Archive for the ‘Energy’ Category

Saudi oil policy has ensured the survival of the shale oil producers

January 1, 2016

WTI Crude Oil Price. $107 in June 2104 and $37 yesterday (graphic Bloomberg).

WTI Crude oil price 2014-2015 (Bloomberg)

WTI Crude oil price 2014-2015 (Bloomberg)

In years to come the Saudi strategy through the last 2 years will form the basis of case-studies in business school about classic strategies which back-fired.

The Saudi overproduction has not managed – as they hoped – to kill off the US shale oil producers during 2015. They have reduced their costs much more sharply than the Saudi’s calculated for. They have also developed the ability to “mothball” and restart their wells at short notice. Iranian oil will come into the market in 2016 and their production costs are even lower than the Saudi cost.

Fighting for market share – while the market is down – is an expensive business. But I think the fundamental error in the Saudi strategy is believing that they will be able to retain market share when the market turns up. Not only will they have to fight off the Iranians but with an increase in demand, all the shale producers will be back. Moreover new shale producers in the UK and Asia are waiting in the wings. The Saudi attack on the shale oil producers has only made them far more competitive, very much faster than they ever expected. With the US experience to draw on, the learning curve for new producers in new countries will be that much easier and faster to traverse.

Reuters:

The U.S. shale industry, meanwhile, surprised the world again with its ability to survive rock-bottom crude prices, churning out more supply than expected, even as the sell-off in oil slashed by two-thirds the number of drilling rigs in the country from a year ago.

The United States also took a historic move in repealing a 40-year ban on U.S. crude exports to countries outside Canada, acknowledging the industry’s growth.

“You do have to tip your hat to the U.S. shale industry and their ongoing ability to drive down costs and hang in there, albeit by their fingernails,” said John Kilduff, a partner at Again Capital, an energy hedge fund in New York.

The bottom line is that Saudi oil is no longer without alternatives. That shale oil producers will disappear is a Saudi fantasy. In fact they have now helped the shale oil industry to become lean and mean enough such that their survival is guaranteed. The oil prices during 2015 were insufficiently low to drive an economic recovery but that could well come in 2016. The number of oil producers will only multiply and Saudi oil revenues will be permanently impaired.

Record number of German households have electricity disconnected following high prices

November 18, 2015

The German Energiwende is proving to be an embarrassing  fiasco, at an enormous cost – to producers as well as consumers – and with no returns. The only plus that can be discerned is to the ego of the “green” parties. Germany has the highest electricity prices in Europe directly as a result of the renewable energy surcharges. There is one small group of people which has benefited hugely. That has been the developers of renewable energy projects who have managed to build plants with very little of their own equity. They have then transferred ownership to plant operators and have shortened their own payback periods and maximised their returns.  Equipment manufacturers have seen their prices tumble, plant operators have seen their returns decline and consumers have seen their prices increase. But the developers have walked away with huge returns.

And it has all been for nothing.

The correlation between residential electricity price and installed renewable capacity is compelling. From Energy Matters.

The Y-axis shows residential electricity prices for the second half of 2014 from Eurostat. The X-axis installed wind + solar capacity for 2014 as reported in the 2015 BP statistical review normalised to W per capita using population data for 2014 as reported by the UN.

Now Der Spiegel reports:

Because of rising prices, more and more German citizens are unable to pay their electricity bills. In 2014, 351,802 residential households were disconnected, reports the Federal Network Agency (BNetzA) and the Federal Cartel Office in its new monitoring report. 

The number of disconnections  increased to the highest value ever recorded. In 2013, 344.798 cuts had been imposed and in 2012 there were approximately 320,000 disconnections. Yet far more households have problems with their electricity bill. According to the Federal Network Agency suppliers threatened their customers with disconnections a total of 6.3 million times.

The main reason for the increasing number of disconnections are the rapidly rising electricity prices. Since 2002, the costs for consumers almost doubled, partly because the levy for renewables rose, and because while the big power utilities reduced costs, these were not passed on to consumers.

The main victims are the households. Their electricity costs are around 45 percent higher than the EU average of 20.52 Euro cents per kilowatt hour. Adjusted for taxes industrial electricity price however is 6.27 cents per kilowatt hour, well below the EU average of 9.37 Euro cents per kilowatt hour.

For 2016, several utilities have already announced further increases. On average, this will be just over three per cent, which would mean an additional cost of approximately 40 euros per year for a four-person household.  .. Further increases are expected to be announced in the coming week. Customers must be notified of planned price changes for 2016 by November 20th. Experience has shown that many send these unpopular letters at the last minute.

The Energiwende has indeed been a revolution but it has not functioned as it was meant to. Costs have increased sharply and nothing has been achieved for the climate.

Because, of course, it couldn’t.

NoTricksZone comments:

It’s a glaring paradox of the Energiewende: On the production side, power plants are losing billions of euros because they can no longer even get a modest price for their power, while on the consumer side more and more households are unable to afford the skyrocketing prices brought on by the mandatory infusion of expensive and unstable green energies into the German power grid. The once mighty German power grid now teeters on the brink of crumbling.

Greenpeace endangers national economic security and is deregistered in India

November 7, 2015

Greenpeace has been deregistered in India and has 30 days to shut down. They intend to challenge the deregistration in court. But their brand of eco-fascism (“we know best what is good for you”) is a luxury that India can ill afford. When per capita energy consumption in India is just one tenth of that in Europe, and one fifteenth of that in US, Greenpeace’s attempts to block coal and nuclear power in India is unconscionable.

Greenpeace in India just reflects the views and values of its foreign membership. Most of this membership is from developed countries and represents the do-gooding, self-righteous attitudes of  a comfortable, energy-guzzling middle class. In Europe, these members are often from the hard-left who, after the fall of communism, have found themselves politically homeless. They have become a political lobby group hiding under the cloak of being a welfare organisation. They not only believe they “know best what is good for others”, they also want to impose that on others. In the developing world, Greenpeace are as “colonialist” as the empire builders of the 19th century and try to impose their values and their solutions by legal and extra-legal means. In India this colonialist attitude showed up with their local “rajahs” acting as feudal lords believing they had the right of droit de seigneur. In nearly every developing country their campaigns are opposed to development projects.

In India their efforts to show that solar energy could be an alternative to coal back-fired badly. They sponsored a solar pv installation at a village in Bihar but only ended up promoting coal power. The villagers now refer to coal power as “real power” and solar power as “fake power”.

Scientific American: Over three months, engineers set up 70 kilowatts of photovoltaic cells on the rooftop of public buildings scattered throughout the village. They installed 224 batteries to store the energy. …. All told, the installation cost 2.7 crore rupees ($407,050). ……

The day the power came was one of celebration. …. Then, the wealthy families plugged in energy-inefficient televisions and refrigerators. With the power suddenly facing heavy demand, the batteries drained within hours.

The microgrid operators scrambled to fix the mess. The village electrification committee decided to restrict electricity supply to five hours at nighttime. Greenpeace put up posters telling people not to use energy-hungry appliances such as rice cookers, electric water heaters, irons, space heaters and air coolers. ….. One month after the rollout, Greenpeace invited Bihar’s former chief minister, Nitish Kumar, to inaugurate the solar village. ……. One week later, trucks rolled in and set up a 100-kW transformer in town, connecting Dharnai to the grid. ….. Power is now free for Kumar and his neighbors who are below the poverty line. Others pay 3 rupees per kilowatt-hour of electricity. As of July, villagers were getting electricity day and night, …….

Meanwhile, enrollment in the solar program has fallen to 120 households, down from 380 at the start ……..At present, solar power in Dharnai costs at least three times as much as grid power. It can support only expensive energy-efficient appliances, such as CFL bulbs. A CFL bulb in India costs 700 rupees ($10), while an incandescent bulb costs 10 rupees (15 cents).

Now Greenpeace India has lost its registration, on the surface for violating financial regulations applying to NGO’s with foreign funding, but more fundamentally, for being anti-development and a threat to the economic security of the country.

NDTV: India has cancelled Greenpeace International’s license to operate and gave the group 30 days to close down, citing financial fraud and falsification of data, …… Last year, the government withdrew permission to Greenpeace to receive foreign funding, saying the money was used to block industrial projects.

Under the latest order issued by authorities in Tamil Nadu where Greenpeace is registered, the government said it had found that the organisation had violated the provisions of law by engaging in fraudulent dealings. ……. A government official confirmed that the closure order had been issued on Wednesday but did not elaborate.

In recent months the federal government has toughened rules governing charities and cancelled the registration of nearly 9,000 groups for failing to declare details of overseas donations.

In India, Greenpeace has blindly opposed almost every project concerned with coal mining, coal power plants, nuclear power plants, GMO crops, forest clearing, and even building of dams. They have opposed India’s tea exports in the name of supporting plantation workers. They have openly supported candidates from a particular political party (AAP). They have tried to influence elections. Agitation has been the name of their game and foreign support has been brought in to manage conflicts that they initiate. The government’s Intelligence Bureau (IB) has estimated that Greenpeace India’s activities depress growth by 2 -3%.

The New Indian Express:

Months before Tamil Nadu’s crackdown on Greenpeace, the Ministry of Home Affairs (MHA) in September had cancelled the Foreign Contribution Regulation Act (FCRA) licence of Greenpeace India. It was alleged that the NGO misused foreign funding for political activities which prejudicially affected the country’s public and economic interests.

The Home Ministry Dossier on ‘Greenpeace Activities’ with Express said that NGO was found violating the FCRA by engaging in political activities to influence and lobby for the formulation of policies of its liking. “Not only Greenpeace activists are involved in agitation, they also invited foreign activists like Emma Rachel Tranquility Gibson (UK national) for handling conflict / team dynamics, prioritisation and difficult decisions and her given task was ‘Election Project’as mentioned in the terms of reference of her job,” the MHA dossier said ……..

The financial irregularities are concerned mainly with hiding the use that foreign funds are put to:

An on-site inspection of the NGO’s accounts and records conducted on September 24 to September 27, 2014 found that Greenpeace first transferred foreign contribution received in FCRA designated bank account to FCRA utilisation account and from there to five other bank accounts without informing the authority concerned.  The NGO also shifted its office and activities from Chennai to Bengaluru without approval /intimation of the Ministry. It claimed that Greenpeace was also involved in international negative campaign against India’s most popular tea brands to reduce India’s export by publicising questionable forensic tests in an undisclosed foreign lab.

“ On October 27-28, 2013, Greenpeace India also invited a 10-member team of international activists (1 US and 9 Bangladesh nationals, nine being on tourist visa) to visit three coal block locations, Waidhan and Mudwani (Baiga Basti) in district Singrauli and Amelia to conduct an environmental study on coal blocks allocated to power plants in the district. The team also attended a meeting organised by a NTPC plant employee, Shyam Kishore……all the payments in respect of boarding and lodging were made by Greenpeace India.”

Timeline 

  • April 9, 2015: Centre freezes Greenpeace India’s seven bank accounts over FCRA violation
  • May 5: Greenpeace India’s executive director Samit Aich tells staffers that they have one month left to fight; face imminent shut down
  •  May 27: Delhi HC allows Greenpeace to utilise two accounts for collecting donations
  • May 28: District Registrar, Chennai, sends notice on inspection of Greenpeace India office in Chennai by Sub-Registrar (Chit & Society)
  • June 3: Sub-Registrar (Chit & Society) inspects Greenpeace office
  • June 16: Showcause notice sent by District Registrar on several irregularities and violations found during inspection
  • August 4: HC directs District Registrar to allow petitioner to peruse documents that RoS based its allegations on
  • October 5: Greenpeace sends extensive rebuttal through its counsel
  • November 4: District Registrar passes order cancelling Greenpeace India’s registration

Those who consume more than the world average of 1.78 toe/individual should shut up and not comment on those who consume less

November 6, 2015

The numbers tell the story.

Taking the data available in the BP 2015 Statistical Review of World Energy and the UN’s World Population Prospects – 2015 revision, it is simple arithmetic to see the current disparity in the energy consumed at the individual level. Per capita energy consumption in tons of oil equivalent varies from less than 0.2 in sub-Saharan Africa to over 7 in the US.

Energy per capita 2014

Energy per capita 2014

China has already developed to consume 2.17 toe per capita,  a little above the world average of 1.78 toe. The sharp growth came around 15 years ago. India is still at 0.49 toe/capita and the sharp growth is just beginning now. Probably India will exceed the world average in about 15 years. Sweden is at over 5 toe/capita and the US lies over 7 toe. The per capita energy consumption is a good reflection of the state of development. The developed countries flattened out after the 1970s. There ought to be a slight reduction in developed countries as energy efficiency effects kick in, and this effect is just starting to be apparent.

Energy consumption per capita 1965 - 2014

Energy consumption per capita 1965 – 2014

Suppose now that an average per capita consumption of around 3.5 toe is a reasonable goal to meet the aspirations of the global population by 2100. The global population will then be about 10.5 billion compared to the 7.2 billion in 2014. The total energy consumption will then increase by a factor of 2.9.

Currently 86% of global energy consumption is from fossil fuels. Suppose that by increased use of nuclear power and a much greater use of hydro, wind and solar power, the dependence upon fossil fuels can be reduced to – say – 70%. This is overly optimistic as to the potential of these other sources and does not seem very likely, but I use 70% to make the calculation.

0.7 *2.9/0.86 = 2.36

That would then require a fossil fuel consumption level around 2.3 times the present consumption by 2100. That in turn requires just a 1% growth of fossil fuel consumption per annum for the next 85 years. This is eminently doable – unless the alarmists, most of who already enjoy a consumption level of greater than 5 toe/ individual, manage to hold down the billions now trying to improve from levels less than 1 toe/capita.

Nobody who consumes more than the world average of 1.78 toe/individual should be allowed to comment on the energy use of all those who lie below that average. 

Forty years of subsidy and wind and solar provide all of 1.3% of global energy

November 6, 2015

The 2015 BP Statistical Review of World Energy is out.

It is an excellent reality check for those who care to subject their religious views about energy and climate to some sanity checks.

Subsidies for solar and wind and even bio-mass began around 1975. They took off after about 1985. I just note that after 40 years of subsidising wind and solar power, these two sources of energy provide all of 1.3% of the global energy consumption in 2014. I note also that the global energy need that people aspire to is almost double that actually consumed.

Energy consumption 1975 and 2014

Energy consumption 1975 and 2014

Fossil fuels contributed 86.3% of global energy in 2014 and have more than doubled since 1975. While carbon dioxide emissions from the use of fossil fuels had increased by 110%, carbon dioxide in the atmosphere rose from 330 ppm in 1975 to reach 398 ppm in October 2015, an increase of about 20%. The man-made emissions are still less than 5% of all carbon dioxide emissions and there is still no certainty as to how much – if any – of the man-made emissions contribute to the carbon concentration in the atmosphere. And the satellite record shows that there has been no significant increase in global temperature over the last 19 years.

It is not that solar and wind power do not have their niches where they make sense. But without energy storage, the need for back-up capacity always adds a hidden cost. The intermittent nature of the source then means that they can never make more than a marginal contribution. The problem with subsidies is that they can’t make the wind to blow or the sun to shine. And even when the sun is shining, the subsidies can’t control cloud cover. What I dislike even more about subsidies is that they have not been used to develop energy storage. Instead they have distorted the market, put large sums of money into the pockets of “cowboy” developers and have provided no benefits to the consumers. Solar and wind hardly show up when looking at global energy consumption since 1965.

Global energy consumption 1965 - 2014. Data from 2015 BP Statistical Energy Review

Global energy consumption 1965 – 2014. Data from 2015 BP Statistical Energy Review

To see the growth in wind and solar on the same diagram as fossil fuel consumption, it is necessary to use a log scale.

Global Energy Consumption log scale 1965 - 2014. Data source 2015 BP Statistical review of Energy

Global Energy Consumption log scale 1965 – 2014. Data source 2015 BP Statistical review of Energy

Which makes one wonder why the Paris conference is taking place at all. A more pointless exercise, and one which has no real measurable objectives , is hard to imagine.

European nuclear moratoria are ineffective and counter-productive as China plans 110 nuclear plants by 2030

October 18, 2015

Update! Numbers have been corrected. By 2030 China plans 110 nuclear plants in operation which is another 60 reactors in addition to the 50 currently in operation or under construction. (I had earlier assumed that the plan was for 110 new reactors).


The European nuclear industry is almost dead as a consequence of,

  1. the ban on nuclear power in countries which have succumbed to environmental political correctness (e.g. Sweden, Germany…)
  2. the ridiculously long and costly permitting processes (environment and safety) in countries where nuclear power has not been banned (UK, Finland…)

As a contribution to the global use (or non-use) of nuclear power, the European reluctance to use nuclear power is entirely meaningless. For the objectives of killing the European nuclear industry and raising costs for electrical power in Europe, the anti-nuclear lobby has been entirely successful.

China currently has 23 nuclear plants in operation and 27 under construction which will be in operation by 2020. By 2020 the Chinese nuclear generating capacity will have almost tripled from the 21GW, 2014 level to be about 58GW in 2020. They have just announced their next five-year plan and some long-term strategies. Another $78 billion has been earmarked to reach 110 nuclear plants in operation by 2030. These plants will be built using indigenous Chinese technology. This technology is now available for export. It is being actively considered for projects in Pakistan and Argentina and now China is even a possible investor in the UK. Each Chinese nuclear plant has a capacity of about 1.1GW (1,100MW). At $78 billion for a further 60 plants, the investment cost planned is about $1200/kW. This is incredibly low, not just for nuclear plant, but for any type of power generating plant. Even assuming a volume effect, it can be expected that Chinese nuclear power plants could be exported at about $1,200-1500/kW.

The Hindu:

China plans to build 110 nuclear power plants by 2030 with an investment of over $78 billion overtaking the U.S. which has 100 such plants amid criticism that Beijing is yet to implement enough measures to develop safety controls in existing projects.

China will build six to eight nuclear power plants annually for the next five years and operate 110 plants by 2030 to meet the urgent need for clean energy, Beijing-based China Times quoted plan analysts as saying. China will invest 500 billion yuan ($78.8 billion) on domestically developed nuclear power plants, the report said. According to the China Times, the country plans to increase its electricity generation capacity to 58 gigawatts by 2020, three times the 2014 level. 

China currently has 23 nuclear power generating units in operation and 27 under construction, about one-third of the world’s unfinished nuclear units.

The construction resumed after the Chinese government which put the brakes on nuclear power plant approvals after the Fukushima nuclear accident in Japan in 2011 permitted their construction after a safety review.

nuclear sites in china (graphic world-nuclear.org)

nuclear sites in china (graphic world-nuclear.org)

In Europe the Olkiluoto #3 nuclear plant of 1,600MW in Finland, was first expected to cost about $2,000/kW, but with all the delays and cost overruns it is going to end up costing about $5,300/kW. Even if the unnecessary approvals and cost overruns incurred just to satisfy the environmental lobbies were not there, the investment cost for new nuclear capacity in Europe would still be about $2,600-3000/kW (compare that with about $1,100/kW for gas fired plant, about $2,500/kW for a coal or onshore wind plant and about $6,800/kW for offshore wind power).

As a comparison, India currently has 21 nuclear rectors in operation with a capacity just under 6GW. A further 6 reactors giving another 4 GW are under construction. The Indian plan is to reach about 63GW of nuclear capacity by 2032 which, of course, will not happen. My experience of Indian power planning is that about 60% of the plan will be implemented (though the track record is improving). So it is quite probable that India will construct around another 40 nuclear reactors (@800MW/reactor on average) by 2032. (In that period Indian coal consumption would also have trebled).

At the Chinese cost of exporting nuclear plant for around $1,200-1,500/kW, it is only to be expected that the electrification of Africa and nuclear expansion in S. Asia will be satisfied to a large extent by nuclear power.  A big chunk of that would be with Chinese technology. I have no doubt that European nuclear plants operate to much higher safety standards than the current Chinese reactors, but the European nuclear industry is now dead and it is Chinese nuclear technology which will be affordable and will prevail.

Considering the goals it was set out to achieve, the European anti-nuclear stance has been totally ineffective (except locally in Europe) and grossly counter-productive:

  1. it has no long-term impact on global use of nuclear energy,
  2. it has effectively killed the European nuclear power industry,
  3. it has effectively reduced the safety levels of all those nuclear plants that will be built over the next two decades, and
  4. it has increased the cost of electric power in Europe.

It is worth remembering that while the Great 2011 Earthquake and Tsunami killed some 18,000 people in Japan, the Fukushima accident it caused has killed no-one directly due to radiation. Now, less than 30 years after the major disaster at Chernobyl, the area is very far from being some nuclear waste-land, and plant and wild-life are thriving as never before in the region.

GE gets approval from the EC and Ansaldo gets Alstom GT technology

September 8, 2015

UPDATE:

More details are now emerging of what exactly will go to Ansaldo. It seems that Ansaldo will get PSM, technology for the GT26 and the GT36 (which does not exist yet) including the test facilities at Birr and the LTSA’s for 34 GT26s sold by Alstom. It is good that it is settled but the European Commission has not – in my opinion – got it quite right.

  1. The technology seems to be restricted to 50Hz technology (after all, all of Europe is 50Hz). So a current GT26 and its potential upgrades should – theoretically – be available from Ansaldo but not the GT24 (60 Hz). It is the US market (60 Hz) which has access to cheap gas and the 50Hz market will take a while and will be dependant on fracking taking off in Europe. Ansaldo will probably need to take all liabilities to get their first 2 or 3 GT26 engines placed. And even then finding a suitable utility customer to host the machines will pose a challenge.
  2. GE will face no competition in the US from an Ansaldo GT24 and probably Ansaldo is not permitted to enter 60 Hz markets except with engines they develop themselves.
  3. The development of the GT36 is a long way from being commercialised and the assumption by the EC that this development will be completed by Ansaldo is almost “pie in the sky”. Of course it is theoretically possible! A 60Hz GT34 is even less likely.
  4. The EC’s assumption that PSM will be able to service engines like the GE 9FA under Ansaldo ownership is flawed. It is one thing to have an Alstom owned PSM servicing such engines considering that Alstom was the main source of GE 9FA until 2000 (when they acquired the ABB gas turbine business), and quite another to have an Ansaldo owned PSM doing such service.

I suspect that GE and Alstom have talked down the difficulties that Ansaldo will face and the EC have bought the sales pitch. Or it could be that the EC does know that this commercialisation of the GT36 (and maybe even the production of the GT26) by Ansaldo will likely not happen, but it gives them a face saving way of approving the GE bid.

Money talks. And we need to bear in mind that GE pays only €300 million less which must now presumably come to Alstom from Ansaldo. Just €300 million as the price for the ongoing service business and the assets at the R &D facilities at Birr does not leave much over actually for the technology that has been purchased.

But

  1. does Ansaldo have the additional €500+ million that they will need to get a GT26 into production?
  2. And do they have another €2 billion (at least), along with the will and the capability, to bring a commercial GT36 into being??

PowerMag:

The commission’s in-depth review, which focused on markets for the sale and servicing of heavy-duty gas turbines operating at 50 Hz, revealed that a GE-Alstom merged entity would have accounted for more than 50% of the European Economic Area market.

It was also specifically concerned that the merger would have risked eliminating an important innovator. “The transaction as notified would have reduced customer choice, R&D [research and development] and innovation, with serious risks that certain Alstom heavy duty gas turbine models would be discontinued and that the newly developed and most advanced model (GT 36) would not be commercialised. This was of concern for many market participants, including major European power utilities,” the commission said.

The merger was approved on the condition that the parties offered to divest Alstom’s GT 26 and GT 36 turbine technology, existing upgrades and pipeline technology for future upgrades, a large number of Alstom R&D engineers, and two test facilities for the GT 26 and GT 36 turbine models in Birr, Switzerland.

The parties will also need to divest long-term servicing agreements for 34 GT 26 turbines recently sold by Alstom, and Alstom’s Power System Manufacturing (PSM) subsidiary. The commission was concerned that if GE absorbed PSM, it would have eliminated competition for the servicing of GE’s mature heavy-duty gas turbines (like its 9FA model) that are installed in existing plants. “As GE is the dominant player in this market and PSM its most significant potential competitor, this would have created a risk of higher prices and less innovation,” it said.

34 gas turbines is a small part of Alstom’s fleet but it may be enough to give Ansaldo a fighting chance of building up experience over – say – 5 years or so.

I remain of the opinion that this is a good deal for Alstom and GE. However, I also remain of the opinion that some 8,000 jobs of those being transferred from Alstom to GE or to Ansaldo will be at risk. Ansaldo surely has a chance for becoming one of the “big 4”. But they may have difficulty chewing or swallowing what they have just bitten off.

Another thought that occurs to me is that the EC process is itself flawed. The solution (divestment to Ansaldo), which has delayed the deal by a year, smacks more of ego and politics rather than protection of competition. The actual protection of competition achieved is minimal.

WSJ: ……. GE already manufactures gas turbines of corresponding size to the two Alstom models, and the company says it will retain licenses that will enable it to compete for business servicing turbines made by other manufacturers—an opportunity for future earnings growth.

The U.S. company will also divest the long-term servicing contracts for 34 turbines that have already been installed by Alstom. GE has said that Alstom’s servicing contracts were a key attraction of the deal, but a person close to the deal said the divested contracts amounted to only 4% of Alstom’s total installed base.

“I am glad that we can approve this transaction, which shows that Europe is open for business and that Europe-based technology can thrive and attract foreign investment,” Ms. Vestager said.


 

Well, the European Commission has given GE approval for the acquisition of Alstom’s power and grid businesses. But Ansaldo will now get Alstom’s large GT technology (it’s not clear to what extent), the testing facilities in Birr and some substantial service business. Whether Ansaldo actually gets the GT24 and GT 26 engines or just technology is not clear yet.

Previous posts: https://ktwop.com/tag/alstom/

Bloomberg:

As part of GE’s offer, Ansaldo will acquire Alstom’s technology for large and very large gas turbines. Alstom will also cede two test facilities for these turbine models in Birr, Switzerland, the EU said.

“Ansaldo will have a true fighting chance” of competing in the European market, Margrethe Vestager, the EU’s competition commissioner, told reporters in Strasbourg, France.

The Italian firm should gain a foothold in the maintenance business by taking over long-term contracts Alstom holds to service 34 previously-sold gas turbines, the commission said. Ansaldo will also acquire Alstom’s Power Systems Manufacturing unit which can service gas turbines of different makes, the regulator said.

With PSM going to Ansaldo, Shanghai (via PSM) gets a foothold in the US for 3rd party engine service – for whatever that may be worth. But I am not very hopeful. As an owner, I would not be very keen on asking an Ansaldo owned PSM to service a Siemens or a GE engine or even an old Westinghouse engine.

Good luck to Ansaldo anyway.

It will be interesting to see if Shanghai Electric can provide sufficient influence to make this work. Ansaldo on its own would have very little chance to make it, I think. It will still take them the best part of a decade and by then GE, Siemens and Mitsubishi would have moved on. I think the EC’s competition commissioner is fooling herself more than a little when she states that “Ansaldo will have a true fighting chance”. She is being far too optimistic, but maybe Shanghai can make the difference.

The Ec’s conditions does not have a great impact on the jobs that will be lost. This will stay at around 8,000 I think for GE. Of the jobs shifted to Ansaldo, I am not very optimistic.

A pity, because I think this marks the end of sequential combustion with a viable player.

I wouldn’t mind being proved wrong – but the probability is rather low.

But it’s good news for both Alstom and GE. For Ansaldo, it may be too much of a mouthful.

12% job losses to be expected post approval of GE – Alstom deal

September 4, 2015

Everything points to GE getting approval next week from the European Commission (deadline 11th September) for its acquisition of Alstom’s Power and Grid businesses – subject to some of the remedies proposed by GE to meet EC concerns about competition. The specific nature of the remedies have not been made public but rumours indicate that these comprise divestment of a service company and a facility in Switzerland to Ansaldo along with some IP, (see previous posts).

Around 65,000 Alstom employees would be transferred (though I am assuming that the JV’s being set-up (Grid, Renewable Power and Nuclear) are just a step along the way to complete divestment. Alstom can exit the Grid and Renewable Power businesses (50% minus one share) by September 2019 for an exit price not less than the acquisition price +3% per year. Alstom has windows for exit from the Nuclear JV (20% minus one share) “for 3 months after the 5th and 6th anniversaries of the joint venture” with an “exit price not to be lower than acquisition price +2% per year”. I assume that Alstom has a put option and that GE is obliged to buy – provided of course that no hidden liabilities show up in the businesses as happened when Alstom acquired ABB’s power generation business in 2000.

Alstom GE JVs (EGM Dec 2014)

Alstom GE JVs (EGM Dec 2014)

Alstom EGM presentation 2014-12-18

Alstom employees breakdown March 2014

Alstom employees breakdown March 2014

That there will be job losses among the 65,000 so transferred is inevitable. The logical conclusion would be that jobs in high-cost countries – except where they are also where the market is – would be most at risk. But as I saw through my years at ABB and Alstom, logic does not always apply. Both ABB and Alstom were (and probably still are) very Eurocentric. Quite often I saw under-utilisation in Europe being taken as the “cost to be avoided” rather than the minimising of total cost. Then, fully loaded jobs in low-cost countries were removed or transferred to Europe to increase loading in European facilities – but which only helped to increase total costs. Also, it was always so much cheaper (redundancy payments) to get rid of jobs in India or China or Indonesia than in France or Germany. So I do expect that similar “political preferences” will still apply for European jobs, though GE should be less inclined to fool themselves over the false economy of maintaining high-cost jobs for saving the “avoided cost” of under-utilisation. (A qualified, engineering job in Europe costs – or saves – at least twice as much as one in India or China after including for wages and all support facilities). On the other hand, GE now has to fulfill some political expectations from the French government and the European Commission. So jobs in France are protected and possibly also in Italy as well, but Eastern Europe and even some developing countries may well take a hit. Switzerland is quite exposed, both for cost and lack of political clout in the EU.

However, GE is also under pressure to implement its cost cutting program and the delay in the EC approval only adds to the pressure to make quick cuts.

ReutersGeneral Electric Co is expected to win regulatory approval next week for its purchase of the power equipment business of France’s Alstom, allowing the U.S. industrial conglomerate to finally carry out a major cost-cutting program 16 months after first announcing the deal. ……… 

In May, GE told investors it expects $3 billion in cost reductions over the next five years as it combines its operations with those of Alstom, more than double the previous target when the deal was first announced in April 2014.

GE has also projected the deal would add 15 to 20 cents per share to earnings in 2018, or nearly 10 percent of GE’s overall profit expected that year by Wall Street, according to Thomson Reuters.  

To hit those goals, GE will consolidate manufacturing operations, cut duplicated overheads, and make savings on purchasing expenses, according to GE presentations on the deal. But to gain the blessing of the French government last year, GE committed to add 1,000 jobs in the country, possibly handcuffing the conglomerate’s ability to reap savings from Alstom’s home base.

My (entirely speculative) reasoning suggests that GE must reduce this 65,000 employees from Alstom by around 12% quickly – say over 12 – 18 months. GE should certainly be able to reduce headcount globally by around 8,000. That will give a saving of only around €500 million annually (€800 million if all the job cuts were in Europe) and further rationalisation will still be needed if GE is to meet its target of $3 billion cost reduction in 5 years. (A $3 billion annual cost reduction is massive. If it was all to be found only by job reductions it would mean around 30,000 jobs).

Over 1,200 of these jobs could go as a consequence of the “remedies” proposed by GE and the consequent divestments to Ansaldo. Around 1,000 of these jobs in Switzerland will likely transfer to Ansaldo and then perhaps around 600 will disappear completely. I note that around 3,000 of the 65,000 jobs transferred are for shared and common services (IT, support facilities, legal and the like). I would be quite surprised if GE could not find sufficient synergies with their existing staff in these areas, and cut at least 1,500 of these jobs. Between 6 and 7,000 of the jobs transferred would be in the US where GE is already very well represented. Again, I would be quite surprised if GE could not find at least 1,000 jobs in the US which were effectively duplicates. Some duplicate manufacturing facilities would also need to be rationalised (Poland? China? Italy?).

It is only my speculation but I could see the initial 8,000 jobs to be reduced consisting of (as an example),

  1. 1,000 in Switzerland divested to Ansaldo
  2. 200 in other locations (service business) divested to Ansaldo
  3. 1,500 reduction in central and shared services
  4. 1,000 jobs rationalisation in the US
  5. 1,000 manufacturing and engineering jobs in duplicated facilities
  6. plus a 5% personnel reduction across the board

There will be much pain in the short-term. I have been through the process myself on more than 6 occasions (downsizing or acquiring or being acquired), and it is the handling of people which is by far the biggest challenge. While it will be of benefit to both Alstom and GE in the long-term (to their investors, their continuing employees and to their customers), that is not much comfort to those who lose their jobs.

India to more than double coal production in next 5 years

August 26, 2015

Coal production in India is not keeping up with consumption. One of the bottlenecks has been the private production of coal which was expected to grow much faster but has been hampered by scams and bureaucratic regulation. Now the Coal Mines Special Provision Bill was passed in March and is meant to encourage the private sector and allows foreign investment through an Indian subsidiary.

The government is very ambitious and targets a domestic annual production of 1.5 billion metric tons by 2020 which is 2.5 times larger than the current 600 million metric tons.

India coal production target

The US Energy Information Administration (EIA) reports:

Coal consumption in India, particularly in the electric power sector, is outpacing India’s domestic production. From 2005 to 2012, India’s coal production grew by only 4.7% per year to about 600 million metric tons while the country’s coal-fired electric power capacity grew by a much faster rate (about 9.4% per year), reaching 150 gigawatts. To help resolve the shortfall in coal supply and to support expanded coal-fired generation, India has set a coal production target of 1.5 billion metric tons by 2020. Recent shifts in government policies and practices may play a key role in India’s ability to meet this coal production goal.

Increasing coal production from its national coal producer. Coal India Limited (CIL), the national coal producer responsible for more than 80% of India’s current production, initially planned to produce 1 billion metric tons of coal by FY2020, almost double its FY2015 production. Although CIL revised its current expectations downward to about 900 million metric tons, its annual production must still rise faster than the current rate of increase to achieve its new goal. Since 2012, CIL has increased coal production by outsourcing production operations to private and foreign companies in an effort to improve mechanization and mining expertise and by working to adhere to detailed mine plans for achieving its 2020 production target.

Encouraging greater private and foreign participation. In August 2014, allegations of impropriety, hoarding of coal resources, lost government revenue, and a lack of transparency led India’s Supreme Court to cancel 214 coal licenses allocated to the private and public sector, representing 9% of FY2013’s production. The Ministry of Coal quickly reauctioned many of these properties to help minimize the disruption from the cancellation, but the impact of this redistribution of coal properties on production is uncertain.

Private mining may be expanded further as a result of the Coal Mines Special Provision Bill passed in March. This law opens the door to commercial coal mining by both private companies and foreign companies having an Indian subsidiary. The government is now evaluating the effect of a coal block auction to allocate properties for commercial development—a significant change for a coal industry that has been nationalized for 40 years.

The simple reality is that coal is essential – and irreplaceable – for Indian development and growth.

Oil price destroys viability of Scottish independence

August 24, 2015

The Scottish National Party (SNP) once had budgeted on the basis of oil price being $115/ barrel. Then at the time of the referendum they assumed a price of not less than $100/barrel giving a tax revenue of not less than £7 billion per year which would offset the “subsidy” that Scotland gets from the rest of the UK of about £9 billion per year. This tax revenue drops to zero with a North Sea oil price of less than $50/ barrel.  But the breakeven price for oil producers is even higher:

Forbes (Jan 2015)Some prospects, including almost all activity West of Shetlands, are considered unprofitable below $100 per barrel. Mature oil wells struggle to be viable below $60, so BP has decided that 200 jobs and 100 contractors’ roles would go following a review of its North Sea operations managed out of Aberdeen, Europe’s oil and gas capital. Looking ahead, BP forecasts the oil price to remain in the $50 to $60 price range for next three years. ………

Either way, BP’s take has darkened the mood in the British and Norwegian sectors of the North Sea. However, it isn’t the first to announce job cuts. If anything, BP’s move is pretty predictable given the company has been quite clear about reducing employee headcount.

Shell, Statoil and Chevron have made similar announcements while ConocoPhillips has also been clear about a need to “streamline operations.” As operators downsize, oilfield services companies would invariably feel the pinch from independent upstarts to market leader Schlumberger.

But reality is biting hard. It is now more likely that Brent oil price will be trapped between $30 and $40 for the next 2 -3 years. Costs of production in the North Sea have not come down much compared to the sharp decline in US production costs of oil from fracking. And now Iranian oil will take its market share. At these prices the North Sea oil producers will be losing money on each barrel produced. Production is likely to be scaled down sharply and investment will drop to a trickle. Onshore jobs involved in both exploration and production (Norway, Holland, Scotland) must decrease. The Norwegian and Scottish production will bear the brunt of this turndown. Norway has built up a huge reserve fund and can weather a storm but not a permanent downturn, The UK economy can take the hit but an independent Scotland would be very hard hit. The introduction of shale fracking in England – which could take advantage of the the production cost reductions achieved in the US – could not only mitigate the risk but add a new source of jobs and tax revenue. The largest cost reductions in the production of oil from shale have come in the non-unionised part of the industry. There is considerable oil shale in Scotland as well, but I expect the SNP and the UK unions to be far too short-sighted and to do their damndest to prevent the introduction of fracking.

Nasdaq brent oil 10 year chart Aug 2015

Nasdaq brent oil 10 year chart Aug 2015

At less than $40/barrel, the SNP would need to create some very strange, fantasy budgets to prove the viability of an independent Scotland. Perhaps they could just nationalise everything and print money.


%d bloggers like this: