David Fuller and Eoin Treacy's Comment of the Day
Category - Energy

    Uranium poised to enter bull market

    This article by Ben Sharples for Bloomberg may be of interest to subscribers. Here is a section: 

    Uranium is poised to enter a bull market amid tightening supply as producers shut mines and delay projects, more than three years after the Fukushima nuclear disaster in Japan sent prices lower.

    The atomic fuel has advanced as much as 18 percent from a May 20 low of $28 a pound, according to data from Ux Consulting Co. in Roswell, Georgia, which provides research on the nuclear industry. Prices closed 0.5 percent higher at $32.65 yesterday and have averaged $31.80 in 2014.

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    Oil Review 2014

    Thanks to a subscriber for this highly informative report from Natixis. Here is a section on Petrobras: 

    From less than 300,000b/d in early-2013, average Petrobras pre-salt output reached 435,000b/d in May. June’s record high pre-salt output of 520,000b/d was achieved with only 25 producing wells; ten in the Santos basin and fifteen in the Campos basin.
    Petrobras plans to add 5 new FPSOs this year. 17 new presalt wells are scheduled to be connected to platforms that are already in position, while another five will be connected to newly positioned platforms. Collectively, this is expected to add as much of 550,000b/d of new crude output. While the slow start to this year’s production makes achievement of Petrobras’ 7.5% growth target difficult, the additional crude supplies due to come on-stream clearly highlight the potential for a more rapid increase in Brazilian crude output over the coming years.

    In 2015-16, Petrobras plans to add eight new pre-salt platforms in the Santos basin (one in 2015, followed by seven in 2016, focusing in particular on the Lula field). Once up and running, this is expected to take pre-salt output above 1mn b/d.

    Petrobras CEO Maria das Gracas Silva Foster plans to increase output to 4.2mn b/d by 2020, of which pre-salt output will contribute 2.2mn b/d. Output from third party producers, which contributed a negligible amount in 2013, is expected to add an additional 800,000b/d, taking total Brazilian crude output to around 5mn b/d by 2020. This will require Petrobras’ investment of $221bn between 2014-18, of which $154bn will be exploration and production. Including the $45bn share of investment by Petrobras’ partners, close to $200bn will be invested in exploration and production alone.

    One important factor behind the slowdown in Brazilian crude output since 2011 has been the sharp decline rate at conventional fields, especially those in the Campos basin. From more than 1.75mn b/d at the peak in 2012Q1, Petrobras’ output in the Campos basin fell to a low of less than 1.43mn b/d in February this year. With pre-salt output in the Campos basin generating 200,000b/d or more this year, this puts the overall decline in conventional output in the Campos basin somewhere around 500,000b/d. In large part, these decline rates at conventional fields were a reflection of Petrobras’ increased focus upon pre-salt fields, exacerbated by the company’s squeezed profitability and scarcity of capital. In an effort to support output levels at mature fields, Petrobras has contracted four new service platforms that will carry out maintenance at offshore platforms over the period 2014-17. By April 2014, efficiency rates at Campos basin platforms had already recovered to 81%, their highest level in almost four years. If this improvement can be maintained, then higher conventional output will complement the additional crude being generated by pre-salt wells.

     

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    Email of the day on uranium funds

    I found your observations on uranium on the 19th very interesting. What vehicles for investing in this sector do you think might best suit private investors? There doesn't seem to be any ETC or the like - the closest I've come across is the Uranium Participation Corporation. This is a pure play on the Uranium price, but is currently trading at a hefty premium to NAV of about 26%. Many thanks! 

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    Oil Market Outlook

    Thanks to a subscriber for this detailed report from DNB Markets which may be of interest. Here is a section: 

    Two years ago we warned that the shale oil revolution might be a threat to the most expensive oil projects around the world. We argued that the most expensive barrels risk being pushed out of the market by shale oil, just like the Russian Shtokman project was pushed out of the market by shale gas. Shale oil is not particularly cheap, it seems to require Brent prices in the 60-105 $/b range in order to be developed, but the cost curve is very different from the other resources out there.

    According to the Goldman Sachs report “400 projects to change the world”, which was released on May 16, the cost curve for the shale projects range from 60-105 $/b, however 90% of the curve is flat at 80-85 $/b. According to the Goldman report, it would require an oil price of 40-100 $/b to develop 4 Million b/d of peak production from Deepwater projects, 20-110$/b for Traditional projects to reach 4 Million b/d, 40-110$/b for Heavy oil projects to reach 5 million b/d at peak and 35-110$/b to develop Ultra deepwater at peak production of 8 million b/d. It would however not require a higher oil price than 85 $/b to see peak production of US shale oil reach 10.5 million b/d. This changes the whole industry as there is no longer a requirement for oil prices to increase anymore in order to cover the market need for the rest of the decade. We hence maintain our view of the oil market that we launched two years ago when we claimed that the shale oil is a game changer for the global oil industry.
     

    There are several quotes from Goldmans’ top 400 report we would fully agree with. Here are some of them: “As shale supply continues to grow from the US with no potential upside to oil demand, significant downside risks continue to plague oil prices”. “Shale dominates volumes and pushes high cost developments into irrelevance”. “Assuming the pace of activity in developing US shale oil reserves remains high – a scenario that is likely with oil prices above 85 $/b – the global oil market will continue to be well supplied in our view. We believe this could have material consequences for oil discoveries that sit at the top of the cost curve, which may not get developed”. “The consequence of shale developments is a displacement of projects with break-evens above 85 $/b Brent”.

    It seems the oil majors are now responding to this new situation after pressure from their shareholders. The focus is shifting from volume to project economics and return focused capital discipline. Why would you in the new resource world invest billions of dollars to develop a project that requires 100 $/b or higher to break even? Studies have shown that more than 400 billion USD of global CAPEX is at risk if oil majors choose not to invest in projects that require a higher oil price than 85 $/b in order to be developed. According to Barclays Capital’s E&P spending report published in June, the oil majors will be cutting their spending by 1% in 2014. Total global E&P spending will still grow 6% to 712 billion USD according to the report, but the increase is coming from US independents and from National Oil Companies and not from the oil majors. US CAPEX E&P spending is set to increase by 9.6% as focus continues to shift towards US onshore. US CAPEX spending has now increased from about 100 billion USD in year 2010 to an estimated 164 billion USD in 2014.

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    Tony Abbott expected to sign uranium deal with India on visit next month

    This article by Daniel Hurst for the Guardian may be of interest to subscribers. Here is a section:

    Tony Abbott is expected to sign a deal to sell uranium to India during a visit to the country next month.

    The Australian prime minister’s scheduled visit follows the completion of negotiations surrounding arrangements for the export of uranium, according to multiple news reports.

    Indian officials convinced their Australian counterparts that the uranium would not be used for nuclear weapons, the Australian Broadcasting Corporation reported on Monday.

    The Times of India reported earlier this month that negotiations between the two countries had concluded and the deal was likely to be signed during Abbott’s visit to India in early September.

    The Australian government would not confirm the reports on Monday, but the assistant minister for infrastructure, Jamie Briggs, told the ABC it would be a welcome development if true.

     

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    Musings from the Oil Patch August 18th 2014

    Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB which may be of interest to subscribers. Here is a section: 

    As the EIA analysis pointed out, for the year ending March 31, 2014, 127 major oil and natural gas companies generated $568 billion of cash from operations, but their major uses of cash totaled $677 billion, leaving nearly a $110 billion shortfall. That shortfall was met by $106 billion increase in debt and $73 billion from sales of assets, leading to an overall increase in cash balances.

    The oil and gas industry is facing a challenging future. Regardless of whether peace or war breaks out, the industry is likely looking at meaningful changes in its underlying fundamentals – commodity prices and energy demand. Depending on which way prices go, companies might have more or less cash from operations. On the other hand, whichever way commodity prices go, demand will also change, either positively or negatively. Due to these scenarios, the energy industry will either need to ramp up its spending to find and develop new supplies or it must cut back spending due to adequate supplies. Thrown into the mix is a more difficult and expensive environment for finding and developing new large oil and gas supplies.

    For many in the energy industry who are unconcerned about the above challenges, we worry that they may be looking over the horizon with a risk of falling into the near-term valley. When confronted with what are perceived as merely short-term interruptions to long-term industry trends, it is often easier to maintain one’s focus on these long-term trends to the exclusion of short-term conditions. If one studies the history of the energy industry during the first half of the 1980s, the result of continued long-term focus over concern for short-term ills proved devastating. We certainly hope current conditions are not a precursor to a repeat of the early 1980s, but hopefully by raising this issue we are providing a service to the industry.

     

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    Global Ripple Effects Of American Energy Independence

    Thanks to a subscriber for this highly informative report which ties a number of energy themes together. Here is a section: 

    It’s rare for more than one disruptive change to occur, but the unfolding of seven disruptive changes at once is unique to energy market today.

    Much attention is rightfully being placed on the shale revolution in the US, which is impacting both sweet and sour crude flows starting in North America, but soon after that, the world.

    Not far behind is the deep water revolution, also focused substantially on N. America, but also the Atlantic and Pacific Basins.

    Refinery capacity build-out in the Middle East and East Asia are turning global flows on their head.

    Russia’s move from a lumpy European supplier of oil and gas to a global supplier is having significant repercussions on the balance between pipeline and seaborne transportation.

    China’s preference for pipeline sourcing, is impacting not just Central Asian supply lines, but is reinforcing Russia’s move toward tied pipeline transportation.

    New sources of LNG in the US, Canada and Australia are about to have dramatic impacts on the pricing and flows of natural gas globally.

    The dramatic drop in solar pricing, combined with ongoing drive to boost renewable generation, is already impacting coal and natural gas markets, but is posing questions of economic viability for various high-cost LNG projects. 

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    The next industrial revolution: Moving from B-R-I-C-K-S to B-I-T-S

    Thanks to a subscriber for this report from Goldman Sachs exploring the industrial applications of the Internet of Things (IoT). Here is a section: 

    While IoT spans a variety of industrial sectors, the focus of this report is on Home Automation. Previous reports in this series addressed the applications of IoT to CommTech, Semiconductors and Software. In this report, we address the impact of the IoT on the industrials space, with a deeper dive into Home Automation within the Building Automation opportunity below. We expect a series of follow-up reports touching the following topics.

    Building Automation focuses on improving energy efficiency and occupant comfort/utility within the home or commercial building. Key advantages include improved security, remote monitoring of devices, and energy management.

    Manufacturing applications of IoT could help facilities to reduce downtime through predictive maintenance, have better visibility into inventory and energy management, and improve operational efficiencies overall.

    Resources could benefit from real-time equipment monitoring, energy efficiency (smart meters), and fuel reduction (O&G).

     

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