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

    Energy Stat: Are Electric and Autonomous Vehicles Heading Down the Road to Peak Oil Demand?

    Thanks to a subscriber for this fascinating report by Pavel Mulchanov for Raymond James which may be of interest. Here is a section:

    There is no law of nature that dictates that global oil demand must eventually reach a peak and then begin an irreversible decline. The well-known “law” of Hubbert’s Peak applies to supply, not demand, and the advent of modern technology (fracking, horizontal drilling, enhanced recovery, etc.) has led to a fundamental rethink of whether oil supply will peak after all. In this context, we see comments such as the one from Shell, suggesting that peak demand will come first, rendering peak supply a moot point.

    There is no direct historical precedent for worldwide demand for a major energy commodity to peak on a sustained basis. (Sorry, whale oil doesn’t count.) Despite all of the regulatory and other headwinds, for example, global consumption of coal is still growing. But it is true that there is precedent for national and even regional demand to peak. Coal demand in Europe peaked in the 1960s, and has since fallen to substantially lower levels. Oil demand in Japan peaked in the 1990s. Oil demand in Europe peaked more recently, in 2006, one year after the U.S. By definition, a peak is something that can only be known in retrospect, but with a decade having passed, it seems abundantly clear that European oil demand will never get back to its pre-2006 levels. With regard to the U.S., the situation is less clear-cut because of the demand recovery in recent years, but 2005 may well be the all-time peak. The theory of peak global oil demand holds that when enough parts of the world reach a peak, a global peak will result, because the few places still growing will not be enough to offset the decliners. In this sense, the theory is conceptually valid. Thus, we would not argue with the notion that peak oil demand is a matter of time. The real question is: how much time?


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    Musings from the Oil Patch March 21st 2017

    Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section comparing the efficiency of a Tesla to a BMW 7 Series:

    “Liberals frequently care more about feelings than facts, and your smug Tesla-owning frenemy will never admit it, but in day to day usage, the big BMW is actually 18% more efficient, and 18% kinder to the planet. (Don’t get too cocky, Mr. 7 Series: at a US average 12 cents per KwH, the electricity cost to the Tesla owner for 1000 miles works out in total to about $81, as opposed to $98 for the gasoline. The reason the Tesla is less efficient, but still cheaper to run, is that the power company pays a lot less for fuel than the automobile driver does. But when the issue is green impact, not greenbacks, the BMW wins handily.)


    “Of course, no self-respecting Green Weenie would settle for powering his car by the sun, but his house by Con Edison. And with the average efficient house using 1 KwH per hour, i.e., 24 KwH per day, the house needs 4.8 KwH capacity, and considering efficiency losses and reserve requirements, that means 6.9 KwH for the house. So to power both the Tesla and the house, Green Man needs at least 1,443 square feet of power production, at a cost of $115,000. But even using a Tesla-only setup, $60k would buy 25,641 gallons of gasoline (at the current US average price of $2.34 per gallon). The Big BMW could travel, on that much fuel, 24,000 x 24 MPG = 615,384 miles. Game, set and match – Munich and Detroit. Sad!” 

    While we didn’t do the analysis, all of Mr. Karo’s numbers were sourced, which was not a surprise, given that he is a Philadelphia lawyer, and the math works. Although Mr. Karo expresses disdain for braggadocios Tesla owners, presumably because of his experiences with some owners he has encountered, the economics in this analysis suggest that gasoline-powered vehicles will have a longer future than EV-proponents suggest, or would like to see happen. Tesla owners will not be swayed by Mr. Karo’s analysis. Instead, they will declare that with falling battery and solar panel costs coupled with their improving efficiencies, the cost advantage will soon swing in favor of EVs. However, the inability of EVs to be swapped for gasoline-powered vehicles in a one-to-one exchange for all applications means there is an extensive convincing period ahead before the public fully embraces them. Just how long that convincing period will be is anyone’s guess. 

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    Google Might Run the Power Grid More Efficiently

    This article by Diego Marquina and Jahn Olsen for Bloomberg may be of interest to subscribers. Here is a section:

    The best way to send the right economic signals that reflect constraints is through locational marginal pricing – having different power prices in different parts of the grid.

    This is a politically unpopular mechanism, as it would see prices go up in zones of large demand – potentially industrial areas.

    The alternative is grid investment. But the costs are huge, as is the case for the bottleneck between Scottish wind farms and English demand centers. The 2.2 gigawatt HVDC cable currently being built there has an estimated cost of 1 billion pounds. Yet National Grid estimates as much as 8GW of additional transmission capacity could be required by 2030, on that particular border alone.

    Less human involvement might be part of the solution. Google’s DeepMind recently announced they are exploring opportunities to collaborate with National Grid. It has been successful elsewhere -- DeepMind demonstrated its immense potential by reducing cooling costs in an already human- optimized datacenter by 40 percent.

    Setting it loose on the extremely complex and quite probably over-engineered National Grid, with its many overlapping services and mechanisms, its rules of thumb and its safety margins, could provide novel ways to ensure system reliability cheaply and efficiently. DeepMind’s CEO conservatively hinted that it might be able to save up to 10 percent of the U.K.’s energy usage without any new infrastructure. Step aside, humans.


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    Round Two still much more to come

    Thanks to a subscriber for this report from Deutsche Bank focusing on the oil marketing companies' sector in India. Here is a section:

    Although there is understandable scepticism given the government’s track record, our confidence on the implementation of free pricing for petroleum products stems from the following measures that the government has already taken: 

    The extinguishing of the diesel subsidy in October 2014 and the revision of prices in line with changes in international prices without any government intervention; 

    The increase in LPG and kerosene prices each month since June 2016; 

    Increases in the auto fuel price even during elections and in times of sharp price increases for crude; 

    The aggressive implementation of Direct Benefit Transfer (DBT) to LPG and kerosene to contain subsidies. 

    FCF yield improves by up to 280 bps over FY17-20 
    Operating cash flow for OMCs will likely be driven by improvement in marketing margins, rising refining margins and higher volumes. Over FY17-20, the FCF yield of state-owned OMCs should improve dramatically, by more than 280bps for IOC and BPCL. HPCL, with capex starting from FY18, will likely see its FCF yield decline by 130 bps. We expect the OMCs to generate robust free cash flows of about USD10bn over FY18-22E. We also estimate net debt/equity of OMCs to decrease further over FY16-22E – HPCL from 1.6x in FY16 to 0.6x in FY22, IOC from 0.6x in FY16 to 0.2x in FY22, and BPCL from 0.7x in FY16 to 0.1x in FY22.

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    A Father of Fracking Seeks to Emulate U.S. Shale Boom in Alaska

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

    A pioneer of the U.S. shale revolution wants to take fracking to America’s final frontier. Success could help revive Alaska’s flagging oil fortunes.

    Paul Basinski, the geologist who helped discover the Eagle Ford basin in Texas, is part of a fledgling effort on Alaska’s North Slope to emulate the shale boom that reinvigorated production in the rest of the U.S. His venture, Project Icewine, has gained rights to 700,000 acres inside the Arctic Circle and says they could hold 3.6 billion barrels of oil, rivaling the legendary Eagle Ford.

    While the potential is huge, the difficulty of shipping millions of gallons of water, sand and chemicals -- the ingredients used in fracking -- to one of the most remote areas on earth is nothing short of monumental. At stake is an Alaskan industry that’s seen output tumble from 2.1 million barrels a day in 1988 to 520,000 in 2016 as reserves dwindled and explorers sought cheaper supplies in shale fields to the south.

    “The oil is there,” said Basinski, founder and chief executive officer at Houston-based Burgundy Xploration LLC, in an interview. “Now it’s a question of how quickly we can get it to flow and whether we can get the economics to work." One exploratory well has been drilled, he said, and a second is planned by mid year.


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    Oil Falls to Two-Month Low as Traders Focus on Record Supplies

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

    Oil has fluctuated above $50 a barrel since the Organization of Petroleum Exporting Countries and other nations started trimming supply on Jan. 1 to reduce a glut. Saudi Arabia and Russia, the architects of the deal, presented a united front on complying with the cuts at the CERAWeek conference Tuesday in Houston. Alongside officials from Iraq and Mexico, they insisted the curbs are working. Managed money boosted wagers that U.S. oil futures would rise to a record last month.

    "There’s a huge amount of speculative length in the market and they’re starting to bail," Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said by telephone. "OPEC didn’t do a good job at CERA convincing the market that it would roll over the cuts into the second half of the year."


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    Musings from the Oil Patch March 7th 2017

    Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section on solar cells

    A more recent analysis by the Lawrence Berkeley National Laboratory covering 1998 to 2015 shows a different measure of PV cost. (See Exhibit 15 on next page.) The pattern of that decline is interesting. It took 11 years for the price per watt to drop from $12 to $8. Notice how the cost per watt dropped between 1998 and 2000, but then remained flat until 2002, after which it declined for the next three years. Starting in 2005, the cost slowly increased for two years before beginning a slow decline that lasted for two years. In 2009, the pace of decline accelerated until it reached about $4 per watt, or half the 2009 value. The recent decline coincides with China’s entrance into the solar panel manufacturing business and its prompt dumping of surplus output into the U.S. market, driving down panel prices and driving U.S. manufacturers out of business.

    It is difficult to separate how much of the historical price decline came from technological improvements versus that from a misguided investment strategy by China. More importantly, will these price reduction trends continue as in the past and how dependent on technological breakthroughs in material science are lower prices in the future?


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    Saudi Arabia $2 Trillion Aramco Vision Runs Into Market Reality

    This article by Javier Blas and Wael Mahdi for Bloomberg may be of interest to subscribers. Here is a section:

    Even within the Saudi government, doubts are emerging. A person familiar with the flotation, who asked not to be named, said last week Aramco in its current form would probably be worth about $500 billion because a lot of its cash goes toward taxes and future investors won’t have a say on investments in non-core areas. Another person familiar with IPO talks put the figure at a little less than $1 trillion if investors base the valuation on Aramco’s ability to generate cash.

    Selling a 5 percent stake would therefore raise at least $25 billion, still enough to match Alibaba Group Holding Ltd.’s unparalleled 2014 offering and dole out millions of dollars of fees to the advisers hired to manage the sale, namely JPMorgan Chase & Co., Moelis & Co. and independent consultant Michael Klein.

    The $2 trillion estimate was initially put forward by Deputy Crown Prince Mohammed bin Salman last March. There are two key issues, according to interviews with a dozen industry analysts, investors and executives, who asked not to be named because of the sensitivity of the matter.

    The first is that it’s premised on a simple calculation: Take the 261 billion barrels of reserves Saudi Arabia says lie under oil fields like the onshore Ghawar and offshore Safaniya, and multiply by $8 (a benchmark used to value reserves). An independent auditor is assessing Saudi reserves, the second- biggest worldwide, before the IPO.

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    Musing from the Oil Patch February 21st 2017

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

    All of the forecasts for domestic oil production appear feasible. The U.S. is home to some of the best oil and gas geology in the world with the largest number of independent explorers testing new theories about where to find and how to produce more hydrocarbons cheaper. These hundreds of independent operators are supported by the largest, most technically sophisticated oilfield service industry. Combine these elements with the deep capital markets existing in the United States that ensures that the petroleum industry has access to adequate capital for creating value for investors, and you have the makings of a vibrant and healthy industry. Depending on events around the world, the risk for the domestic oil industry is that its success could undercut the global oil industry’s recovery and knock down the prospect for a slow steady rise in oil prices and future domestic oil output. We don’t know what the odds of that happening are, but it is a scenario that everyone should keep in the back of their minds as they cheer on the nascent oil industry and oil production recoveries. However, too much U.S. oil success could actually be a bad thing for the industry, but probably a good thing for consumers.

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    Bottom is in for Uranium; Gold & Silver Off to the Races in 2017

    Thanks to a subscriber for this report from Cantor Fitzgerald which may be of interest. Here is a section on uranium

    Kazatomprom that it plans to cut its annual uranium production by 10%, or by 5.2M lbs U3O8. This amount translates into roughly 3% of 2015 global production and marks an inflection point in the space. Since at least 2001, Kazatomprom has relentlessly increased production into an oversupplied market and is arguably the single biggest cause for the weakness in the commodity aside from the Fukushima disaster. In fact, we had long since given up on expecting Kazatomprom to exercise production restraint as its mines were the lowest cost operators in the world and constant production increases appeared to be a cultural focus in Kazakhstan.

    While some skepticism exists on whether Kazatomprom will actually follow through with this cut (as opposed to OPEC style “cuts”), we suspect that at least some of the production reduction will occur among joint venture operations managed by western producers such as Cameco. Moreover, we believe the impact will be more than the announced cut amount because the market was likely factoring in a typical Kazatomprom increase as opposed to a cut. So instead of a 3-5% increase we are expecting a reduction of 10%, or a 13-15 percentage point swing.

    Cameco’s announcement of Tokyo Electric Power Holdings’ (“TEPCO”) termination of its supply contract has cast some concern over what will happen with the U3O8 pounds that were earmarked for the Japanese utility. In total, the contract was for 9.3M lbs U3O8 to be delivered from 2017-2028, this works out to 775,000 lbs annually. TEPCO was selling some if not all of the material it was contractually obligated to purchase already. As such, we believe the worst case scenario arising from the cancellation is that Cameco does the exact same thing and sells the material into the spot market. However, we think there is room for potential positivity from this announcement, as Cameco could instead elect to not produce the pounds at all (and further cut costs by doing so) or it could elect to store them in inventory to await higher prices. Either of those two actions would effectively be removing some of the excess supply in the market. 

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