Tag Archives: Energy

Energy Predictions for 2010

Energy, On the cover, Sin categoría

(Published in Cotizalia on Dec 24 2009)

First, I do not agree at all with those who see the dollar appreciated in 2010. We are living in the greatest appropriation of wealth in recent history, and if the dollar has fallen so much so far, wait to see the effect of the 1.3 trillion dollars that the U.S. has to refinance and the $700 billion in pending stimulus plans. The weak dollar is part of the reason why I am more positive than other investors in oil and gas prices.

Second, everyone expects interest rate hikes. I do not think so. With the UK and US together needing to refinance $2 trillion, debt to GDP of 300% and 10% unemployment, interest rate hikes are more a dream than a reality.

In the world of oil, we face a year of anemic demand and abundant supply. The supply problems and decline rates that are so appealing for the market are not an issue for 2010. Demand is likely to be above 85.4 million barrels a day, but this means that we will have a capacity surplus of around 4 million barrels a day. Therefore, the production cuts from OPEC and its adherence to the quotas in place (at very low levels today, 58%) will be decisive.

But what we are likely to see are aggressive moves in Asian demand due to lower nuclear production and the already mentioned infrastructure projects. Thus, it is not surprising that we might see a period of high volatility. Certainly in 2010 oil will likely continue to be a hedge against the dollar. I also expect demand from emerging countries to grow by around 6%, so it would be reasonable to see oil reach $85/barrel as inventories are reduced to normal levels, which I do not expect to happen until 2011.

On the supply side, with a 5-6% decline from existing fields, non-OPEC production is likely to fall to around 50.8 mbpd instead of the estimated 51.3. And forget refining. With nearly 7 mbpd of excess capacity and anemic demand, refining margins will not be a riot.

The gas market in 2010 will likely see a drastic drop before the recovery, which will be even more drastic. Demand continues to be the problem because it depends on electricity consumption and we will see coal to gas switches, but no real demand increases in a year in which producers will increase LNG supply capacity by 10%.

But beware, because the market is exaggerating the gas overcapacity in at least 20BCM. I am convinced that we will see lower exports to Russia (145BCM instead of 162 expected), Norway and Qatar reducing exports, leaving the market “only” with 10BCM of overcapacity, more than enough to justify spot price of $ 5.5 -6/MMBTU and 35p per therm … but before the recovery we will see gas prices to record lows, until the recovery in demand in winter.

The electricity market in Europe will probably live a delayed pickup in demand, where we still need an industrial demand still heavily damaged by the crisis. A drop in electricity demand of 0.5% in Europe could be feasible. Reserve margins (excess capacity) in Europe are at levels of 25% considering the additional 15GW of wind capacity, and we probably will not see an environment of demand-supply balance until 2012. In such an environment is difficult to see higher electricity prices. And in oil, gas and electricity, high volatility leads to reductions in investment, which explains in part my positive view of future prices.

2010 will, in my opinion, be a year of divestments and capital increases, and energy companies can take advantage of the market opening to preserve the strength of their balance sheets in the bottom of the cycle. I estimate around $35 billion in the oil and electricity sectors. Pay attention to balance sheets, it seems that everyone has forgotten debt in 2009. It will also be an exercise in which well-capitalized companies will continue to aggressively buy assets, particularly in exploration and production and “shale gas. The war for natural resources is not going to stop, and I reckon a figure of about $30 billion in mergers and acquisitions.

I believe that 2010 will not be a bad year for investments by taking advantage of occasional corrections. Everyone is negative or cautious, money remains cheap, the cost of capital of companies continues to fall, bonds are overpriced … This generates expansion of multiples even with stagnant profits. Remember Buffett, the market is never wrong. Use it as a tool, not as a guide.

Observations on the arrival of the electric car

Energy, On the cover, Sin categoría
(Article published in Spanish in Cotizalia on Deecember 17th 2009)

Everyone talks about the electric car in Copenhagen, even when there are only five cars representing the sector at the summit. However, recently we have seen reports from the current U.S. government, which is not suspected of being paid by the oil industry, which show that the electric car can be a huge cost, and in the most optimistic forecasts, it will be an anecdote in the worldwide fleet of vehicles.According to a study commissioned by the U.S. Department of Energy, the electric car will cost $ 18,000 more than traditional cars because of the price of the batteries. Moreover, according to the study, funded by the U.S. administration, it is more than likely that the batteries to move these vehicles, lithium ion, will not be cheap enough to stimulate a shift by consumers, at least until 2030.

According to independent analysis, the cost of lithium-ion batteries may fall from the current $ 600-800/kwh to $ 300-500/kwh. An electric car needs a minimum of 20kwh of capacity and a hybrid requires at least 10kwh. I can not foresee a radical change in the global fleet switching to a car whose battery will cost over $6000. Funnily, there is a publicly traded company whose stock market valuation is equivalent to $40 million for electric car produced. But from a more optimistic perspective, the process is not going to eradicate traditional vehicles, but make available to the public an alternative that in the long term is acceptable.

The above study states that the electric car will require “subsidies of hundreds of billions of dollars” over the coming decades to reach a level of market penetration in vehicles with 20-60 kilometres of autonomy. The aim is to build some 40 million electric cars globally (a 15-17% penetration) in 2030. In light of this, listening to Copenhagen delegates predict the end of oil consumption is highly amusing.

The U.S. president, Barack Obama, wants to have one million electric cars on American highways in 2015. In Spain we want to have a million, as many as throughout the whole U.S., but in 2014. It seems very ambitious. And considering that in the U.S. they have already spent 11 billion dollars in subsidies to the project, even more difficult.

It is worth mentioning where the market is positioning itself to meet the demand that the electric car might generate. Besides building the necessary networks and generate electricity with nuclear energy, wind and coal, the challenge will be to control natural gas reserves sufficient to ensure supply of gas to CCGTs, essential to provide flexibility to the system in periodic increases of consumption. Because the gas supply overcapacity which we live today will not last much beyond 2014-2015, as we discussed a few weeks ago, moving from 30BCM per annum to 5BCM spare capacity, according to my estimates, once new LNG projects are completed. Also worth exploring is the possibility that the “shale gas” provides, a type of unconventional natural gas extracted from low-porosity rock, and we’ll talk soon about it.

And in times of overcapacity is when the bargains appear … Between 2008 and 2009 we have seen the big utilities invest more than $12 billion in gas reserves or gas producing companies. It’s obviously a long term bet. It is also Investor T. Boone Pickens,’ bet for example. And I think that is what Exxon sees, buying XTO for $31billion on Monday, some 7,500 million barrels of oil equivalent in gas reserves taking advantage of low prices. Exxon is always looking forward. We must listen.

Copenhagen and the aim to create the biggest bubble in energy

Energy, On the cover, Sin categoría

(This article was published in Cotizalia on December 10th)

We are reading many headlines these days about the Copenhagen summit and the commitments that are expected to come out of it. I will not discuss the scientific findings that lead to this group of nations to meet, but would warn about the plan to create the biggest energy and financial bubble in history: a huge fund to drive CO2 through the roof.

In this summit governments will take the first global decision since the industrial revolution that is not based on an improvement in economic efficiency. It is about intervention on a global scale to promote industrial processes which are more expensive and inefficient than current technologies, and managing the global energy policy from the UN, not from markets and sovereign governments.

The interventionist governments have already created a commodity, CO2, and assigned a fabricated supply and imposed demand. This artificial commodity was allowed to trade on the markets with the goal of encouraging speculation, the same speculation that is demonized when it comes to gold or oil.

But the problem is that the prices that they had expected, €40-50/ton CO2 did not materialize; given that when markets are allowed to work they fastidiously often reflect the true dynamics of supply and demand, and prices sometimes fall. Now the CO2 (December 2010 contract) is trading around € 15/T. And the plan does not accept price falls, as they need to generate price inflation to justify the transition to expensive alternative technologies. Thus, the world’s governments are meeting this week to create a huge fund, estimated at more than 300 billion dollars, financed with our taxes, to revive the bubble, where the laws of efficiency, supply and demand are abolished in favour of a supposed climate benefits in 2050. A bargain.

The expected agreements could be summarized in three parts. First, developed countries would commit to reduce their emissions to a specified amount.

Second, developing countries would commit to reduce the “growth in emission intensity.” As the reader may have guessed, the sum of the two will not reduce emissions, but increase it. Why? Is there no commitment to save the Earth? No, because the objective is not to save anything except the mega-bubble by creating more emissions than required so countries will buy more expensive CO2.

Come to the third: They want to create the previously mentioned $300 billion fund dedicated to the transfer and technological adaptation.

Let me translate: Dear friends of developing countries… please forget about using your natural resources to grow at $ 40/bbl as we will force you to use foreign technology and increase your energy bill to $ 110/bbl or more.

In short, a fund controlled by politicians from the UN, with such a great track record as managers, that decides and orders on global industrial development with an objective that is unquantifiable in any economic or efficiency term. The UN will impose foreign and expensive technologies on developing countries at a reasonable price or free to begin with, but a very high cost subsequently, in order to increase their dependence. This is a fund that will be created through higher taxes, increasing the bill for the CO2 bubble. And the bill to purchase CO2 credits will cost Spain, for example, 3 billion Euros between 2008 and 2012, and the UK will pay around 5 billion in the same period.

I agree that CO2 emissions are a problem to solve. I am convinced that many renewable technologies will be competitive without subsidies in the short term, and I firmly believe in companies that innovate and lead the change process. But this change can not be managed by supranational agencies with no positive track record. The law of supply and demand, as well as innovative and efficient technologies should be the axis of a profitable and efficient change, but not imposed.

A 2010 Warning Risk for Non-OPEC supply

Energy, On the cover, Sin categoría
russia
(Graph above shows Russian Crude Production). From an article I published in Cotizalia on Dec 3rd 2009.Today we saw Rosneft production figures reach a disappointing 2.119mbpd (only +1.5% y-o-y). This includes Vankor production at 160kpd in October (104kbpd in 3Q).

While Vankor crude output is expected to increase from 3.5MMt this year to 11.5-13.5MMt, production in the rest of the upstream portfolio (including the Priobskoye field) is expected to go down, leaving 2010 output “close to 2009 levels”. This is new and somewhat disappointing, taking into account that previously the company had expected crude output from the Priobskoye field to reach peak in 2012. This suggests that output growth at the Priobskoye field has been probably too high in 2005-09 and the field may stabilize lower than 2009 even after pick-up in drilling expected in the next two years. Investors will be concerned that Priobskoye might repeat the Sibneft fate when its fast production growth phase (2001-05) was followed by a steep decline in 2006-08. This is also new.

The market had continued to have a positive view of non-OPEC supply growth 2010-2012 despite the warning signs that we have highlighted for months. We already saw Lukoil back down from their strategic growth targets (from 4-7% production growth to flat), predominantly due to the fact that under the current tax system that eats 90% of revenues, Caspian and West Siberian oil fields are uneconomical. Furthermore, the other Russians are declining steeply: Surgut’s year-to-date production declined 3.2%, Tatneft declined 0.9% and Slavneft 3.7%.

Consensus on non-OPEC supply for 2009 versus 2008 calls for a 400,000 bpd increase, and the subsequent reduction of the call on OPEC, predicated on Russia growing to a level that offsets Norway-North Sea and Mexico declines.

I believe my bearish view on non-OPEC supply needs to be even more bearish for 2010, probably by 200kbpd given the capex, high tax and credit environment hitting Russia, Mexico and Norway.

So far YTD:

  • Norwegian volumes are at 2.24mbpd (below consensus estimates of 2.3-2.4mbpd)
  • Mexico volumes are at 2.65mbpd versus consensus at 2.96mbpd
  • Russian volumes are close to 10mbpd versus consensus at 10.3 mmbpd.
  • Total oil production by countries outside of OPEC averaged 50.1 million bbl/d during the first 3 quarters of 2009.