iran – the root cause of the drop is that there is no longer a monopoly that the OPEC cartel enjoys. And the the way being shown by US shale oil is available to many more countries. In the short term it may well affect stock markets as these fetters are removed but in the long term this is an inexorable driver of growth – especially for the developing countries and their hard pressed consumers.

Remarkably many oil producers are now even increasing production in a time of a glut and cutting prices to win market share. They are being short-sighted. As the Opec cartel collapses, and it becomes a buyer’s market it will be oil price which governs and even then only for short term supply contracts. It will no longer be possible for the cartel oil producers to extort long-term contracts at high prices from developing countries who have no alternatives.

FP0106_Oil_C_JR

2015 not 2014 — via Financial Post

 Financial PostU.S crude crashed below US$50 a barrel while benchmark Brent crude tumbled under US$53 after data showed Russian oil output at post-Soviet era highs and Iraqi oil exports at near 35-year peaks.

Meanwhile, the outright price for Canadian heavy crude fell below US$35 a barrel. ……. The drop in WTI pushed the pushed the price of Canadian heavy crude to US$34.64 per barrel, a level that could make producing crude from the oilsands unprofitable for most operators in the world’s third-largest crude reserve.

Many of the region’s operators have already slashed capital spending and slowed work on new projects in order to cope with the price crash, though production from the region has not yet been affected.

…… Top crude exporter Saudi Arabia revealed it had made deep cuts to its monthly oil prices for European buyers , the sixth time in a row since June when it had slashed prices, corresponding with the rout in crude futures markets over the period. Analysts read the latest cut as reflecting Saudi Arabia’s deepening defence of its market share for crude. The OPEC kingpin also trimmed its prices for U.S. refiners for a sixth straight month, while raising rates for Asia.

…… Some traders seem certain that U.S. crude will be trading in the US$40 region later in the week if weekly oil inventory numbers for the United States on Wednesday show another supply build. ……. 

Russia’s oil output hit a post-Soviet high last year, averaging 10.58 million barrels per day (bpd), up 0.7% thanks to small non-state producers, Energy Ministry data showed. Iraq’s oil exports were at their highest since 1980 in December, an oil ministry spokesman said, with record sales from the country’s southern terminals.

The Russian and Iraqi data overshadowed reports of drops in Libya’s oil output due to conflict. Libya’s oil output has fallen to around 380,000 bpd after the closure of the OPEC producer’s biggest oil port Es Sider, along with another oil port Ras Lanuf.

The sooner oil price drops to less than $40 per barrel, the sooner the oil price can stabilise for 12 – 18 months. Then, as the price works its way through the economies of the consumer countries, the markets could see a year or two of stable, sustainable growth.


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