Daimler is entering into business in the field of stationary energy storage plants with its one hundred percent subsidiary Deutsche ACCUmotive. The first industrial-scale lithium-ion unit is already on the grid and is being operated by the partner companies The Mobility House AG and GETEC Energie AG. For business with private customers in the area of energy storage in Germany, Daimler AG is planning to collaborate with EnBW AG. Daimler is also aiming to enter into cooperation with other sales and distribution partners both in Germany and at international level. "Mercedes-Benz energy storages provide the best confirmation that lithium-ion batteries Made in Germany have a viable future," says Harald Kröger, Head of Development Electrics/Electronics & E-Drive Mercedes-Benz Cars. "With our comprehensive battery expertise at Deutsche ACCUmotive we are accelerating the transition to sustainable energy generation both on the road and in the field of power supply for companies and private households. The technology that has proven its worth over millions of kilometres covered in the most adverse conditions, such as extreme heat and cold, also offers the best credentials for stationary use. We have been gathering initial experience in this field since 2012."

Daimler was in the news last month for its introduction of driverless haulage vehicles to Nevada following the state’s legislation on autonomous vehicles. The company’s entry into the domestic and commercial energy storage sectors is equally ground breaking and suggests it has ambitions of being a pioneer in the future of transportation and energy storage. 

It’s a different calculus for prolific deep-water wells, which can produce far greater quantities of crude over a longer time span than a typical onshore well. The new wells are the latest step in a long-term development plan where much of the investment -- in pipelines, platforms and subsea processing systems -- already has been made.

“When you’re 90 percent complete, you’re not going to stop,” Gheit said.

Gulf of Mexico production will jump from 1.4 million barrels per day in 2014 to an average of 1.58 million barrels per day in 2016, a 13 percent increase, according to Wood Mackenzie projections. The growth in deep-water will add to total U.S. output, which is projected to grow by 14 percent over that period as rising efficiency continues to push shale production up despite declines in drilling.

‘Mega Projects’

Deepwater oil developments are so enormous they are referred to within the industry as “mega projects,” featuring platforms that can cost as much as $2 billion, wells that cost about $300 million to drill, and a system of pumps and processing equipment along the seafloor that can add another $100 million, Sandeen said.

“These aren’t onshore projects where you’re going to produce from a well for a few years,” said Jackson Sandeen, a senior research analyst covering the Gulf of Mexico for Wood Mackenzie. “These are 30 to 40 year projects where a slight bump in the road in the short term is not really going to affect the project in the long term.”

Oil prices have paused following a rally to close the overextension relative to the mean. Shale oil producers which in many respects represent an important source of marginal supply have been cutting back and the number of rigs in operation has collapsed. The reality of unconventional oil and gas drilling means they have to keep drilling new wells due to the early decline rates associated with hydraulic fracturing. As a result they have relative flexibility of supply because they can choose to stop drilling when prices are low only to ramp up production when prices are high. The flexibility, but high debt of unconventional oil and gas drillers contrasts with the expansive balance sheets but inelasticity of supply characterised by the major oil companies.  

More importantly, when we look at total natural gas import volumes and the percentage originating from Canada, we can see (Exhibit 13) how important imports and Canada’s share were until total imports peaked in the winter of 2007-2008 and began to slide. As gas import volumes peaked, the Canadian share declined and other supply sources expanded, in particular LNG volumes from the Caribbean. In recent months, LNG and other gas supply sources declined, leaving Canadian pipeline gas as our sole import volumes.

The dilemma for Canada is that without either more rapid growth in U.S. natural gas consumption or a decline in U.S. gas output, Canada’s ability to ship more of its gas production to the U.S. will be capped, or possibly worse shrink. This is a reason why Canadian politicians need to work harder to open other export opportunities for its natural gas and oil output. Without them, Canada’s petroleum industry will face an extended period of depressed activity as it is highly likely that Canadian natural gas prices will remain depressed and volumes shipped out will show no growth, not a good outlook for either Canada’s economy or its petroleum industry.

A link to the full report is posted in the Subscriber's Area.

The USA’s unconventional oil and gas revolution has done Canada no favours. A failure to develop additional export markets has left the country at the mercy of an explosion in supply from shale oil and gas wells in the USA and it will still be a number of years before even the most optimistic plans for additional export options are realised. This should be a national priority for such a resource dependent country but handwringing about the environmental consequences and continued dependence on a fickle US judiciary has delayed export projects. 

In late 2014, Global Bioenergies started up the fermentation unit for a pilot program to produce gaseous isobutane from renewable biomass sugars such as corn-derived glucose. Gaseous isobutane is a sort of raw material for the petrochemical industry that can then be refined into a variety of plastics, fuels and other applications.

The next step in the process was to run the material through a conditioning and purification process, allowing it to be collected and stored in liquid form under pressure. Some of it was then sent to Germany to be converted into isooctane fuel, creating a pure, 100 octane gasoline.
"To me this is a historic moment," says Global Bioenergies CEO Marc Delcourt. "It is the first time that we have produced real gasoline from plants."

Isooctane is currently used as an additive to improve fuel quality, but could also be used a stand-alone fuel. Audi calls the final, refined form of the fuel "e-benzin" and claims that it burns clean due to its lack of sulfur and benzene. Also, its high grade enables it to power engines using high compression ratios for more efficiency.

Audi will test the fuel composition and conduct engine tests to see how it performs before eventually trying it out in vehicle fleets. Delcourt says he could see it being used in consumer cars on a large scale "very soon."

"We thinking we're bringing green-ness to a field that desperately needs green-ness," says Rick Bockrath, vice president for chemical engineering at Global Bioenergies. "It's basically how we're moving away from an oil-based economy towards something that has a renewable, sustainable future to it."

 

This follows a story from a month ago talking about how Audi produced a diesel fuel from air and water through a chemical process. Today’s story is a further iteration of this concept.

In the last month we have also learned that artificial photosynthesis has been achieved. Here is a section from an article by Lynn Yarris for Lawrence Berkeley National Lab: 

Scientists with the U.S. Department of Energy (DOE)’s Lawrence Berkeley National Laboratory (Berkeley Lab) and the University of California (UC) Berkeley have created a hybrid system of semiconducting nanowires and bacteria that mimics the natural photosynthetic process by which plants use the energy in sunlight to synthesize carbohydrates from carbon dioxide and water. However, this new artificial photosynthetic system synthesizes the combination of carbon dioxide and water into acetate, the most common building block today for biosynthesis.

“We believe our system is a revolutionary leap forward in the field of artificial photosynthesis,” says Peidong Yang, a chemist with Berkeley Lab’s Materials Sciences Division and one of the leaders of this study. “Our system has the potential to fundamentally change the chemical and oil industry in that we can produce chemicals and fuels in a totally renewable way, rather than extracting them from deep below the ground.”

As written above, Saudi Arabia see no reason to let higher cost producers continue to produce while themselves, a low cost producer, should cut oil production in a supply driven downturn. If you cut your output when demand is dropping you do not give your market share to someone else, but if the price drop is due to a supply growth story the situation is different. There were stories also leading up to the last OPEC meeting in November that meetings were held with non-OPEC producers in order to gather support for production cuts also from countries outside of OPEC. It turned out that there was no appetite to contribute from any non-OPEC nations then. The situation may of course however be different this time since now all oil exporting countries have felt the pain of lower prices while that was really not the case last autumn.

Again we are seeing in front of the OPEC meeting, which will be held on June 5, that some OPEC countries are trying to rally support from several non-OPEC producers to contribute to production cuts. Algeria and Venezuela are reportedly in dialog with Azerbaijan, Kazakhstan, Mexico and Oman in order to achieve a collective cut in production between OPEC and non-OPEC producers. The key is however Russia, which is still the world’s largest crude oil producer at 10.7 million b/d. A tiny percentage cut from Russia is more worth than a large percentage cut from Oman to put it that way.

 

A link to the full report is posted in the Subscriber's Area.

There is no sign yet that the Baker Hughes Rig Count has stopped falling despite the fact that oil prices are now trading in the region of $60; having been closer to $45 in March. As a result we don’t yet know what price will encourage fresh expenditure on drilling but we can conclude it is higher than $60. As a result it is still too early to conclude at what point the market will return to equilibrium. If the Saudi Arabians feel the same way they have no incentive to curtail supply.

It is possible that what is happening in China with respect to EVs and hybrid vehicles is a precursor of how America’s vehicle sales and distribution models will work. In response to air pollution and vehicle congestion in major cities, China has begun a strategic initiative to build EVs and is encouraging foreign manufacturers and their partners to join the effort. China expects as many as 40 new EV models go on sale in the country this year, triple the number of new EV models available two years ago. As described in an article in Business Week, Toyota Motors (TM-NYSE) will only market an EV in China as it is committed to hydrogen-powered vehicles as a better alternative to EVs elsewhere. In fact, its dedication to hydrogen-powered vehicles is why Toyota ended its all-electric Rav4 EV crossover partnership with Tesla Motors, Inc. (TSLA-Nasdaq).

China has new emission guidelines that call for a 28% improvement in average per vehicle fuel consumption by 2020, something that likely requires manufacturers to embrace plug-in EVs. Since China controls the permitting of new manufacturing facilities, automakers are almost forced to embrace EVs if they want to have plants capable of manufacturing new vehicles. According to an analyst with A.T. Kearney in Shanghai, China, all the new EV models coming to market may enable the industry to get 1-2 million EVs and other new energy vehicles on the country’s roads by 2020. That achievement, however, will still fall well short of the government’s target of five million EVs being on the road.

While China may be the model, the technology still is short of delivering a reasonably-priced EV with a traveling range similar to that of an ICE vehicle, or roughly 200 miles on a single charge. There is also the issue with fast charging of EVs, as drivers will measure charging times against the length of time they must spend at the gas pump filling up their ICE vehicle. Environmental concerns are an important consideration for EVs, but they were largely bought by people more interested in impressing their neighbors with their statement about environmental concern than their economics. The fact these clean-fuel vehicles are now being traded in for conventionally-fueled vehicles at an accelerating rate suggests that economics are clearly trumping environmental considerations. Whether this is a good thing or not remains to be seen, but the fact it is happening tells us how powerful the pocketbook is for consumer purchasing decisions. It also tells us that auto manufacturers need to address the shortcomings of EVs and hybrids if they want them to become a competitive auto market segment. Then again, those manufacturers may just elect to let the draconian U.S. fuel-efficiency standards force consumers to buy these less desirable vehicles.

 

A link to the full report is posted in the Subscriber's Area.

As the world’s largest car market, China’s regulatory structure will make waves around the world. If China is insisting on electric vehicles in order to contain pollution then car manufacturers will have little choice but to build them. 

An additional thought with regard to range anxiety: A large number of people, at least in Southern California lease they vehicles. In order to get the best price for the vehicle at the end of the lease, mileage has to be kept low. This means that many people rent a car for long trips and use their own car for commuting. I wonder if it is conceivable that the same model will expand beyond SoCal with the advent of electric vehicles which may or may not have overcome their range issues within the next decade. 

SMA Solar Technology AG, a German solar company that’s cutting a third of its staff to reduce costs, rose to a three-week high in Frankfurt after first-quarter sales jumped and losses narrowed.

SMA climbed as much as 5.9 percent to 14.50 euros, the highest intraday level since April 23, after saying sales grew 28 percent to 226 million euros ($254 million) and a loss on earnings before interest and taxes narrowed to 5.4 million euros. Sales were driven by large-scale solar projects in North America, Japan, the U.K. and Australia, it said.

“With the sales generated and the order backlog at the end of the first quarter, we have already achieved more than 60 percent of our sales target for the year,” Chief Executive Officer Pierre-Pascal Urbon said. “The earnings situation developed better than planned, partly due to the reduction of fixed costs already initiated and to exchange rate effects.”

 

Solar cells produce direct current but if you want to it to power your home, heat your water or sell electricity back onto the grid it needs to be inverted into alternating current. Therefore everyone who buys solar cells must also buy an inverter. While SMA Solar is a global leader in manufacturing inverters it is not the cheapest. 

David posted an article from the Telegraph on Monday highlighting the role silver plays as a conductor in solar cells. Considering the fact that silver suffered from a loss of demand with the demise of photographic film, the potential for growth in another industrial sector is a potentially important bullish catalyst. In order to gain some additional perspective on just how much of a growth sector this might represent for sliver there are two key considerations. The first is demand growth projections which are bullish and second the capacity for technological innovation which is potentially bearish.

New Energy Technologies Inc (WNDW US Equity) 2.0240  has recently changed their name  to SOLAR WINDOW TECHNOLOGIES.(WNDW US Equity) 2.0240   They are closer to production than  Ubiquitous Energy

Thank you for pointing out this name change which has a more marketable ring to it than New Energy Technologies. I've been watching the company for a number of years. If I recall correctly T.Boone Pickens was an early investor and I learned of the company following an interview he gave on CNBC 

I've been watching the share since in the hope they would come through with a marketable product. 

Besides Prince Mohammad bin Salman’s role as minister of defense, which to date has not been a monumental success as the battle with the Iranian-backed Houthi rebels in Yemen has produced little other than destruction of that country and a humanitarian disaster, he also has been handed responsibility for the council dealing with economic reform. King Salman appointed Labor Minister Adel Fakeih, a former chairman of Savola Group, a food company, as minister of economy and planning. In January, King Salman appointed Azzam bin Mohammed Al-Dakhil, a board member on several private companies, as minister of education. He also named Mohammed Al Jadaan, an advisor to Morgan Stanley and Clifford Chase in Saudi Arabia, to head the capital markets authority. This is quite important as on June 15th the country’s stock exchange will open to direct foreign investment. Saudi Arabia will become one of the largest emerging market indexes available to investors.

And

Two trends in the crude oil trading market will help shape the future of oil prices. One is the action of commodity traders who seem to have thrown in the towel in late March on their bets that oil prices would continue to fall. (See Exhibit 17 above.) The traders have since added to their long trades, meaning they expect prices to continue rising. But the ETFs for oil have suddenly witnessed huge outflows of money that will put downward pressure on crude oil prices as futures contracts, which the funds hold, are sold to meet the redemptions. The Wall Street Journal reported that one ETF, the United States Oil Fund LP, experienced a $2.7 billion cash outflow in April. That fund was holding about 11% of the June crude oil futures contracts’ total open interest. Will the commodity traders tossing in their towels be the buyers of the contracts the ETFs are selling? If yes, then oil prices will not retreat. If the answer is no, then look for near-term downward pressure on oil futures prices.

 

A link to the full report is posted in the Subscriber's Area.

Saudi Arabia remains in a state of transformation both politically and economically as it responds to the elevation of a new generation to power, continued strife along just about all of its borders, energy price volatility and a massive young population. Opening up the country to direct foreign investment raises the question of what foreigners might be allowed to buy? The stock market is a natural destination for investment flows. 

If the storage breakthrough is coming, it seems obvious it would happen in California, which has long led the U.S. in supporting alternative energy. The state has the most demanding fuel-efficiency standards for cars, as well as incentives that have made it the biggest market for solar power in the U.S.

California “is often a lab” for the rest of the country, said Brian Warshay, an analyst at Bloomberg New Energy Finance. It will “continue to be so on the storage front.”

Older methods of trying to store power have existed for decades, including pumped hydropower facilities in which water is sent to higher elevation reservoirs and released through lower turbines to produce electricity when demand is high.

 

Here is a link to Tesla’s website where they highlight some of the key features of the Powerwall battery. Perhaps the most important consideration today is that almost no one has a battery in their home and that in a decade it could be commonplace. I reviewed the residential battery sector on April 23rd. 

As much as smoothing out supply and demand curves for electricity use in the home are interesting, the industrial and utility sectors are just as exciting. 

Sunfire claims that analysis shows the properties of the synthetic diesel are superior to fossil fuel, and that its lack of sulphur and fossil-based oil makes it more environmentally friendly. The overall energy efficiency of the fuel creation process using renewable power is around 70 percent, according to Audi.

"The engine runs quieter and fewer pollutants are being created," says Sunfire CTO Christian von Olshausen.

The fuel can be combined with conventional diesel fuel, as is often done with biodiesel fuels already.

The Dresden pilot plant is set to produce about 42 gallons (160 l) of synthetic diesel per day in the coming months, and the two companies say the next step is to build a bigger plant.

"If we get the first sales order, we will be ready to commercialize our technology," von Olshausen says.

Sunfire anticipates that the market price for the synthetic diesel could be between 1 and 1.5 Euros per liter, which would be nearly competitive or a little more expensive than current diesel prices in Europe, but the actual figure will be largely dependent on the price of electricity.

 

One of the issues hydrogen fuel cell and similar technologies face is that they are dependent on the availability of cheap electricity to drive the process of separation or combination. The commercial utility of a water-to-diesel project as outlined above will be contingent on the cost of electricity coming down. As such the improving efficiency of solar cells and improvements in battery technology represent a major step forward for such technologies as the cost of electricity would be free from volatility and could conceivably trend lower in real terms over time. 

Jackson Family Wines, based in Santa Rosa, has a new partnership with Tesla involving battery storage and several vehicle charging stations, according to the February issue of Wine Business Monthly. The winery declined to comment.

Mack Wycoff, Wal-Mart’s senior manager for renewable energy and emissions, said the company is intrigued by energy storage. “Instead of pulling electricity from the grid, you discharge it from the battery,” he said. “Ideally you know when your period of peak demand is, and you discharge it then.”

Mike Martin, Cargill’s director of communications, declined to provide details about how the company plans to use Tesla batteries at the Fresno plant. The 200,000-square-foot facility, one of the largest of its type in California, produces nearly 400 million pounds of beef each year.

Janet Dixon is director of facilities at the Temecula Valley Unified School District in southern California, which plans to install solar panels at 20 of its 28 schools this summer. Dixon said that SolarCity is the solar provider, and five of the facilities will have Tesla batteries.

“We spend roughly $3 million a year on electricity, and most of that is lighting and air conditioning,” said Dixon. “We are going solar to reduce our overall costs and the battery storage should help us manage our peak demand.”

Tesla trades on aggressive multiples. Since its car sales are a fraction of even the smallest auto manufacturer, it will be quite some time before the company will compete on that front even if one assumes that large numbers of people will be driving electric vehicles 10 years from now. Batteries are a much bigger story for Tesla which is why they are investing so much capital in building a “gigafactory” which they anticipate will deliver the economies of scale necessary to drive down the cost of their products.

At the present moment almost no one has a battery in their home. As solar technology improves and the prospect of containing volatility on energy spending becomes a realistic possibility demand is likely to increase. At the present moment the solar cells companies like SolarCity are installing in homes are not particularly efficient. However, as the efficiency rates of laboratory tested products reach commercialisation the energy generation capacity of one’s home will rapidly improve. Therefore the efficiency of solar and the potential demand landscape for home batteries are linked. 

Today I listened to a presentation by Torbjørn Kjus, oil analyst at DNB Markets. He has become quite a guru in the last years so it was interesting to hear what he had to say. Interestingly, after having been possibly the most bearish oil price analyst for quite some time, he is now among the most bullish forecasters, see pages 7-9 in the presentation. He believed that the oil producers would continue to cut investments and particularly exploration costs, even if we see a move to $70-80 bbl. The majors will prefer to maintain dividend payouts. This will be particularly painful for oil services. As such one should expect oil producers to gain more from any oil price rise, rather than oil service companies.

Thank you for this topical report and informative email. With oil prices stabilising above the psychological $40 level and as the Dollar unwinds its short-term overbought condition it makes sense to be more positive on the oil prices for at least as long as it takes to unwind the oversold condition relative to the 200-day MA, which at present is near $72.

Here is a summary of the arguments set out in the above report:

We came away with several impressions from the two presentations and our discussions with fellow attendees. First, as we mentioned earlier, the vultures who circle over every disastrous industry are circling over energy with high expectations that road-kill victims will soon be available. Second, there are a lot of smart investors looking for the right opportunity to “buy into the energy industry at the bottom.” To us, that means there is too much money chasing a limited number of quality investments. That also likely means pricing on deals initially will be too high. The private equity investors believe these early investors may have to wait longer for the returns they are traditionally expecting. Fortunately, or unfortunately, the availability of public money is delaying the typical industry cycle pattern for private equity returns.

The uniformity of thinking among private equity players is a bit scary. Group-thought is usually not a successful strategy. The volume of public capital is not only surprising, but discouraging if one believes the industry needs to experience pain before a true recovery can begin. Lastly, in looking at the presenters and the audience, there were very few present that experienced the 1980’s forced re-structuring of the energy business following the bullish experience of the 1970’s. In our discussions that day, we encountered another old-timer who referenced the 1980’s downturn starting in 1982, three years before when most who look at the industry’s history think it began. We were there then, and this guy had it exactly right. This industry is headed for significant change.

 

A link to the full report is posted in the Subscriber's Area.

One of the problems faced by fundamental or value investors at a time when interest rates are low, liquidity abundant and valuations elevated is that there is a dearth of opportunities. When a decline such as we have seen in the energy sector occurs, they have little choice but to deploy capital because there are so few other low prices opportunities. This at least partially explains the ease with which private equity firms have been able to raise capital. The problem is that with so much money chasing opportunities prices will rise for troubled assets and the eventual rationalisation of the sector will be delayed. 

Last week’s event was another enjoyable visit to Singapore and was an apt time to ruminate on Lee Kwan Yew’s legacy of turning a tropical backwater into a first world private banking and high end manufacturing centre. Delegates came in from Argentina, Australia, Japan and of course Singapore which led to some interesting and varied discussions.

Singapore’s stock market is being led higher by the banking sector and shares a high degree of commonality with Taiwan and South Korea. The Index is somewhat overbought in the short-term and some consolidation of recent gains in looking likely. However a sustained move below the 200-day MA, currently near 3400, would be required to question medium-term scope for additional upside.

As one might imagine the main topic of conversation was on the outlook for the Asian region not least following China’s explosive breakout over the preceding three weeks.  Delegates were also interested in the outlook for the European region and we also looked at the S&P 500. We looked at the oil price and a number of related instruments. We also looked at gold prices and a number of miners, select Singapore shares as well as a wide range of international bank shares. We also had a wide ranging discussion on currencies. 

The four biggest private-equity firms have raised about $30 billion to invest in energy deals. They don’t all agree on how to spend that money.

Carlyle Group LP is prepared to bet that oil prices have bottomed out and sees now as the best time to deploy its money, co-founder David Rubenstein said last week. Apollo Global Management LLC says the sell-off in oil isn’t over yet and the highest-returning deals are still on the horizon.

“There will be attractive opportunities to buy now,” Rubenstein said March 23 at the SelectUSA Investment Summit in Washington. Greg Beard, who leads energy investing at Apollo, sees a different timeline: “The worst, the problems, are yet to come,” he said in an interview last month.

Private-equity firms are trying to take advantage of crude’s 54 percent plunge since June, which has made targets cheaper. Carlyle, Apollo, Blackstone Group LP and KKR & Co. raised about $30 billion in the past 18 months for energy- related deals.

How and when they spend that money depends on their view on the future direction of oil. Apollo, led by Leon Black, has recently bought debt of companies struggling to meet their repayments because the firm expects oil will remain at multiyear lows, potentially allowing it to take control later. Carlyle has raised billions to acquire companies in leveraged buyouts because it expects oil to start rising, allowing it to sell its holdings at a profit later.

“Oil prices will come back a bit,” Rubenstein said. “If you can buy now at relatively low prices and hold on for a few years, you’re going to do quite well.”

 

The speed with which the major private equity firms have been able to raise large pools of capital to invest in the energy sector is a testament to just how much liquidity is still sloshing around the system. There are plenty of opportunities to acquire attractive assets as overleveraged players are squeezed by lower than expected prices for both oil and gas. The fact that private equity has already become so active suggests they will aid in base formation development. However base formation development and recovery are not the same thing. 

The facilities will be replaced by four gas-fired stations with capacity to supply 2.6 times more electricity than the coal plants.

The closures are part of a broader trend in China, which is the world’s biggest carbon emitter. Facing pressure at home and abroad, policy makers are racing to address the environmental damage seen as a byproduct of breakneck economic growth. Beijing plans to cut annual coal consumption by 13 million metric tons by 2017 from the 2012 level in a bid to slash the concentration of pollutants.

And

Nationally, China planned to close more than 2,000 smaller coal mines from 2013 to the end of this year, Song Yuanming, vice chief of the State Administration of Coal Mine Safety, said at a news conference in July.

 

I’ll be stopping off in Beijing on my way to Singapore next week and I’m looking forward to seeing first-hand what measures, if any,  have been taken to tackle the pollution problem. Replacing coal fired power stations with natural gas plants is a hugely positive development which is likely to have some far reaching repercussions. 

As small U.S. oil producers struggle to remake their business models, the bankruptcies are already beginning to be announced with Quicksilver (KWKA-OTC), a Barnett gas shale producer being the most recent company to file for court protection. Continued low natural gas prices and now low oil and natural gas liquids prices are straining the finances of E&P companies, and in some cases oilfield service firms. We are seeing frequent announcements of E&P company asset sales, capital spending cuts and employee layoffs. We also see numerous announcements of companies hiring advisors signaling that more restructuring activity is on the horizon.

Indicative of the challenges facing energy companies with substantial debt loads is shown in Exhibit 14, which plots the rates for the high-yield (HY) debt market overall and for the energy sector within that market. As shown, immediately before global oil prices began to slide last year, the spread between energy HY and overall HY yields was almost non-existent. As oil prices fell at the end of 2014, the energy HY rate soared as the financial weakness of highly leveraged energy companies was highlighted.

The most surprising phenomenon (for us) this year has been the receptivity of public equity and debt markets to offerings from energy companies. As Dealogic has reported, so far this year, energy equity offerings have accounted for 12% of total U.S. equity issuances, or roughly $8 billion. The firm also reports that the pace of energy debt issuance has remained consistent with the pace the sector experienced over the past five years, as companies have sold $5.6 billion in new bonds. It appears investors are happy to back energy companies with the expectation crude oil and natural gas prices will rise from current levels in response to global energy demand growth and prospects that supply additions will be limited or even decline, as producers cut back their drilling. How much this view is shaped by a hoped-for-cut in output this spring by OPEC, Russia and Mexico that would shoot oil prices sharply higher is unknown, but we suspect that possible scenario does play a role.

 

A link to the full report is posted in the Subscriber's Area.

WTI crude oil prices have at least stabilised in the region of $40. However, a meaningful catalyst in the form of sharply lower output or significantly above target demand will likely be required to spur a return to demand dominance beyond the short term. The wide divergence between current pricing and where oil was expected to trade when so much money was invested in additional supply from expensive and technically difficult regions is undoubtedly causing problems for less well-capitalised companies. 

There will be additional bankruptcies and private equity firms are eager to make acquisitions at distressed valuations. However an additional perspective is to conclude the only way companies have a chance of meeting their debt obligations is to increase output and that supply has to get to market. 

Consider the crash effort at the Joint Center for Energy Storage Research in suburban Chicago. Within five years, researchers want to create one or more battery types that can “store at least five times more energy than today’s batteries at one-fifth the cost,” according to George Crabtree, an agreeable silver-haired scientist who runs the U.S. Energy Department-backed battery-research skunk works.

Harvard University, the Massachusetts Institute of Technology, leading-edge technology companies like Elon Musk’s Tesla Motors Inc. and scads of startups are getting into the act. Some are seeking to double the capacity and dramatically cut the costs of the lithium-ion battery, the standard in iPhones and electric vehicles. Others are working on mega-scale battery systems using novel chemistries that could cheaply store enough energy to help power entire cities.

Battery entrepreneurs have begun to even talk like revolutionaries. “The ability for a battery company to change the dynamics of the world is what has got us excited,” says Bill Watkins, chief executive officer of Imergy Power Systems Inc., a Fremont, California, startup working on utility-scale batteries. “We can actually make a big difference here. I call it democratizing energy.”

As the former CEO of Seagate Technology Plc, the Silicon Valley digital storage maker, Watkins can speak from experience about tectonic technology shifts. In 1980, a Seagate five- megabyte hard drive that rendered floppy disks obsolete was a $1,500 PC add on. These days, drives holding two terabytes of data -- equivalent to two million megabytes --  can be had for a retail price of under $200.

What’s primarily driving the battery revolution is the phenomenal growth of rooftop and other forms of solar energy and an awakening by renewable energy advocates that storage is the lagging piece of the transformative puzzle. Solar now powers the equivalent of 3.5 million American homes and accounted for 34 percent of all newly installed electricity capacity last year.

Wind supplies enough electricity for the equivalent of about 14.7 million U.S. homes, about the same as 52 coal-powered generating plants, according to the Wind Energy Foundation.
An exponential breakthrough in battery capacity and cost would bulldoze the limitations to adopting renewable energy on a massive scale, be a potent weapon to fight climate change by lowering carbon emissions and potentially bring billions of dollars in profits, never mind fame, to the winners. The knock on renewables is that while fossil fuels keep the power on all the time, solar fades when the sun doesn’t shine and wind power fizzles when the wind doesn’t blow – unless you have a way to store the excess for when you need it.

“What’s holding back solar and wind isn’t their availability but the fact that the technology to generate renewable energy has lept far ahead of the capacity to store and deploy it round the clock as needed,” says Crabtree of the Joint Center project, which is run out of the federal Argonne National Laboratory.

Prophesies of energy revolutions always come with caveats, of course, and some researchers note that an exponential breakthrough in battery storage and cost has been forecast for more than a decade and still hasn’t arrived. “Of all these other battery technologies people promote, how many of them are real?” says Jeff Dahn, a professor at Dalhousie University in Nova Scotia who continues to plug away at making stronger and cheaper lithium-ion batteries. “All that remains to be seen.”

 

When we first started writing about the massive investments in battery technology as early as 2010 there was a great deal of enthusiasm about how batteries were going to make the case for renewable energy more compelling than ever. However, the difficulty of innovating in the chemical sector and the lead time in bringing new methodologies to market was underestimated. 

A link to the full report is posted in the Subscriber's Area. 
 
Please note: All data quoted above originates in Bloomberg. We realise that some of the data displayed is inaccurate for some indices, particularly where ADRs are included. However, I have endeavoured to remove the most problematic indices. We publish these tables because the data is generally accurate and going forward we will continue to weed-out the less reliable data sets as subscribers highlight them for us. The P/Es quoted by Bloomberg are exclusively based on operating earnings.) 

Despite the recent drop in oil price, we expect solar electricity to become competitive with retail electricity in an increasing number of markets globally due to declining solar panel costs as well as improving financing and customer acquisition costs. Unsubsidized rooftop solar electricity costs between $0.08-$0.13/kWh, 30-40% below retail price of electricity in many markets globally. In markets heavily dependent on coal for electricity generation, the ratio of coal based wholesale electricity to solar electricity cost was 7:1 four years ago. This ratio is now less than 2:1 and could likely approach 1:1 over the next 12-18 months.

Electricity Prices are Increasing, Despite Nat Gas Price Swings
Peak to trough, average monthly natural gas prices have decreased ~86% over the past 10 years. Yet, during this time period, average electricity prices have increased by ~20% in the US. The main driver for rising electricity bill is that T&D investments which represent 50% of bill have continued to ramp and have accelerated recently. In 2010, T&D capex levels of for US Utilities ~$27B were ~300% higher than 1981 levels. We expect electricity prices worldwide to double over the next 10-15 years making the case for solar grid parity even stronger.

Solar System Costs Could Continue to Decline
The economics of solar have improved significantly due to the reduction in solar panel costs, financing costs and balance of system costs. Overall solar system costs have declined at ~15% CAGR over the past 8 years and we expect another 40% cost reduction over the next 4-5 years. Yieldcos have been a big driver in reducing the cost of capital and we expect emergence of international yieldcos to act as a significant catalyst in lowering the cost of solar power in emerging markets such as India.

 

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This is a fascinating report not least for its international scope and estimates of where solar has already reached grid parity. China is where solar has the greatest potential to impact power production for two important reasons. The first is that the world’s largest solar cell manufacturers are Chinese. The second is that China has some of the worst pollution in the world. 

A documentary film released online over the weekend by Chai Jing, discussing the causes of China’s poor air quality, has gone viral with more than 120 million hits to date. If domestic Chinese people are as outraged at the total absence of environmental law enforcement as Mrs Treacy there is going to be a major discussion about the environment. 

As the company’s first foray into selling directly to the home energy storage market, the batteries are expected to get plenty of attention just by virtue of the attached Tesla label. And it should be an improvement from the home batteries Tesla has been quietly supplying to its sister company, the solar panel maker SolarCity, located up the road from Tesla in San Mateo, California. Those batteries are currently available in select markets within California, and only through SolarCity. The new batteries would be more widely available.

Tesla would face plenty of competition for their batteries, with names like Bosch, GE and Samsung involved. Honda has unveiled a demonstration smart home that features a rechargeable home battery, along with an electric vehicle, solar panels and geothermal heat pump, and is driven by an energy management system.

Researchers from both Harvard and MIT have developed flow batteries for renewable energy storage, while Bloom Energy’s fuel cell boxes act as a power source as well as an energy storage device.

One area where Tesla might stand out is in cost. Tesla assembles its battery packs from battery cells provided by Panasonic, and is about to do it on a massive scale as soon as 2016 at its gigafactory currently under construction in Nevada. Such an economy of scale – producing 50 gigawatt-hours of battery capacity each year – is expected to push the company’s car battery costs down by 30 percent. Based on the same technology, Tesla's home battery costs should come down as well.

 

The same efficiency gains observed in how Moore’s Law is applied to semiconductors can also be seen in solar technology. This has changed how companies perceive the growth of the domestic energy production sector. This requires a much more flexible electric grid and a utility sector that will have to evolve if it is to avoid obsolescence. As the potential to cut one’s personal expenses through the application of technology develop, homebuilders will be happy to see that the benefits of owning a new home equipped with the wide range of modern gadgetry is becoming increasingly convincing. 

The draft rule also would require that new cars be built with steel shells that are 9/16th of an inch thick, people familiar with the plan said. The walls of the current cars, both DOT-111s and the newer CPC-1232 models, are 7/16th of an inch thick.

Monday’s derailment was the second in three days in North America. Canadian National Railway Co. shut its main line linking western and eastern Canada after an eastbound train carrying crude oil came off the tracks in Ontario.

The train of 100 cars, all carrying crude from Canada’s oil-producing region of Alberta to eastern Canada, derailed just before midnight Saturday in a remote and wooded area about 30 miles (48 kilometers) north of Gogama, Ontario, spokesman Patrick Waldron said in an e-mail.

 

There is still a great deal of opposition to building additional pipeline infrastructure in the USA, not least the Keystone project. However, considering the economic benefits of increasing domestic supply the product will find its way to market one way or another. The growth of shale-by-rail has been the primary response to the lack on energy infrastructure serving North Dakota in particular.  This is regardless of the fact that trains carrying such large heavy cargoes run a higher risk of derailing. It is only a matter of time before the sector is more heavily regulated suggesting demand for new upgraded railcars is likely to increase. 

Exports of U.S.-sourced natural gas as liquefied natural gas (LNG) will likely begin within a year’s time, and will ramp up through the 2016-19 period. That much seems certain. What’s less clear is whether the capacity of U.S. liquefaction/export projects will plateau at the roughly 6 Bcf/d in the “First Four” projects now under construction or continue rising higher. Yesterday’s decision by the BG Group to delay its commitment to the 2 Bcf/d capacity of the Lake Charles LNG terminal until 2016 certainly casts doubts on those further expansions. Prospects for additional export projects hinge on a few interrelated factors, including the higher capital costs associated with some next-round projects; the costs and challenges of shipping LNG through the expanded Panama Canal; and the possibility of competing LNG export projects being developed elsewhere, including western Canada. Today we consider these factors and handicap the handful of export projects on the cusp of advancing.

Making a final investment decision (FID) on multibillion-dollar liquefaction and export projects is not for the faint of heart. Once that FID trigger is pulled, there’s really no turning back. But the decision to build a project is in many ways easier than the decision by a Japanese utility or global LNG trader to commit to 15 or 20 years of LNG purchases. After all, if (as has been the case with all U.S. liquefaction/export projects so far) the project’s economics are based largely on long-term take-or-pay liquefaction commitments, the developer is basically assured of recovering the costs of its investment (and making at least some profit) once it has the necessary Sales and Purchase Agreements (SPAs), even if the LNG buyer elects not to use all the liquefaction capacity it has lined up.

An LNG buyer, on the other hand, is committing to pay up to $3.50/MMBTU for liquefaction capacity and—if, as is likely, it uses that capacity--115% of the Henry Hub price of natural gas for the gas that is liquefied. As a result, prospective LNG buyers need to be very sure that any SPA they enter into will work to their benefit over a wide range of possible scenarios, including the possibility (and current reality) of low oil prices that make once-onerous oil-indexed LNG contracts look not so bad anymore.  As we said in Episode 1, the first liquefaction “train” at Cheniere Energy’s Sabine Pass facility in southwestern Louisiana by early 2016 will be supercooling natural gas and loading LNG onto ships for export to Asia and other markets. Three more trains at Sabine Pass will start operating later in 2016 and in 2017, and soon thereafter the Cameron LNG, Freeport LNG and Cove Point LNG liquefaction/export facilities (a total of six more trains) will be up and running too. The LNG production capacity of what we call the First Four (four trains at Sabine Pass, three at Cameron, two at Freeport and one at Cove Point) totals 45 million tons per annum (MTPA)—enough to consume just over 6 Bcf/d of U.S.-sourced natural gas, or about one-twelfth of current U.S. gas production.

 

As a result of the fall in oil prices investment in energy infrastructure is on hold at best. The decline has upended the growth assumptions of major oil and gas companies with the result they will likely need to see evidence of bottoming before they commit to major expenditure once more.  For Asia the fall in energy prices is good news for some of the world’s largest importers i.e. China, Japan and India while it is a mixed blessing for countries such as Indonesia and Thailand. 
 

Another week and another huge drop in the Baker Hughes oil-directed drilling rig count. The speed with which the rig count is dropping has encouraged forecasters to translate the decline into an immediate fall in oil output. The focus of analysts has been on the oil rig decline since the world is absorbed with determining when either Saudi Arabia cuts its production to boost global oil prices from current levels or the American shale industry cuts back drilling sufficiently that the natural decline rate of shale wells eliminates the existing oil surplus.

The chart of the count of active oil drilling rigs since the turn of the century shows an almost vertical decline in recent weeks. The angle of this oil rig decline is sharper than occurred in the 2008-2009. On the surface, this picture would support the view of a rapid decline in new oil production. Below the surface there may be some variances in the pace of decline of the various drilling rig types that could moderate the optimism of a quick production reaction.

In Exhibit 21 we plotted the change in the weekly rig count since Thanksgiving by whether the rigs were drilling directional, horizontal or vertical wells. In the first couple of weeks, there seemed to be little or no reaction to the start of the collapse of oil prices following the Thanksgiving Day meeting of the Organization of Petroleum Exporting Countries (OPEC) at which the members agreed to sustain the organization’s 30-million-barrel a day production level. The announcement of that decision caused one of the largest one-day drops in global oil prices and started the industry on the slide into its current recession.

 

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The energy sector has experienced a sharp decline as oil prices fell and as expansion plans were cancelled or at least re-evaluated. The Baker Hughes rig count offers a representation of just how quick the response to falling oil prices has been. Having cut back on expansion, drillers will now be watching for signs of oil prices stabilising before committing to additional expenditure. 

Saudi Arabia led a decision in November by the Organization of Petroleum Exporting Countries to maintain its collective output target of 30 million barrels a day. The 12-member group, which pumps about 40 percent of the world’s oil, produced 30.9 million barrels a day in January, exceeding its quota for an eighth straight month.

Statoil will deepen spending cuts by 30 percent to $1.7 billion from 2016 and reduce capital expenditure to $18 billion this year from earlier targeting $20 billion, the Stavanger, Norway-based company said Friday. The move followed similar announcements by competitors including Shell, BP and Chevron Corp. that they would cut billions of dollars in investments.

U.S. companies pulled 83 oil rigs out of fields in the latest week, following 94 in the previous week, according to Baker Hughes data.

 

We have long described the peak oil arguments in terms of rising cost of marginal production. If one looks at long-term charts of oil prices we can see that despite volatility and a number of decade-long bull markets, once supply catches up with demand, prices retreat to wherever the cost of marginal production has increased to. 

The above chart highlights that 50 to 60¢ was the level at which demand returned to dominance prior to 1933. After World War II prices were held at $1.80. The 1970s saw a great deal of disruption and volatility but prices stabilised above $10 which represented the point at which marginal supply was no longer viable. The upper side of that 25-year range was around $40 which remains an important level. A great deal of offshore and unconventional oil is uneconomic below $40. Likewise a great deal of the same production becomes highly economic around $100. If history is any guide oil prices could range in that band for a prolonged period suggesting the cyclicality of industry is very much intact. 

“With low oil prices and Petrobras’s financial difficulties, the incentives to lean more on international oil companies to help develop the pre-salt have grown substantially,” the Eurasia analysts wrote about the company’s offshore discoveries. “It is clear that any substitute to Graca is likely to be someone with industry credentials and capable of conducting a ‘house cleaning’ of the firm.”

The scandal has also engulfed Brazil’s largest construction companies, which may bring public works projects to a halt, and threatens the presidency of Dilma Rousseff, who served as Petrobras chairman during some of the time when the alleged graft was occurring.

Foster, a frequent guest at the presidential palace in Brasilia, had offered to resign “one, two, three times” after the company was forced to delay quarterly results because of the scandal, she told reporters on Dec. 17. Foster said then that she would stay in the job as long as the president trusted her.

Rousseff has been a personal friend since the two worked together at the Ministry of Mines and Energy in 2003.

An issue faced by many nationalised industries is that they become subject to the avarice of their politically appointed boards as well as rent seeking public officials. For Petrobras this was particularly poignant since the President of Brazil is a former executive. In the run up to the October election Petrobras rallied in anticipation of Dilma Rousseff losing. Unfortunately for shareholders she won and the additional decline in oil prices contributed to the share more than halving from what was already a depressed level. 

The United Steelworkers union, which represents employees at more than 200 U.S. oil refineries, terminals, pipelines and chemical plants, began a strike at nine sites on Sunday, the biggest walkout called since 1980. A full walkout of USW workers would threaten to disrupt as much as 64 percent of U.S. fuel production.

The U.S. oil rig count dropped to a three-year low of 1,223, Baker Hughes said Jan. 30. Drillers idled 352 oil rigs in eight weeks.

Royal Dutch Shell Plc, Occidental Petroleum Corp. and ConocoPhillips alone said they would reduce spending by almost $10 billion this year.

Chevron Corp. cut its drilling budget by the most in 12 years and said it may delay some shale projects. The company is targeting $35 billion in capital projects this year, from $40.3 billion in 2014.

“Oil production growth should be flat or declining by May or June unless there’s some substantial recovery in oil prices,” James Williams, an economist at WTRG Economics, an energy-research firm in London, Arkansas, said by phone Jan. 30.

 

Falling prices necessitate that those heavily impacted by the decline act. Oil companies cutting investment is an expected response and they will be slow to ramp back up now that they have relearned how swiftly prices can fall when supply exceeds demand. Striking union workers introduces a fresh dynamic and could act as a bullish catalyst if they succeed in withholding supply from the market. 

Brent Crude rallied by an additional $1.80 today to take the bounce to almost $10 from the mid- January low. This is the largest rally since the onset of the decline in June and suggests short covering is underway. Considering the speed and depth of the decline there is ample room for mean reversion and an unwind of the short-term oversold condition. However once this rally has run its course a potentially lengthy period of support building will probably be required before a return to medium-term demand dominance will be in evidence.  

You might think that such striking progress would be widely celebrated, and that people would rush to figure out what is working so well and do more of it. But they’re not, at least not in proportion to the progress. In fact, I’m struck by how few people think the world is improving, and by how many actually think the opposite—that it is getting worse.

I believe this is partly because many people are in the grip of several myths—mistaken ideas that defy the facts. The most damaging myths are that the poor will remain poor, that efforts to help them are wasted, and that saving lives will only make things worse.

I understand why people might hold these negative views. This is what they see in the news. Bad news happens in dramatic events that are easy for reporters to cover: Famine suddenly strikes a country, or a dictator takes over someplace. Good news—at least the kind of good news that I have in mind—happens in slow motion. Countries are getting richer, but it’s hard to capture that on video. Health is improving, but there’s no press conference for children who did not die of malaria.

The belief that the world is getting worse, that we can’t solve extreme poverty and disease, isn’t just mistaken. It is harmful. It can stall progress. It makes efforts to solve these problems seem pointless. It blinds us to the opportunity we have to create a world where almost everyone has a chance to prosper. 

If people think the best times are in the past, they can get pessimistic and long for a return to the good old days. If they think the best times are in the future, they see things differently. When science historian James Burke wrote about the Renaissance in The Day the Universe Changed, he pointed to one source for many of the advances that happened in that amazing period: the shift from the belief that everything was decaying and getting worse to the realization that people can create and discover and make things better. We need a similar shift today, if we’re going to take full advantage of the opportunity to improve life for everyone.

 

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Apart from its deep pockets the Gates Foundation sets itself apart by exuding a sense of optimism that the problems affecting large portions of the global population can be solved within our lifetimes. The rise of China and India has already lifted a billion people out of abject poverty and improving governance is likely to achieve a similar feat in the next decade for even more countries. 

The ECB’s massive QE program will put pressure on the BoE to delay any plans it may have had to raise short term interest rates. Along with its own easy monetary policy, the prospect of recovering demand on mainland Europe should be a positive for the UK’s economy and it may also be subject to additional capital flows since not all the money created by the ECB will stay inside the Eurozone. 

I thought it might be an opportune time to look at the FTSE 350 since its constituents may be among the beneficiaries of ECB largesse. The Index has surged over the last two weeks to retest its peak and a while some consolidation is possible in the current area a sustained move below 3500 would be required to question medium-term scope for additional upside. 

I clicked through the constituents of the FTSE 350 this morning and also created a section for the FTSE All Share REIT Index in the Chart Library. Here is a link to an Excel sheet of the FTSE350’s constituents ranked by sector then by market cap. 
Among Autonomies:

In the banking sector HSBC (Est P/E 10.65, DY 5.27%) has firmed in the region of 600p. It is now testing the 200-day MA and a sustained move below 600p would be required to question potential for additional upside.  

Prince Muqrin is the third youngest son of King Abdulaziz. He is a pilot having been trained at a Royal Air Force college in Britain. He is a former chief of the General Intelligence Directorate and served as a governor of several provinces in the country including the one containing the holy city of Medina. While Prince Muqrin is thought to be a steady hand and close to the king, probably because he is strongly anti-Iranian, the fact that his mother was from Yemen and thought to have been a concubine, introduces a new dynamic into the succession thinking. At the current time, Islamist revolutionaries have seized control of Yemen and are actively fighting Saudi Arabia. We wrote about that development in the context of how Saudi Arabia is being surrounded by Islamist terrorists, which was manifest in the overthrow of the Kingdom’s political supporters in Yemen. The Saudi government admits it ignored Yemen in recent years, which contributed to the power shift and the loss of its allies there. 

At the time Prince Muqrin was elevated to his position as second in line to the throne in 2013, we and others commented that the choice indicated King Abdullah’s focus was on maintaining the historical consistency in the selection process rather than introducing politics into the selection. It also suggested that the King was entrusting Prince Muqrin with the future responsibility for selecting the first Saudi Arabian ruler from the family’s third generation, which will mark a significant event in the history of the country. 

The current fighting between Saudi Arabia and Yemen could present a succession issue within the Allegiance Council as family lines (loyalty) are considered very important in the Islamic world. Is it possible that Prince Mishal, as head of the Allegiance Council, might exercise power to alter the current royal succession line, and not just in dealing with the elevation of Prince Salman? Would he welcome his younger brother as King, or would he rather see the leader come from the next generation?

We have read that Prince Muqrin is not motivated by wealth and because of his strong anti-Iranian views may be more willing to use Saudi Arabia’s oil policy as a weapon against its neighbor. Does that mean he would be more willing to endure low oil prices for longer to ensure that the Kingdom’s Islamist enemies’ economies might be truly broken – possibly even leading to the overthrow of their governments? What about social unrest in Saudi in response to reduced government income? If low prices hurt Russia, would that be a problem? What would it mean for Saudi Arabia’s relations with the U.S.? We guess the Obama administration would be happy to have low oil prices for its remaining time in office as it should provide a powerful stimulus for economic growth. Low oil prices might also be welcomed by the presumed Democratic presidential nominee, Hillary Clinton. It would certainly set back the energy self-sufficiency arguments made by the oil and gas industry and many Republican politicians, including some vying for their party’s presidential nomination, and it would hurt the economies of Texas, Oklahoma and North Dakota, among the handful of leading energy state economies, all states dominated by Republican politicians. 

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When the head of state is 90 one can’t but speculate about succession. When that state is Saudi Arabia, still the most influential oil producer, the stakes rise. As the custodians of Mecca and Medina, the Saudi royal family have a claim to leadership within the Muslin world that no other administration can touch. However it is worth considering that the deeply conservative elements of society that aided the creation of the state also represent a sympathetic ear for forces threatening the nation’s borders. Any new king will face a delicate task in managing the nation’s internal and external challenges. Oil will certainly continue to represent both a tool and weapon in achieving those goals. 

We are directionally bullish to prices, but are revising down our average price forecast for

2015 due to a lower starting point than anticipated in early December
2015 revised down from 70 $/b to 65 $/b - could see prices even well into the 40¡¦s in 1H-2015 (not our base case however), but we expect a sharp price recovery
2020 revised down from 95 $/b to 90 $/b as we expect deflationary pressure in the oil market as global E&P CAPEX is cut drastically and hence create slack in the service industry

The market changed after the OPEC meeting
After the OPEC meeting in November the market will be left to itself until the next OPEC meeting scheduled for June
Prices will have to be low enough to achieve a new equilibrium between supply and demand but the price effect on fundamentals will be somewhat lagged
How far down prices need to decrease is impossible to calculate as the market could easily overshoot to the downside during the adjustment process, but we believe that current low prices are not sustainable for the global oil industry

1H-2015 looks over supplied even with higher demand and lower supply
The market looks to be over supplied in 1H-2015 even after assuming that global non-OPEC production will decrease sequentially through the year and at the same time assuming much stronger demand growth in 2015 than what we have seen in 2014
We expect that by 2H-2015 US shale production will start falling
Our base case is that by the second half of 2015 the worst part of the adjustment process is over and prices will improve

 

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In common with this service, the DNB team have been some the most sceptical of the widely held opinion that oil prices would stay perennially high. Veteran subscribers will be familiar with our refrain that unconventional oil and gas represent game changers for the energy sector but a secular bear market does not happen all at once. It is therefore interesting that the DNB team are now beginning to call time on what has been a spectacular decline since June. 

Here are some exciting news on collaboration between a US nuclear lab and privately held Terrestrial Energy, which seems to have the most advanced molten salt nuclear reactor concept available. This is encouraging news for those of us eagerly awaiting commercialization of new nuclear!

Fyi and disclosure I am invested in Terrestrial Energy.

 

Following on from the above piece, there is no denying that the molten salt reactors currently considered generation IV technology hold a great deal of promise as does the fusion solution touted as possible by Lockheed Martin and others. However, considering the lead time to commercialisation it will be the decade beyond 2020 where some of these promises are fulfilled. 

These advances help to enhance further the future of abundant energy we envisage as the most probably result of a decade of high pricing. 

The weaker ruble has driven inflation to the highest in more than five years while at the same time helping some commodity exporters that make sales abroad while covering their costs in the local currency. Nickel prices may rise 18 percent on average this year, according to Bloomberg Intelligence.

Norilsk pays half its earnings before interest, taxes, depreciation and amortization as dividend, plus a special payout for 2015, according to Bank of America’s research report dated Jan. 5. Analysts also cited its exposure to nickel and palladium as well as an “attractive valuation” as reasons they like the stock. The London-traded shares trade at 5.5 times projected 12- month earnings, less than half the average of 16 global peers, data compiled by Bloomberg show.

“Investors are focusing on non state-run companies that benefit from a weaker ruble, demonstrate strong cash flow and pay dividends,” Slava Smolyaninov, the chief strategist at UralSib Financial Corp. in Moscow, said by phone Monday. “The idea is that they can avoid the sanctions risk that way.”

 

It is open to question whether one really needs to get involved in Russia considering the geopolitical risk attached to the current administration. Falling oil prices have been an enormous benefit for many Asian countries but couldn’t be worse for countries like Russia or Venezuela. The Ruble has bounced from its lows but we do not yet have conclusive evidence of bottoming while the threat of an additional geopolitical deterioration remains non trivial.

I'm finding the current moves in the dollar versus gold to be fascinating. Usually, if the dollar is going up, gold goes down in dollar terms (almost as if gold is a currency, hmm). Right now, both are going up, which of course means gold is really going up in non-USD currencies... suggesting that demand is quite strong.

I'm short again, market-wise... shorted QQQ this morning... so many of the big stocks have made lower highs and lower lows (AAPL, CAT....) and others, (F, SBUX, DE) have 1 or the other. The QQQ now has both. Even the transports (IYT) look toppy to me. Of course the price action will tell...

Lol, this morning oil had a 5 hour rally, which the bobbing heads on TV claim is a bottom... of course it's dropped 1.60 in the past hour or so. Reducing drilling plans for next year does not shut down the rigs currently completing wells (rig count is still not dropping - it will, but these things take a lot of time). Short term, everything still points to increasing supply in the next few months. 

As always, your comments would be greatly appreciated :)
Hope all is well...

 

Thank you for your kind words and this informative email. In an environment where almost every central bank, with the notable exception of the Fed, is increasing supply of fiat currency, the relative attraction of gold tends to be burnished. In many respects deflation is a more bullish factor for gold than inflation since it is less likely to have to compete with higher yielding assets.

For example, while gold experienced a deep decline in US Dollar terms over the last few years it has been confined to a range when redenominated to Yen which has been among the weakest currencies. While gold is holding steady relative to weak currencies it will a more convincing bullish catalyst to reignite medium-term demand dominance against the US Dollar. 
 

The fundamentals of copper do not mirror that of oil. In copper, there is no technological breakthrough which has opened up vast new resources, therefore copper should not suffer the same fall in pricing as that of oil. The fallout from oil has however impacted the overall sentiment towards commodities. However, copper remains a well-supplied market, and a lower oil price in combination with weaker producer currencies will lower the marginal cost support level, which we now estimate at USD5,800/t.

We continue to forecast a surplus market in copper for 2015E and 2016E, which in our view will see prices grind lower. However, we have cut the magnitude of the surpluses in both 2014 and 2015E by 200kt over the course of the year. The big increase in mined supply growth that we had previously forecast has been eroded by the latest round of downgrades to company guidance. Although we forecasts a more substantial surplus in 2016, we think risks are skewed to the downside, given the poor industry track record in delivering growth.

 

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Energy represents a significant cost for mining companies and has been a major contributor to the commodity price inflation witnessed over the last decade. One might expect lower energy prices to be a benefit for mining companies and they are. However the hard reality is this only helps marginal producers to survive longer and therefore prolong the supply surplus.

Oil prices are accelerating lower so energy costs for mining operations have halved since the summer. This has contributed to the recent weakness in the industrial metal prices. The LME Metals Index broke downwards to new three-year lows this week and a clear upward dynamic would be required to check potential for additional weakness. 

Ken Leech, chief investment officer at Western Asset Management Co., has been adding energy assets slowly, including debt from California Resources Corp., an exploration and production company. The Western Asset Core Plus Bond fund gained 3.02 percent after the risk adjustment.

Leech said he sees value in CMBS, residential-mortgage backed securities and U.S. investment-grade corporate bonds. The extra yield investors demand to hold company debt rather government notes rose last year for the first time since 2011 on slower global growth, which reduced returns. That trend probably will reverse this year as the economy accelerates.

 

I highlighted a number of high yield ETFs in a piece before Christmas when they were testing areas of previous resistance. I was led to this investigation by curiosity as to whether they had been affected by the fall in oil prices. What I discovered is that funds like HYG do not hold appreciable quantities of energy sector debt and that the sell-off in high yield was more macro focused. 

In an effort to ascertain what effect the fall in oil prices has had on the debt markets I performed a search on Bloomberg for junk bonds, with ratings below BBB- and in the energy sector. Coal companies, a number of which are at risk of bankruptcy, have the highest yields. 

The EIA later makes the following point about its scenario in which there is even greater closures of coal-fired power plants, which was authored prior to the EPA’s introduction of its new carbon emission restriction plans for existing power plants. “If additional existing coal-fired and nuclear generating capacity were retired, natural gas-fired generation could grow more quickly to fill the void. In recent years, the number of coal and nuclear plant retirements has increased, in part due to a decline in profitability as low natural gas prices have influenced the relative economics of those facilities. The Accelerated Coal Retirements case assumes that both coal prices and coal plant operating costs are higher than in the Reference case, leading to additional coal plant retirements. In this case, natural gas-fired generation overtakes coal-fired generation in 2019, and by 2040 the natural gas share of total generation reaches 43%. In the Accelerated Coal and Nuclear Retirements case, the natural gas share of total generation in 2040 grows to 47%.”

What if there isn’t sufficient natural gas available, at least at reasonable costs? That would create a serious economic hardship on Americans and the American economy. We suspect one immediate remedy would be to ban the export of all LNG from this country. If possible, there could also be some restrictions imposed on gas exports to Canada and Mexico. If the gas shortage proved even more severe, we would probably begin restarting coal-fired power plants, much like the UK is doing this winter at a significant cost merely to ensure that the UK has sufficient power generating capacity available. What would that cost our economy both financially and in greater carbon emissions? Maybe by the time the gas shortages become severe, we will have addressed the storage challenge for intermittent renewable power sources. Building new nuclear power plants might become an option, but we know that they take years to be constructed so they are not a short-term solution. In either case, the EPA is counting on the EIA’s abundant gas supply scenario as it moves forward with power plant shutdowns.

While this debate over gas production forecasts may seem like a tempest in a teapot, its significance should not be understated. The impact on the future economic strength of the United States if insufficient gas resources are available cannot be underestimated. Not only would we have misallocated energy capital for decades, but we would have significantly altered the health of our public utility industry, possibly leaving it so weak it could not meet the needs of its customers, forcing the federal and state governments to have to bail out the industry. Maybe we need a “time out” before we rush to implement the EPA’s plan to restrict the carbon emissions for power plants to the degree that we force the retirement of much of our coal-fired generation capacity. Rest assured that the gas production forecast debate, while seemingly academic at the moment, will become a much more serious and a more mainstream issue in the coming years.

 

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Shale gas has, as predicted, been a true game changer for the energy sector. Let’s look at this question from both the supply and demand sides of the equation. 

On the demand side the EPA is wholeheartedly devoted to the climate change hypothesis. In order to deliver upon commitments to reduce carbon emissions, it is imposing progressively more stringent regulations on coal fired power stations. Since natural gas prices are competitive with coal at current levels this has had little effect on consumers. However it is worth considering that coal is the largest fuel for electricity generation at present and the USA is by far the world’s largest economy. Replacing even more coal with natural gas is going to require a great deal more natural gas than is currently used.

It comes as no surprise that the weakness of the commodity complex and particularly oil has taken a heavy toll on the value of resources companies. As a result they dominate 2014’s laggards. However it is worth considering that this year’s worst performers are often not next year’s worst performers because so much of the bad news has already been priced in. In some cases they can post outsized rallies, at least in percentage terms, because their prices have fallen so much. After all, a $1 rally from $20 is a more influential event than a $1 rally from $100. 

Among the S&P500’s top-10 worst performers this year:

Our country bank analysts have studied the financing of the local energy production chain in 12 Asian markets and in this report evaluate the risks arising from sharply falling global oil prices. For the oil production countries, namely Australia, Malaysia and China, bank lending is primarily extended to the state-owned or globally established MNCs engaging in E&P (Exploration and Production), with some of them engaging in diversified energy businesses; for example, gas, that can help offset part of the losses from falling oil prices. In Australia, banks have set aside economic overlays (3-6% of the exposure) to buffer against potential risks from the worsening asset quality of the mining and energy sectors.

Impact for banks financing refinery businesses and overseas projects
While the refinery businesses of the major oil importing countries (India and Thailand) should benefit from falling global oil prices, the banks have less than 1% of loans pledged to the related industries, implying limited positive earnings impact. For Asian banks, such as Japanese banks, that have financed overseas projects, the borrowers are primarily strong companies with limited default risks.

Indian, Indonesian and Chinese banks historically the best performers
Since 2006, we identified four periods of global oil prices falling by an average of 46% within six months and we observed that global equity indices have been negatively affected, with MSCI Asia-ex JP financial index underperforming the S&P Index by 2%, but outperforming the global MSCI EM index by 4.7%. The best performers were India (+19%), Indonesia (+8%) and China (+4%), while HSBC (-14.5%), Standard Chartered (-21%) and Korean banks (-16%) were the worst. This order of performance is consistent with our preference among Asian financials based on our fundamental analysis.

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A number of Asian markets have been subject to some quite extreme volatility over the last couple of weeks as the impact of meaningfully low oil prices have shaken the status quo. 

Global oil markets are experiencing “temporary” instability caused mainly by a slowdown in the world economy, Oil Minister Ali Al-Naimi said, according to comments published today by the Saudi Press Agency. He reiterated the country’s intention to maintain output amid plunging prices.

“In a situation like this, it is difficult, if not impossible, that the kingdom or OPEC would carry out any action that may result in a reduction of its share in market and an increase of others’ shares,” Naimi said, according to the state-run news agency. Saudi Arabia, the largest producer in OPEC, will stick to its oil policies, he said.

The Organization of Petroleum Exporting Countries decided Nov. 27 to keep its production target unchanged at 30 million barrels a day, ignoring calls from members including Venezuela to curb output to tackle a supply glut. Crude prices, which had already fallen 30 percent for the year by the November meeting, plunged after the decision, extending the drop to 43 percent.

Steady global economic expansion will resume, spurring oil demand, Naimi said, leading him to be “optimistic about the future.” Oil extended gains after the comments.

The oil price remains under pressure as OPEC refrains from any action to support it. As the downtrend becomes progressively more overextended, no one will want to cut supply but some may have to. Some of the more overleveraged oil market participants will likely be under pressure as a result of the current situation. .

Things have changed to the worse after the OPEC meeting

We had assumed a small OPEC quota cut and some deliverance from Saudi/UAE/Kuwait, but the market would still be over supplied

After the OPEC meeting it looks as the market will be left to itself until the next OPEC meeting scheduled for June

Prices will have to be low in order to achieve a new equilibrium between supply and demand but the price effect on fundamentals will be somewhat lagged

How far down prices need to decrease is impossible to calculate as the market could easily overshoot to the downside during the adjustment process

Our base case is that we are close to the bottom of this price cycle now but since the effects of lower prices is lagged the market could overshoot to the downside

We could see the 50’s short term before the market turns

 

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At The Chart Seminar we define a range as an explosion waiting to happen. Prices are either trending or ranging so by definition every range is eventually resolved by a breakout which generally goes farther and for longer than many expect. This is as true of upside as downside breakouts. When applied to the oil market, the tightening of the trading band in the 3-year range suggested that when the breakout came it was going to be emphatic. So what next? 

There is a positive: capex likely much reduced, trading volumes enhanced
Today c15-20% of major IOC capex is on LNG developments. We think much will be deferred in 2015/beyond, potentially a material $10bn plus curb on near term IOC capex. For those with trading businesses (BP & BG) greater access to US volumes gives an attractive, low capital, source of annuity cash flow. 

Other industries?
For Europe, by 2022 70bcm (15% of supply) could come from the US, potentially cutting Russian dominance of Europe markets (to 22% from 33% now) unless significant ground is ceded on price. For European Oil & Gas E&C companies the shift in build to the US represents another nail in their coffin. Euro utility? Falling spot gas helps affordability but curbs UK power margin. 

Why bother writing this report?
LNG matters to the IOCs: long-lived, low maintenance it grows towards 20% of operating cash flows by 2020. With the downstream pressured, this shift has been central to the rebuild of cash cycles at Shell, Total, Chevron and Exxon. Relative winner? BP. A price disrupter and less dependent on Asia, BP is long US gas and short European, a positive given the likely trade flows. 

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A number of the international oil companies (IOCs) have been producing more gas than oil for a number of years which is why they report reserves on an energy parity basis. Chief among these are Exxon Mobil and Royal Dutch Shell. There is no doubt that the US has the gas necessary to supply a substantial portion of the global LNG market but it is questionable at what price this can be achieved and whether today’s wide arbitrage will be sustained once US gas starts to be exported.   

Mining is an energy-intensive industry and lower oil costs have a deflationary impact on producers, according to Macquarie Group Ltd. Copper also declined as a strike was set to end at Peru’s Antamina mine, the world’s sixth-largest copper mine.

“Whatever positive connotations lower energy might have for global growth, the extent and pace of the decline in oil seems the more worrying factor for the moment,” RBC Capital Markets Ltd. said in a note.

 

Shale gas and oil are gamechangers for the energy sector has been a refrain here at FullerTreacyMoney since 2007. Just how much of a gamechanger is quickly coming into focus. Oil is by far the most globally significant commodity because of its utility, portability and energy intensity. Increasing global supply prompted by the high price environment represent a problem for traditional producers. Additionally, rising energy prices were a substantial component in the rising cost of producing just about all commodities. 

Falling energy prices improve the economics of mining operations, allowing greater production. However, in a falling price environment this is not a positive factor. The medium-term result of falling energy prices will be to encourage economic growth and therefore demand but prices could easily fall further before a rebalancing is achieved. 

Hi David & Eoin, I wanted to get FTM thoughts and opinion on where the best investment returns could be had over the next 12 months and what would be the key things to watch for? Thanks for an excellent service 

Thank you for your kind words and your question. This is a topic we cover almost daily in the written commentary and the audio but it is a good time to summarise our views. 

Let’s ruminate for a moment though on the timing of your question. Generally speaking, the last six weeks of the year is given over to thinking about the possibility of a Santa Claus rally and people don’t generally look at the outlook for the next year until the last week of December or the first week of January. It made headlines during the week that Goldman Sachs had released its prognostication for the coming year, which may have prompted your email. However I believe it is worth considering that the stock market is a discounting mechanism and as a bull market progresses we tend to want to discount cash-flows from increasingly further into the future. It is a measure of how strong the market has been over the last month that investors are already planning for next year. Five consecutive weeks to the upside suggest some consolidation is increasingly likely.

Temasek, Singapore’s state investment company, has joined with RRJ, a private equity firm founded by Richard Ong, a Malaysian dealmaker, to purchase $1 billion in convertible bonds to be issued by Cheniere Energy (LNG-NYSE) for financing the construction of its liquefied natural gas (LNG) export terminal. The bonds have a 6 ½ year maturity and carry an annual interest rate of 4.87% and will be convertible into Cheniere’s common stock in a year’s time. RRJ already had an equity investment in Cheniere. This move comes at the same time Asian buyers appear less interested in buying U.S. LNG. We don’t know why they are turning down what is supposed to be cheaper LNG, but we wonder whether they have less confidence that U.S. LNG supplies will be available in the volumes projected, and especially at the current low price that is projected to remain so for many years. It is also possible that Asian gas demand will not grow as much as projected due to slow growing economies, increased conservation and efficiency that trim demand growth, and  other alternative gas supplies being available with long-term, fixed price terms that prove cheaper than U.S. gas volumes. We continue wondering whether the U.S. LNG export terminals will become white elephants just as the LNG import terminals did.

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Natural gas prices are characterised by volatility not least because the demand component of the market is so heavily influenced by weather. This is more important now than in the decade prior to 2012 because in many respects the market has returned to a balance between new gas coming on line, displacement of coal in the power sector and a focus on profitability among drillers. This season’s injection pace is now being put to the test as winter weather arrives early and demand for heating rises. 

Demand from utilities is driving prices higher after uranium entered a bull market in September amid a labor strike at Cameco Corp.’s McArthur River operation in Canada, the world’s biggest mine for the fuel. Kyushu Electric Power Co. this month received local approval for reactors at its Sendai power station to resume operations, clearing the way for the first nuclear plants in Japan to restart as soon as early 2015.

While uranium for immediate delivery is in demand through January, there’s also been a rise in buying interest for distribution of supplies later in 2015, Ux said. It has recorded 22 transactions for 3.8 million pounds this month.

Uranium and nuclear energy is on a “more positive trajectory with a lot of upside to come,” John Borshoff, the chief executive officer of Paladin Energy Ltd., said on a conference call Nov. 13. Global production cuts of 6 million to 8 million pounds are starting to take effect, he said.

 

Increasing tensions with Russia have reduced supplies from that country while the restarting of at least some of Japan’s reactors represents some good news from the demand side of the equation. 

Uranium prices rallied in August to break the almost four-year progression of lower rally highs and continue to extend the rebound. Until recently the majority of related shares have been slow to respond but as metal prices extend the breakout investor interest in the sector is increasing once more. 

The following charts are in log scale in order to highlight the base formation characteristics without focusing on the depth of the prior declines. 

Both companies are hired by oil and natural gas explorers to drill wells and provide services such as hydraulic fracturing, or fracking, which cracks rock to let petroleum flow more freely. Together, the companies will dominate the $25 billion U.S. market for onshore fracking.

The merger also gives Halliburton access to Bakers Hughes technology to boost production in aging wells and its prized oil tools business.

The two companies restarted talks yesterday after initial discussions fell apart late last week, a person familiar with the matter said yesterday. Baker Hughes confirmed the takeover talks on Nov. 13 after media reports of a potential deal.

Talks collapsed a day later, and Baker Hughes released letters in which Craighead took Halliburton’s Lesar to task for refusing to raise his offer and pressuring for a hasty decision by threatening a proxy fight. 

 

If major oil producers cut back on drilling and exploration because they no longer believe oil prices will continue to trend higher, oil service companies necessarily run into trouble. Deep corrections have been evident on almost all oil service companies over the last couple of months as oil prices pulled back. This is creating interesting situations for expansion oriented boards that now see bargain prices among some of their competitors. 

Transocean Ltd., owner of the biggest fleet of deep-water drilling rigs, is feeling the effect of an oncoming glut in the expensive vessels just as crude prices tumble.

The company will delay posting third-quarter results after saying earnings would be hit by $2.76 billion in charges from a decline in the value of its contracts drilling business and a drop in rig-use fees, the Vernier, Switzerland-based company said in a statement today. Transocean, which had been scheduled to report earnings today, fell 7.9 percent to $27.55 at 8:10 a.m. in New York before regular trading began.

Oil’s decline to a four-year low in recent months has caused companies to consider spending cuts, reducing demand for rigs and the rates it can get for leasing them to explorers. Rig contractors had responded to rising demand during the past few years with the biggest batch of construction orders for rigs since the advent of deep-water drilling in the 1970s. Almost 100 floating vessels are on order for delivery by the end of 2017, according to a June estimate from IHS Energy Inc.

“Ouch,” analysts from Tudor Pickering Holt & Co. wrote in a note to investors. The announcement “reflects the reality of this oversupplied floater rig market globally.”

 

A topic of conversation at The Chart Seminar is “How do the majority of market participants predict how a market is likely to trade?” The short answer is that people predict what they see. When prices have been static for a period of time, expectations go down and people assume that the situation will persist. When oil prices were ranging above $100 oil companies and those that service them made decisions based on the situation persisting. 

Kyushu Electric Power Co. today received final local approval to resume power generation at its Sendai nuclear plant in northern Japan, according to a prefecture statement. All reactors in Japan have been shut since a March 2011 earthquake and subsequent tsunami led to a meltdown at Tokyo Electric Power Co.’s Fukushima Dai-Ichi nuclear power plant, the worst nuclear disaster since Chernobyl 

“We have been waiting for this moment for a long time,” David Sadowski, a Vancouver-based analyst at Raymond James Financial Inc., wrote today in a note to clients. “Restarts in Japan will reduce the threat that Japan’s utilities will dump their uranium inventories into the market.”
Sendai’s two reactors are in position to be the first nuclear plants in Japan to resume operations under more stringent safety rules set by the country’s nuclear regulator. 

Officials in Satsumasendai city, the closest community to the reactors, last month voted in favor of allowing restart. Final reviews of construction and safety rules must still be completed.

 

Increased geopolitical tensions with Russia and the prospect of Japan restarting more of its stalled nuclear reactors have both contributed to a firmer tone for uranium prices. The spot index rallied to break a more than three-year progression of lower rally highs by September and spent much of the subsequent month consolidating, before breaking out once more. A sustained move below $35 would now be required to begin to question medium-term recovery potential. 

The U.S. companies believe they have a lot more staying power than many of Saudi Arabia’s partners in the Organization of Petroleum Exporting Countries, or OPEC. Several producers plan on increasing production.

“Saudi Arabia is really taking a big gamble here,” Archie Dunham, chairman of shale producer Chesapeake Energy Corp., said during a telephone interview. “If they take the price down to $60 or $70 a barrel, you will see a slowdown in the U.S. But you’re not going to see it stop. The consequences for other OPEC countries are far more dire.” 

 

Hydraulic fracturing and horizontal drilling techniques coupled with advanced geophysics make exploiting shale oil and gas possible but it is not a low cost production method. Despite oil price weakness, the benefits to the US economy of energy independence suggest the question is more of at what price the balance between profit and loss exists rather than whether these resources are going to be developed. 

A number of companies have spent a great deal of money in securing acreage, leaving them at risk as oil prices decline. This would suggest that larger, better capitalised companies have an advantage in a weak price environment. 

EOG Resources dropped by a third between June and October but has held a progression of higher reaction lows since as it closes the overextension relative to the trend mean.
Conoco Philips and Marathon Oil share similar patterns. 

Chesapeake Energy retested its 2012 lows in October and continues to bounce. It will need to the hold the low near $16 on the next pullback to demonstrate a return to demand dominance beyond the short term. 

The other factor in play now is TransCanada’s plan to ship Canadian oil sands output east from Alberta to the Irving Company refinery and its oil export port in Saint John, New Brunswick. TransCanada formally submitted its 30,000-page application for the 1.1 million-barrel-a-day project, labeled Energy East, to Canada’s regulator, National Energy Board. Once in place, oil sands output could move from Alberta to the East Coast and then be loaded on ships and transported to the U.S. Gulf Coast refining complex for only a couple of dollars more than the proposed tariff to ship it to Texas on Keystone. In a low oil price environment, that cost might be considered an impediment to oil sands export, but it doesn’t appear to represent a significant economic hurdle. As a result, the environmental movement’s argument that by preventing Keystone from being built would prevent Canada from expanding its oil sands business and stepping up its exports would be severely weakened. Energy East requires no U.S. approvals, although it does need Canadian federal government ok and approvals from various provinces. Our understanding is that TransCanada has worked hard to win over those people with rational objections to the pipeline route by relocating the route and adding spurs to refineries in the provinces and export ports. We anticipate Energy East having an easier time winning approval than Keystone has experienced.

We have learned several things from watching the battle over Keystone. The view that environmental politics overwhelms energy economics when the country is governed by the left was reinforced. Additionally, while pipelines represent the safest mode of oil transportation, the recent string of oil leaks from old pipelines has battered that safety image. The spills strengthened the hand of the environmentalists battling Keystone and the images of black oil oozing through people’s backyards, neighborhood streets and bubbling streams is a powerful weapon against the energy business, and the energy companies have not been proactive in trying to change their image. The environmentalists have demonstrated that they have learned how to fight energy projects more effectively through the regulatory and legal systems. Lastly, low oil prices, should they continue for any duration, will disrupt the pace of development of the oil sands – just how much and exactly when remain uncertain – and possibly change the impetus for either or both Keystone and Energy East. In the end, oil sands output will reach markets, but where those markets are may be different

 

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It is in Canada’s national interest to develop an export avenue for its crude oil. Since it has met with such stiff resistance to the Keystone pipeline, exporting via its Eastern border represents the next best thing. With Russian supplies now representing a risk for European refineries there is the possibility that Canadian supply will have more than one market rather than having to depend on demand from the US gulf coast. This may be part of the reason Saudi Arabia has been so keen to preserve its European market share by offering discounts. 

Interestingly, oil services was a hot topic in one of today’s financial newspapers in Norway. A former oil service analyst (seven times oil service analyst of the year in Norway), now asset manager, sold his last oil service stocks a year ago. He believe the trouble for oil service stocks is far from over. Big fundamental problems will take many years to be solved. He says we might see short term rallies but prices will come further down and he won’t consider buying for the next five years. Current oil price drop, and downward pressure on costs from technological development and increased efficiency of shale production are cited as reasons.

Skagen (asset manager) says they are not looking to buy at these levels…

So it may not be over yet…

Thank you for this additional intelligence which highlights how well understood the bearish case is. Considering the depth of the declines posted to date, this is to be expected and it is true that the issues affecting oil and gas services in a declining oil price environment are non-trivial.

We have been tracking IEA´s monthly oil reports for the past 38 months to see how they have forecasted the growth in US oil production. The graph above to the left represents 38 monthly oil market reports from the IEA. When these lines are rising it means upward revisions to production growth. During the past 38 months we have seen 35 upwards revisions. This means that in almost every monthly oil market report issued by the IEA during the past three years the agency has revised its estimated growth in US oil production higher. That is quite remarkable. Something like that has probably never happened before. The forecasted growth for 2014, which was issued last summer (in other words several years into the shale revolution) started at 700 kbd. Now the last IEA estimate is that US oil production will grow 1.4 million b/d in 2014. This is in other words a forecasting error of 100% and at the time of the initial forecast, the agency had already witnessed growth of oil production of about 1 million b/d for both 2012 and 2013. This is not to criticise the IEA. They have not been alone in being too conservative to the US shale oil industry.

The large growth in US oil production has meant that non-OPEC production has been growing faster than 1.5 million b/d for more than a year now. The key growth is as mentioned coming from the US, but also Canada and Brazil are growing their output quickly. In Canada the growth is coming from oil sands production, mainly in-situ projects, but we also see growth in shale oil output from Canada. According to PIRA Energy, Canadian shale oil production has reached about 0.5 million b/d. We expect continued start-up of new projects in Canada in 2015. These will be projects that are not sensitive to today’s oil prices, as the investments have been taken several years ago. Going forward however, the investments in Canadian oil sands are set to suffer on a lower oil price but that will only lead to lower production growth as we approach 2020. Also in Brazil there will be no negative impact on production in the next couple of years due to lower prices. The country continues to ramp up its production from the pre-salt fields in the Santos and Campos basin. Pre-salt production reached a record 532 kbd in September which is 62% higher than the year before. We do however expect larger production growth from Brazil in 2016 than in 2015 as 900 kbd of platform capacity is then set to come on line. This could of course slip into 2017 but it will be coming to the market no matter what happens to oil prices in the coming two years.

 

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Veteran subscribers will be familiar with our view that oil prices are likely to trend lower in real terms over the next decade. The DNB team have been among a small number of analysts to share this view. Unconventional oil and gas remain game changers for the energy sector and this is likely to remain a significant factor for the foreseeable future. 

In 2010, coal was the world’s No. 1 fuel for power generation, accounting for about 45 percent of fuel demand. Though coal use will likely increase by about 55 percent in developing countries by 2040, it continues to lose ground in developed countries – primarily to natural gas and renewables such as wind and solar.

By 2040, demand for natural gas in the power generation sector is expected to rise by close to 80 percent. At that time, natural gas will be approaching coal as the world’s largest energy source for power generation, and coal’s share will have dropped to about 30 percent. Natural gas will actually produce more electricity than coal, reflecting efficiency advantages of gas-fired versus coal-fired power plants.

Increased local natural gas production in North America and elsewhere, along with expanded international trade, is expected to supply the gas for power generation.

By 2040, we expect that the use of nuclear power will approximately double and renewables will increase by about 150 percent, led by wind and hydroelectric power.

 

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It’s hard to think of a more benighted sector than coal. Beset on all sides by obstacles such as tougher environmental standards, slower growth in major markets like China, excess supply, too much debt and low natural gas prices in the USA,  steaming coal has fallen back to test the 2013 lows. 

The U.S. winter will be colder than normal, with the north- central and Southeastern states seeing the “strongest chill,” MDA Weather Services in Gaithersburg, Maryland, said in a report to clients yesterday. The number of gas-weighted heating degree days, a measure of weather-driven fuel demand, will fall short of the previous winter, MDA said.

Temperatures across most of the lower 48 states will be above normal over the next 10 days before returning to seasonal norms across the East Coast and Midwest on Nov. 2 through Nov.6, according to Commodity Weather Group LLC in Bethesda, Maryland.

The low in Chicago on Oct. 30 will be 45 degrees Fahrenheit (7 Celsius), 4 above normal, before dropping a week later to 27, 12 below average, AccuWeather Inc. said on its website. About 49 percent of U.S. households use gas for heating.

 

The natural gas price briefly surged earlier this year in response to the polar vortex that drove outsized demand for natural gas. Once the weather eased prices dropped back and have been drifting lower since. The injection rate for natural gas stockpiles has been aggressive this summer and according to Allen Brooks is back to the highs seen in 2003. Against that background a cold winter represents a potentially bullish argument for prices, but in its absence the benefit of the doubt can be given to continued lower to lateral ranging. 

Oil’s collapse into a bear market is excessive because there’s no oversupply to justify the selloff, according to Goldman Sachs Group Inc.

The bank is “near-term constructive about prices” after they fell too much, too soon, analysts including Jeffrey Currie, the head of commodities research in New York, wrote in a report e-mailed today. While expectations of a glut have driven down crude, the risk of a near-term shortage may increase as forward prices of benchmarks including West Texas Intermediate and Dubai crude discourage stockpiling, it said.

Oil futures slumped to the lowest in four years in London amid the highest U.S. output in almost 30 years and weakening global demand growth. Members of the Organization of Petroleum Exporting Countries are responding by cutting prices, prompting speculation that they will compete for market share rather than reduce production.

“The ‘supply glut’ is not yet here today, it exists in expectations,” the Goldman analysts wrote. “Prices have likely overshot to the downside.”

 

West Texas Intermediate posted an upside key day reversal yesterday and held the advance today. Following such an accelerated decline there is scope for some steadying but market participants will continue to watch Saudi Arabia for signs of a change to their policy of pricing out competitors from their major growth markets. 

“Our compact fusion concept combines several alternative magnetic confinement approaches, taking the best parts of each, and offers a 90 percent size reduction over previous concepts,” said Tom McGuire, compact fusion lead for the Skunk Works’ Revolutionary Technology Programs. “The smaller size will allow us to design, build and test the CFR in less than a year.”

After completing several of these design-build-test cycles, the team anticipates being able to produce a prototype in five years. As they gain confidence and progress technically with each experiment, they will also be searching for partners to help further the technology.

Expectations of when we might have the first viable fusion reactor have been in the range of 25 years away for the last 60 years. What is interesting now is the volume of literature and development in the subject is increasing exponentially and expectations of when we might have the first active reactor are shortening to the medium term. Lockheed Martin is not a pop science organisation so when they say they can do it I’m inclined to take them at their word. On a day when the market is weak, a press release such as this is likely to be ignored by the mainstream media but it is important. http://www.lockheedmartin.com/us/products/compact-fusion.html In the event that fusion is achieved it would change the global economy beyond recognition over the next 30 years. 

Electric-car battery prices already have fallen by 50 percent since 2010 to about $500 per kilowatt hour, and “by drawing on auto-battery technology, battery makers may also be able to supply storage batteries at a lower price,” Citigroup said in a Sept. 25 report. Tesla Chairman Elon Musk said in July that battery packs for electric cars will drop to $100 in the next 10 years. The Tehachapi batteries are supplied by LG Chem Ltd. and are the same type used in General Motors’ Volt.

The Southern California Edison project is part of a push for more wind and solar power in the state, among the sunniest in the U.S. A third of California’s electricity must come from renewable sources by 2020, and mandates also require that the three biggest investor-owned utilities store 1,325 megawatts by 2024. California already has more than 12,000 wind turbines, the most of any state, according to the American Wind Energy Association.

Many of the efficiencies claimed by battery manufacturers have been achieved via scale in manufacturing rather than technological leaps. Tesla’s gigafactory takes this process further by introducing additional economies of scale to further reduce the price of lithium batteries. So far ground breaking innovation has been more difficult to achieve than previously envisaged by companies but one benefit of building utility sized batteries is that power to weight ratios which are so important for car batteries are no longer a consideration.  

But even modest cooperation between many members has broken down, and Saudi Arabia, in particular, has moved to act on its own. While it cut output earlier this summer, other members didn’t go along. Since then, it has dropped its prices.

Each member has a different tolerance for lower prices. Kuwait, the United Arab Emirates and Saudi Arabia generally don’t need prices quite as high as Iran and Venezuela to keep their budgets in the black.

Late Friday, Venezuelan Foreign Minister Rafael Ramirez, who represents Caracas in the group, called for an urgent meeting to tackle falling prices. The group’s next regular meeting is set for late next month.

But on Sunday, Ali al-Omair, Kuwait’s oil minister, said there had been no invitation for such a meeting, suggesting the group would need to stomach lower prices. He said there was a natural floor to how low prices could fall at about $76 to $77 per barrel—near what he said was the average production costs per barrel in Russia and the U.S.

Asia represents OPEC’s largest growth market and has become increasingly important as the USA ramps up production and European demand wanes on economic stagnation. The discounts offered in the last week to secure market share in both Europe and Asia suggest large OPEC members are willing to sacrifice short-term considerations for the longer-term goal of diversifying their client base and to ensure they preserve their competitive advantage relative to less influential producers. 

This market condition won’t last forever but in the short-term major producers, such as Saudi Arabia, are likely to persist until other members are willing to the toe the line on production, pricing and competition. 

The HTR-PM is not to be confused with another ambitious high temperature project underway in China, in which the Chinese Academy of Sciences in Shanghai is developing small prototypes of a salt-cooled, solid fueled pebble bed reactors (Li Fu’s HTR-PM design uses gas cooling) and of a salt-cooled, liquid fueled molten salt reactor. It is targeting a 2019 completion date.

The two projects reflect a drive in China to develop nuclear power as part of an environmental and energy security push. China even has other advanced reactor projects under way. For example, it hopes to operate a “super critical water-cooled reactor” by 2025, NucNet reported. And its current commitment conventional reactors has become legendary. As I wrote recently, whereas China currently operates only 20 nuclear reactors , it has another 28 under construction, an additional 58 planned, and a staggering 150 or so proposed.

It is also stepping up as an exporter of nuclear reactors and technologies to countries including Saudi Arabia and possibly the UK. Its penchant for selling abroad applies not only to conventional reactors, but to advanced reactors as well. In one of his Vienna slides, Tshinghua’s Li noted that the HTR-PM is “suitable for international market” and that its small size makes it “more flexible for developing countries.”

 

The development of Generation IV nuclear reactors represents a bold step forward for the prospects of a future with abundant energy. However, the fact that China is the only country presently willing to commit to experimenting with a variety of potential solutions ensures that not only has it a better chance of solving its energy dilemma but that it will gain a technological lead in what is a highly strategic sector. The deterioration in the price of oil and gas together with political ignorance of and ambivalence to new nuclear suggest that North American and European appetites are likely to remain tepid for developing these technologies. 

The IEA’s comment about how remarkable the decline is, suggests that it did not have a grasp of the magnitude of the impact on oil demand from China’s ending the filling of its oil storage tanks during the past few months in response to the country’s growing economic weakness and financial stress. It would appear that the additional cost of this storage oil was too expensive for the Chinese economy and banking system to bear. Additionally, we believe the IEA’s model assumed too generous an estimate for economic growth in Western Europe and North America during the second half of 2014.

And

Besides the accelerating demand growth against limited non-OPEC supply increase case, the bulls point to the growing cost to find additional oil supplies. They also point to the new dynamic for OPEC, which is the high fiscal cost of their oil output. By “fiscal cost” they mean the price for a barrel of oil that multiplied by the number of annual barrels produced yields income sufficient to cover the cost of running the country’s government. That cost has risen sharply in a number of Middle Eastern and North African countries due to rapidly growing populations (these countries have some of the highest birth rates in the world) and the cost to mitigate social tensions associated with the ethnic struggles (Arab Spring) ongoing within most of these countries – what some of us might call political insurance. A number of analysts have crunched the budget numbers for these countries and created charts such as that below.

What this chart demonstrates is that only Qatar and Kuwait among the OPEC members have fiscal breakeven prices of around $75 a barrel. A substantial volume of OPEC production needs a price somewhere around $100 a barrel for the country to breakeven, while another substantial amount requires prices in the $125 per barrel neighborhood.

A link to the full report is posted in the Subscriber's Area.

There have been a number of headlines pondering the response of oil prices when geopolitical tensions have been so taut. China’s decision that its strategic reserve is large enough represents the withdrawal of a significant source of demand from the market at a time when supplies have been reasonably steady regardless of geopolitical tensions. 

The U.S. on Sept. 12 expanded sanctions against Russia to include OAO Sberbank, the country’s largest bank, because of the fighting in eastern Ukraine. The EU added 15 companies such as Gazprom Neft and OAO Rosneft, and 24 people to its own list of those affected by its restrictions.

In Canada, voting on Cameco’s new labor agreement will happen once workers are back on the job, the United Steelworkers said Sept. 12. The Saskatoon, Saskatchewan-based producer said Aug. 27 it had started shutting down the mine after receiving a strike notice from the union.

An agreement to end the strike will be negative for the uranium sector, Rob Chang, the head of metals and mining at Cantor Fitzgerald in Toronto, said in a Sept. 12 note. The brief shutdown may affect about 900,000 pounds of supply, he said.

The repercussions of the sanctions on Russia continue to be felt across an increasing number of sectors. Locking Sberbank out of large international capital markets is a major impediment to Russia accessing the working capital necessary to fund normal financial markets operations. By comparison, the ban on salmon exports from Europe and Norway has been a boon for the Faroe Islands but in the wider scale of things a pretty small consideration. Russia’s tactical advantages lie in the energy sector and potentially in the cyber sector. 

1. We believe the global Shipping industry is on the cusp of entering a new era of prosperity, driven by:
Improved supply/demand dynamics
Increased fleet utilization
Abundant capital to fund vessel growth

2. We forecast an almost doubling of earnings power in 2016 (vs. 2013) across our coverage universe, driven by:
Increasing spot market rates
Vessel growth

3. We are most bullish on shippers of Dry Bulk, Crude Oil, and LPG/LNG
Near-term: Dry Bulk rates are starting to inflect higher, but are still 55% below 20-year historical average (i.e. more room to run).
Mid-term: Distance between where oil is harvested and refined is increasing, creating significant secular growth opportunities for shippers of crude oil.
Long-term: Demand for LPG/LNG shipping should increase significantly as infrastructure projects come online and export capacity grows.

A link to the full report is posted in the Subscriber's Area.

Generally speaking when shippers have high yields and attractive valuations they are about to engage in a spending spree to purchase new ships which trashes their balance sheets. However, following a period where profligate spending was widespread the supply of new ships is moderating and the credit crisis has curtailed overly ambitious expansion plans. Nevertheless, as the sector reaches equilibrium, catalysts such as improving global trade will be required to reignite investor interest in the majority of shares. 

“I am not really concerned about the prices declining at this short term,” OPEC’s El-Badri said. “I think the price will rebound by the end of the year. When we’re coming to the fall, things will look better.”

Saudi Arabia cut its crude production by 408,000 barrels a day to 9.6 million in August, the biggest reduction since the end of 2012, the kingdom said in a submission to OPEC.

OPEC officials, including Saudi Arabian Oil Minister Ali Al-Naimi, have said they see no urgent need to respond to oil’s drop. Prices “always fluctuate and this is normal,” Al-Naimi told reporters in Kuwait on Sept. 11. Oil will recover as demand for winter fuels climbs, Kuwaiti Oil Minister Ali Al-Omair said the same day. The group is next due to meet on Nov. 27.

‘Huge Decline’
“The huge decline in prices since June has been a major concern to all oil producers,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. “The Saudis have already started to cut output and now we’re getting evidence of further action. The market appears to have found a bottom and the statements are a sign for the buyers to return.”

Russian and OPEC analysts will meet in the spring, Russian Energy Ministry spokeswoman Olga Golant said by text message. “High-level” talks are scheduled for the second half of 2015, according to a joint statement from OPEC and Russia today “I wouldn’t be surprised if the Russians and OPEC cooperated to support the market,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $2.6 billion, said by phone. “It’s in the interests of both parties to keep prices from falling further.”

Oil remains both the most important and most political of all commodities. The actions of OPEC, in supporting prices in the $100 region over the last three-years, have helped sustain the range evident in Brent crude prices. As a result traders have been waiting for a statement from the cartel on what their actions are likely to be with prices testing the lower side. They appear to have their answer. 

Brazil votes next month on whether to reinstate incumbent President Dilma Rousseff or elect Marina Silva. The two are running in a statistical tie, with a Vox Populi poll published last week showing Silva would get 42 percent of votes in a runoff, compared with 41 percent for Rousseff.

“We’re overweight because we’re looking and we’re continuing to look for change,” Landers said in a Sept. 12 interview at BlackRock’s New York office. “We have good reasons to believe that the election will go towards Marina.”

Landers said Silva is signaling that she will allow the private sector to be “in charge of its own destiny,” instead of trying to control every aspect of the economy, and that she will bring inflation down. Rousseff has been using Petrobras and other state companies as fiscal and monetary policy tools, driving their value down, Landers said.

As part of Rousseff’s effort to contain inflation, she limited Petrobras’s ability to increase fuel prices.

If Rousseff wins in October, Petrobras will return to the nine-year low it hit in March, Landers said, and BlackRock would reduce its exposure to Brazil. “We would significantly have to rethink our portfolio,” Landers said. The Latin America fund shrank from $4.5 billion in December on flows.

Petrobras is the second-largest holding in Brazil after Itau Unibanco Holding SA in BlackRock’s Latin America fund. Earlier this year, various BlackRock funds bought 500,600 shares of Petrobras, as the Rio de Janeiro-based company is known, according to data compiled by Bloomberg.

The Brazilian Bovespa Index pulled back sharply from early this month in the aftermath of polls that showed Rousseff with a wider lead than many had expected. This year has seen a number of heavily contested elections which have seen pro-reform candidates assume power. If Brazil votes for Silva it will probably be seen as another green light for foreign investors to return to Brazil after a particularly difficult period. 

Your comment on the Uranium price is of interest to me. Prior to Fukishima , Geiger Counter was very much in vogue. Then came the collapse. I wondered what the view was now concerning the above and perhaps suggest other companies listed in London that have positive chart patterns .    

Thank you for this question which others may have an interest in. Geiger Counter generally runs a concentrated portfolio of high potential explorers and developers although its current holdings are peppered by some larger uranium names.  

I highlighted it as a potentially interesting fund offering exposure to the uranium market on August 22nd. 

WTI for October delivery fell 98 cents, or 1.1 percent, to $92.31 a barrel on the New York Mercantile Exchange. Futures touched $91.80, the lowest level since Jan. 14. Volumes were 8.6 percent higher than the 100-day average. The U.S. benchmark grade traded at a $7.52 discount to Brent, compared with $7.53 at the close on Sept. 5.

“The fundamentals have been bearish and eventually the fundamentals win out,” Sarah Emerson, managing principal of ESAI Energy Inc. in Wakefield, Massachusetts, said by phone. “We’re looking at a weak global market.”

In China, imports fell for a second month as a property slump hurt domestic demand. The trade surplus climbed to a record of $49.8 billion in August as exports rose on the back of increased shipments to the U.S. and Europe.

The 2.4 percent drop in imports compares with the median estimate for a 3 percent increase. Exports increased 9.4 percent from a year earlier, the Beijing-based customs administration said today, compared with the 9 percent median estimate in a Bloomberg survey.

Brent Crude closed out the day close to $100 which has represented an area of support on successive occasions since 2011. Demand growth might be moderating but supply constraints are what helped prices maintain elevated prices over the last few years. This situation is easing as US production displaces imports and as some of the missing Middle Eastern barrels begin to come back to market. 

Once one of the biggest and most powerful oil companies in the world, BP faces years more of uncertainty that will put continued pressure on shares and may open the company to takeover pressure from larger rivals such as Royal Dutch Shell Plc or Exxon Mobil Corp.

Today’s ruling defines the scope of the ultimate payouts, which will be determined after a trial scheduled to begin in January 2015 in New Orleans. If Barbier agrees with the government’s spill estimate of 4.2 million barrels, the payout could ultimately be as high as $18 billion based on federal guidelines for pollution fines. If he sides with BP’s estimate that only 2.45 million barrels spilled, it would reach $10.5 billion.

Barbier has discretion in how the fines are ultimately decided. “During the penalty proceedings, BP will seek to show that its conduct merits a penalty that is less than the applicable maximum after application of the statutory factors,” BP said in its statement.

BP also may be subject to unspecified punitive damages from lawsuits. Legal appeals may prolong the outcome for more than a decade -- Exxon paid the final punitive damages from the 1989 Valdez spill off Alaska 20 years after the incident.

BP failed to sustain the breakout to new highs in late June and encountered resistance this week in the region of the 200-day MA. The next area of potential support is in the region of 425p but a clear upward dynamic will be required to check momentum beyond a brief pause. 

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.

The uranium market still has to recover from the post Fukushima backlash that saw reactors shuttered in Japan and even France retiring some of its older plants. The news flow has been somewhat more positive recently with Australia agreeing to supply Indian reactors. Indian demand represents a significant growth trajectory not least because of the new Modi led government’s development focus. 

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.

 

A link to the full report is posted in the Subscriber's Area.

Petrobras had to raise a great deal of capital to fund the development of the pre-salt discoveries, some of the world’s largest in recent times, as well as the refining capacity to deal with the additional supply. The process of developing these fields has been lengthy but supply is ramping up and the deterioration in the share price moderated as pre-salt supply kicked in. 

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! 

Thank you for this question which may be of interest to subscribers. There were a considerable number of uranium funds listed when uranium prices were surging higher in 2005 and 2006. Many have since been delisted but there are still a small number that are reasonably liquid. 

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.

A link to the full report is posted in the Subscriber;s Area.

We have long defined the bull market in oil prices from the perspective of the rising cost of marginal production. There is plenty of oil to be brought to market if the price is right. Over the last decade, as demand has increased, the marginal cost of additional barrels has risen to meet it. Shale oil represents a truly important development since it was not previously thought possible to extract oil from these formations directly and they are very large. With increasingly large volumes coming through, shale oil represents a significant marginal supplier for the global market. 

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.

 

Despite the fact Australia has the world’s largest deposits of uranium, it has no nuclear power stations and has often had a difficult relationship with its uranium mining sector; with the result that some states and territories permit mining while others don’t. Signing a deal with India for exports is a welcome development for the sector which has been languishing in the aftermath of the Fukushima disaster.

Uranium prices collapsed from their 2007 peak near $140 and, following a relatively brief rally in 2010, extended the downtrend to fresh lows. The recent three-week rally has closed the overextension relative to the 200-day MA but a sustained move above it will be required to begin to suggest a return to demand dominance beyond the short term. 

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.

 

A link to the full report is posted in the Subscriber's Area.

Unconventional shale and deep water oil might be abundant but they are not cheap sources of supply. Together with increasingly strident nationalisation trends across a number of jurisdictions, the cost of delivering additional supplies remains a challenge for oil companies. Over the last twenty years the response of companies such as Exxon and Shell has been to focus on natural gas but again new sources of supply are not cheap when compared with conventional supplies. 

Following an encouraging start to the year’s speaking engagements I am looking forward to our events later this year. . . 

We are also available to conduct private seminars and occasionally agree to speaking engagements at investment conferences and professional societies. 

With regard to The Chart Seminar, 2014 marks a number of changes in how we organise the event.  In order to facilitate more venues we are open to partnering with other groups to market the event. If your organisation would like to arrange a seminar either internally or for your clients please do not hesitate to contact us. .

The remaining dates and venues for 2014 are:
September 29th & 30th The Chart Seminar Chicago - The University Club, 6 E Monroe St, 
November 13th & 14th The Chart Seminar London - Radisson Edwardian Hotel, Leicester Square

If you are interested in any of our remaining venues please contact Sarah Barnes at [email protected]

The full rate for The Chart Seminar is £950 + VAT. (Please note US, Australian and Asian delegates, as non EU residents are not liable for VAT). The early booking rate of £875 for non-subscribers expires two months ahead of the event start date. Subscribers are offered a discounted rate of ¡ê850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.

The full rate for the Global Strategy Sessions will be £450 + VAT). The early booking rate of £375 for non-subscribers expires two months ahead of the event start date.

Subscribers are offered a discounted rate of £350. Anyone booking more than one place can also avail of the £350 rate for the second and subsequent delegates.

Delegates who attend both The Chart Seminar and the Global Strategy Session receive a reduced rate of £250 on the Global Strategy Session.

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. 

A link to the full report is posted in the Subscriber's Area.

We are living through an incredibly interesting period in the energy markets. The high price environment that has prevailed for much of the last decade has translated into a supply response where new supplies and adoption of alternatives will change the complexion of the market for years to come. 

At FullerTreacyMoney, we have been highlighting the return to outperformance of cyclical sectors for much of the year. We have also pointed out that this type of action is often an indication that the cyclical bull market is entering a mature stage. A select group of miners, fertilisers and oil companies have been completing base formations and I thought it would be illustrative to highlight the recent performance of some of the laggards.

 

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).

 

A link to the full report is posted in the Subscriber's Area.

The frivolity of much of the social media space has led some to believe that future productivity gains will be limited. However, the increasing application of new technologies to the industrial sector almost certainly insures that this assumption will prove false. Rapid prototyping, embedded sensors, processors and transmitters are driving efficiencies that are transforming the industrial sector. This is important because productivity growth is a necessary component in the evolution of a secular bull market. It is for this reason that veteran subscribers will be familiar with our continued emphasis, particularly in the Friday audio, that we are in a technological golden age more commonly referred to as the Third Industrial Revolution. 

Russian companies face $3.93 billion of dollar-bond maturities by year-end, data compiled by Bloomberg show. The central bank said it has enough instruments to support individual financial institutions as well as broader financial stability, according to an e-mailed statement. The main consequences related to refinancing are for long-term loans and will have largely a delayed effect, it said.

Shares of Rosneft lost 4.6 percent and Novatek slid 5.2 percent. Government debt risk rose to the highest since May.

Credit-default swaps insuring against losses on Russia’s sovereign debt jumped 27 basis points to 210 basis points, according to data compiled by Bloomberg. A total of 9,726 contracts covering a record $9.8 billion were outstanding as of July 11, according to the Depository Trust & Clearing Corp.

That’s up from about $5.5 billion at the start of 2014 and the sixth most among 1,000 companies and countries tracked by DTCC.

 

The response of Western governments to Russia’s annexation of Crimea and continued involvements in Ukraine has been relatively muted. The Russian administration appears to believe they can weather any economic sanctions that might arise from their actions. They may reason that since the response to date has been limited to personal attacks rather than broad spectrum sanctions, which would run the risk of pressuring global commodity supplies, that sanctions can be viewed as the price paid for the territory gained. 

The shooting down of a Malaysia Airlines flight over Ukraine today has the potential to reignite concerns over the bubbling up of geopolitical risk in the region regardless of whether it is shown to have been a Russian missile that brought it down. This has at least contributed to weakness today in stock markets and the bounce in crude oil from a short-term oversold condition.  
 

Even in Canada, booming U.S. petroleum elbowing out Alberta producers – Thanks to a subscriber for this article by Jeff Lewis for Financial Post which may be of interest. Here is a section: 

So much low-cost gas is expected to flow from the Marcellus in the northeast part of the U.S. , for example, that Nova is in “serious” talks to develop a second pipeline into the region, Mr. Thomson said. Access to U.S. feedstock is “going to be key” in deciding whether to build a second production unit for making high-end polyethylene products at its Sarnia plant, he said.

In the Quebec town of Bécancour, IFFCO Canada Enterprise Ltd. aims to start construction on a $1.6-billion fertilizer plant by spring next year. But the company, majority owned by a unit of India’s largest fertilizer manufacturer and distributor, has warned the project’s future hinges on timely access to low-cost gas, including through the Dawn trading hub in southwestern Ontario, one of the entry points for U.S. gas into Canada.

“At the moment Dawn is the cheaper alternative than Western Canada. I don’t think this is a surprise,” said Simon Pillarella, vice-president, corporate affairs with IFFCO Canada.

“It’s not only us who’s looking for this sort of option,” he added. “Most clients in Eastern Canada are looking for the cheapest way to supply their gas.”

 

The boom in the USA’s production of crude oil, natural gas and various by-products can’t but displace more distant suppliers. The evolution of North American unconventional extraction methods continues to represent a game changer for the energy sector which is having a significant effect on capital investment decisions across the chemical, fertiliser, industrial, refining, pipeline and transportation sectors which in no small part has contributed to the USA’s recovery. . 

Sector completely out of favor due to increasing oversupply - Solid rebound lately to yield stocks with near term cash flow visibility (SDRL, AWDR)

Seadrill’s rebound explained by several positive company specific events (Rosneft deal, Pemex deal, Jupiter contract etc.)

Underperformance in general driven by sentiment, while also company specific events explain Songa’s (balance risk), FOE’s (SPS cost overruns) and Sevan Drilling’s (rig #4) underperformance

A link to the full report is posted in the Subscriber's Area.

The oversupply in the drilling sector referred to in this report has resulted in the majority of related companies trending lower. Just as a similar situation contributed to the underperformance of the US drilling sector in 2010 and 2011, the eventual outcome will be that orders for new rigs will be cancelled and others will be idled which will eventually resolve the oversupply situation. 

OPEC predicted that demand for its crude will decline in 2015 to the lowest in six years as supplies from other producers, led by the U.S., are more than enough to cover the increase in global consumption.

The need for crude from the Organization of Petroleum Exporting Countries will slide to 29.4 million barrels a day next year even as growth in world oil consumption accelerates, the group said in its first assessment of 2015. That’s 300,000 a day less than OPEC’s 12 members pumped in June. It would be the third consecutive annual drop in demand for OPEC crude and the lowest since 2009. The U.S. will provide about two-thirds of next year’s supply growth, OPEC said, amid a shale-oil surge that has made the U.S. the world’s biggest producer.

“Even if next year’s world economic growth turns out to be better than expected and crude oil demand outperforms expectations, OPEC will have sufficient supply to provide to the market,” the group’s Vienna-based secretariat said in the report.

The U.S. has overtaken Saudi Arabia and Russia as the world’s biggest oil producer as it taps shale formations in Texas and North Dakota by splitting apart rocks with high- pressure liquid, a process known as known as hydraulic fracturing, or fracking. Oil prices have remained supported by threats to supplies in OPEC members such as Iraq and Libya, with the Brent benchmark’s loss this year limited to 2.3 percent.

We have referred to the evolution of unconventional oil and gas as a game changer for the energy sector since at least 2008 and the fact that OPEC’s dominance of the energy sector is decreasing is testament to that transformation.

There are two ways to look at this development. On the one hand, new US and Russian production might be at a higher marginal cost than that of many OPEC members but at today’s prices it is helping to contain the risk of price spikes since there is ample supply. 

In its most recent 5-Year Plan (2011-15), the Chinese government laid out an aggressive time table for development of its coal-to-olefins (CTO), coal-to syngas (CTG) and methanol-to-olefins (MTO) industries (Appendix 1-3). 

The economics of China coal-to-olefins (ethylene / propylene) is competitive relative to the world’s naphtha-to-olefins industry (Figure 2, Figure 20 & Figure 92-93). The world’s naphtha-to-olefins industry is Asia-based. Ninety percent (90%) of Asia’s olefin (ethylene) capacity uses naphtha as a feedstock (Appendix 6-10). Asia produces 34% of global ethylene. A fast-growing China CTO industry would displace its own naphtha to olefins industry (24% of global ethylene capacity). Somehow, this strategy does not make much sense; although it would produce short-term China GDP growth. 

The economics of China coal-to-olefins however is not competitive relative to a growing North American and Middle Eastern natural gas-to-olefins industry (Figure 2, Figure 20, and Figure 94). From a cost perspective, a fast-growing China CTO industry would displace its own naphtha to olefins industry but then be displaced itself by a lower-cost North American and Middle Eastern natural gas-to-olefins industry. Somehow, this strategy makes even less sense; except for the fact that it creates plenty of China GDP by both building and then dismantling multiple China industry chains. 

China’s coal-to-olefins and / or coal-to-urea do not make economic sense in a world awash in low-cost natural gas. Notwithstanding, China continues to grow its coal-to industries; maybe on the prospect that the world’s growing supplies of cheap natural gas could be short-lived.

The production of olefins from coal requires an abundance of water (Figure 98) and produces an abundance of CO2 emissions (Figure 102). The addition of one 600k tpa CTO facility in Beijing would increase provincial CO2 emissions by 14%. China’s abundant water resource (Figure 95) is located in the South and South West part of the country; its coal resources are located in the North and North West part of the country (Figure 11-12) – bad luck.  

 

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China has a substantial coal sector which, in common with the global sector, has been under pressure from below trend global growth, increasingly stringent environment regulations and competition from lower cost alternatives (at least in some jurisdictions) such as natural gas. The green light for investment in coal to liquids development appears to be an attempt from some portions of the administration to provide the coal sector with an additional business line in order to preserve its viability.

Quite how viable that is when water and environmental concerns have not been addressed and when the country is also investing heavily in developing its own natural gas reserves raises some important questions about whether this will in fact pan out. 

By the end of last year, 17 nuclear plants were in operation, with a total capacity of nearly 15,000 megawatts of electricity.

At a meeting of the National Energy Commission on April 18, Premier Li Keqiang announced the introduction of new nuclear power plants along the east coast "at a proper time".

Earlier this month, the Ministry of Environmental Protection released the environmental impact statements for two new nuclear power plants, one in Guangdong Province and another in Shandong, but this is still not enough in the longer term.

"China's nuclear power sector still has a long way to go before reaching the global average," said Ye Qizhen of the Chinese Academy of Engineering.

A proportion of 10 percent of nuclear power is an ideal number for China, Ye said.

 

With a serious pollution problem and energy consumption on a secular upward trajectory, China has little choice but to explore every avenue for electricity generation. The approval of new nuclear reactors suggests the period of contemplation that followed the Fukushima disaster has ended.  

Among Chinese companies related to the construction of nuclear reactors; Shanghai Electric Group (Est P/E 12.35, DY 3.04%) found support three weeks ago in the region of the 200-day MA. It will need to hold above the HK$2.80 area if potential for additional higher to lateral ranging is to be given the benefit of the doubt. 

Exxon evacuated some workers from the West Qurna oil field, according to a person familiar with the company’s Iraq operations. BP Plc removed non-essential workers, Chief Executive Officer Bob Dudley said June 17. Malaysia’s Petroliam Nasional Bhd. moved 28 of its 166 Iraq employees to Dubai, the company said by e-mail yesterday. Royal Dutch Shell Plc isn’t evacuating staff yet and is ready to do so, Andy Brown, head of Shell Upstream International, said in an interview in Moscow.

The companies all said they’re continuing to pump oil and there are few signs Iraq’s production has been curbed after Islamic State in Iraq and the Levant fighters took northern cities including Mosul. Police near the Baiji refinery, the nation’s largest, said government forces are now in control after a battle with ISIL. Crude shipments from the south, where most production is located, may accelerate next month and Kurds are defending the Kirkuk oilfield in the north.

“The only infrastructure that is currently producing and supplying international markets is in the south and will remain untouched,” said Kyle Stelma, managing director of Dubai-based Dunia Frontier Consultants, which researches Iraq for clients.

 

The spread between Brent Crude and WTI is widening once more which further emphasises the USA’s position as a secure and growing source of supply. While the USA does not export meaningful quantities of crude oil, the market for products such as gasoline and heating oil is globally fungible so prices are increasing. 

Higher oil prices represent an additional bullish catalyst for the energy majors which have been exhibiting relative strength for much of the last couple of months. I recreated the Oil Majors section from my Favourites in the International Equity Library which should make it easier for subscribers to return to in future. Some of the more interesting charts include: 

With relations badly strained, there is little appetite in the Kurdish capital of Irbil to provide any military support to Maliki.

“The Iraqi government has been holding the Kurds hostage, and it’s not reasonable for them to expect the Kurds to give them any help in this situation without compromising to Kurdish demands,” said an adviser to the Kurdish government, speaking on the condition of anonymity to be candid.

The pesh merga say they have not tried to displace ISIS from territory it now controls.

“In most places, we aren’t bothering them [ISIS], and they aren’t bothering us — or the civilians,” said Lt. Gen. Shaukur Zibari, a pesh merga commander.

In his statement, Yawar said, “There is no need for Peshmerga forces to move into these areas.”

 

If we remember our geography lessons from a decade ago, the ISIL has stormed into what might be described as the Sunni heartland of Iraq. The Kurds to the north have aspirations of an independent nation while the Shia majority to the south are sitting on the majority of the nation’s oil resources. The above article suggests that the ISIL has chosen to avoid fighting on two fronts, at least for now. 

One of the main sticking points almost a decade ago in the formation of the Iraqi government was on how much oil revenues would be transferred to the Sunni’s, whose territory has less oil than its neighbours. The result was unsatisfactory from a Sunni perspective. One wonders if it could realistically have gone any other way. 
 

Hello, I was wondering if you could analyse the solar power sector, in Europe there are no funds or ETFs to invest in this sector. In the US I found the Guggenheim Solar ETF. I notice that this ETF is very correlated with the heaviest weighted stock, First solar, so I will probably buy this as being in Europe we are fiscally punished if we buy us ETFs which are not compliant with UCITS regulations. Anyway First Solar seems to have a very interesting chart could you please comment thanks

Thank you for this question and following a search on Bloomberg I did not find a dedicated solar fund listed in Europe. I’ve reviewed solar companies on a number of occasions over the last year not least because they were rallying from deeply depressed levels and because the technological advances seen in the sector hold out the potential for a truly game changing innovation in the energy sector globally. Here is a link to the Tag for solar comments. 

The translated Nikkei article described the transmutation experiment in the following manner: “The researchers put the source material that they want to convert on top of the multi-layer film, which consists of alternately laminated thin films of calcium oxide and palladium. The thin metal layers have a thickness of several tens of nanometers. Elements are changed in atomic number in increments of 2, 4 and 6 over a hundred hours while deuterium gas is allowed to pass through the film.

“The transmutations of cesium into praseodymium, strontium into molybdenum, calcium into titanium, tungsten into platinum have been confirmed.”

Mitsubishi’s patent was originally issued in Japan but it was extended in 2013 into a European patent, and protects the company’s proprietary thin-film transmutation technology. The Japanese newspaper also reported that a research and development company of the Toyota Group (TM-NYSE), Toyota Central Research and Development Labs, has also replicated the elemental conversion research with results similar to Mitsubishi’s experiment.

While the Mitsubishi and Toyota research efforts have focused on material transformation rather than the generation of energy, the process is similar. High profile work on LENR as an energy source has been conducted by Andrea Rossi, an Italian engineer, inventor and entrepreneur. He has invented the Energy Catalyzer (E-Cat) and completed two tests, one of which produced 900o C (1,650o F) of heat that could be used to generate steam to power a generator to produce electricity. In early 2013, a group of independent scientists ran tests on two versions of the “Hot Cat,” a one megawatt LENR unit. Their coefficient of performance (COP) was measured, determining the ratio of energy out versus energy in. The COPs in the two tests were 5.6 and 2.2, respectively. Another group that is not affiliated with nor has it worked with Mr. Rossi, has been using an E-Cat and conducting longer term tests, the results of which may be released soon. This could be a monumental development, although it will not end skepticism of the technology.

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In the aftermath of the Fukushima disaster Japan has a vested interest in figuring out how to deal with the problems associated with nuclear power. In the near term that has meant building tsunami walls around nuclear plants and reinforcing structures to protect them from earthquakes. The challenges represented by nuclear waste have been intractable for a long time but the transmutation methods detailed above hold out hope that these will eventually be solved. 

I wonder if one of you can be tempted to have a look at some charts of the more successful Master Limited Partnership?  In particular ETE, MMP and TRGP have had rivetingly consistent charts for a number of years, and they have been my main money spinners recently. However they are doing so well that I have now got out of them fearing a pullback, but (as always with a bull market) wondering whether hanging on to a good thing would not have been best.

These three are either General Partners or (MMP) have no General Partner, which partly explains why their growth is so high, as I understand that a GP is in a way a leveraged play on the underlying LP.  But their charts are much more consistent than those of their LPs and indeed than those of most other MLPs.  The whole sector (AMJ) has also had an explosion recently, which does make me think the trend is actually likely to continue.

 

Thank you for this informative email and question of general interest to the Collective. Pipeline MLPs have been among the greatest beneficiaries of the boom in US unconventional oil and gas production, not least because regardless of how profitable the drilling operation is, the product still needs to reach market. As volumes increased, so have the shares of the related MLPs. The companies’ attractive dividend streaming characteristics have been additionally compelling in what has been a low yield environment. 

Revising the EEG is not the only power industry debate ongoing in Germany. The electric power companies are dealing with the government’s decision to shut down its nuclear power industry. Estimates are that small plants may cost €500 million ($684 million) to €1 billion ($1.368 billion) for larger plants. While cost is one aspect of dismantling nuclear power plants, there are many unanswered questions about what to do with the nuclear fuel and components from the plant that are radioactive. Moreover, these dismantling projects may take 10-20 years to complete, subjecting them to potential cost over-runs. Because of these technical and cost challenges, the heads of the three utilities responsible for eliminating Germany’s nuclear power plants have developed a plan to get the government to establish a “bad bank” structure for the plants. The utilities would contribute the roughly €30 billion ($41 billion) in reserves they were forced by the government to accrue for clean-up costs to the bank with the government (taxpayers) assuming all the technological and cost over-run exposures.  

The decision by Ms. Merkel’s government’s decision to shut down its nuclear power plants cost the Germany utilities substantially. They were forced to absorb the balance sheet hit from the write-down of the plants’ value, plus the additional costs of mothballing the plants while dealing with the costs of the dysfunctional power market due to the implementation of the EEG and Energiewende. They were forced to cut their dividends while suffering significant earnings hits, both of which hurt share prices. It is fascinating to watch the Germany energy industry deal with its mandate to completely shut down its nuclear power industry by 2022 while trying to meet the country’s 2025 and 2035 goals of 45% and 60%, respectively, of renewable power generation. The cost of these policy changes has levied a financial toll on both Germany’s manufacturing sector, which is heavily dependent on export competitiveness, and its citizens. Do the recent Ifo institute index results reflect ongoing fallout from these policies and if so, what might the proposed energy sector reforms mean for Germany’s economic future?

 

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Germany is engaged in an expensive experiment in energy politics which has so far resulted in the country’s carbon emissions hitting new highs. This is despite the fact that renewable energy is contributing progressively more to the country’s energy mix. Since Germany continues to subsidise renewables, is closing nuclear plants and has to import oil and gas, they are relying on coal to ensure base load requirements are met. Reuters today reported that Vattenfall has had its brown coal (lignite) mining licence renewed beyond 2026. The irony of this politically driven energy policy is that it has failed in both containing costs and moderating carbon emissions. 

Even though the second half of the year looks stronger fundamentally than the first half, there are some larger parts on the move in the oil market. The last two years we have seen a stronger and stronger tendency for non-OPEC production to cover a larger and larger part of global oil demand alone and the latest year non-OPEC production has been growing quicker than global oil demand. That can hardly be described as a bullish development for the fundamental supply-demand balance. The market has however the last couple of years been saved by all the lost OPEC barrels, but will that continue? Can we have as a base case that the Iran negotiations will fall apart, Iraq will fall into civil war, no barrels will return from Libya and Venezuela will break apart? It could happen of course but to have that as a base case is not prudent in our opinion.

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Oil markets have been pretty quiet for much of the last six months with a relatively tight range evident on both Brent Crude and West Texas Intermediate since February in particular. For a market as volatile as oil this is a reasonably unusual situation which is unlikely to persist. 

In that way, Sasol is a metaphor for what we don't yet understand about America's gas boom. Most know what fracking has meant for oil and gas prices. But because much of the work hasn't started yet, few appreciate the true extent of the industrialization that's about to begin.

So let's put it this way: We are building a Qatar on the Bayou. From whole cloth, companies are laying new cities of fertilizer plants, boron manufacturers, methanol terminals, polymer plants, ammonia factories and paper-finishing facilities. In computer renderings, the Sasol site looks like a fearsome, steel-fitted Angkor Wat.

In all, some 66 industrial projects—worth some $90 billion—will be breaking ground over the next five years in Louisiana, according to the Greater Baton Rouge Industry Alliance. Tens of billions of other new investments could be coming, says Louisiana's economic development secretary, Stephen Moret. How many projects will actually get built remains to be seen.

Assuming that most will, you realize we are still probably underestimating the positive impact of the gas boom on both local and national economies. The entire GDP of the state of Louisiana is about $250 billion annually.

"As an economist, I can only say, 'Wow. Holy Cow,'" said Loren Scott, a Louisiana economist who has studied the state for 40 years. "We typically measured expansion in terms of hundreds of millions of dollars. Something like that makes your eyes bug out." He expects, for instance, that once 10-year tax-abatement deals expire, schools boards will "find themselves with a bonanza."

Veteran subscribers will be familiar with our belief, since at least 2009, that unconventional oil and gas represent game changers for the energy sector. The USA’s competitive advantage both in terms of energy production and costs represent powerfully attractive qualities for energy intensive industries. 

The Mexican company is reducing its shareholding as lawmakers prepare regulations to open up the oil industry to foreign investment for the first time since 1938. Pemex was “very disappointed” in Repsol’s performance, Chief Executive officer Emilio Lozoya said in an Oct. 31 interview. The stake “has returned zero” under the current administration, he told a congressional energy committee on Nov. 20.

The US Mexican Border is a political rather than geological boundary so it is reasonable to expect that the Mexican government has been looking on with envy at the surge in oil and gas production that has occurred in west Texas. This has been made possible through the innovation of wildcatters and private enterprise. By contrast national oil companies have been left scrambling to upgrade their knowhow. In tandem with a desire to reverse the country’s the production decline Mexico has strong reason to court private investment in its energy sector. 

Meanwhile, Comcast, the cable giant, is in a pilot project with NRG in Pennsylvania that adds electricity to its cable, phone and Internet packages. AT&T last year entered the home automation and security business in 15 markets; while not yet planning power sales, it has introduced a smart thermostat that puts it solidly in the home energy-management business. It could do what Comcast and Vivint are doing.

Google’s $3.2 billion acquisition of smart-home startup Nest in February “ought to give utility officials a sinking feeling in the pit of their stomachs” since it makes clear the Technarians have begun to seriously eye at least the periphery of utility business if not its core, said Adrian Tuck, CEO of Tendril Networks Inc. a Boulder, Colorado-based energy-services management company.

Google Energy
While coy about its ultimate energy ambitions, Google is already a power generator through more than $1.4 billion in clean energy investments and holds a wholesale power license.

Last month it contributed $100 million to a program to promote rooftop solar power with SunPower Corp.

Nest, maker of the Learning Thermostat that memorizes and adjusts to users’ preferences, gives Google a leap-ahead presence in the burgeoning smart-home market at the precise time that power in the U.S. has begun to flow both ways with the rise of rooftop solar and other forms of decentralized, home-grown energy, collectively called distributed generation.

Though Tuck said he has no special insight into Google’s thinking, he believes that its Nest acquisition may well be a “Trojan horse” that gives Google a back door into the utility industry with the ability to leverage its smart thermostats into massive quantities of salable demand response even as it begins to compete directly with utilities with its own green-power projects.

Google spokesman Tim Drinan declined to comment on Tuck’s speculation.
Tuck’s company Tendril is also doing a brisk business in advising regional cable, home-security and home-automation companies how to exploit this opening. He said the utilities he talks to feel constrained by tradition, phobia or regulatory uncertainties from wading in -- a mistake he likens to Eastman Kodak Co. being slow to join the digital camera revolution.

 

As a society we need cheap abundant energy if we are to generate the type of productivity growth that can fuel a secular bull market. We don’t have it yet but the advent of unconventional oil and gas coupled with technological innovation across a whole host of sectors increases the likelihood that energy price inflation will be much less of a factor in the next decades than it was in the last one. 

Our bottom up analysis suggests US industrial demand is likely to assume a higher growth trajectory as new projects take hold beyond 2015. While we are wary of simply adding both our top down and bottom up approach to forecasting, the announced project backlog and the implied intensity of incremental natural gas demand is significantly ahead of consensus expectations. Our view is that some portion of the industrial projects is additive – not a substitute - to the baseload of US industrial natural gas use implied by a top down survey. 

The EIA and Wood Mackenzie forecast US industrial demand growth for natural gas based on trend. The EIA annual energy outlook assumes 22.2 Bcf/d of 2018 demand (up 2.5 Bcf/d from 2012). Wood Mackenzie looks to add both a baseline of GDP driven growth (1.9 Bcf/d) and a similar project build-up adding 2.0 Bcf/d. We would also note Wood Mackenzie recently revised its total industrial demand estimates, with total 2018 industrial demand increasing from 22.7 Bcf/d (Fall 2013) to 23.6 Bcf/d, directionally in line with our work. 

Our utilities equity research colleagues highlight the potential impact from the pending EPA ruling on carbon regulations for existing coal plants. Aggressive carbon reduction targets are expected, but mandating specific levels may prove difficult in light of the Clean Air Act limitations. We expect the result will be more demand side reductions and more natural gas burn in the power stack. While a potential positive for deferred natural gas, compliance is likely in the 2019-2030 timeframe. 

Our top down macro approach forecast based on a multi-variable regression model compares favorably with a 22.5 Bcf/d implied forecast by 2018, implying ~0.5 Bcf/d annual growth. At risk of double counting, we remain confident that little of the project based inflection in demand is included in the EIA estimates. We see the potential for 2.3 Bcf/d of incremental natural gas demand through 2018 based on our bottom up forecast. This demand is identifiable, risked, and promises to reach an inflection point by 2016. We believe that industrial demand is likely to find a balancing point between these our top down and bottom up approach, but above levels implied by major forecasting agencies such as the EIA.

 

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It has been our belief at FullerTreacyMoney since at least 2008 that unconventional oil and gas represent game-changers for the energy sector. The imposition of stringent environment standards on the coal burning sector represent an additional compelling demand driver. There is every reason to believe that the use of natural gas as a feedstock for utilities, industry, homes and transport is on a secular uptrend.   

U.S. gas traded at $4.391 per million British thermal units on Louisiana’s Henry Hub by 5:21 p.m. London time. Northeast Asian LNG for delivery in four to eight weeks cost $13.50 a million Btu in the week to May 19, according to assessments by World Gas Intelligence. U.K. front-month gas, a regional benchmark, was at 44.51 pence a therm ($7.48 a million Btu) on ICE Futures Europe.

Sanchez Gestido is returning to Noble after leaving “about a year ago when a decision was made that the business wasn’t ready for this initiative,” Griffiths said.
Cheniere Energy Inc. will start exporting LNG in the first quarter of 2016, Jean Abiteboul, president of Cheniere Supply & Marketing Inc., said on May 19 in Amsterdam. The Houston-based company’s Sabine Pass terminal is the first to win full approval for U.S. exports from the Federal Energy Regulatory Commission since ConocoPhillips’s Alaskan Kenai plant in 1967. There were 14 more U.S. export terminals proposed to FERC as of May 21.

Cheniere will charge 115 percent of Henry Hub prices plus $3.50 a million Btu in liquefaction fees, and estimates shipping costs of $1 per million Btu for Europe to $3 for Asia, according to an April presentation on the company’s website.

 

The global market for LNG remains on a growth trajectory as ambivalence towards coal is unlikely to moderate anytime soon. A great deal of additional supply from the USA, Australia and Africa is set to come online in the next decade which will help allay the liquidity fears potential consumers may have towards the market. 

Based on the above figures, US exports will probably be more competitive in Asia supplies than Europe. Meanwhile China will be a less attractive market than other countries following its agreement with Russia. As gas markets become more fungible there is potential for US prices to appreciate somewhat while Asian prices should contract somewhat. 

Since taking over, the former BP Plc executive announced the sale of $2.3 billion of gas properties, the purchase of $3.1 billion of oil lands, planned a royalty spinoff and paid down debt. Suttles is shifting production toward more valuable oil and gas liquids to buffer Encana from the wave of North American supply unlocked by modern drilling techniques that reduced gas prices about 60 percent in the past six years.

“He’s done a better job than what I was originally anticipating,” Kyle Preston, an analyst at National Bank Financial in Calgary, said in a May 15 phone interview. “My original view, and it was probably shared by much of the market, was that Encana was this beast of a gas-focused company and it was going to be hard to turn that ship around.”

In November, Suttles laid out plans to fire almost 1,000 people, or about 20 percent of Encana’s workforce, and lower its dividend 35 percent to cut costs and boost profits.

“He took the hard medicine up front” and the company is now on a “good path,” Craig Bethune, a vice president and portfolio manager at TD Asset Management Inc. in Toronto who holds Encana shares, said in a May 15 phone interview. “The stock’s done well so that’s probably your biggest evidence.”

 

Natural gas companies have been forced to evolve by the ongoing revolution in unconventional supply. This has been particularly challenging for Canadian producers since the USA represents their only export market of any size and US production has ballooned over the last decade. This has forced a migration to oil rich plays where possible and some drastic cost cutting in other parts of their businesses. 

According to LPP Fusion chief scientist Eric Lerner, the vast majority of the financial resources have been allocated to ITER's approach to fusion power, while other avenues, such as the one being pursued by his team, have been largely neglected, despite being much cheaper. Using an approach he calls "focus fusion," Lerner says his team can obtain a crucial electrode for $200,000, demonstrate net power gain with $1 million, and solve the final engineering problems, leading to a functioning fusion reactor with just $50 million in funding.

Fusion has been described as the holy grail of the energy sector for decades and always seems to be about thirty years away. Part of the reason for this is because the government sector which originally funded nuclear research was more interested in weapons development than cheap, clean energy. The ITER project has been plagued by lack of funding, political struggles and a need to make one bet on a developing technology which has not yet been proven.

This project has clear parallels with Craig Venter’s success in sequencing the human genome. His company achieved the feat faster and more cost effectively than the government funded Human Genome Project. It remains to be seen whether the above privately funded initiative will be fruitful, but it seldom pays to bet against humanity’s capacity for innovation.