Archive for the ‘Gas’ Category

US shale gas arrives in Scotland today

September 27, 2016

The SNP’s idiotic environmental policies means that Scotland has to import shale gas from the US even though there is plenty available locally. North Sea revenues for Scotland have collapsed and Scottish energy policy is a self-inflicted wound. In Europe generally, it is misguided, meaningless, environmental constraints on energy policies which have been a major contributor to holding back the economic recovery.

The low oil price in 2016 has effectively postponed any new independence referendum for a few years to come. Without North Sea revenues Scotland – if it wants to be an independent EU country – would be the “poor man of Europe” for 2 decades.

Image result for Scotland north sea revenue collapse

graphic: market oracle

BBC: 

The first shipment of US shale gas is arriving in Scotland amid a fierce debate about the future of fracking in the UK.

A tanker carrying 27,500m3 of ethane from US shale fields is due to dock at Grangemouth, the refinery and petrochemicals plant owned by Ineos.

The company said the gas would replace dwindling North Sea supplies and secure the future of the plant’s workforce.


 

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Saudi Arabia seeks bank loans for first time in a decade

March 9, 2016

I am still of the opinion that the oil price war that Saudi Arabia has been waging against shale oil, Russia and Iran, was misguided and due primarily to a geopolitical machismo that was grossly overestimated. It was misguided because shale fracking is not a technology that is going to go away. In the short term some of the more expensive shale wells may close, but they can very soon start up again. But more importantly, shale gas and oil are available all over the world. They just haven’t been developed yet. And those that don’t have access to shale – like Japan – will have access to gas from methane hydrates within a decade. And there is more gas available from methane hydrate than from shale which, in turn, is more gas than all the natural gas resources known.

In the long run I expect the Saudis to be the losers. Their budget deficit climbed to approach $100 billion last year and now, for the first time in a decade, they are looking to borrow.

Reuters: 

Saudi Arabia is seeking a bank loan of between $6 billion and $8 billion, sources familiar with the matter told Reuters, in what would be the first significant foreign borrowing by the kingdom’s government for over a decade.

Riyadh has asked lenders to submit proposals to extend it a five-year U.S. dollar loan of that size, with an option to increase it, the sources said, to help plug a record budget deficit caused by low oil prices.

The sources declined to be named because the matter is not public. …

The kingdom’s budget deficit reached nearly $100 billion last year. The government is currently bridging the gap by drawing down its massive store of foreign assets and issuing domestic bonds. But the assets will only last a few more years at their current rate of decline, while the bond issues have started to strain liquidity in the banking system. …….. 

…… Analysts say sovereign borrowing by the six wealthy Gulf Arab oil exporters could total $20 billion or more in 2016 – a big shift from years past, when the region had a surfeit of funds and was lending to the rest of the world.

All of the six states have either launched borrowing programs in response to low oil prices or are laying plans to do so. With money becoming scarcer at home, Gulf companies are also expected to borrow more from abroad.

In mid-February, Standard & Poor’s cut Saudi Arabia’s long-term sovereign credit rating by two notches to A-minus. The world’s other two major rating agencies still have much higher assessments of Riyadh, but last week Moody’s Investors Service put Saudi Arabia on review for a possible downgrade. ……. 

The pricing of the loan is likely to be benchmarked against international loans taken out by the governments of Qatar and Oman in the last few months, according to bankers. Because of banks’ concern about the Gulf region’s ability to cope with an era of cheap oil, those two loans took considerable time to arrange and the pricing was raised during that period.

Oman’s $1 billion loan was ultimately priced at 120 basis points over the London interbank offered rate (Libor), while Qatar’s $5.5 billion loan was priced at 110 bps over, with both concluded in January.


 

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:

PowerTechnology:

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.

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.

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

May 3, 2015

UPDATE! 

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

GT cycles - conventional and sequential combustion

GT cycles – conventional and sequential combustion

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

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

M Class GT?

M Class GT?

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

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

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

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

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

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

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

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

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

April 21, 2015

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

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

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

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

Xinhua reports:

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

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

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

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

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

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

shale basins China (The Diplomat)

shale basins China (The Diplomat)

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

shale gas basins India

shale gas basins India

Fossil Fuels Will Save the World (Really)

March 17, 2015

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

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

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

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

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

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

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

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

Two years of $70 oil could be the boost the global economy needs desperately

October 27, 2014

There are two questions here of course:

  1. How will oil price develop over the next 2 years? And the only certain thing is that forecasts will be wrong, and
  2. Can the net difference between the positive effect on oil consuming countries and the negative effects on oil producing countries be sufficient to lift the global ecoonmy out of its doldrums?

Oil prices have dropped 25% since June and currently WTI crude is at $81 and Brent crude is at $86 – down from around $110 – 115 in June. How far can prices drop and for how long? Of course this depends on supply and demand. But I think there is a new paradigm here and created by the injection of shale oil into the mix. I suspect that shale oil production now establishes a new floor price which means that the prices cannot drop lower than about $60 or possibly even $70. Oil from the traditional, large oil wells can still be produced profitably at much lower prices. But shale oil is more expensive to produce partly due to the costs of fracking but also due to smaller individual wells which last for shorter periods than the large oil wells. This in turn means that there is both a higher investment cost and a higher operating cost for shale oil compared to “traditional” oil. It is thought that as shale oil increases its contribution to the total mix, this production cost will set a floor for all oil at around $60-70 instead of the $30-40 needed for break-even (zero exploration) with traditional oil. The oil companies will maintain profits and dividends by scaling down jobs and their new exploration costs which is the variable they can play with . It is the oil producing countries who will lose tax revenues (offset by increased production – if any).

oil price 2710214 oil-price.net

oil price 27102014 oil-price.net

Goldman Sachs have forecast in a new research report that prices could drop to $70 by the second quarter of 2015.

Reuters 27/10: Brent crude futures fell below $86 a barrel on Monday after Goldman Sachs cut its price forecasts for the contract and for U.S. oil in the first quarter of next year by $15.

The U.S. investment bank said in a research note on Sunday that it had cut its forecast for West Texas Intermediate to $75 a barrel from $90 and that for Brent to $85 from $100, with rising production in non-OPEC countries outside North America expected to outstrip demand.

The bank expects WTI to fall as low as $70 a barrel and Brent to hit $80 in the second quarter of 2015, when it expects oversupply to be most pronounced.

Even Saudi Arabia now seems to have accepted that a regime of low prices will last  1 – 2 years.

Reuters 26/10The recent decline in global oil prices will prove temporary even if it lasts a year or so, since population growth will ultimately bring higher consumption and prices, the chief executive of Saudi Basic Industries Corp said on Sunday.

Mohamed al-Mady was speaking to reporters after the company, one of the world’s largest petrochemicals groups and the Gulf’s largest listed company, reported a 4.5 percent drop in third-quarter net income, missing analysts’ forecasts.

At these price levels for 2 years almost $3 trillion will shift from the “few” producers to the “many” consumers.  But most of this could fuel consumer growth (which it would not do to the same extent when in the hands of the oil producers). The consumer countries will also lose the foreign exchange constraints they must operate under for purchase of oil in US Dollars. It could release monies desperately needed for infrastructure projects. But the consumer countries need the prices to stay low for some time – and I would guess that 2 years is a minimum – for the public funds released to be utilised in “growth” projects.

The EconomistFor governments in consuming countries the price fall offers some budgetary breathing-room. Fuel subsidies hog scandalous amounts of money in many developing countries—20% of public spending in Indonesia and 14% in India (including fertiliser and food). Lower prices give governments the opportunity to spend the money more productively or return it to the taxpayers. This week India led the way by announcing an end to diesel subsidies. Others should follow Narendra Modi’s lead.

Producer countries will be hit. Russia has actually been helped by the fall in the rouble which has cushioned – a little – the rouble values of the dropping oil revenue.

The most vulnerable are Venezuela, Iran and Russia.

The first to crack could be Venezuela, home to the anti-American “Bolivarian revolution”, which the late Hugo Chávez tried to export around his region. Venezuela’s budget is based on oil at $120 a barrel. Even before the price fall it was struggling to pay its debts. Foreign-exchange reserves are dwindling, inflation is rampant and Venezuelans are enduring shortages of everyday goods such as flour and toilet paper.

Iran is also in a tricky position. It needs oil at about $140 a barrel to balance a profligate budget padded with the extravagant spending schemes of its former president, Mahmoud Ahmedinejad. Sanctions designed to curb its nuclear programme make it especially vulnerable. Some claim that Sunni Saudi Arabia is conspiring with America to use the oil price to put pressure on its Shia rival. Whatever the motivation, the falling price is certainly having that effect.

Compared with these two, Russia can bide its time. A falling currency means that the rouble value of oil sales has dropped less than its dollar value, cushioning tax revenues and limiting the budget deficit.

There are a number of other effects of $70 per barrel for oil.

Bio-fuels and bio-diesel, which are fundamentally unsound, have stayed alive on the back of subsidies on the one hand and a high oil price on the other. If the prices stay at $70 for 2 years or longer, land currently being wasted on bio-fuels could revert to food production. With lower fertiliser and transport costs in addition, a great deal of pressure on food prices go away. If the floor price is set by shale oil production costs, it may be too low for oil production from tar sands to take off in any big way. Electricity production costs will be bench-marked against the cost of gas turbine combined cycle plants.

But most importantly, another 2 years or longer with the public spending pressures reduced will allow a number of other countries to get their own shale oil (and gas) production going. And that will make Opec and the oil cartel obsolete. Oil and gas price speculation will no longer be possible.

It could provide the start for a long sustained period – perhaps even a decade or two – with oil prices stable at around $70 per barrel.

Shale gas in Europe worries Putin

October 25, 2014

It might seem counter-intuitive for Russia to be against the advent and development of shale gas in Europe since they themselves have huge quantities of oil and gas bearing shale in SiberiaBut Russia has a very large investment in conventional natural gas production and pipelines (through Gazprom) which must be protected and nurtured. Putin needs to ensure revenues and that exports of conventional natural gas gives them a reasonable return on the investment before moving onto shale gas. About 30% of Europe’s gas comes from Russia. Russia needs Europe to go slow with its own shale gas production and to continue buying Russian gas at reasonably high prices for as long as possible. So much so that Russia has even been supporting anti-fracking groups in Europe. (It is a little ironic when the European anti-fracking alarmists take well disguised Russian funds and play into Russian hands).

The MotleyFoolNow there are accusations that Russia is working hard to keep Europe dependent on its gas supplies. According to Nato chief Anders Fogh Rasmussen, Russia is doing this by funding anti-fracking groups. That’s something that some of the larger groups deny, but it would be hard to suss out where all of their donations come from in the anti-fracking movement.

There are good reasons for Russia to undertake such a covert operation. For starters, Gazprom would suffer greatly if its European business started to slip away. Second, by keeping Europe hooked on Gazprom gas, Russia maintains a strong bargaining position in world politics.

That, however, just gives the United States more reason to come to the aid of its European allies. Right now, the export of U.S. natural gas is severely limited. With the combination of horizontal drilling and hydraulic fracturing (fracking) in the U.S., however, the flow of gas has outstripped demand and pushed U.S. domestic gas prices to record low levels.

While being able to sell natural gas to Europe would be a huge win for Europe politically and U.S. gas drillers financially, it would also be a big win for pipeline operators like Kinder Morgan (NYSE: KMI  ) . Moving natural gas from where it’s drilled to where it’s used made up roughly 50% of Kinder Morgan’s business last year. The business isn’t about natural gas prices, either; it’s about providing a service. CEO Richard Kinder describes it this way: “We operate like a giant toll road.” So, if natural gas starts going overseas, Kinder Morgan will be involved in the process and make money doing it.

The possibility of surplus shale gas from the US entering Europe and depressing sales of Russian natural gas is a nightmare economic scenario for Vladimir Putin. Even the recent drop in oil prices has seriously unbalanced the Russian budget which needs an oil price of over $100 to be in balance.

Putin takes part in final session of 11th Valdai International Discussion Club meeting

Putin at the 11th Valdai International Discussion Club meeting in Sochi

Putin is clearly worried. Russian President Vladimir Putin took part at the plenary session of the Valdai International Discussion Club in Sochi. He talked up the risks with US shale gas to Europe and talking up the benefits of Russian gas.

TassPutin: Europe’s transition to American shale gas will be suicidal for EU economies

Russian President Vladimir Putin believes that transition to shale gas will be suicidal for the EU economies. In his speech at the Valdai discussion club on Friday, Putin said that Russia’s trade turnover with the European Union stood at 260 billion dollars in the first half of 2014 even despite sanctions. He assumed, however, that the trade volumes could fall if Russia stopped all gas and oil supplies to Europe.

“We assume that it can happen at the will of our partners in Europe. But it’s hard to imagine,” Putin said, explaining that alternatives to Russian gas and oil supplies were worse.

It is either the crisis-hit Middle East where the “Islamic State” militants have stepped their operations or deliveries of shale gas and shale oil from the United States.

“We can imagine that /deliveries/ of shale oil and shale gas from the United States are possible. But how much it will cost?” Putin asked.

“This is going to be a direct way to reducing their own competitive ability because it is going to be more expensive than our pipe gas or oil delivered from deposits in Russia,” the Russian president went on to say.

“They are simply going to kill their competitive ability. What kind of a colony Europe should be to agree to this option. But I believe that common sense will prevail. The same is true of Asia,” Putin said in conclusion.

For very many reasons the very best thing that Europe (and Asia) could do would be to expedite the production of their own shale gas. It would bring down energy prices, stimulate growth, increase jobs, increase independence from Russia, increase exports, increase competitiveness against the US and consolidate energy intensive industries which are moving out. But this would have to overcome the opposition of the alarmist, European green parties who have a remarkable facility for being counter-productive.

Opposing the development of shale gas in Europe gives Russia the edge on the geopolitical playing field.


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