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Anti-nuclear State of Fear. Japan and the impact of the tsunami

Global Economy, On the cover, Sin categoría

(This article was published in Cotizalia on 19/3/2011)

Let me begin this article by sending a heartfelt remembrance to the great country of Japan, and to all those affected by the disaster and their families. We don’t forget them.

But my job is to talk about energy and the disaster has a huge importance for the market of oil, gas, nuclear energy and CO2.

The perceived risk of nuclear energy has soared , even leading to Angela Merkel to take the populist measure of ordering to stop the seven nuclear plants built before 1980 for a period of at least a month. This implies a loss of about 7.1 giga watts of electricity generation in a country that has not seen a nuclear accident of any relevance in many decades.

What has been achieved with this measure has been to make the country poorer as energy prices soared, but also impacting the EU, as wholesale electricity prices in UK, France and other countries, which remained depressed for months, are up 11%, coal is up 14%, gas (NBP) is up 12% and CO2 prices, which had not moved for nearly eighteen months, have risen 10%, above the expected increase in thermal generation, thus slashing any remote possibility of meeting the Kyoto targets, in addition to giving a blow to competitiveness. The price of uranium plummeted 19% to $ 54/lb on the risk of loss of at least 7% of annual demand. All for the perception of political risk, ie that the European Union will take action against nuclear energy.

The Fukushima Daiichi’s accident is very important. But it is an exception. And if there is proof of the security and reliability of nuclear power, it is shown by the fact that out of the 11 reactors affected by the earthquake, only two have suffered an accident. And this exception originated in the midst of a natural disaster which unfortunately coincided other unusual circumstances, such as the blackout of eight hours. To make wild and hasty conclusions about the rest of nuclear power stations, particularly in a country, Germany, where there is no seismic risk, is incredible. That does not mean that we should not review and improve all security systems. But … stop 30% of nuclear power stations in Germany due to an accident in Japan?.

The loss of the capacity of 11 nuclear plants in Japan has an immediate effect of increasing demand for liquefied natural gas (LNG) by substitution effect. In 2007, when Japan closed the Kashiwazaki-Kariwa nuclear plant, 40% of the lost capacity was immediately replaced by gas.

The impact on the demand for LNG (liquefied natural gas) caused by the loss of nuclear plants mentioned can be up to 0.7 BCF/ day, ie, absorbing 50% of the current excess capacity of the gas system. This would send to Japan from 5 to 6 additional LNG tankers per month . At the time of writing this article, the price of liquefied natural gas contracts for new ships had soared, from $ 9/MMBTU a month ago to nearly $14/MMBTU. Still at prices well below those of 2006, making the LNG the cheapest alternative back-up energy source today.

For the oil market, the Japanese tsunami is, to give you an idea, similar in volume to the impact of Libya for the supply side, but of opposite sign. That is, Japan means a possible loss of demand of about 1.3 million barrels per day. Assuming only the impact of Japan, which is about 4% of global refining capacity, and no contagion effect on the economies of the West, there could be a further impact on oil demand.

And all this leads to renewables. Interestingly, the initial effect has been an avalanche of buyers into solar stocks . But in a sector with structural overcapacity, the loss of demand in Japan, which is about 7-8% of global demand for solar panels, will be a real problem that will not be easily offset despite the dreams of launching more aggressive environmental policies.

The view that solar will suddenly grow exponentially is questionable particularly when U.S. and European gas is still much cheaper than solar energy (photovoltaic) despite the cuts in the premiums seen in Germany, Spain and other countries . And coal is also much cheaper and reliable. Even if CO2 prices soar to €23/tm (it’s at €17.5/mt right now), coal generation runs at a fraction of the cost of solar photovoltaic. To give you an idea, in Germany, the same government that takes action against nuclear plants has seen the brutal effect of solar energy on prices. Germany has accumulated 40% of global solar installations over the past two years and has seen the cost of subsidies reach to more than €56/MWh, 56% of the retail price for the consumer.

Alternative energies are valid but can not replace nuclear power and, as any alternative, should prove to be cheaper than the incumbents. Because if not, the anti-nuclear rhetoric, anti-oil, anti-everything that is going on is going to prove to be anti-competitive and anti-growth. And forget about reaching Kyoto targets if Germany dismantles the nuclear park.

Nuclear energy accounts for 14% of the electricity generated in the world at a cost of about €33/MWh if we assume all costs, including closing and cleaning. Solar energy is less than 0.08% at an average cost of €410/MWh, twelve times more expensive. Solar energy today costs about $700 per barrel of oil equivalent, and therefore more than 25 times the average price for liquefied natural gas. This without mentioning the necessary investments in transmission networks, estimated at one trillion US dollars in Europe alone.

Solar energy, by definition is intermittent, ie, its plants operate at less than 10% utilization, as opposed to nuclear or hydro, operating with load factors of 70-80%. Wind energy has a much lower cost, an average of € 78/MWh, although still higher than gas, coal, nuclear and hydro, but also has the disadvantage of a low and unpredictable utilization factor (23-24 %). Additionally, it requires huge investments in networks. Therefore, an aggressive energy policy change based on an accident in a distant country seriously affects the competitiveness of countries and, after a decade of clean energy implementation, no significant net job creation or reduction in the cost of energy. It is clear that the costs exceed the alleged benefits. And studies made in Spain and the US show that for every green job created, two are lost from lost competitiveness, as industries’ costs soar. First Solar’s CEO says that solar energy will be competitive within ten years. They said the same thing years ago, referring to 2010. They have to prove it.

If we multiply by ten the OECD investments in prevention and safety of the nuclear power plants currently in operation, this would not pose anywhere near the same cost that would be needed to replace 10% of nuclear power by solar energy. And the latter would still have to compete with other sources of energy that are more abundant, cheaper and flexible.

It is worth continuing to invest in security, investigate further about economically viable and safe energy, but the greatest risk we face now is to take populist measures that sink competitiveness, curtail security of supply and make the system more expensive.

In energy, substitution can only come from competition. Either you compete or you disappear. Crude oil beat whale oil on price 120 years ago. The same happened with gas and coal. Anything else is dreaming.

Brent-WTI Spread…. More Fundamental than Market Perceives

Global Economy, On the cover, Sin categoría,
brent wti
(This article was published in Cotizalia on Feb 17th 2011)

I write to you this week from Oman. Impressive country, producing 900 thousand barrels of oil a day, and 9% of GDP from oil revenues, which finances amazing investments in infrastructure and civil works from Musqat to Salalah and other cities that are downright impressive.

As a country, it’s an example of how different the countries of the area are, despite the Western media efforts to put them all in the same basket of so-called risk of Egyptian contagion.

Another week and now that the Egyptian crisis has been solved, the market continues to focus on that country and the risk involved in the Suez Canal for crude supplies. And there is no real risk. The importance of the Suez Canal for the transportation of crude oil has fallen sharply in recent decades. During the 60s and 70s, almost 10% of global oil traffic passed through the canal. Today, it’s less than 1%. Moreover, as the three largest companies working in the channel say, the traffic is roughly balanced, with 55% of oil on ships heading north (992 thousand barrels/day) and 45% (about 850 thousand barrels/day) due south. Any problem in the Canal is, first, negligible for the transit of oil and, second, very easy to re-route around the Horn of Africa, an increase of transit time of less than 15 days.

For those who care about Egypt and the Sumed pipeline, just remind them that it only moves 1.1 million barrels per day despite having a capacity of 2.4 million barrels per day. And as a good friend of EGPC told me, there are few safer places than this pipeline, where the army has more troops than any city in the country except Cairo.

And in this environment we find the Brent and WTI spread at historical highs. Two clear effects: first the inflationary impact on Brent added to the deflationary impact on WTI to create the largest differential between the two ever seen: $14.5/bbl. Also very wide differential relative to other crude, Bonny Light (Nigeria), in particular, and Asian Tapis.

Let’s start by explaining what justifies the weakness of WTI:

Inventories at Cushing (at Oklahoma) are at historically high levels. 50% higher than the average for the past five years (25022). The problem is that the WTI weakness shows the growing isolation of the North American market and infrastructure problems to evacuate excess oil.

WTI crude trades on the basis of inventories at Cushing, in the middle of the American continent, and it is hard to move oil out of the area (called PAD II) or the large refineries on the Gulf.

1) There is enough transport capacity to carry crude from the Gulf to the center of the continent, but not vice versa. The fact that the Enbridge pipeline has had problems has increased the glut of crude in Cushing.

2) There has been an increase in exports of crude oil (oil sands) from Canada to the U.S., which increases the overcapacity in Cushing. Transcanada launched the second phase of its Keystone pipeline, which attracts even more crude to Cushing bottleneck.

3) The increase in U.S. domestic production, including Bakken, is also filling the stores in Cushing. The over-production in the U.S. is partly because the gas companies take advantage of high oil prices to produce more natural gas liquids, whose price is close to oil, in order to fund production of natural gas which today at $4/mmbtu, is not giving the best economics, actually very poor returns. Therefore they compensate for the low profitability of the gas with the price of associated liquids.

Add the fact that three refineries have been closed for maintenance, and we have the perfect storm. Excess production of high oil prices, withdrawal of the American system because of lack of infrastructure, and reduced refinery demand .

Meanwhile, Brent is affected some powerful inflationary forces:

1) The decline of production from Norway and North Sea, that previously functioned as a cushion against price increases, and does not produce that effect anymore.

2) The increase in OPEC oil transit to Asia, and rising domestic demand in exporting countries have reduced the oil for export. Saudi Arabia expects to increase its exports by 1 million barrels per day, but, for now, demand does not justify it.

3) The perception of geopolitical risk and the effect that we mentioned of transport cost increase. The market assumes that the cost of transport must rise. We are already seeing freight day rates recover, particularly in the VLCC segment, as I commented with Oman Oil. Having seen the Baltic Dry Index tumble to record lows due to excess spare capacity of ships, we could start to envision a horizon of recovery. Very gradual, and certainly not to be bullish, because overcapacity still exists (especially in the Capesize and Panamax segments.) And if freight costs rise, the chance to evacuate American crude to Europe is reduced.

As I mentioned two years ago on the differential between gas (Henry Hub) and oil, it is very dangerous to play against a very clear structural effect of isolation of a market, the American, in which the administration has no intention of promoting improvements in the system, and as a result, crude oil and domestic gas (WTI and Henry Hub) at lows is a clear boost from the country’s competitiveness.

Further read:

http://energyandmoney.blogspot.com/2010/01/revolution-of-shale-gas.html

http://energyandmoney.blogspot.com/2011/06/iea-releasing-strategic-reserves.html

Can Oil and Nat Gas go back to historical parity?

Global Economy, On the cover, Sin categoría

 

(This article was published in Cotizalia on December 16th)

oil gas sobrecapacidad

We discussed many months ago that the link between the price of natural gas compared to oil broke in mid-2006, reaching a historic high gap in 2010.

Why natural gas and oil have “de-linked”

a) Natural gas is used mainly for power generation and heating. Oil is used primarily for transport. Natural gas demand has suffered from falling electricity demand in the OECD, which has slowed down aggressively between 2007 and 2010, and most countries face problems of overcapacity in generation after the growth of renewables and thermal capacity. Meanwhile, oil demand has remained almost constant between 2007 and 2010.

b) The revolution of U.S. shale gas, which is approaching Europe from Poland, has increased the reserves of gas dramatically (and growing production in the U.S. by 15BCMs per annum despite Henry Hub trading at historic lows, between $4 and 4.5/MMBTU). Meanwhile, oil reserves, which have also grown with the discoveries of recent years, have not increased so dramatically even when in 2010, as was in 2009, we will have a global reserve replacement ratio exceeding 100%.

oil gas curva 2

Of course the anti-oil lobbyists say that there are only 40 or 60 years of oil (depending on whether or not we include NGLs), but the reality is that there’s plenty of oil. Plenty but not necessarily “cheap”, if we assume $40-50/bl as benchmark. Because oil is very cheap indeed. One of the world’s cheapest and most productive liquids. In 1991 when I started in the oil industry people said there were just 20 years of reserves, and now there are 60 (proven). And after the discoveries of Brazil, we will continue to see a very solid replacement ratio. Wait till we see the results in the Arctic, new frontiers, etc …

c) The shale gas revolution and LNG have lowered the marginal cost of natural gas, while in the oil complex, the marginal cost has stayed flat even in the downturn, as the oil complex re-rated due to the increased technical costs and more complicated geologies.

d) Additionally, the price of natural gas has been affected by a very significant increase in liquefaction capacity (more than 15BCM per annum to 2013), while in the oil market supply challenges remain. Oil-on-sea stored in vessels was rapidly consumed in 2010, and despite OPEC claims of almost 5 million barrels a day of spare capacity, the supply-demand balance has tightened.

oil gas curva 1

These fundamental shift in supply and demand fro both commodities has made companies enter a process of renegotiation of oil-linked long-term gas contracts to achieve a higher level of spot indexation, suited to a more cyclical and flexible power demand environment.

The Future

It is worth mentioning the huge difference between prices of liquefied natural gas sold to Europe or Asia. This shows how each gas market is very different and regional. On the other hand, the oil market is global and, despite talks of electric vehicles and other inventions, Asian demand and the traditional use of oil for transport will not vary dramatically.

In the fourth quarter of 2009 the average prices of LNG varied between $4.5/MMBTU (Spain) and $ 7/MMBTU (Korea). But between the second and fourth quarter of 2010, Asian demand and a colder winter have led liquefied natural gas prices to reach levels of $9/MMBTU (Spain, Japan and Korea). In oil, most countries are seeing that the price of crude in local currency remains very attractive, due to the collapse of the dollar, especially for China, whose dollar reserves fall in value every month. That is why demand has not fallen despite the poor economic environment when oil surpassed $90/bl. As the president of OPEC stated, oil is trading closer to $70-75/bl in constant dollars for them.

In summary, it is hard to foresee an environment in the short-term (1-2 years) where the difference between oil and gas will return to historic levels. While LNG capacity expands and shale gas advances, supply will continue to be well above demand. But in the medium term, the horizon is a little more positive.

If there has been something that has been shown in 2010 is that the natural gas market is suffering from less overcapacity than expected. And in the medium term, we can see that uncontracted demand for liquefied natural gas will likely exceed 10BCM in 2013, leaving the market balanced. This does not imply a massive price appreciation given the spare capacity in the system (Russia, Qatar, US-Europe shale), but the market is set to gradually tighten in gas, although at a slower pace than what we have seen in oil. Only a collapse in oil prices from unforeseen excess capacity or a switch in the use of oil for transport to gas could help close the gap.

Anti-climatic Change, and UK Nat Gas

Global Economy, On the cover, Sin categoría,

(This article was published in Cotizalia in Spanish on December the 8th)

UK Gas balance

In May 2010, gas inventories in England were at a truly low level, with storage almost empty, at a level of 35%. The country decided not to take the opportunity of having gas prices at a minimum to fill storage for the winter. Why, You may ask yourselves. Two reasons. On one side, a group of scientists who had advised the ministry and the industry that “climate change would create one of the warmest winters of the last hundred years”. On the other, the view that would have “radically hot and dry” winter(The Guardian, July 2010) due to the effect of La Niña.

Additionally, the Uk decided to play “commodity trader”, and clung to the estimates of CERA (Cambridge Research) and Wood Mackenzie about a bubble of gas in Europe from 2010 to late 2012 . According to these estimates, the Qatari government was going to flood Europe with cheap liquefied natural gas, the Russians were going to get nervous and cut prices aggressively, and the Norwegians would have to sell below cost price. Even agreeing that the gas market has spare capacity, and I have written about it several times, is very imprudent to take a bet on prices to fall, not to secure supply, when the price can move dramatically depending of many factors.

Of course, today at 2 degrees below zero, the British gas system is in deficit of between 15 and 25 million cubic meters (see graph). Of course, the “scientists” were wrong by as much as 170% in their projections of climate, and thus gas consumption. Of course, gas producers have not foolishly flooded the market. And nothing happens here, no one said it had been wrong, while England and the continent are desperately trying to buy more gas …. 41% more expensive than three months ago.

UK Gas vs Henry Hub

In Europe we have spent more than a year complaining about the oil-linked formula of long term gas contracts with Gazprom and Statoil. Of course, when gas has decoupled aggressively from oil, as gas demand growth has slowed down dramatically, we have seen governments and E.On-Ruhrgas, GDF-Suez ENI and others force the machine to renegotiate their contracts with major gas producers. Perfectly acceptable.

Anecdotally, I remember the CEO of Gazprom say in London that for eight years, when long-term oil-linked gas contracts were very competitive compared to spot gas, no one complained. And he said if it was not possible to renegotiate the contracts but with retroactive effect, ie, all they had lost between 2002 and 2008 subtracted from what buyers have lost between 2009 and 2010.

Well, now that they have renegotiated up to 20% of contracted volumes to be linked to the price of spot gas… Surprise. The spot price ($8.8/MMBTU) exceeds the long term, compared with the price of Gazprom ($7.8/MMBTU) and Statoil ($7.5/MMBTU). These things happen. And of course, solar and wind energy can not cover the difference in consumption, and the bill of the average consumers in the UK, for example, will rise by 20% when it would have only risen 9% if the measures had been taken to ensure supply and maintain the reserves filled in summer with gas prices 41% lower.

Of course, they forgot that the gas market is also global and is one of the most rapidly adjusted given supply is focused in very few countries. And the liquefied gas, LNG, and especially the spot part, which is still less than 12% of total gas, is sent to that market that pays the highest. Asia, in this case. So again, companies and politicians, instead of worrying about security of supply and proper planning, decided to play the market. A lesson to be learned by all European countries.

The Independent states that despite the low temperatures and having been a 346% wrong in their estimates of 2002 about the melting of the Arctic, global warming is a looming problem that will cause one million deaths in 2030. With this track-record of successes, I can not help but tremble.