Archive for the ‘Energy’ Category

EC conditions for GE’s acquisition of Alstom will probably sacrifice Swiss jobs

August 14, 2015

UPDATE! 14th August

Reuters reports “exclusively” – and no doubt from anonymous EU bureaucrats as their sources – that the EC is set to approve the GE/ Alstom deal. The EC decision will be announced by 11th September. The report suggests that GE was prepared to accept the divestment of PSM and of a “facility” in Switzerland. That probably consists of some or all of the gas turbine R & D operations at Baden/Birr. The precise scope of the GE concessions are not yet revealed.

The French government, is probably not too perturbed by what happens to Swiss jobs or to PSM jobs in the US. And the price to be paid by Ansaldo probably compensates for most of the reduction that Alstom has accepted in the price to be paid by GE. In fact Alstom, the French government and Bouygues are all probably quite relieved to now see their way clear to financial closure.

Alstom management will also be quite glad to get rid of the difficult task of controlling “fortress” Baden. Whether GE for part, and the Italians or the Chinese for the rest, are up to that task is another matter.

Ansaldo (with Shanghai Electric) has emerged as the unlikely saviour of the gas turbine R & D tradition at Baden/Birr in Switzerland. But whether under GE ownership or in some hive-off to Ansaldo, it is only logical that many jobs in Switzerland would shift either to France or to Italy. One estimate puts the job losses to be expected in Baden to be around 600. I would expect the number to be very much larger. As far as the European Commision is concerned they may be making the calculation that more jobs will shift to Italy with Ansaldo ownership than would have shifted to France under GE ownership.

Job losses in Switzerland, of course, will not weigh very heavy with the EC in any case, and especially not if they were to shift to France or Italy. The EC may be calculating that Ansaldo could manage and run an R & D facility at Baden. I am not very optimistic about Ansaldo’s ability to be a technology owner. Shanghai Electric is more credible for that. My personal opinion is that Ansaldo has not the management strength or the R & D traditions to be able to manage an R&D program in Switzerland. (I note that even after a wholesale influx of French personnel, Alstom had its difficulties to manage Baden). On the other hand, any jobs which shift from the long and rich R & D traditions of Baden to Genoa will effectively be R & D which comes to an end. If the focus of development of an “Ansaldo” sequential combustion engine shifts to Italy, I would go so far as to forecast that it will never happen.

If this focus shifts to Shanghai instead, it will take a very long time but the development will eventually happen. With Shanghai Electric providing the “deep pockets” for Ansaldo, I suspect that jobs shifting to Italy will only be as a stop along the way to China.


Alstom Switzerland: 600 jobs in the balance

General Electric wants the energy division of Alstom.This could have a major impact on the Swiss workforce. Unions say that up to ten percent of the people have to go.

……. According to reports, GE will therefore sell its gas turbine business – the heart of Alstom Switzerland. The buyer would be the publicly listed energy company Ansaldo, a subsidiary of the Italian industrial group Finmeccanica. “Ansaldo is expected to shift the business to Genoa,” says a trade unionist. 

………… On 11 September, the Commission will announce a decision. “The closing of the deal in the second half of 2015 remains our goal,” said GE spokesman Bernd Eitel. 

For the EC, sacrificing Swiss jobs ostensibly for the benefit of any EU country is probably positive. But what about sacrificing Swiss jobs and an R & D tradition for the benefit of Shanghai?

Disclaimer: I should note that I own a few shares in GE and in Alstom but not enough to influence even my own opinions. I own no shares in “Baden” but I have a huge respect and admiration for the R & D work done at Baden as BBC and then as ABB and even later under Alstom ownership. Baden has been less impressive as a role-model for good management practice.

Could Ansaldo/ Shanghai Electric be the inheritors of Alstom’s sequential combustion gas turbine technology

July 30, 2015

There are reports that GE may have offered to sell off some of Alstom’s sequential combustion gas turbine technology to Ansaldo /Shanghai Electric:


US-based General Electric (GE) has confirmed it is prepared to sell parts of Alstom’s gas turbine assets to Italian Ansaldo Energia in order to gain European Union approval for the proposed $17bn acquisition of Alstom’s power business.

Sources have been quoted by Bloomberg as saying that GE informed the EU that it is willing to divest some of Alstom’s sale and servicing activities to the Italian firm, along with certain intellectual property.

Alstom has also agreed to lower the prices of its energy assets to support GE’s efforts to win anti-trust clearance from the European authorities.

Even with Shanghai Electric’s deep pockets I don’t see that Ansaldo could come out with a sequential combustion engine in less than 5 years and perhaps not for a decade. Ansaldo does not have a tradition of breakthrough innovation and neither does Shanghai Electric. The current Ansaldo engines could not be easily modified to cater for sequential combustion. They would have to come out with a completely new machine. More importantly they would need new compressors for the higher pressure ratio that sequential combustion demands. And I don’t see either Ansaldo or Shanghai Electric developing – or even having the capability to develop –  a brand new compressor anytime soon.

However if the EC’s requirements are seen as helping the Chinese (via Ansaldo) gaining a clear foothold in Europe, the EC will not be very popular in France or even with Siemens. In fact this is the argument being used by the French government to urge the EC to approve the deal quickly.

In any event GE’s “remedies” must contain two elements I think

  1. a “sale” of some IP or of that IP being made open source – and this might well involve the sale of some IP to Ansaldo /Shanghai Electric,
  2. a divestment of some of Alstom’s service business and this could be either by a divestment of a small part (not more than 10 installed engines in my estimation) of the service business for Alstom’s GT26 (probably not GT24) fleet, or by a complete or partial divestment of Alstom’s service business for non-Alstom machines.

It is conceivable that Alstom (not GE) has agreed to exclude their subsidiary PSM from the GE deal and then to sell this unit to a 3rd party. But a buyer other than Ansaldo could probably pay much more for this unit which offers an entry into the US marketplace. I am not sure that GE would be party to allowing the Chinese into the US market place to service “GE Frame 6B, 7E/EA, 9E and 7FA machines, the Siemens/Westinghouse 501F (SGT6-5000F) engine and the Mitsubishi 501F engine.”

Whatever actually transpires, the heavy duty gas turbine playing field is seeing upheavals of a kind not seen since ABB divested to Alstom in 2000. With a GT market cycle of 7-8 years, that was two market cycles ago. The next 2 decades (3 market cycles) will probably be dominated by an era of relatively low gas prices. A gas glut and a gas turbine boom could well see the market grow such that entry barriers are reduced and we may see some new players being able to break in.

Previous posts on Alstom/GE deal

Alstom and GE trim the scope of their deal by €300 million to ensure EC approval

July 29, 2015

The “remedies ” that GE has proposed to the European Commission to meet the EC’s concerns about their acquisition of Alstom’s power and grid businesses have not been disclosed. Now it has been announced that the Alstom Board has approved a reduction of €300 million in the sale price to GE. Since I suspect that GE’s proposed “remedies” are in two main areas (technology and service business), it would seem that the €300 million is made up of Alstom retaining some “balance sheet items” and some profitable business that will not, now, be transferred to GE.

Alstom shareholders will be looking at the numbers. Alstom has 309,419,350 shares with a nominal value of €7 each, giving a paid up share-capital of €2.165 billion. The current market cap is €8.22 billion with a share price of €26.6. The original deal with GE was for a sale price of €12.35 billion (€39.9 per share). This has now been reduced by just under €1 per share. Since the deal was originally announced Alstom agreed to pay a fine of €695.4 million ($772 million) to the US to settle past bribery charges. GE had also agreed to pay Alstom an additional €400 million for further, unspecified, commercial arrangements. Since the announcement of the deal therefore the Alstom shareholders have taken a net hit of €595 million (-695+400-300) or €1.9 per share. Estimates of what could finally be received by the shareholders varies between €3.2 and € 3.7 billion ( c. €10-12 per share).

Just as a number crunching exercise I assume that the €300 million reduction is made up of – say – €150 million of balance sheet items (assets to be retained by Alstom) and €150 million is for ongoing business (with a profit potential of about €15 million per year) which will remain in Alstom’s hands. If some of the assets to be retained are IP then their “value” will probably have to be written off by Alstom (as “goodwill”?). Whether Alstom can sell such IP to any other buyer (Shanghai/Ansaldo?, Doosan?) is doubtful but could be a little bonus for shareholders if it does transpire. If some real assets are retained, then presumably they could still generate some profit for Alstom. It occurs to me that a “smart” way out for GE could be with Alstom retaining PSM (Power Systems Mfg., LLC.) a wholly owned subsidiary. This unit is Alstom’s “pirate” company for performing service on non-Alstom machines. This might kill 2 birds with one stone. In 2000 Alstom lost its GE licence and acquired ABB’s gas turbine business. PSM was formed in 2000(?) and acquired by Alstom in 2007. As a “pirate” it is involved with the service of  GE Frame 6B, 7E/EA, 9E and 7FA machines, the Siemens/Westinghouse 501F (SGT6-5000F) engine and the Mitsubishi 501F engine. The loss of competition in the service business is one of the particular areas of concern for the EC. Moreover, GE does not really need PSM. It could well be that Alstom retaining PSM may provide the necessary concession regarding competition in the service business and the entire business may well have a value as an ongoing business of €150-200 million.

Such a solution would mean a much smaller hit for the Alstom shareholders since Alstom could probably continue with the this very self-contained business especially since it is not concerned with the Alstom range of Heavy Duty Gas Turbines. The profitability of this continuing business should not be much impaired by remaining in Alstom ownership. PSM should be “saleable” and could be quite attractive to an aspiring player.

Of course this is speculation, but perhaps Alstom shareholders need not be too despondent over the latest Alstom concession of €300 million. If most of that is due to the retention of PSM then the value of that ongoing and profitable business will not be lost.

Previous posts on the GE/ Alstom deal.

GE makes its pitch for Alstom acquisition to the EC this week

July 1, 2015

The European Commission must make its decision by early August regarding GE’s proposed acquisition of Alstom’s energy and grid business. The EC’s concerns have held this deal up for the best part of a year. I estimate that financial closure for this deal is now no longer possible at least till the end of 2015. The EC sent GE its “statement of objections” in the middle of June. This week (tomorrow) GE will be attending “hearings” at the EC at its own request. The hearings are to be “oral” and the meetings are “closed-door”.

It seems to me that this is more of a negotiation rather than a “formal” hearing. Clearly GE will be exploring how far it needs to go in its final, written submissions which will be needed before the EC can make any formal adjudication in August. I suspect that GE might be considering “creative” alternatives for making IP from Alstom, which it judges it does not – and will not – need, available to other “serious” players. One difficulty is that a lot of IP has value in creating a barrier for others, rather than being usable in its own right. I also suspect that GE is looking to ensure that the revenue stream from the service of Alstom’s fleet of operating gas turbines is not impaired by being forced to give up part of that business. And to do that GE may be considering ways and means of assuring the EC that the pricing of such service business will be “reasonable” and not predatory.

Personally I think that many of the EC’s fears are imaginary or theoretical. They are quite insignificant compared to some of the predatory pricing and price-fixing that is evident in other industries. But then my own opinion is that it is better not to have a competitor in the market place rather than for a “sick” or reluctant competitor to be forced to continue. That only encourages distortion of the market place to the ultimate detriment of OEM’s and customers and eventually consumers. Moreover, R & D for advanced gas turbine technology will, I think, be served best by the deal going through.

According to Reuters, General Electric, the EC, other EU agencies, and parties opposing the deal will take part in a closed door hearing this Thursday, July 2.


Senior officials from the EU competition authority, their counterparts from EU agencies and rivals are expected to attend the closed-door hearing.

“We have requested an oral hearing,” GE spokesman Jim Healy said. He said the hearing would be on July 2.

French Economy Minister Emmanuel Macron has said the deal should be viewed in a global perspective and take into account Chinese rivals following the EU regulator’s decision to exclude the Chinese market from its scrutiny of GE’s market power.

The Commission is concerned the takeover would leave just two gas turbine companies in Europe, with GE competing only with Germany’s Siemens.

The EC has not announced who the objectors are but I expect that Ansaldo Energia (40% owned by Shanghai Electric) and Siemens are among those opposing. I can well see that Ansaldo/Shanghai would be looking to be able to access some of Alstom’s IP to help them to bridge the not inconsiderable technology gap they must overcome to even have a chance of becoming a major player in the Heavy Duty Gas Turbine market. Siemens, I am sure, would object as a matter of principle even if they will actually benefit from the deal. I am not sure if Mitsubishi-Hitachi has a presence large enough to have any locus standi as an objector in Europe. The Siemens/Wood Group JV (Turbo Care) which focuses on the service of non-Siemens gas turbines is likely to be a principle objector but in this case it is essentially a “pirate” and, hopefully, will not be given too much credence.

Patrick Kron, CEO of Alstom is very bullish – but then, of course, he can hardly be anything else.

Bidnessetc: Alstom SA chief executive Patrick Kron remains bullish that General Electric Company will successfully acquire its energy unit and will also have the European Union (EU) regulatory authorities’ approval. Mr. Kron’s statement came as General Electric has requested the EU antitrust authorities to conduct a hearing with the aim to get their approval.

The EU has been holding back General Electric’s request to acquire Alstom’s energy unit for the last few months, as it is investigating the effects of the acquisition on the European market. However, Mr. Kron said in an interview to a newspaper yesterday: “I hope that we are now in the final leg and I am confident … My position is very clear. I do not see why Plan A would not work out.”

Bill Gates punctures the renewables fantasy balloon

June 29, 2015

I know that renewables provide a useful but limited resource for our energy needs. I know that they are economic only in some specialised niches in the energy sector. I dislike the distortion in the market caused by subsidies generally and power generation subsidies in particular. I “know” because I have worked within the energy sector including the renewables sector for some 40 years. I have made the calculations myself and I don’t rely on advocacy reports or alarmist scenarios. I have made the calculations of the various benefits accruing to the developers, the equipment manufacturers, the power plant owner/operators and the consumers. Grant subsidies allow the developers to make money at the cost of the consumer. Feed-in tariffs and tax breaks allow the owner/operator to make money at the cost of the consumer. Subsidies attract the “cowboy” developers and manufacturers who take their money and arrange a suitable bankruptcy at the appropriate time. If subsidies are reduced or removed, it is all too easy for the owner/operator to walk away without losses and without liability. It is consumers and the duped small investors who pay the cost.

I pay little attention to publicity hungry “personalities” who jump on the nearest fashionable, image enhancing band-wagon. I am highly suspicious of the rich and famous supporting “causes”, without any exercise of mind and primarily for the sake of publicity and image. I admire but don’t much care for Microsoft’s autocratic ways (and  I do use Windows) and see Bill Gates as extraordinary in his field but not as any kind of expert on energy matters. But he is a “personality” with a very valid claim to fame – in his area. So it is gratifying to read this report, even if it has no real impact on my views, at least as one example of a rich and famous “personality” who bothered to think.

The A-Register:

Retired software kingpin and richest man in the world Bill Gates has given his opinion that today’s renewable-energy technologies aren’t a viable solution for reducing CO2 levels, and governments should divert their green subsidies into R&D aimed at better answers.

Gates expressed his views in an interview given to the Financial Times yesterday, saying that the cost of using current renewables such as solar panels and windfarms to produce all or most power would be “beyond astronomical”. At present very little power comes from renewables: in the UK just 5.2 per cent, the majority of which is dubiously-green biofuel burning1 rather than renewable ‘leccy – and even so, energy bills have surged and will surge further as a result.

In Bill Gates’ view, the answer is for governments to divert the massive sums of money which are currently funnelled to renewables owners to R&D instead. This would offer a chance of developing low-carbon technologies which actually can keep the lights on in the real world.

“The only way you can get to the very positive scenario is by great innovation,” he told the pink ‘un. “Innovation really does bend the curve.”

Gates says he’ll personally put his money where his mouth is. He’s apparently invested $1bn of his own cash in low-carbon energy R&D already, and “over the next five years, there’s a good chance that will double,” he said.

The ex-software overlord stated that the Guardian‘s scheme of everyone refusing to invest in oil and gas companies would have “little impact”. He also poured scorn on another notion oft-touted as a way of making renewable energy more feasible, that of using batteries to store intermittent supplies from solar or wind. 

“There’s no battery technology that’s even close to allowing us to take all of our energy from renewables,” he said, pointing out – as we’ve noted on these pages before – that it’s necessary “to deal not only with the 24-hour cycle but also with long periods of time where it’s cloudy and you don’t have sun or you don’t have wind.” ……

I would go further of course. A low-carbon economy itself is nothing to aspire to unless it makes commercial sense. It does not now and will not for many years to come. It achieves nothing for climate but does increase costs, everywhere and particularly in the developing world where fossil fuels are needed most. In Europe, the obsession with renewables has delayed the financial recovery and has cost almost 20 million jobs.

Though Bill Gates does not qualify as an energy expert, he certainly does qualify as an influential investor. He even qualifies as an informed investor in the energy sector. So some little common sense from one of the very rich and famous to balance the irrational, do-gooding and sanctimonious mouthings of others is always welcome.

European Commission’s objections to GE/Alstom deal may come today

June 12, 2015

My previous posts about the GE/Alstom deal are here:

UPDATE2! The EC has apparently sent its statement of objections to GE:

WSJ: The European Commission, the EU’s top antitrust regulator, said it had sent a so-called statement of objections to the U.S. industrial company on Friday.

UPDATE! Reuters reports that Alstom has reacted to the press articles today and said that they will continue to provide evidence to the EC about the positive aspects of the deal for Europe. About the “statement of objections” they said “There have been press comments that a ‘statement of objections’ would be issued by the European Commission associated with the investigation of the sale of Alstom’s Energy businesses to General Electric. This is a usual step in a phase II merger case and it does not prejudge the outcome of the investigation. It will allow both General Electric and Alstom to address specific matters pointed out by the investigating team.”

The EC are playing hardball and seem to be looking for substantial concessions from GE before approving GE’s acquisition of Alstom’s power and grid businesses. According to Reuters a statement of their objections could come today (12th June).

ReutersGeneral Electric Co may need to offer bigger concessions to win European Union approval for its purchase of Alstom SA’s power unit as regulators plan to warn the U.S. company that the deal would harm competition, two people familiar with the matter said on Thursday.

….. “A statement of objections could come on Friday,” one source said.

Such a document shows why the EU regulator views the deal as anti-competitive and is a prelude to a veto unless companies come up with strong arguments or significant concessions.

Alstom shares fell 3.2 percent following the Reuters story, while GE was down 0.3 percent. An EC spokesman declined to comment. Alstom had no immediate comment. GE said it was working constructively with the regulator.  “We are focused on a positive outcome that preserves the deal economics,” GE said, adding it was confident of closing the transaction in the second half of 2015.

As I have written before, I expect that the EC objections are centred around what will happen with Alstom’s Heavy Duty Gas Turbine (HDGT) technology and service business. GE has no immediate need for Alstom’s sequential combustion technology, though, in the long run, GE may be the best placed to utilise that technology to take gas turbines to new heights. Regarding the service business for gas turbines it is very rarely, and only for older machines, that a party other than the OEM can provide the most critical spares. So such spares for the Alstom machines would come in the future from GE instead of Alstom but it would be no real change to the competitive position. (For the critical, “noble” parts of any not-too-old gas turbine, the OEM has a virtual monopoly).

However what the EC may be struggling with is that

  1. insisting on Alstom selling the HDGT business to someone other than GE will not find any competent buyers and certainly not any price close to what GE would pay, or
  2. asking GE (or Alstom) to sell sequential combustion technology to a 3rd party could only find buyers a long way down the learning curve who would need deep pockets and maybe 5 years to bring themselves up to any kind  of competitive position, or
  3. asking GE to either commit to use the sequential combustion technology themselves but where GE would probably want to discontinue the Alstom machines quickly, or
  4. to make the technology  “generally available” (as some kind of open source technology) for other potential competitors which would also require that GE give up the service business for some of Alstom’s biggest engines (say the machines operating in Europe) so that they could be available as a “training ground” for any technology user trying to make a go of it (for example; Ansaldo/Shanghai, MHPS, Harbin, Bhel, Kawasaki Heavy ……)

None of these options would be easy to implement. Option 1, I think, will not fly. Option 4 is probably beyond GE’s walk-away point since the heart of their business plan – the service revenues – would be impaired. Some variation of Options 2 and or 3 and parts of 4 maybe will not chase GE away.

The EC is due to announce its decision by early August, and since the EC is in regular discussions with GE, it does look like there is a negotiation ongoing (even if it cannot ever be acknowledged to be a negotiation by either party). I suspect Alstom has no great part to play in this negotiation. The French government probably can not be seen to be involved, but they are certainly not happy with the EC and its objections. (Of course, it is inconceivable for the French government that the EC could possibly go against “French interests”).

The statement of the EC’s objections – if it comes out today – should give a good indication whether this deal is going to go through or will eventually die. But killing the deal is not really in Europe’s interests, so the EC will have to tread very carefully.

French Minister warns EC not to hold up GE acquisition of Alstom

May 30, 2015

Previous posts on the GE acquisition of Alstom are here.

The GE 9HA gas turbine (nicknamed Harriet after a Galapagos giant tortoise) is being built at their Belfort factory and is surely a giant. At 400 MW it will be the largest gas turbine ever built and will give a combined cycle of, nominally, 600 MW output from a single GT/ST block. This will be the first “H” class Frame 9 machine (Frame 9 is for 50Hz and Frame 7 is for 60 Hz) and it is reported that just scaling up the 7HA engine to the 9HA has cost GE about $1 billion in R & D.  Two such 9HA GT’s with a single steam turbine in a 2+1 configuration would give a 1000 MW power block. The 9HA weighs in at about 400 tonnes. Strong, powerful stuff.


The GE 9HA turbine, aka Harriet. (GE)

This is the same facility which was part of Alstom while Alstom was a GE licencee and before it was separated from the rest of the site when Alstom acquired ABB’s power generation business. This particular engine is for a gas turbine combined cycle plant for EdeF’s Bouchain North plant. Alstom still has a large part of the Belfort site but Alstom’s power part of the site will go to GE if the acquisition of Alstom’s power and grid businesses now gets approval for the EC. The portion of the site dedicated to transport will remain with Alstom. The steam turbine business at Belfort for nuclear turbines will be in a GE/Alstom JV (project name Arabelle) but I expect that Alstom will (must) exit in due course, though the French government will not allow the nuclear power part to be entirely out of their control. If the deal goes through the French government will have 20% of what is left of Alstom (mainly transport plus their share of the 2 JV’s with GE) and Bouygues will have their (albeit partial) exit.

Most other countries have already approved the acquisition including India, South Africa and Brazil. It has not been much of an issue in the US where Alstom’s business is small compared to GE’s. The long draw-out EC process sticks out.

Yesterday the French Economy Minister, Emmanuel Macron, visited Belfort and his highly publicised visit to both the GE and the Alstom parts of the site was a very visible “blessing” from the French government for the deal. He took the opportunity to warn the EC and Margrethe Vestager, the European commissioner for competition, not to hinder the deal since this would only help the Chinese competitors. I note that Patrick Kron, Alstom’s CEO, was conspicuous by his absence. His €4 million termination deal with Alstom (once the GE deal goes through) has been heavily criticised by the French socialist government. Mind you these same leftists had also talked about “treachery” when the deal was first announced. The French press has also criticised Vestager for being too finicky. Needless to say the EC is not amused.

PoliticoEmmanuel Macron warned that blocking the deal would only bolster Chinese rivals and cost jobs in Belfort, where GE and Alstom are the largest private employers. He has met with Margrethe Vestager, the European commissioner for competition, on two occasions in recent months.

The Commission put the brakes on the deal in late February, announcing an in-depth investigation into the combined market power of the two companies. The Commission said it was concerned about preserving competition in Europe for heavy-duty gas turbines. As the clocked ticked down in May to the Commission’s deadline for GE to submit more information and data, GE’s Chief Executive Jeff Immelt signaled he was ready to bargain, potentially selling some of the intellectual property.

The Commission reset the clock and must now decide by August 21.

Macron assured factory workers and told local newspaper L’Est Républicain, “We think that competition policy is important and we support the Commission’s role in this domain. But we ask it to really look at the right market: that market is global, and the competitors are Chinese. And it is above all them that would benefit from the Commission blocking the rapprochement between GE and Alstom!”

Macron’s intervention is unlikely to please European Commission officials. Seldom do national governments take a public stance on mergers being reviewed by the EU competition authority, which does not take into account a deal’s effect on employment. …… Immelt has drawn a red line around Alstom’s business that services gas turbines. That lucrative segment underpins the economic rationale.

As I have posted earlier, GE will walk away from the deal if the EC demands conditions which impairs the service revenue from Alstom’s existing gas turbine fleet. From my experience it is this revenue which probably enables the deal and impairment here could be fatal.

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.

Macron does have a point though. If EC conditions are so onerous that GE walks away from the deal, Alstom will most likely have to find another (or several) buyers who will not pay anything like as much as GE have offered. If the EC insists that GE must sell Alstom’s sequential combustion business or the technology, any buyer would need to have a high enough technological base and very deep pockets – and that may be an impossible ask. Alstom clearly has no heart left to continue the business by itself. And then Shanghai Electric (leveraging its 40% ownership of Ansaldo) has some interesting possibilities of becoming one of the Big 4 in the gas turbine world (the others being GE, Siemens and Mitsubishi).

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


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.


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


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.


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