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November 21 2017

Commentary by Eoin Treacy

Musings From The Oil Patch November 21st 2017

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

Between 2010 and 2016, coal’s share of U.S. energy fell from 23% to 15.8%, while renewables’ share climbed from 1.7% to 3.7%.  In the EU, coal’s share fell from 16% to 14.5%, and renewables more than doubled its share, going from 3.9% to 8.3%.  This emissions and economic progress by the EU is in jeopardy following the election of President Trump who is determined to boost U.S. oil, natural gas and coal industries, and push back on green mandates and subsidies.  The EU’s response has been to isolate the United States for its climate position.  Their strategy for overcoming high energy costs and exposure to energy disruptions is to make people choose expensive renewable energy in the guise of it being the only logical choice when confronted with the alternative of a disastrous environmental outcome if we continue burning fossil fuels.  

As the EU’s strategy seems not to be working as well as planned, it has become more radical with governments seeking to ban internal combustion engine cars.  This, its leaders believe, will force American auto companies to compete in the marketplace of zero-emission vehicles.  Little is mentioned about the fact that the carbon emissions legacy associated with building electric cars requires years of driving them before it is neutralized.  Electric car promoters also never mention the environmental and social costs of mining the rare earth minerals required in rechargeable batteries.  If fairly presented, people might question whether there are other alternative solutions that are less-costly and do more to mitigate the environmental hazards of electric batteries and renewable energy sources.  

While the goal to level the economic playing field with respect to energy’s cost in manufacturing remains an EU objective, the path to achieving that goal has changed.  The choice presented is impending environmental disaster with continued use of fossil fuels versus feeling good about saving the planet with high cost renewables and zero-emission electric vehicles.  Expect more of rhetoric as we move forward.  Maybe President Trump understands that the climate change movement is really an economic war in the guise of climate change.

Eoin Treacy's view -

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

The simple fact is the EU imports a lot of its energy and the USA is close to being energy independent. Quite whether the EU is so cynical in its attempts to pioneer high cost power is questionable, but if everyone were to adopt the same cost base for energy production it would certainly create a more level playing field for a lot of important industries and help European competitiveness.  



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November 20 2017

Commentary by Eoin Treacy

The Chart Seminar

Eoin Treacy's view -

It is always a pleasure to meet subscribers but doubly so when we get to spend two days together discussing the outlook for psychological makeup of the market, where we are in the big cycles and which sectors are leading and which are showing relative strength. I had three big takeaways from last week’s seminar in London.

As anyone who has attended the seminar will know, I do not have examples but offer delegates the opportunity to dictate the direction of the conversation. That ensures the subject matter is relevant to what they are interested in and also highlights the fact that subject matter is applicable to all markets where an imbalance between supply and demand exists. The second benefit of allowing delegates to pick the subject matter is that it is offers a window into what is popular in markets right now and what might be getting overlooked. 



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November 16 2017

Commentary by Eoin Treacy

World's Biggest Wealth Fund Wants Out of Oil and Gas

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

 

Norway, which relies on oil and gas for about a fifth of economic output, would be less vulnerable to declining crude prices without its fund investing in the industry, the central bank said Thursday. The divestment would mark the second major step in scrubbing the world’s biggest wealth fund of climate risk, after it sold most of its coal stocks.

“Our perspective here is to spread the risks for the state’s wealth,” Egil Matsen, the deputy central bank governor overseeing the fund, said in an interview in Oslo. “We can do that better by not adding oil-price risk.”

The plan would entail the fund, which controls about 1.5 percent of global stocks, dumping as much as $40 billion of shares in international giants such as Exxon Mobil Corp. and Royal Dutch Shell Plc. The Finance Ministry said it will study the proposal and decide what to do in “fall of 2018” at the earliest.

Eoin Treacy's view -

Norway’s proposal to diversify its exposure to the oil sector makes sense but the timing of the decision, ahead of the proposed Saudi Aramco IPO and after the successful sale of Abu Dhabi’s Adnoc retail gasoline stations’ business says more about the trauma of the crash lower from above $100 than the state of the sector at present. 



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November 09 2017

Commentary by Eoin Treacy

Rio Tinto joins race for stake in world's largest lithium miner

Rio Tinto joins race for stake in world’s largest lithium miner – This article by Cecilia Jamasmie for Mining.com may be of interest to subscribers. Here is a section: 

 

El Mostrador suggested Tinto Rio had already made a bid, potentially trumping Chinese companies Sinochem, Tianqi and GSR Capital, all of which had also expressed interest in SQM.

The news came on the heels of PotashCorp and Agrium announcing Tuesday that China’s ministry of commerce had approved the merger, but required the sale of PotashCorp’s minority holdings in Arab Potash Company and SQM within 18 months of closing, and Israel Chemicals Ltd. within nine months.

SQM, which has a market value at just over $15 billion, produced roughly 44 million tonnes of lithium carbonate last year and is developing new projects in Chile and Australia.

Rio's current incursion in the lithium market is mostly limited to its 100%-owned lithium and borates mineral project in Jadar, Serbia, which is still in the early stages of development.

Eoin Treacy's view -

Rio Tinto generates 68% of its revenue from iron-ore and aluminium. Diamonds and minerals, copper and energy make up the balance of its operations in that order. Despite enthusiasm about lithium SQM generate about 26.5% of its revenue from the metal, with plant nutrition (32.2%) and potassium (20.8%) also representing major businesses for the company. 



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November 09 2017

Commentary by Eoin Treacy

Email of the day on feudalism in the modern era

I was thinking back to our dinner at the club in LA, and remembering that you stated that the Princes of the Sauds owed allegiance to their King, comparing them to the Barons of Europe in the middle ages. You said that sooner or later, the finances of the Kingdom would have to be enhanced, and that the Princes would be called upon to do so, just as the Barons of long ago were required to collect taxes and give treasure to the Crown. The parallels between today in the Kingdom of Saudi Arabia and those days so long ago are amazing!

We have now seen the first round of the tax collection begin, and those who were arrested were quite likely opposing the new "taxes", if not plotting actual rebellion (in which case they will almost certainly be executed). There is a clear message here for the rest of the Princes...

Now this is the stuff that historians truly love. 

 

Eoin Treacy's view -

Saudi Arabia has been held together by a series of transfers and concessions to families and tribes that agreed to set aside their enmity in return for a share in the nation’s oil wealth. That worked well as long as the population was small and oil revenues trended higher amid a century of oil’s dominance of the global economy. 



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November 09 2017

Commentary by Eoin Treacy

Britain risks a nuclear dead end by spurning global technology leap

Thanks to a David for this article from Ambrose Evans-Pritchard in the Telegraph. Here is a section: 

A few million will be put aside for ‘blue sky’ research but the real money will go to a consortium led by Rolls-Royce to develop a series of 440 megawatt SMRs for £2.5bn each, drawing on Rolls’ experience building PWR3 reactors for nuclear submarines. The company bills it as part of a “national endeavour’ that will create 40,000 skilled jobs. It requires matching start-up funds of £500m from the state. 

I find myself torn since these ambitions are commendable. They revive a homegrown British sector, akin to the success in aerospace. It is exactly what Theresa May’s industrial strategy should be. Rolls-Royce is a superb company with layers of depth and a global brand. It could genuinely hope to capture an export bonanza.  

Yet the venture looks all too like a scaled-down version of Sizewell, plagued by the same defects as the old reactors, less flexible than advertised, and likely to spew yet more plutonium waste.  

Rolls Royce insists that the design is novel and can slash costs by relying on components small enough to be manufactured in factories. “Everything can be cut down to size and put on a lorry,” said a spokesman.  

Rolls-Royce has said the design can slash costs by relying on components small enough to be manufactured in factories It aims for £65 MWh by the fifth plant, dropping to £60 once the scale is ramped up to seven gigawatts (GW), with exports targeting a putative £400bn global market.  

 

Eoin Treacy's view -

A decade ago the UK went from being an oil and gas exporter to an importer, as the North Sea oil fields hit peak production, and the cost of production began to rise. That represents a considerable headwind to growth from a sector which had been a tailwind for decades previously. When people bemoan declining living standards and the rising cost of living, one of the first places to look has to be the energy sector and absence of a clear strategy to promote energy independence. 



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November 08 2017

Commentary by Eoin Treacy

Venezuela Will Seek to Restructure Debt, Blaming Sanctions

This article by Katia Porzecanski, Patricia Laya, Ben Bartenstein, and Christine Jenkins for Bloomberg may be of interest to subscribers. Here is a section: 

Prices on PDVSA’s $3 billion of bonds maturing in 2027 were quoted at 20 cents on the dollar at 9:23 a.m. in London, according to pricing source CBBT. Venezuelan government bonds maturing in 2018 slid 16 cents on the dollar to 63 cents, while longer-maturity debt was little changed.

Even after the oil producer known as PDVSA made an $842 million principal payment Oct. 27, the nation is behind on about $800 million of interest payments. All told, there’s $143 billion in foreign debt owed by the government and state entities, with about $52 billion in bonds, according to Torino Capital.

Sanctions imposed in August by the U.S. have made it difficult to raise money from international investors, and effectively prohibit refinancing or restructuring existing debt, because they block U.S.-regulated institutions from buying new bonds. It’s an unprecedented situation for bondholders, who have limited recourse as long as sanctions are in effect.

“I decree a refinancing and restructuring of external debt and all Venezuelan payments,” Maduro said. “We’re going to a complete reformatting. To find an equilibrium, and to cover the necessities of the country, the investments of the country.”

 

Eoin Treacy's view -

$60 is a big level for many higher cost private sector oil producers. It’s a number many companies have quoted as they struggled with cutting costs while prices traded below economic levels. Their fortunes are improving now that prices are at two-year highs. Venezuela’s breakeven is well above current levels so the recent rally is less of a salve, while bond payments are a constant drain on revenues. 



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November 07 2017

Commentary by Eoin Treacy

Musings From The Oil Patch November 7th 2017

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

The euphoria that greeted the production cut agreement announcement lifted oil prices above $50 a barrel, a critical threshold for market confidence.  As global oil inventories failed to drop as the market expected, investors turned on the commodity as well as energy stocks, sending their prices lower.  Since the oil price drop in early 2007, prices have largely traded between the low $40s a barrel to now above $54, with a brief excursion as low as $26.  The narrow price range reflected global oil inventories remaining relatively flat, until recently.  As oil inventories started falling a few weeks ago, we are now in a period favorable for higher prices.  

Today, we are firmly planted in an oil market reflecting positive price momentum.  Better projected oil demand growth seemed to be the initial factor that helped lift the oil market.  The International Energy Agency (IEA) upped its demand growth estimates for the second half of 2017.  About the same time, U.S. shale producers began shedding oil drilling rigs in response to weakening oil prices and as they sensed a need to rebuild investor confidence in their financial health.  Producers had to dispel the image of exploration and production (E&P) companies as destroyers of capital, a label the industry’s record seemed to warrant.  Disciplined capital spending, meaning living within a company’s cash flow in order to not have to borrow money or sell more equity to fund the overspending, appears to be the new mantra for E&P companies.  The latest survey of E&P company spending plans versus cash flow demonstrates that overspending remains high.  This may signal that it will take time for companies to generate positive cash flow.  

In recent weeks, as Brent oil prices have risen at a faster rate than WTI oil, the forward oil price curve moved into backwardation, meaning that barrels of oil able to be delivered immediately are worth more than if they are stored and delivered in the future.  This price disparity is further impacted by the cost of storing the oil.  Backwardation encourages holders of oil in storage to begin selling those barrels, which has accelerated the shrinking of global oil inventories.   

Eoin Treacy's view -

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



Comparing these two futures curves for Brent Crude oil and West Texas Intermediate we see that the backwardation is most acute in Brent while West Texas Intermediate is in contango over the first four contracts. That highlights the continued incentive domestic US suppliers have, to pump and export into the global market; picking up a more than $5 spread in the process. 



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November 06 2017

Commentary by Eoin Treacy

A resignation, detentions and missiles: 24 hours that shook the Middle East

This article by Tamara Qiblawi for CNN may be of interest to subscribers. Here is a section:

Saudi Arabia was still putting out the fires caused by the missile attack when state TV announced the onset of an anti-corruption crackdown led by the crown prince. Over 17 princes and top officials were arrested on graft charges, according to a list obtained by CNN and cited by a senior royal court official.

The list includes billionaire business magnate Prince Alwaleed bin Talal, who owns 95% of Kingdom Holding, which holds stakes in global companies such as Citigroup, Twitter, Apple and News Corp.

The list also includes formal head of the royal court Khaled Al-Tuwaijri, Saudi media mogul Waleed Al-Ibrahim and Prince Turki Bin Nasser.

"Some of the wealthiest figures in the Arab world are in apprehension today," said military analyst Riad Kahwaji.
"This is unprecedented. We're seeing it for the first time and it's definitely causing shockwaves across the region."

 

Eoin Treacy's view -

On October 19th 2015 I wrote this: 

To think of Saudi Arabia as having to go to the market for money is a misrepresentation of just how much capital the kingdom has. Let’s think of the country more as a feudal kingdom than the democracies we are accustomed to. It is not beyond the realm of possibility that the various princes who have accumulated impressive wealth based on the largesse of the crown could be called upon to supply the state with arms, capital or soldiers in just the same way that dukes and earls would have done in feudal Europe.

 



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November 03 2017

Commentary by Eoin Treacy

Fossil-Fuel Friendly Tax Plan Spares Oil, Not Solar or Tesla

This article by Alex Nussbaum, Brian Eckhouse and Emma Ockerman for Bloomberg may be of interest to subscribers. Here is a section:

The House proposal protects three provisions that save explorers billions of dollars annually, while chopping a few others.

The legislation preserves the use of last-in-first-out accounting rules, also known as LIFO. The rules let companies value crude stockpiles at the price they’re selling for, rather than the original purchase cost. The bill also allows continued deductions of so-called intangible drilling costs and preserves a measure that lets explorers reduce taxable income to reflect the depreciation of reserves.

All three were thought to be in jeopardy as Republicans searched for offsets to pay for lowering taxes elsewhere.
Eliminating the drilling and depletion provisions alone would force energy companies to pay about $25 billion in additional taxes between 2016 and 2026, Congress’s Joint Committee on Taxation estimated last year.

The House bill would also end two smaller breaks for “marginal" oil wells and enhanced oil recovery projects, which involve older oil and gas fields. That would cost drillers about $371 million over ten years, the committee estimated.
The plan spares “the Holy Grail of E&P tax breaks" by maintaining the intangible drilling costs provision, analysts at Houston investment bank Tudor Pickering Holt & Co. said in a research note Friday. Between that and a plan to cut the corporate rate from 35 percent to 20 percent, the legislation would be “a net positive for oil and gas," they wrote.

 

Eoin Treacy's view -

The US oil and gas business represents a major opportunity for the economy to reduce its trade deficit with oil producers or even to become a net energy exporter. Renewables represent an equally important part of that goal since every barrel of oil not consumed at home is available for export. It therefore makes sense from a strategic perspective to support both from a regulatory and tax perspective. However, energy is about the most politically charged of all sectors, not to mention being competitive between source and others. Therefore one tends to be favoured over the other depending on the tone of the administration in power. 



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October 27 2017

Commentary by Eoin Treacy

Brent Oil Tops $60 for First Time Since 2015 Amid OPEC Optimism

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

Both the global benchmark and its U.S. counterpart have rallied in October amid increasing belief that the Organization of Petroleum Exporting Countries will agree to cut output later into next year, helping to work down global inventories. Statoil ASA’s Chief Executive Officer Eldar Saetre said in a Bloomberg Television interview that he continues to see strong demand and the oil market is “definitely balancing.”

“People are starting to price in the OECD inventories moving back towards normalized levels into later 2018,” Brad Hunnewell, senior equity analyst at Rockefeller & Co., said by telephone.

U.S. Army Colonel Ryan Dillon, a spokesman for Operation Inherent Resolve, the U.S.-led coalition against the Islamic State said in a Twitter message Friday that he “incorrectly” said in an interview with Kurdish Rudaw news agency that there was a cease-fire between Iraqi and Kurdish forces. A rally in WTI immediately followed his message. Iraqi Prime Minister Haider Al-Abadi suspended operations by federal forces for 24 hours in disputed areas to allow a joint Iraqi and Kurdish team to deploy forces, Sumaria TV reported.

 

Eoin Treacy's view -

Synchronised global economic expansion is generally positive for commodity prices. With OPEC at least limiting supply that is helping to support prices. Saudi Arabia also has a vested interest in getting prices as high as possible over the next year as it burnishes the appeal of the Saudi Aramco IPO. 



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October 24 2017

Commentary by Eoin Treacy

Musings from the Oil Patch Ocotber 24th 2017

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

If you are Saudi Arabia, a one-product (oil) economy, and you are watching the aggressive adoption of government policies around the world to stop the sale of internal combustion engine cars, you have to be concerned.  Given that France and the UK have announced bans on the sale of ICE vehicles by 2040, auto industry executives are assuming China will adopt a similar date.  The Netherlands just adopted a 2025 ban on the sale of new ICE cars, with a 2030 date for all ICE cars to be off Dutch roads.   

For China, the world’s largest car market, having sold over 28 million cars last year (nearly a 14% year-over-year increase), the banning of ICE vehicles will shrink the need for, and eventually eliminate motor fuels, which will have a material impact on Saudi Arabia’s long-term oil export opportunities.  When considering that Saudi Arabia has been fighting Russia and Iran to gain an increased share of the Asian, and especially Chinese, oil markets, anything threatening the long-term success of that fight is of concern, even if it is a future event.
   
 Is the industrial policy to ban ICE vehicles a signal of the impending end of the Petroleum Age, much like Sheik Yamani predicted?  Is that prospect part of the motivation behind Crown Prince Salman’s plan to sell off a portion of Saudi Aramco, either in an initial public offering or through a direct sale to sovereign wealth funds to raise money now for diversification investments?  In a way, current industry developments and future prospects are similar to the forces that drove OPEC’s formation in 1960.  A brief review of history may help put into perspective why OPEC is struggling to remain relevant now, and will likely continue to struggle in the future. 

 

Eoin Treacy's view -

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

The argument about the exact timeline for when renewables will represent a dominant position in the energy mix and in the transportation sector continues to receive a great deal of attention. However, the bigger picture is that energy providers, who have little choice but to adopt very long-term perspectives, have already concluded that the heyday of the oil market has passed. That should help to inform our view of what the medium-term perspective on the energy markets is. 



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October 23 2017

Commentary by Eoin Treacy

Venezuela's Behind on Its Debt and Facing Two Huge Bond Payments

This article from Bloomberg may be of interest. Here is a section:

Venezuela could still also make the payments on time. While $10 billion in foreign reserves isn’t much for a country that now owes some $140 billion to foreign creditors, it’s still enough to pay the bills for a while.

And the Maduro government has surprised the bond market before, making payments the past couple years that many traders had anticipated would be missed. Some of those now betting that these next two payments will also be made actually point to the $350 million currently overdue on the other notes as an encouraging sign. Those arrears indicate, they contend, that officials are prioritizing the payment of bonds with no grace period at the expense of those they can put off without penalty.

Even if Venezuela can make the payments due this year, investors say that, unless oil prices stage some sort of miraculous comeback, they still see default as an inevitable outcome. Credit-default swaps show they’re pricing in a 75 percent chance of a PDVSA default in the next 12 months and 99 percent in the next five years.

 

Eoin Treacy's view -

Venezuela represents a problem for bond investors because it could either be a one-off default or be the thin end of the wedge for distressed energy producers. The fact PDVSA sinkable bonds are now trading at a spread of 526 basis points, versus 200 last week, suggests investors are increasingly skeptical the government is going to be able to make principal payments when they mature on November 2nd. 



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October 09 2017

Commentary by Eoin Treacy

During Irma's Power Outages, Some Houses Kept The Lights On With Solar And Batteries

This article by Adele Peters for fastcompany.com may be of interest to subscribers. Here is a section: 

Of course, if a storm is strong enough to tear solar panels off a roof and the battery can’t recharge, this type of system wouldn’t work for long. It’s also expensive: A single Powerwall unit, which can store 14 kilowatt-hours of energy, costs $5,500 plus supporting hardware and installation that can cost up to $2,000. A similar battery from Mercedes-Benz ranges from $5,000 to $13,000 for a 20 kilowatt-hour system including installation. In the U.K., where Ikea now sells both solar panels and batteries, its batteries are also nearly $4,000 at current exchange rates. Beyond cost, if someone rents an apartment or house and can’t install solar panels, it’s not an option.

But the cost is likely to drop, and battery storage and solar power could also be used in community solar projects, where customers don’t have solar panels at their own homes, but invest in or buy power from a nearby microgrid. In Orlando, customers can buy solar energy from a 12-megawatt solar farm built on top of a landfill; while the power is currently sent back to the grid, in the future, it’s possible that it and other community solar farms could use batteries to provide local backup power from multiple locations in emergencies.

 

Eoin Treacy's view -

Microgrids, batteries and solar cells have the potential to grow exponentially as costs come down and business models evolve. There are two additional points that are likely to prove attractive to consumers as well as government. The first is that the utility network is likely to be a target in any future war and foreign governments have already demonstrated both the intent and ability to tamper with it. 



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October 05 2017

Commentary by Eoin Treacy

More Lean, More Green

Thanks to a subscriber for this report from Goldman Sachs dated June 5th which is no less relevant today and may be of interest to subscribers. Here is a section:

We expect the costs of wind and solar to fall below the level of European power prices in the early 2020s (Exhibit 4). As costs fall below the price of the marginal technology, we expect utilities to ramp up their renewables installations, to keep/gain market share in the generation mix. We expect this to significantly change the generation mix in Europe, and would expect thermal technologies (mainly coal and gas) to be negatively impacted in terms of output. We would expect most governments (aside from those keen to protect a particular technology, such as domestic coal) to support this, as it should help reduce carbon emissions and lower electricity tariffs.  

Profits for wind developers/manufacturers to accelerate We estimate that the reduction in costs for wind/solar that we forecast will trigger a 30% step-up in annual global renewables investment (MWs) globally, post 2020, for the main European developers (Exhibit 7). We expect this trend to accelerate net income growth to c.2.5% (2017-36E) from 1.5% currently (Exhibit 8). 

For the European wind turbine manufacturers, we expect an average step-up in annual revenues of c.17% globally over 2017-36E, vs. 2017E (9 pp higher than previously anticipated), boosting annual net income by 58%. We estimate that this will support an equity value c.15% higher than we previously anticipated for the manufacturers.  

Our forecasts assume a significant change in the generation mix only in Europe: therefore, we would see upside to our renewables estimates if we were to extrapolate this globally.

 

Eoin Treacy's view -

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

When thinking about the march of technology we need to force ourselves to think about the consequences of something that is happening today on the future. The pace of innovation is accelerating; often in an exponential manner so the linear trajectory of our personal experience is often not the best way to think about the how markets will evolve. It would be easy to look at the wind or solar sector today and conclude it is not yet competitive but technology is changing so quickly that it is almost inevitable it will be cost competitive in future. That is the whole point of the exponential way of thinking Ray Kurzweil pioneered. 



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October 04 2017

Commentary by Eoin Treacy

Shale Oil What the Thunder Said

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

After a year-long investigation, we challenge the orthodoxy on shale oil. Breakevens will deflate from $50/bbl to c$25-30/bbl. Ultimate production potential is 25-30Mbpd by 2025-30, overwhelming agency forecasts for 5-7Mbpd. The implications extend far beyond the oil industry.

What has changed is our perception of shale oil as a new technology paradigm: a digital revolution, offering 50-70% further productivity gains. Unlocking the full potential requires $100bn pa of upstream investment to be attracted by improving economics. Requisite political support is also warranted by reshaping global geopolitics and manufacturing, in favour of the US.

But world-changing trends are rarely realised in smooth trajectories. The conventional oil industry will contest shale’s ascent. International costs will continue deflating. Tax regimes will be overhauled to reinvigorate investment. Incumbent producers must compete with shale. OPEC’s last resort may be to incite periodic oil price volatility, potentially as soon as 2018.

Investing in this era is challenging. Our models now assume sustained deflation, averaging $46/bbl oil to 2020. The forward curve is too optimistic. Complacent companies will disappoint shareholders. But the leading European Majors are becoming remarkably resilient and can at least preserve equity value.

The prize lies in shale, with 25% upside and lower risk than conventional oil, even amidst low, volatile oil prices. US Super-Majors will capture the opportunity, by pivoting to short-cycle investment. Chevron is preferred. Shorter term bottlenecks will also emerge, benefiting select Oil Services.

Eoin Treacy's view -

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

The energy sector is in a state of flux. That is the natural reaction to a prolonged period of high prices which encourage economisation, greater technological innovation and investment in more supply. We now see a broad spectrum of responses to high prices which have contributed to better efficiency and more potential options for both production of electricity and storage as well as uses for electricity. Meanwhile oil is likely to remain a vitally important commodity for the foreseeable future not least as the global economy continues to industrialise and the chemical industry innovates the cracking process to prioritise commodities as the market demands. 



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October 03 2017

Commentary by Eoin Treacy

Chinese EV market nearing 2% penetration

This article from mining.com may be of interest to subscribers. Here is a section:

In 2016 Chinese electrical vehicle makers represented 43% of the global EV market, or 873,000 units, overtaking the United States for the first time, according to a July report by McKinsey & Company. The report notes that not only did China up its share of the EV market by 3% compared to 2015, it also made gains on the supply side of EVs including components such as lithium-ion batteries and electric motors. "One important factor is that the Chinese government provides subsidies to the sector in an effort to reduce fuel imports, improve air quality, and foster local champions," McKinsey explained.

The Chinese government has announced that "new energy vehicles" (NEVs, which includes hybrids) should account for 8% of the passenger vehicle market by 2018, 10% by 2019 and 12% by 2020, according to EV Volumes.com.

Eoin Treacy's view -

Anyone who has spent any time in Beijing over the winter knows how badly the entire north east of the country needs to combat air pollution. On my first strip in 2005 I developed a cough as if I have been smoking my entire life that only let up once I got back on the plane home. If anything, the air is worse today than it was then. 



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September 28 2017

Commentary by Eoin Treacy

Gleanings: "When Smart People Talk, We Listen"

Thanks to a subscriber for this report from Jeffrey Saut for Raymond James which may be of interest. Here is a section: 

1. Invest in something when people say they never want to invest in it again, when they are throwing it out the window. Think about that.  We know people that liquidated their portfolios around the March 2009 lows vowing to never buy a stock again.  The same can be said about tech stocks as they were bottoming between November 2002 and May 2003.  Currently, the same thing is being said now about energy stocks, especially the midstream MLPs.

2. Investing is both qualitative and quantitative. There is room for both disciplines (qualitative and quantitative) in one’s portfolio just like there is room for both passive and active investment management, although currently we favor active. 

3. The more people ridicule and question you, the more likely you are probably onto a good thing no matter what it is. This was like us buying oil sands stocks in the late 1990s when everyone was buying tech.  Or like when we bought tech stocks near the end of 2002; and, what we are doing now in buying the out of favor energy stocks. 

4. Don’t invest in an area just because it is depressed, find and wait for the change and invest just before it happens while still unrecognized by the market. My father use to tell me, “Good things happen to cheap stocks,” but stocks can stay cheap for a really long time if other investors do not recognize their cheap valuations.  The charts will tell you when other investors will recognize them too.

 

Eoin Treacy's view -

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

Many investors seeking to follow the buy-low-sell-high maxims laid out in this report are hunting for sectors that look cheap by historical standards. The most obvious candidate is the energy sector which is still struggling with the profound changes unconventional supply have wreaked, not to mention the anticipated surge in demand for electric vehicles. 



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September 28 2017

Commentary by Eoin Treacy

The World Is Creeping Toward De-Dollarization

Thanks to a subscriber for this article by Ronald-Peter Stöferle for the Mises Institute. Here is a section:

A clear signal that something is afoot would be the abolition of the Saudi riyal's peg to the US dollar. As recently as April of this year economist Nasser Saeedi advised Middle Eastern countries to prepare for a “new normal” — and specifically to review the dollar pegs of their currencies: “By 2025 it is clear that the center of global economic geography is very much in Asia. What we’ve been living in over the past two decades is a very big shift in the political, economic, and financial geography.”

While the role of oil-producing countries (and particularly Saudi Arabia) shouldn't be underestimated, at present the driving forces with regard to de-dollarization are primarily Moscow and Beijing. We want to take a closer look at this process.

There exist numerous political statements in this context which leave no room for doubt. The Russians and Chinese are quite open about their views regarding the role of gold in the current phase of the transition. Thus, Russian prime minister Dimitri Medvedev, at the time president of Russia, held a gold coin up to a camera on occasion of the 2008 G8 meeting in Aquila in Italy. Medvedev said that debates over the reserve currency question had become a permanent fixture of the meetings of government leaders.

Almost ten years later, the topic of currencies and gold is on the Sino-Russian agenda again. In March, Russia's central bank opened its first office in Beijing. Russia is preparing to place its first renminbi-denominated government bond. Both sides have intensified efforts in recent years to settle bilateral trade not in US dollars, but in rubles and yuan. Gold is considered important by both countries.

 

Eoin Treacy's view -

Oil and its derivative products are used in every country in the world so it is logical that the acquiescence of major suppliers to a Dollar standard is a necessary condition of the USA’s international currency hegemony. However, it is not the only consideration. 



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September 27 2017

Commentary by Eoin Treacy

2017 at the Three Quarter Pole

Thanks to a subscriber for securing an invitation for me to attend Jeff Gundlach’s presentation yesterday which as always was an educative experience. 

Eoin Treacy's view -

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

There were a number of interesting points raised but I believe the most relevant for subscribers’ centre on what he said about shrinking the Fed’s balance sheet, the outlook for the Dollar, commodity markets, the relative attractiveness of emerging markets and his best guess for when to expect the next recession.



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September 26 2017

Commentary by Eoin Treacy

BHP, world's largest miner, says 2017 is 'tipping point' for electric cars

This article by Clara Ferreira-Marques and Gavin Maguire for Reuters may be of interest to subscribers. Here is a section: 

Balhuizen said he expected the electric vehicle boom would be felt - for producers - first in copper, where supply will struggle to match increased demand. The world’s top mines are aging and there have been no major discoveries in two decades.

The market, he said, may have underestimated the impact on the red metal: fully electric vehicles require four times as much copper as cars that run on combustion engines.

BHP, Balhuizen said, is well-placed, with assets like Escondida and Spence in Chile, and Olympic Dam in Australia. BHP said last month it was spending $2.5 billion to extend the life of the Spence mine in northern Chile by more than 50 years.

 

Eoin Treacy's view -

Copper is currently in contango suggesting a short-term supply deficit is not what has driven prices higher over the last couple of months. The outage at Escondido which restricted supply was a consideration that contributed to the gain but was not enough to push the futures curve into backwardation. Enthusiasm about the demand vector electric vehicles represents for metals like copper, nickel, lithium and cobalt could be a better explanation despite the fact these represent medium rather than short-term considerations. 



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September 20 2017

Commentary by Eoin Treacy

Oil Traders Empty Key Crude Storage Hub as Demand Booms

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

Oil traders are emptying one of the world’s largest crude storage facilities, located near the southernmost tip of Africa, as the physical market tightens amid booming demand and OPEC production cuts.

Total SA, Vitol Group and Mercuria Energy Group Ltd. are selling crude they hoarded in Saldanha Bay, South Africa, during the 2015-2016 glut when the market effectively paid traders to store oil, according to people familiar with the matter, who asked not to be named discussing private operations. 

Crude demand is now seasonally outstripping supply, tightening the physical market for some crude varieties to levels not seen in the last two years and encouraging traders to sell their stored oil.

“The market is selling inventories from everywhere,” Mercuria Chief Executive Officer Marco Dunand said in an interview in Geneva.

Although largely unknown outside the oil trading industry, Saldanha Bay is one of the world’s largest crude storage facilities, with the capacity to hold 45 million barrels in just six gigantic, partially-buried concrete tanks. By comparison, Cushing, the better-known U.S. oil storage center in Oklahoma that serves as the pricing point for the West Texas Intermediate oil benchmark, can hold about 75 million barrels in more than 125 tanks.

 

Eoin Treacy's view -

We are in a period of synchronized global economic expansion so that should be generally positive for commodity demand, all other factors being equal. The hurricanes which hit the US and meant that the strategic reserve was tapped means it will need to be refilled while refineries will be running at capacity once they get back on line to make up for lost time.



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September 14 2017

Commentary by Eoin Treacy

Oil Breaches $50 as Worldwide Energy Demand Outlook Brightens

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

Oil topped $50 a barrel for the first time in more than a month amid heightened optimism that a demand resurgence is in the offing.

Futures rose as much as 2.4 percent in New York, extending the longest upswing since July. Two of the most influential organizations in world oil markets -- the International Energy Agency and OPEC -- nudged their demand forecasts higher, signaling continued erosion of a global glut that has weighed on prices.

Oil demand for 2017 will expand by the most in two years, the Paris-based IEA said on Wednesday. That followed OPEC’s increase of its estimate for how much crude buyers will seek from the cartel next year, driven by rising consumption in Europe and China. In the U.S., hurricane-driven refinery outages spurred fuel distributors to pull a record amount of gasoline from storage tanks to cope with shortages last week, government data showed.

“The market is continuing to digest that information and realizing that the rebalancing process is working,” Mark Watkins, a Park City, Utah-based regional investment manager at U.S. Bank Wealth Management, which oversees $142 billion in assets, said by telephone.

 

Eoin Treacy's view -

Saudi Arabia’s decision to sell a part of Aramco with the aim of setting a valuation so they could borrow against the balance led investors to conclude it believes oil prices are in terminal decline. Anecdotal evidence it is planning to delay the IPO has had the opposite effect on sentiment and is contributing to recent strength. 



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September 13 2017

Commentary by Eoin Treacy

Musings from the Oil Patch September 12th 2017

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

If a homeowner installs a charging station in his garage, there may not be much impact on the grid.  However, if all his neighbors do the same thing, there could be a problem.  Transformers are necessary to regulate the power flowing into a home, and they usually service multiple homes, generally four at a time.  A problem is that utility companies do not know exactly how much power is being used by a particular home relative to its neighbors until a transformer fails.  Upgrading transformers can be expensive and limited by weight limits for units mounted on power poles.  One estimate suggests moving from a 50KVA pad-mounted transformer serving four homes to a 75KVA unit costs about $3,000.   

For underground power installations, upgrading the transformer units may be easier, but not necessarily less costly.  One study by the Institute of Electrical and Electronics Engineers says that the problem is at the local level.  If multiple Level 2 chargers that fully recharge a car in 2-3 hours, are plugged in at the same time at night, they may prevent transformers from cooling as they are designed.  Sustained excess current will eventually ‘cook’ a transformer’s copper windings, causing a short and blacking out of the homes attached to the device.  This problem was observed from a study of the habits of EV owners in an Austin, Texas suburb.  Over a two-month period, the residents tended to recharge their EVs at the same time – when returning from work – that coincided with air conditioning loads increasing along with the use of other appliances. 

A similar study was conducted in the UK, which conducted an 18month study of resident habits when 100% were using EVs.  The study’s result show that at least a third of the UK’s power grid will need to be upgraded to support an EV sales rate of 40% of new car sales by 2023.  That doesn’t address the load issue if 40% of the entire UK vehicle fleet were plug-in EVs. 

 

Eoin Treacy's view -

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

The rollout of electric vehicles, which is anticipated to ramp up as manufacturing capacity for both batteries and cars comes on line in the next few years, is going to put strain on the electrical grid both from a generating and traffic perspective. While it can be argued how much additional supply with be required, the introduction of charging stations to the residential environment will certainly increase the consumption of electricity at individual homes. 



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September 12 2017

Commentary by Eoin Treacy

Email of the day on the ground experience from the Texas panhandle

I had the pleasure of spending several days with a friend who is an executive in a drilling company. He indicated that the recovery had brought a boom in drilling, but that customers were demanding the latest high-tech drilling rigs (faster, more efficient, much bigger pumps, able to drill longer laterals). This requires very large capital investments with uncertain payback times. Older, lower tech rigs are left unused, which creates dramatically lower rig utilization rates for drillers. Unfortunately, the past month has seen a bit of a slowdown, with some new tech rigs coming off of pads with no new contract (meaning the rig goes to the yard and sits, and the crew have no jobs). While this may be a short-term issue, it could alternatively be a sickly-looking canary.

Unlike last year, when vast numbers of pump jacks were idle (indicating the well is not producing at that moment), this year more than 75% of the pump jacks I saw were pumping, and most looked well-maintained. Pump jacks do not normally pump full-time, as they shut down for maintenance, and when their storage tanks are full, etc. A lot of the oil in the area is pumped into tanks and then picked up by trucks. 

The beef, pork, chicken, and nuclear weapon businesses all appeared to be thriving.

Probably needless to say, but the Texas Panhandle is about 700 miles from the flooding.

Eoin Treacy's view -

Thank you for this trip report which I’m sure will be appreciated by subscribers. Relatively low prices, at least compared to a few years ago, put pressure on services businesses to employ the most sophisticated technology which requires fewer people and more capital. That benefits larger companies with the financial heft to prosper while it is likely to have a negative effect on smaller operations. 



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September 07 2017

Commentary by Eoin Treacy

How a Bird Charity's Battle Against a Wind Farm Backfired

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

When plans for Neart na Gaoithe started being developed in 2008, Siemens AG’s 3.6 megawatt turbine was the most popular among developers. Now manufacturers are working on machines that could be four times bigger, helping companies like Dong Energy A/S build projects cheaply enough to make money at market prices. The collapse in oil prices has also helped lower offshore wind costs, by making the sea vessels needed to install projects cheaper to hire.

Eoin Treacy's view -

I’ve haven’t seen a satisfactory solution for the problem of wind turbines impact on migratory bird populations regardless of the fact offshore turbines help create artificial reefs for sea life. However, the economies of scale that can be gained from going offshore has altered the wind turbine sector beyond recognition. 



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September 05 2017

Commentary by Eoin Treacy

Hurricane Irma Strengthens to a Category 5 Storm

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

 

Beyond the threat to people and property in the Caribbean, the focus so far is on agriculture with the storm, "being a case of being long orange Juice futures rather than gasoline futures," Jakob said.

Irma will probably cross the northern Leeward Islands Tuesday into Wednesday, according to the NHC, which said it’s still too early to determine what impact it might have on the U.S. Hurricane warnings have been issued for the U.S. and British Virgin Islands, Puerto Rico, Vieques, and Culebra. Tropical-storm-force winds could arrive in the British and U.S. Virgin Islands and Puerto Rico by early Wednesday.

About two-thirds of Florida’s citrus crop is located in the lower two-thirds of the peninsula. Frozen concentrated orange juice futures in New York already rose last week on speculation the storm could strike, though prices are down almost 30 percent since January.

Eoin Treacy's view -

Hurricane Katrina hit New Orleans in 2005. Hurricane Harvey hit Houston in 2017 and in between we have seen some of the quietest storm seasons in years. I think that is worth remembering that when so many stories running right now talk about accelerating climate change. Hurricane Irma has not yet made landfall but at Category 5 it is going to create a lot of damage somewhere. If Irma makes landfall it will be the first time the USA is hit by two such powerful storms in one season.   



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September 01 2017

Commentary by Eoin Treacy

Email of the day on cobalt

Nickel is an important metal in itself for battery technology, but 2/3 of nickel goes into stainless steel, so from this perspective nickel isn't a very highly leveraged play on battery advances. Whilst Cobalt is a by-product of nickel mining, it is my understanding that this is mainly the case from lateritic nickel deposits, and there is a much lower % of cobalt by-product from deep mines. 

Eoin Treacy's view -

Thank you for this educative email, from a subscriber who literally wrote the book on mining economics. I agree that not every nickel company produces cobalt which is why the three large miners I mentioned all specifically state they do produce it. 



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August 31 2017

Commentary by Eoin Treacy

August 30 2017

Commentary by Eoin Treacy

Musings from the Oil Patch August 29th 2017

Thanks to a subscriber for this edition of Allen Brook’s ever interesting report for PPHB. Here is a section on lithium and cobalt:

We don’t know the details behind the Morgan Stanley electric vehicle forecast, but we know there are both more and less aggressive forecasts.  We wonder if those forecasters have considered the potential constraints from lithium carbonate supply.  There is a greater issue with cobalt, which accounts for 58% of a battery by weight, more than the lithium in a battery, and consumes 42% of all cobalt output.  The problem is that cobalt supplies are smaller and about 60% comes from the Democratic Republic of Congo, which is controlled by war lords and relies on child labor for mining the ore.  The governments we will have to deal with to meet the demand for rare minerals to meet electric vehicle forecasts present many moral and financial question marks.  In fact, when we were in Tibet earlier this summer, we followed Chinese trucks hauling bags of lithium carbonate from mines to shipping depots.  That supply is likely committed to the Chinese electric vehicle industry, which needs it to meet its anticipated growth outlook.   

As a result of the growing demand for lithium and other rare minerals, their prices are climbing, and in some cases at alarming rates.  Since 2015, lithium prices have quadrupled, while cobalt prices have doubled.  What will rising prices and limited availability mean for the forecasts of ever cheaper batteries?   

 

Eoin Treacy's view -

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

Forecasts for where lithium and cobalt demand is going to be in 2025 are being used to drive investment in new supply today, but it takes years to bring new supply to market. In that window between when demand increases and supply responds there is room for prices to increase meaningfully; in a rerun of the Supply Inelasticity Meets Rising Demand dynamic that animated the commodity bull market from the early 2000s. 



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August 29 2017

Commentary by Eoin Treacy

Harvey Recharges Offshore as Crippled Houston Counts the Cost

This article by Joe Carroll and Thomas Black for Bloomberg may be of interest to subscribers. Here is a section: 

Gasoline futures in New York extended gains a sixth session Tuesday as more than a million barrels of fuel-making capacity was knocked offline; and natural-gas fields and offshore-drilling rigs shut down. The motor fuel advanced 0.4 percent to $1.7183 a gallon at 5:09 a.m. New York time.

Ports along a 250-mile stretch of Texas coast were closed to tankers. Twenty-two vessels laden with a combined 15.3 million barrels of crude from as far afield as Brazil and Colombia were drifting off the coastline, waiting for the all clear.

Ten of the state’s 25 refineries are shut down, accounting for about half the 6 million barrels per day of capacity, said Christi Craddick, chairman of the three-member Texas Railroad Commission, which regulates the industry. Companies will have to wait for floods to recede before they can evaluate damage, she said.

“Hopefully within the next week to two weeks, we’ll see refineries back online,” Craddick said.  

 

Eoin Treacy's view -

Hurricane Katrina resulted in a surge in natural gas prices because so much supply depended on Gulf of Mexico platforms. The rise of onshore shale supplies has reduced reliance on offshore gas so hurricane Harvey has had little impact on gas prices. On the other hand, gasoline refining is heavily concentrated on the Gulf coast and not least around Houston. Therefore, it is the commodity most likely to be affected by hurricane induced damage. 



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August 24 2017

Commentary by Eoin Treacy

Harvey Likely to Be First Hurricane to Strike Texas Since 2008

This article by Brian K Sullivan and Melissa Cheok for Bloomberg may be of interest to subscribers. Here is a section: 

“It could intensify right up to landfall on Friday,” said Jeff Masters, co-founder of Weather Underground in Ann Arbor, Michigan. “I expect a Category 1 hurricane at landfall, but I cannot rule out a Category 2.”

Harvey is expected to bring multiple hazards including heavy rainfall, storm surge and possible hurricane conditions to parts of the Texas coast on Friday. Heavy rainfall is expected to spread across portions of south, central and eastern Texas and the lower Mississippi Valley from Friday through early next week and could cause life-threatening flooding, according to the advisory.

The Gulf Coast from Corpus Christi, Texas, to Lake Charles, Louisiana, is home to nearly 30 refineries -- making up about 7 million barrels a day of refining capacity, or one-third of the U.S. total. It’s in the path of expected heavy rainfall. Flooding poses risks to operations and may cause power failures.

 

Eoin Treacy's view -

The last few years have been particularly quiet hurricane seasons and even though Harvey will struggle to exceed category one its location ensures there will be plenty of precipitation falling in the Corpus Christ through Louisiana areas which will disrupt businesses. 



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August 17 2017

Commentary by Eoin Treacy

Musings from the Oil Patch August 15th 2017

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

In total, between 2010 and 2040, the EIA expects energy demand to grow by 54.4%.  Liquids fuels are projected to grow over this period by 37.7%, while natural gas growth will soar 78.7%.  In physical terms, natural gas (93 QBtus increase) consumption will grow by nearly a third more than oil’s use (68 QBtus), while coal consumption (34 QBtus) will increase by barely over half of the growth in liquids’ consumption.  Nuclear power increases the least of all the fuels (19 QBtus), but posted one of the largest percentage gains (+67.9%) due to its small base in 2010.  Most interestingly, the Other category, which includes renewables, is predicted to increase consumption by 74 QBtus, or an impressive 128.5% gain.   

A consideration that should not be overlooked is where this growth is happening.  Exhibit 3 (next page) shows energy consumption divided between the developed countries of the world (OECD) and the developing ones (non-OPEC).  The difference in energy demand growth between these two groups is astounding.  The OECD economies will increase their energy use by 15.8% compared to the 87.5% growth projected for non-OECD economies.  For a domestic exploration and production company, this may seem to be a worthless consideration, but now that the United States has become an oil exporter, the health of the global oil market should be of increased interest to the executives of these E&P companies.   
What the EIA forecast demonstrates is that the portfolio shifts underway at several major integrated oil companies – BP, Royal Dutch Shell (RDS.A-NYSE) and TOTAL S.A. (TOTF.PA) – from crude oil to natural gas resource exploitation, are founded on the expectation that the world’s energy market has entered a new era that will be dominated by natural gas.

The quest for cleaner fossil fuels, in response to global pressure to reduce carbon emissions, has focused on increased use of natural gas, which has considerably fewer carbon emissions than either crude oil or coal.  That explains why natural gas was initially embraced by environmentalists as the “bridge fuel” to a cleaner energy mix until renewable fuels could mature sufficiently to become the “carbonless fuel” for the future.  The double-digit price at that time may explain why the environmentalists loved natural gas as it provided a price umbrella over expensive renewables.   

 

Eoin Treacy's view -

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

The major oil companies have been reporting reserves on an energy equivalent basis for more than a decade which tends to paper over the transition that has been made from oil to gas production. It’s no exaggeration to state that companies like Royal Dutch Shell, Total and Exxon Mobil might better be described as major gas companies rather than major oil companies. 



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August 08 2017

Commentary by Eoin Treacy

Email of the day on batteries

Welcome back from China, I would also reciprocate the glowing comments
on Saturdays missive.

FYI attached please find some headlines from the Asian Nikkei, unfortunately I am not a subscriber, but for all the battery fanatics following you and I agree with the view that battery technology is a game changer. I thought you would be interested in the following :

Eoin Treacy's view -

Battery technology was a fringe industry for a long time because there was no compelling commercial reason to invest the money required to develop it. That changed when oil prices surged higher and consumers were forced to begin to think about economizing to reduce how much they were spending on energy. 

The dynamics that have unfolded in the energy sector are a perfect example of how high prices influence spending decisions by producers and economizing by consumers while low prices have the opposite effect. These long-term dynamics contribute to the long-term cyclical nature of markets. 



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August 01 2017

Commentary by Eoin Treacy

Musings from the Oil Patch August 1st 2017

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

Since these solid-state batteries can be packed more tightly, more power can be put into the same space occupied by a current lithium-ion battery, significantly boosting a vehicle’s range.  Another advantage of these solid-state batteries is that they can handle higher charging currents safely.  That allows for faster charging times, assuming the remote charging stations are equipped with more powerful charging current equipment.   

According to the patent applications, solid-state batteries are less susceptible to temperature variations than liquid electrolyte batteries, which is a hidden issue for many EVs who suffer lost power and range due to extreme heat and cold.  Additionally, solid-state batteries eliminate the need for many of the safety features of current lithium-ion batteries, which will help boost their relative cost advantage, thereby improving the economics for EVs.   

 

Eoin Treacy's view -

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

The prize for innovation in the battery sector cannot be overstated. Energy storage represents the lynchpin for the evolution of the renewable energy, transportation and utility sectors. The company that can get a better battery with high energy density and faster charging capabilities to market first will quickly gain market share because the cost advantage it will derive will be so acute. 



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July 21 2017

Commentary by Eoin Treacy

Letter to the Editor of the New York Times from Sunrun's CEO

I thought this letter by Lynn Jurich may be of interest to subscribers. Here it is in full:

“After Rapid Growth, Rooftop Solar Programs Dim Under Pressure From Utility Lobbyists” (news article, July 9) got it right that traditional utilities are fighting to undercut competition and customer choice by targeting state solar policies, “particularly net metering, which credits solar customers for the electricity they generate but do not use and send back to the grid.”

Rooftop solar growth, however, is inevitable. More than one million consumers across the country are already powering their homes with rooftop solar. By 2022, residential solar capacity will more than triple, according to GTM Research estimates.

The utility lobby is intentionally distracting regulators from focusing on the real threat to affordable energy: billions of dollars of grid expansion proposals with virtually guaranteed profits and requests to subsidize nuclear plants. Rooftop solar competition forces utilities to control their costs.

Policy leaders who dig into the facts know that rooftop solar, plus home batteries for solar storage, will modernize our grid, provide more affordable clean power to everyone and create more American jobs.

 

Eoin Treacy's view -

The combative tone of this letter to the editors highlights the fact that the battle between utilities and solar companies is far from over. If we distil the arguments down to their core. Utilities have a vested interest in preserving their near monopoly on supply of electricity and the grid on which it travels. Solar companies want to create as large a market for their products as possible and rooftops are an important part of their growth strategy. To that end they have developed innovative pricing models and relied on sharing the grid so electricity can be sold. 



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July 19 2017

Commentary by Eoin Treacy

Musings from the Oil Patch July 19th 2017

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

The latest topic of interest in the oil and gas business is the lack of new discoveries given the cutback in capital investment in keeping with Mr. Dudley’s “capital diet.”  What does this mean for the industry’s future?  The International Energy Agency (IEA) has sounded the alarm over sharply higher oil prices in the 2020-2022 time frame due to a lack of industry capital spending.  With capital spending cut by 25% in 2015 and by another 26% in 2016, prospects are increasing for a growing gap in the future output trajectory for oil.  Current expectations call for a modest increase in capital spending during 2017, but that increase could prove overly optimistic should oil prices fail to recover in the second half.   

The IEA warned in its Oil 2017 report of a possible imbalance between demand and supply growth, leading to the smallest global spare production capacity surplus in 14 years by 2022.  That conclusion is based on demand growth for 2016-2022 of 7.3 million barrels per day (mmb/d), which exceeds the projected supply growth of under 6 mmb/d.  A possible relief valve might be the growth in U.S. shale output.  As Dr. Fatih Birol, the IEA’s executive director put it: “We are witnessing the start of a second wave of U.S. supply growth, and its size will depend on where prices go.”  He went on to say, “But this is no time for complacency.  We don’t see a peak in oil demand any time soon.  And unless investments globally rebound sharply, a new period of price volatility looms on the horizon.”

The supply shortage view seems to be gaining traction among oil and gas industry professionals.  Halliburton Company’s (HAL-NYSE) Mark Richard, senior vice president of global business development and marketing, told the World Petroleum Congress that “You’ll see some kind of spike in the price of oil, maybe somewhere around 2020, 2021."  This fits with Bernstein Research’s latest oil price downgrade.  The firm now sees oil prices exhibiting a U-shape cyclical pattern: after having declined from over $80 a barrel in 2014, they traded in the $40s for 2015-2016, and will now be flat at $50 for 2017-2018 before slowly climbing back to $70 by 2021.   

 

Eoin Treacy's view -

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

Synchronised global economic expansion is generally positive for energy consumption and most particularly in emerging markets where the bulk of energy demand growth is expected to originate. How quickly battery technology advances to quell range and charging time questions is likely to represent a significant a key arbiter for whether bullish forecasts come to fruition over the next five years. 



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July 11 2017

Commentary by Eoin Treacy

Lithium-rich countries risk missing the boat on electric batteries boom

This article by Cecilia Jamasmie for Mining.com may be of interest to subscribers. Here is a section:

As Tesla Motors begins to build the world’s largest lithium-ion battery in Australia and other vehicle makers such as Volvo get on board the electric vehicles train, concerns are rising over the environmental footprint of mining that and other materials used in car batteries, as well as their eventual disposal.

According to analysts at UBS, by 2025 the market will need 12 times the battery capacity currently available. At the same time, only 5% of lithium-ion batteries get recycled, versus more than 90% of those used in conventional vehicles, reports Financial Times:

“One of the challenges of making battery recycling economically viable is the quantity of battery material that is needed to keep utilisation rates of recycling facilities sufficiently high,” say analysts at Morgan Stanley. “The risk, therefore, is there may not be the necessary infrastructure in place in time for the first significant wave of EV batteries to reach end of life.”

Demand for the commodity has been rising as of late, which in turn has caused prices to more than double in the past 18 months.

The need for the metal is expected to triple by 2025, but not all the countries rich in lithium are taking advantage of the boom. At the same time, new actors are emerging worldwide.

 

Eoin Treacy's view -

This article carries a number of interesting graphics on which countries have the largest lithium reserves and which are the largest producers. With demand for the metal expected to multiply over the next decade a supply inelasticity meets rising demand growth model is in place at least until the necessary infrastructure to produce and recycle the metal has been built which could take another few years. 



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July 07 2017

Commentary by Eoin Treacy

Musings from The Oil Patch July 6th 2017

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

While U.S. production grew slightly in 1978, and then remained stable until 1983 before once again growing. The emergence of the North Sea as a significant new oil supply basin (UK and Norway) as well as Mexico’s offshore oil success demonstrated the power the sustained higher oil prices had on creating new supplies. The impact of new supplies contributed to OPEC’s collapse.

At the same time oil supply outside of OPEC started growing, oil consumption in the developed world (OECD) fell, which is demonstrated by the United States and Europe consumption curves in Exhibit 13. Those two regions are the key part of the OECD. Non-OECD consumption continued growing. As the chart shows, the demand reduction was significant, and was key to crippling OPEC’s pricing power as was the growth in new oil supplies.

As we look at the factors helping to reshape today’s oil market, environmental pressures, especially the potential impact of electric vehicles, coupled with the impact on oil demand growth that will come in response to efforts by countries to decarbonize their economies, can be considered the equivalent of the 1970s oil price shock to global oil demand. Demand will continue to grow for the foreseeable future, but the annual rate of growth is likely to continue to slow until it eventually goes negative. Lower demand is coming at the same time oil companies are reducing well breakeven prices insuring more supplies in the future. These improved E&P economics is broadly similar in impact to the opening of new oil supply basins that occurred in the 1970s and 1980s. Just as the opening of new supply basins had a long-term impact, the reduced well breakeven prices will also have a long lasting impact. We can argue about how long the impact will last, but it is likely to last much longer than we expect.

History does not repeat, but it does rhyme, as suggested in the famous quote. In our view, the current oil industry downturn is rhyming more with the 1982-1986 cycle than with the 2008-2011 one. If that is true, then the industry may be looking at an extended period of low oil prices just as the industry experienced following the 1981 oil price peak. That span extended for 18 years as oil prices averaged below $45 a barrel, or the very long-term average of inflation adjusted oil prices, with the brief exceptions of the First Gulf War and 9/11. BP plc CEO (BP-NYSE) Robert Dudley’s comments in early 2015 that the industry needed to learn to live in a “lower for longer” environment seem to be proving accurate. That means the oil industry must continue adjusting its cost structure. The oil companies will need to keep their staffing lean, employ the best drilling and completion technologies available, and manage their balance sheets appropriately to succeed in the future. This environment doesn’t mean that there is no future for the oil industry. It means that corporate strategies must constantly be reassessed within a broader energy industry panorama subject to external pressures that will only grow in the future.

 

Eoin Treacy's view -

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

“The cure for high prices is high prices” has been an adage in the commodity prices for decades and is no less true of oil prices. After almost a decade of high prices a great deal of additional supply has been brought to market. However, the advent of new technology which has allowed previously inaccessible reserves to be accessed, namely shale oil and gas, and the subsequent success in reducing the cost of extraction continue to represent gamechangers for the sector. That is before we begin to talk about the emerging trend of refracking; where wells that are past their peak output can be revitalized at a substantially lower cost.  



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July 05 2017

Commentary by Eoin Treacy

Oil Tumbles as Russia Is Said to Oppose Deeper Production Curbs

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

Russia "pretty much threw cold water" on rumors of additional cuts, said Bob Yawger, director of the futures division at Mizuho Securities USA in New York. The American Petroleum Institute is due to issue weekly U.S. inventory numbers Wednesday afternoon.

Oil and gas companies’ shares were down across the board. Bloomberg Intelligence’s index of independent exploration and production companies fell as much as 4.4 percent. Baker Hughes plunged 34 percent on its first day of trading as a unit of General Electric Co.

While crude prices surged last week, futures are down 15 percent for the year amid concerns that rising global supply will offset the output cuts from the Organization of Petroleum Exporting Countries and its partners. Libya and Nigeria, which are exempt from the agreement, accounted for half of the group’s production boost last month, according to data compiled by Bloomberg.

"Now we’ll see if this rally was based on loose expectations that there could’ve been some agreement or additional cuts, or if it was a rally on short-covering," Mizuho’s Yawger said.

 

Eoin Treacy's view -

Oil prices have been confined to a volatile range over the last 12 months with a distinct downward bias since January. The price might have rallied for eight consecutive sessions but there has been a distinct absence of clear upward dynamics similar to those posted in August and November while the large tail on the candle that marked the May low was also a clearly bullish development. 



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July 04 2017

Commentary by Eoin Treacy

Energy Stat: Is "Fake News" Driving Down Oil Prices?...

Thanks to a subscriber for this report from Raymond James which takes a bullish opinion on oil prices. Here is a section:

Myth #2: U.S. shale production growth is going to flood the market at $35/bbl.
The fear of massive U.S. oil supply growth at oil “breakeven” prices of $35-40 per bbl is the other panic button that most investors (and many sell-siders) have been happy to push over the past few months. Yes, there are many U.S. horizontal (especially Permian) operators that can make solid incremental well returns at $35-40 per barrel if and only if they do not include any costs other than the drilling and completion costs of that next well. The problem with this type of analysis is twofold: 1) It is definitely not capturing the fullcycle returns where companies must include lifting, overhead, interest expenses, and other sunk costs. On a full cycle basis, very few U.S. E&P companies are actually generating positive returns at oil prices below $50/bbl, and 2) There is simply not enough cash being generated by U.S. E&P companies at oil prices below $50 to justify current drilling and completion activity and some of the U.S. supply growth forecasts that are now starting to appear. In fact, at current oil prices (of around $45/bbl) we estimate that the U.S. E&P industry as a whole will outspend cash flow generated by a whopping 50% this year! That amount of outspend is simply unsustainable and means the unfettered U.S. oil supply growth assumptions in a sub-$50 oil world are highly, highly unlikely.

We would also point out two other important points on this emerging U.S. supply growth panic. First, we have historically had one of the most aggressive (and accurate) U.S. oil supply growth models on the Street. Despite this, our global oil supply demand equation still suggests a meaningfully undersupplied oil market for the remainder of this year. In fact, if we go back to the beginning of this year (six months ago), our 2018 U.S. oil supply growth estimate of 1.3 million bpd was high on the Street and at least 500,000 bpd above consensus estimates at the time. Note that our current U.S. supply estimate is actually down about 500,000 bpd from our estimate a year and a half ago (early 2016) because of downward revisions in U.S. industry cash flows and emerging oil service equipment bottlenecks. In our opinion, forecasts of 2018 U.S. supply growth of 2.5 million bpd at oil prices below $50/bbl are simply not doing the math. Secondly, the longer-term fear of too much U.S. supply growth at $50/bbl ignores the fact that there is another~30 million bpd of OPEC and ~50 million bpd of non-OPEC supply (across a variety of geographies, both short-cycle and long-lead-time) that will likely be declining in a few years. Solely considering U.S. supply growth would be a “one hand clapping” approach: that is to say, it gives an exaggerated impression of how much global supply is actually growing. In 2017, for example, at least three significant nonOPEC producers – China, Mexico, Colombia – are posting sizable declines. Several others – Russia, Norway, Argentina – are flattish. Longer term, 2018 is shaping up to be the cyclical trough year for global long-lead-time project startups (down close to 50% versus 2016 levels) meaning non-U.S. oil supply growth will likely come under significant pressure in 2019 and beyond.

 

 

Eoin Treacy's view -

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

I think it’s fair to say that a lot of unconventional supply becomes uneconomic around $45 but starts making money anywhere above $55 so the big question is the extent to which producers hedged their exposure when prices were north of $55 at the beginning of the year. That is likely to be key variable in whether they are making money in the current environment. 



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June 30 2017

Commentary by Eoin Treacy

China Is About to Bury Elon Musk in Batteries

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

Roughly 55 percent of global lithium-ion battery production is already based in China, compared with 10 percent in the U.S. By 2021, China’s share is forecast to grow to 65 percent, according to Bloomberg New Energy Finance.

“This is about industrial policy. The Chinese government sees lithium-ion batteries as a hugely important industry in the 2020s and beyond,” Bloomberg New Energy Finance analyst Colin McKerracher said.

In all, global battery-making capacity is forecast to more than double by 2021 to 273 gigawatt-hours, up from about 103 gigawatt-hours today. That’s a huge opportunity, and China doesn’t want to miss it.

“The Gigafactory announced three years ago sparked a global battery arms race,” said Simon Moores, a managing director at Benchmark Mineral Intelligence. “China is making a big push.” 
But don’t count Tesla out. The company, based in Palo Alto, California, plans to announce locations for up to four new factories by the end of 2017. (It’s exploring at least one site in Shanghai.) And there are few, if any, individual Chinese battery companies that can match the scale of Tesla’s production toe to toe.   

 

Eoin Treacy's view -

China went from pretty much nowhere to become the dominant force in solar cell manufacturing in a relatively short time because of unwavering government support and could easily achieve the same feat in batteries. That is quite apart from similar objectives being pursued in South Korea and Japan. 



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June 21 2017

Commentary by Eoin Treacy

Why Britain Has to Be Really Nice to Norway and Russia

This article by Anna Shiryaevskaya  and Kelly Gilblom for Bloomberg may be of interest to subscribers. Here is a section:

Already buffeted by political chaos at home and abroad, the U.K. gas market must now operate without its biggest stabilizing force: the giant Rough gas storage facility under the North Sea.
     
The planned permanent shutdown of the Centrica Plc site, able to meet 10 percent of peak demand in winter, means Britain is becoming even more reliant on imports of liquefied natural gas or pipeline fuel from Russia and Norway. That sets up the possibility that traders would have to outbid Japan, the world’s biggest LNG buyer, and others to keep millions of homes warm.

Political uncertainty is making the supply game even riskier, with rules for international gas pipelines clouded in mystery as the U.K. negotiates an exit from the European Union.

And the diplomatic crisis this month involving Qatar, the nation’s largest LNG supplier, caused gas prices in Britain to jump the most since January as two tankers were diverted.
     
“It takes two weeks for a cargo of LNG to arrive from Qatar, which is not a politically stable place right now,” Graham Freedman, principal analyst for European gas and power at Wood Mackenzie Ltd. in London, said by phone.“That does raise the political implications quite a lot, along with Brexit. So it’s a perfect storm in terms of security of supply for the U.K.”
     
Last winter as much as 94 percent of the country’s gas came from sources other than storage. More than half of that was imports, mainly through pipelines from Norway. Statoil ASA, Norway’s state-owned producer, has repeatedly said it doesn’t plan to significantly boost exports, but can divert more fuel to Britain if needed.

Eoin Treacy's view -

The graphic contained in this article highlighting the UK’s transition from being an energy exporter to importer represents a major inflection point for the economy which was exacerbated by the repercussions of the global financial crisis. 



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June 20 2017

Commentary by Eoin Treacy

Musings From the Oil Patch June 20th 2017

Thanks to a subscriber for this report by Allen Brooks’ for PPHB. Here is a section on the rig count:

At the same time, U.S. oil output continues growing in response to the increase in the number of working drilling rigs. As a result, the International Energy Agency (IEA) is projecting that U.S. oil output will grow by almost 5% on average this year, and by nearly 8% in 2018, overwhelming projected demand growth and re-establishing the glut environment. This forecast is creating concern about the success of OPEC’s strategy of cutting its output. The pessimistic view of crude oil prices rests on the belief that the slow pace in reducing oil inventories will create an environment where cheating on production cuts occurs, making it impossible for demand growth alone to drive oil prices higher. The optimists, including OPEC, believe that its strategy is working, it will merely need more time – hence the nine-month extension rather than a six-month one.

What we know is that the lift in oil prices sparked a drilling rig recovery in 2016, which has continued into 2017, and has become the fastest industry recovery in history. Although the recovery has been the fastest, it has yet to reach the levels of the recoveries of 1979 and 2009. The current weakening of crude oil prices is likely to cut short this rig recovery below the levels reached in those earlier recoveries, unless something else is at work in the oil patch.

 

Eoin Treacy's view -

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

Something interesting has occurred in the oil market as prices have declined almost $10 over the last month. When the front month price was close to the $60 in January the spread between it and the two-year future was about $1. Now it’s closer to $4. 



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June 16 2017

Commentary by Eoin Treacy

Many Rivers to Cross Decarbonization breakthroughs and challenges

Thanks to a subscriber for this report from J.P. Morgan Private Bank which may be or interest. Here is a section: 

New York. This is more of a theoretical exercise, since in NY, wind/solar comprise only 3% of electricity generation. But in principle, NY could also reduce CO2 emissions to 90 MT per GWh in exchange for a ~15% increase in system costs. One difference vs California is that NY’s build-out would start from a much lower base. The other difference is that storage is less optimal given lower NY solar capacity factors. Instead, a more cost-effective approach to reaching the deeper 60% emissions reduction target would be to build more wind/solar and discard (“curtail”) the unused amount, and not build any storage.

Conclusions. Scale and innovation are creating cost-benefit tradeoffs for decarbonizing the grid that are more favorable than they were just a few years ago, even when including backup thermal power costs. However, this is likely to be a gradual process rather than an immediate one. Bottlenecks of the past were primarily related to the high capital cost of wind, solar and storage equipment. The next phase of the renewable electricity journey involves bottlenecks of the future: public policy and the construction/cost of transmission are two of the larger ones7. As is usually the case with renewables, there’s a lot of hyperbole out there. The likely trajectory: renewables meet around one third of US electricity demand in 2040, with fossil fuels still providing almost twice that amount

Eoin Treacy's view -

Energy storage solutions have been evolving for a long time but the advances in battery technology has potential to revolutionise the sector. However he cost of those batteries still needs to come down a lot for them to truly have a transformational impact on the cost of generating and storing energy. What is clear from the above report is that the continued build out of renewable energy solutions, with or without storage, represents an additional cost for consumers over the lengthy medium term without a major advancement in battery technology.  



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June 09 2017

Commentary by Eoin Treacy

Renault plans foray into energy market with mega battery

This article by Christoph Steitz and Edward Taylor for Reuters may be of interest to subscribers. Here is a section:

Large batteries can help stabilize the primary reserve electricity market, which is responsible for ensuring the grid has at least 50 Hertz. Carmakers can also earn money competing with conventional power stations to guarantee the provision of electricity during periods of high demand or volatility.

"We forecast the combined market for electric passenger vehicles, electric buses and battery storage to increase eight-fold to over $200 billion by 2020, a five-year compound annual growth rate of more than 50 percent," Berenberg analysts said.

With about 4 million electric cars expected to be on the roads by 2020, vehicle manufacturers looking at ways to recycle batteries, including Tesla, which already sells everything from solar panels to batteries and electric cars.

Daimler, BMW, Volkswagen and China's BYD Co Ltd are also exploring so-called second-life storage projects with batteries.

That includes partnerships such as the recent collaboration between BMW and Vattenfall, in which the luxury automaker will deliver up to 1,000 lithium-ion batteries to the Swedish utility for storage projects this year.

"What will end up happening is that BMW and Daimler will ... become utilities themselves," said Gerard Reid, founder of Alexa Capital LLP, a corporate advisor in the energy, power infrastructure and technology sectors.

"They use Vattenfall now because they need to learn but I think the amount of batteries coming back will be so big that I think they'll end up engaging directly with the end customer themselves. And they've got the brand name to do that."  

 

Eoin Treacy's view -

The diesel scandal took a heavy toll on the growth ambitions of a number of auto manufacturers. There are now scrambling to come up with a way of ensuring their next clean energy gambit is successful. Since the batteries going into electric vehicles are a lot like bigger versions of those in phones we know that they lose capacity after a few hundred recharges. That means finding new uses for old batteries is a major field of endeavour if the price is to be kept under control. 



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June 02 2017

Commentary by Eoin Treacy

U.S. Won't Change Efforts to Cut Emissions Post-Paris: Tillerson

This note by Katia Dmitrieva for Bloomberg may be of interest to subscribers. Here it is in full:

Secretary of State Rex Tillerson says the U.S. won’t change “ongoing efforts" to reduce greenhouse gas emissions in the future, despite pulling out of the Paris climate accord.

U.S. “has a terrific record on reducing our own greenhouse gas emissions It’s something I think we can be proud of and that was done in the absence of a Paris agreement," he tells reporters before meeting at State Dept with Brazilian Foreign Minister Aloysio Nunes Ferreira

 

Eoin Treacy's view -

The revolution in unconventional supply has contributed more to the USA’s ability to combat emissions than any form of renewable energy because it has made coal uncompetitive. The evolving argument for the development of fracking techniques to develop geothermal energy sources is another reason why the USA is likely to meet its emissions targets without being party to an international agreement. The energy intensity of the countries like China and India is still in its major growth phase and the question of global emissions rests on their ability to innovate. 



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May 31 2017

Commentary by Eoin Treacy

Musings from the Oil Patch May 30th 2017

Thanks to a subscriber for this edition of Allen Brooks’ report which has a number of particularly interesting items this week. Here is a section on the pace of technology adoption: 

When the pace of adoption of technologies is examined, there are a number of interesting questions that bear on the projections of how quickly EVs and AEVs, as well as on-demand ride services, will be accepted. Are they going to be adopted as consumer technology items or truly revolutionary technologies and labor-saving devices? As shown in Exhibit 10, proponents of rapid technology adoption point to the cellphone, which took about a decade to go from zero to 60% penetration. That was about the same time span as the internet, but maybe only slightly longer than the VCR. On the other hand, the telephone needed nearly 50 years, while electricity needed only about 25 years, to reach the 60% penetration level. However, maybe we should look at these vehicle technologies as akin to those that brought significant lifestyle changes such as the stove, the clothes washer and the dishwasher, which needed between 35 and 50 years to reach 60% of American homes.

Our best guess is that the adoption rate will be somewhere between the cellphone and electricity, 10 to 25 years, but with a bias toward the longer timeframe. Why do we say that? It is important to understand that vehicles play an important role in family evolutions, something that hasn’t changed over generations. The hyped concern about millennials not getting married, starting families and buying homes, which was very popular during the years immediately following the global financial crisis of 2008, is disappearing. We now see millennials coming out of their parents’ basements, getting married, starting families and buying homes – although maybe not of the same size or in the same locations as their parents. These millennials are, however, continuing the generational pattern of societal evolution, although they are taking longer than previous generations to take some of the steps down that road. Given the pace of this phenomenon’s development, it is important to remember that automobiles remain the second largest purchase after homes for families. These purchases are not made frequently, they usually require significant research and time to reach a decision, and the decisions are often based on economic considerations involving all aspects of families’ lives and not just social concerns, such as climate change.

Given the factors involved in new car purchases, those forecasting the demise of petroleum must explain how those with limited incomes and wealth will voluntarily give up their perfectly functioning fossil fuel vehicle for an expensive EV, which because of battery technology may not get anywhere close to the advertised performance due to the climate where they reside. Their lives will become more complex until electric charging stations are as ubiquitous as gasoline stations, since they may not be able to afford the wait for battery recharges nor the cost of an installed charger in their home, if that option even exists for them.

There is also the question of what happens to the economics of EVs versus ICE cars when the values of used ICE cars go essentially to zero? In that case, unless gasoline and diesel fuels are banned, which may be the next target of environmental activists, it will be much cheaper to own and operate ICE cars than EVs.

There is also the question of how quickly the fleet of American vehicles can be converted to EVs or AEVs. For the past several years, Americans have purchased 17 million or slightly more new vehicles each year. At that pace, it will take 15 1/3 years to completely replace the approximately 260 million vehicles currently on America’s roads. To reach the magic 60% penetration rate, Americans must buy 17 million new EVs every year for more than nine years. Despite the high number of EVs in the fleet, it still leaves 104 million ICE vehicles on the roads burning fossil fuels.

Eoin Treacy's view -

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

Something that has always been at the back of my mind when reading comparisons about the pace of adoption of technologies is whether it is appropriate to compare adoption rates over more than a century. The pace of life has accelerated considerably in only the last decade so that we find it hard to imagine how anyone lived without the benefit of wifi or indeed indoor plumbing more than a century ago. My kids for example can’t imagine a world without iPhones, iPads and YouTube.



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May 31 2017

Commentary by Eoin Treacy

Trouble Brews for OPEC as Expensive Deep-Sea Oil Turns Cheap

This article by Serene Cheong, Sharon Cho and Dan Murtaugh for Bloomberg may be of interest to subscribers. Here is a section:

The falling costs make it more likely that investors will approve pumping crude from such large deep-water projects, the process for which is more complex and risky than drilling traditional fields on land. That may compete with OPEC’s oil to meet future supply gaps that the group sees forming as demand increases and output from existing wells naturally declines.

Saudi Arabia’s Al-Naimi left his post shortly after his speech targeting high-cost producers, and his successor Khalid Al-Falih organized production cuts by OPEC and some other nations that are set to run through March 2018. In a speech in Malaysia this month, Al-Falih bemoaned the lack of investment in higher-cost projects and said he fears the lack of them could cause demand to spike above supply in the future.

Warnings from OPEC of a looming shortage are “overstated and misleading,” Citigroup Inc. said in a report earlier this month. The revolution in unconventional supplies like shale is “unstoppable” unless prices fall below $40 a barrel, and deep- water output could grow by more than 1 million barrels a day by 2022, according to the bank.

Royal Dutch Shell Plc in February approved its Kaikias deep-water project in the U.S. Gulf of Mexico, saying it would break even with prices below $40 a barrel. That followed BP Plc’s decision in December to move forward with its Mad Dog Phase 2 project in the Gulf, with costs estimated at $9 billion compared to $20 billion as originally planned.

Over the next three years, eight offshore projects may be approved with break-even prices below $50, according to a Transocean Ltd. presentation at the Scotia Howard Weil Energy Conference in New Orleans in March. Eni SpA could reach a final investment decision on a $10 billion Nigeria deep-water project by October.

Eoin Treacy's view -

Oil producers spent a decade investing in additional supply and while they went right on investing until prices declined, the reality is that a lot of that investment was in new technology which is now being used to drive prices down while exploration has been abandoned. 



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May 26 2017

Commentary by Eoin Treacy

VW's Diesel Defeat Devices Finally Located, Cracked Wide Open

This article by Joel Hruska for EmtremeTech may be of interest to subscribers. Here is a section:

But making those rules public does have a downside: It means companies know precisely how to cheat. Here’s how the Jacobs School describes the situation:

During emissions standards tests, cars are placed on a chassis equipped with a dynamometer, which measures the power output of the engine. The vehicle follows a precisely defined speed profile that tries to mimic real driving on an urban route with frequent stops. The conditions of the test are both standardized and public. This essentially makes it possible for manufacturers to intentionally alter the behavior of their vehicles during the test cycle. The code found in Volkswagen vehicles checks for a number of conditions associated with a driving test, such as distance, speed and even the position of the wheel. If the conditions are met, the code directs the onboard computer to activate emissions curbing mechanism when those conditions were met.

But VW didn’t stop there. The researchers who examined Volkswagen’s work pulled 964 separate versions of the Engine Control Unit (ECU)’s code from various makes and models of Volkswagens. In 400 of those cases, the ECU was programmed with defeat devices.

Now, you might be thinking that a single code model couldn’t possibly compare all the variables in play between various test facilities, and that some cars should have shown a fault simply due to random chance. But VW was aware of that possibility and took steps to prevent it. Their defeat device had ten separate profiles to allow it to detect various permutations in test scenarios.

Not all the defeat devices were sophisticated. The Fiat 500X (not manufactured by VW) has a much simpler defeat device. The vehicle’s emission control system runs for 26 minutes and 40 seconds after you first start the car, period. That’s long enough to pass most emission tests, and it doesn’t try to detect if the vehicle is being tested. But VW’s work was extremely sophisticated, it evolved over time, and the company’s claims that this was all instituted by a few rogue engineers are more farcical than ever.

Eoin Treacy's view -

The fact that it has taken this long to figure out just how the diesel defeat mechanisms function highlights the fact that Volkswagen and Bosch have not been entirely forthcoming with investigators. The emerging reality is that defeating emissions testing was a long-term highly orchestrated endeavour that must have required the efforts of teams of engineers and years of work to achieve such impressive results. 



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May 25 2017

Commentary by Eoin Treacy

OPEC, Allies to Extend Oil Cuts for Nine Months to End Glut

This article by Nayla Razzouk, Golnar Motevalli and Laura Hurst for Bloomberg may be of interest to subscribers. Here is a section:

"The market seems to be a bit disappointed as there is no ‘something extra,’” said Jan Edelmann, a commodity analyst at HSH Nordbank AG. “It seems as though OPEC fears letting the stock-draw run too hot.”

The Organization of Petroleum Exporting Countries agreed in November to cut output by about 1.2 million barrels a day.

Eleven non-members joined the deal in December, bringing the total supply reduction to about 1.8 million. The curbs were intended to last six months from January, but confidence in the deal, which boosted prices as much as 20 percent, waned as inventories remained stubbornly high and U.S. output surged.

OPEC agreed earlier Thursday to prolong their own output cuts by nine months. Nigeria and Libya will remain exempt from making cuts and Iran, which was allowed to increase production under the original accord, retains the same output target, Kuwait’s Oil Minister Issam Almarzooq said after the meeting.

That deal gave the Islamic Republic room to increase output to a maximum of 3.797 million barrels a day.

 

Eoin Treacy's view -

The oil markets rallied ahead of today’s OPEC announcement on the expectation that the production cuts would be extended. The fact the announcement came in line with expectations has resulted in a clear “buy the rumour sell the news” response. Oil prices pulled back sharply today to confirm the progression of lower rally highs with a downside key day reversal. 



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May 24 2017

Commentary by Eoin Treacy

The Big Green Bang: how renewable energy became unstoppable

Thanks to a subscriber for this article by Pilita Clark for the FT which may be of interest. Here is a section: 

“I have been early twice in financing the low carbon energy transition,” says Bruce Huber, cofounder of the Alexa Capital advisory group. “But we feel it’s third time lucky.”

One reason for his optimism is what he calls the “tectonic plateshifting” in the car industry that is driving down the cost of energy storage. Storing clean power has long been a holy green grail but prohibitive costs have put it out of reach. This has begun to change as battery production has ramped up to meet an expected boom in electric cars.

Lithium ion battery prices have halved since 2014, and many analysts think prices will fall further as a slew of large battery factories are built.

The best known is Tesla and Panasonic’s huge Nevada “gigafactory”. Tesla claims that once it reaches full capacity next year, it will produce more lithium ion batteries annually than were made worldwide in 2013.

It is only one of at least 14 megafactories being built or planned, says Benchmark Minerals, a research group. Nine are in China, where the government is backing electric cars with the zeal it has directed at the solar industry.

Could this lead to a China-led glut like the one that helped drive solar industry writeoffs and crashing prices after the global financial crisis?

“It’s something to watch,” says Francesco Starace, chief executive of Italy’s Enel, Europe’s largest power company.

The thirst for electric cars, not least in China, means “the dynamics of demand are completely different” for batteries than for solar panels, he adds.

Still, Enel’s internal forecasts show battery costs falling by about 30 per cent between 2018 and 2021 and it is among the companies already pairing batteries with solar panels to produce electricity after dark in sunny places where power is expensive, such as the Chilean desert.

Eoin Treacy's view -

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

The main objections to renewable energy are focused on intermittency and their reliance on subsidies. However economies of scale and the application of technology represent reasons for why we should be optimistic these can be overcome over the medium term. That represents a significant challenge for both the established energy and utility sectors. 

Right now we are talking about a time when solar and wind will be able to compete without subsidies on an increasing number of projects. However if we continue on that path there is potential for the sector to be a victim of its own success because the lower prices go and the more fixed prices are abandoned the greater the potential for volatility in energy pricing. 



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May 19 2017

Commentary by Eoin Treacy

China successfully mines flammable ice from the South Sea

This article by Cecilia Jamasmie for mining.com may be of interest to subscribers. Here is a section:

During the mining trial done at a depth of 4,153 feet, engineers extracted each day around 16,000 cubic metres of gas, with methane content of up to 99.5%, Minister of Land and Resources Jiang Daming said.

The new energy source, while revolutionary, is not exempt of risks. The release of methane into the atmosphere as permafrost melts is regarded for those who believe in climate change as one of the worst potential accelerator mechanisms for it. Methane hydrate is also hard to extract, which makes the cost of producing it high.

Test drillings have also taken place in the US, Canada and Japan, with the latter announcing earlier this month that it was successful at producing the natural gas on the pacific coast and will continue mining it for around three to four weeks.

Sources of methane hydrate are so large that the US Department of Energy has estimated the world's total amount could exceed the combined energy content of all other fossil fuels.

 

Eoin Treacy's view -

Methane hydrate is uneconomical using today’s methods of extraction and current prices However, its existence highlights the important fact that any argument referring to peak oil must be prefaced with details of costs of production and timeframes. There is no shortage of natural gas or fossil fuels for that matter. Their supply is limited only by a combination of technological innovation and price. Technology is improving all the time so it is inevitable that major important countries like China and japan will continue to work on how to bring down the cost of methane hydrate.



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May 17 2017

Commentary by Eoin Treacy

Musings from the Oil Patch

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section on Saudi Arabia’s motivations in the oil market:

 

The analysts’ takeaways were that the Saudi Arabian economy was healthier than many thought, thus pressure for the country to lead the OPEC charge to substantially higher oil prices was soon dissipated. The headlines also helped explain King Salman’s willingness earlier to reverse the salary and benefit cuts for ministers and to grant salary bumps for the military and air force pilots. With the shrinking budget deficit and the ability of the kingdom to tap global debt markets twice in the last six months, the government felt comfortable it could increase spending without necessarily needing higher oil prices. Further comfort in its spending decision was provided by the point about non-oil revenue in the first quarter exceeding the government’s expectation. That latter point is important and helps explain why MBS says that Saudi Arabia’s debt will not exceed 30% of GDP. This is in contrast to many countries where total government debt equals or exceeds the country’s GDP. The shifting economic condition in Saudi Arabia is a long-term dynamic at work within the global oil market, and requires that analysts reassess their view of the kingdom’s strategy toward higher oil prices in the future. The last pillar supporting the significantly higher oil price forecast is the requirement for a favorable oil price backdrop in order to launch the initial public offering of Saudi Aramco, the state oil company. 

Crude oil prices are likely to remain highly volatile in the near-term as the shoulder months for oil demand and the restarting of refineries from the heating oil to gasoline turnarounds is creating inventory fluctuations. Many of these inventory fluctuations are not being accurately captured in the average analysts’ weekly inventory change forecasts, setting the oil market up for weekly surprises between the data and estimates. A key driver over the next few weeks will be people trying to guess the outcome from the May 25th OPEC meeting, but the outcome seems preordained. A negative surprise will be if the OPEC members fail to extend the production cut agreement as assumed by conventional wisdom. A positive surprise might be an increase in the production cut volumes, or an extension of the production cut agreement into 2018. Either or both of those actions will likely be viewed skeptically as greater volumes and longer time horizons create an environment that encourages increased cheating by OPEC members. If there has been a surprise from the current production cut it is the high compliance by the OPEC member countries. Is that a reflection of desperation or a true commitment to greater output discipline? 

Eoin Treacy's view -

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

The Saudi Aramco IPO will be a major event and the price of oil is an obvious consideration in the valuation that will be achieved. However the broader question for Saudi Arabia, in a market which is concerned both with equilibrium and increasing geopolitical tensions, is to ensure it affects an aura of stability and a lack of overt unilateral price manipulation strategies. That suggests they have no choice but to negotiate for concerted efforts to support prices, however successful those might be. 



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May 16 2017

Commentary by Eoin Treacy

Third Well to Help Meet Demand for Geothermal Heating in Boise, Idaho

This article by Parker O’Halloran for thinkgeoenergy.com may be of interest to subscribers. Here is a section

According to Colin Hickman, a spokesman for Boise Public Works, “We’re getting to a place where the amount of space downtown that we’re heating we felt it was the right time to bring on the third well to ensure that we have redundancy, in case something happens during the winter months, during our peak season so we have some back up for the customers on geothermal heating,”

Interestingly, a third well was dug in 1982, however, it has been not in use. Hickman says this third well is needed. These particular wells in Boise have geothermal water that is approximately 177 F (80 C) degrees when it comes out of the ground and is then pumped in insulated pipes to the downtown locations where the water heats the buildings.

“The buildings will basically take the heat out of that water, use it for their heating purposes in their building, and then that water goes back to Julia Davis Park, and there’s an injection well there that puts that water back into the earth,” Hickman said.

Hickman adds that Boise should be proud of its geothermal system as it eliminates the use of fossil fuels, it’s renewable and it’s an economic driver that will bring businesses in that are interested in this type of renewable energies to the Boise area.

Geothermal energy use in Boise dates back to the 1890s.

Eoin Treacy's view -

Geothermal energy has been around for a long time but has been totally reliant on the confluence of shallow heat vents and abundant water. However, it occurs to me that with the advances in hydraulic fracturing and horizontal drilling there is potential for cross pollination between the oil services and renewable energy sectors. 



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May 12 2017

Commentary by Eoin Treacy

Stretching Thin

Thanks to a subscriber for this heavyweight 114-page emerging market fixed income focused for report from Deutsche Bank which may be of interest. Here is a section on Saudi Arabia: 

Large FX buffers buy time despite high fiscal breakeven KSA also has a high fiscal breakeven, expected to reach USD84 in 2017 according to the IMF and somewhat lower according to our estimates at USD72. As such fiscal reform is a priority, but over USD500 billion of SAMA reserves and the potential for part-sale of oil assets give flexibility of timing. However, arguably, the size and conservative nature of the Kingdom makes early reform a necessity.

Saudi Arabia’s approach to breaking its hydrocarbon habit has been to undertake something akin to a revolution in the country, as outlined in the Vision 2030 document and the shorter-term National Transformation Program 2020. The challenges are significant, given the elevated fiscal breakevens, delivering 11% budget deficit in 2017. Ambitions for achieving a balanced budget by 2020 (“Fiscal Balance Program 2020”), suggests the bulk of the social and economic overhaul should be front-loaded. 

The National Project Management Office (NPMO), announced in September 2015 and tasked with moving projects forward in a coordinated fashion, has stalled. Furthermore, headline projects such as the Makkah Metro or the North-South rail line have been pushed out. Of the USD1 trillion pipeline, the only actual new project awards have been limited to Aramco investments. Until the NPMO is fully in place, any major project awards will be exceptions.

By contrast the establishment of the Bureau of Capital and Operational Spending Rationalization – an entity aimed at reviewing the feasibility of projects less than 25 per cent complete has moved forward with a review of some of the SAR1.4 trillion of projects in development. On the first round, approximately SAR100 billion of costs have been cut. Some projects will be cancelled, others retendered or converted to self-financing PPP-style contracts, but the certainty is that these cannot continue to be financed substantially from the public purse. There has also been additional controls on current spending with cuts in civil service allowances. The switch from an Islamic contract year to a slightly longer Gregorian one amounts to a 3% pay cut.

 

Eoin Treacy's view -

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

With significant reserves Saudi Arabia has time to deal with a relatively low oil price environment and the effect that is having on its fiscal condition. Rolling back spending commitments would leave the country in a much healthier position to compete considering its abundant resources and low cost of production. The new administration has embraced the need for change both in terms of domestic reform and investing in sectors outside of energy. The soon to launch $100 billion Softbank Technology Fund is a case in point. 



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May 02 2017

Commentary by Eoin Treacy

Musings from the Oil Patch May 2nd 2017

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

As automobiles transition from being completely under the control of a human driver to being totally controlled by machines and computers, several things can happen. If cars can operate without having accidents, highway speeds can be increased, which could reduce vehicle fuel-efficiency, boosting fuel consumption. Fully-autonomous driving will also enable classes of the population currently unable to utilize vehicles, adding more vehicle miles traveled to the nation’s transportation system and increasing fuel consumption. Those classes of people include non-drivers, along with the elderly, disabled and young people. A study by Carnegie Mellon University estimates that this expansion of the driving population could increase vehicle miles traveled by 14%, or adding 295 billion miles of driving annually. That will mean more fuel consumed, regardless of how fuel-efficient the vehicles are that these classes of people utilize. A rough calculation based on vehicles with 30 miles per gallon ratings, means about 675,000 barrels a day of additional gasoline, or approximately a 7% increase on today’s gasoline consumption. Fully-autonomous driving suggests more vehicle use, more miles driven and more fuel consumed. The offset is if fully-autonomous vehicles dominate the growing car/ride-sharing segment of the transportation sector, which could act to reduce fuel consumption. 

Whether the vehicles of the future are ICE-powered or derive their power from some other fuel source will be influenced by the outcomes of the other two broad trends. For example, if we become a nation of car-sharers, there will be fewer vehicles needed, vehicle miles traveled might decline, although they just as easily could increase. A fully-autonomous vehicle provides the possibility of having a greater impact on fuel consumption than human-driven vehicles. First, cars that don’t have accidents can be made from lighter materials that facilitates more EVs since greater battery weight will be offset by lighter vehicle bodies and frames. That could help EVs overcome some of the range-anxiety challenges for many potential buyers. It could help accelerate the electrification of the automobile fleet, which would have a significant negative impact on vehicle fuel consumption. On the other hand, if ICE powered vehicles remain the popular option, fuel consumption might not be as impacted as in an EV-favored scenario. With fully-autonomous vehicles offering the potential for increased vehicle use, fuel consumption is likely to increase. 

Eoin Treacy's view -

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

The Jevons Paradox suggests that if the price of a vital commodity falls use will increase so that the greater efficiency achieved through advancing technology is absorbed by demand growth. In fact the only commodity I can think of that has been completely obviated from popular use is whale oil. In every other case uses might have changed and costs might collapse but we end up using more of it. 



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April 24 2017

Commentary by Eoin Treacy

Musings From the Oil Patch April 18th 2017

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

The worst downturn in the history of the oil industry has been followed by the fastest drilling rig recovery in history. From massive layoffs and corporate restructurings, oil and gas and along with oilfield service companies have had to switch gears and figure out how quickly and profitably they can grow along with the current recovery. As someone mentioned, the industry has crammed a year’s worth of rig activity growth into a few months – something that is creating a challenge for the oilfield industry. 

As the energy companies are about to start reporting financial results for the January - March 2017 period, numerous oilfield service company managements have already signaled that the numbers will likely not reflect the levels of profitability Wall Street analysts had expected due to the costs of responding to the explosion in activity, especially following OPEC’s surprise output cut to help drive a recovery in oil prices. From the rapid climb in the rig count, it is clear that not only had investors and analysts bought into the recovery scenario, but so too had exploration and production (E&P) company managements. 

There is an expression in English literature that “all things come to those who wait,” but that isn’t the case in the oil patch – especially if one wants to make money. In reality, the expression “the early bird gets the worm” is more appropriate to describe how people in the E&P business operate, but it is taking a toll on the pace of the recovery in oilfield service company profits. Service company managers have had to spend money to reactivate equipment and re-crew them before they can actually earn revenue. The more aggressive a company has been, or is, in ramping up its idle equipment, the greater are the costs incurred. At the present time, everyone is comfortable in the belief that the delay in gratification – increased profits – will be worth the effort, and the wait. Whether that proves a correct assumption or not will depend on how the recovery continues unfolding and what happens to well costs, which is what is driving the increased activity. Everyone has to make money going forward for the recovery to be sustained. That doesn’t mean, however, that everyone will enjoy the levels of profitability experienced during the era of $100+ a barrel oil prices. But, unless people make money, the industry will not be able to support additional activity, or possibly even support the current level of work. So where are we in this recovery?

 

Eoin Treacy's view -

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

Unconventional oil and gas wells are more expensive to drill and have prolific early supply surges which peak quickly. That means operators are uniquely positioned to respond to lower prices by cutting back on drilling and to higher prices by stepping up drilling. It might not be great news for worker job security but it means the USA is increasingly the swing producer in the global oil market. 



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April 05 2017

Commentary by Eoin Treacy

Global Shipping Fleet Braces for Chaos of $60 Billion Fuel Shock

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

Little more than 2 1/2 years from now, the global fleet of merchant ships will have to reduce drastically how much sulfur their engines belch into the atmosphere. While that will do good things -- like diminishing the threat of acid rain and helping asthma sufferers -- there’s a $60 billion sting in the tail.

That’s how much more seaborne vessels may be forced to spend each year on higher-quality fuel to comply with new emission rules that start in 2020, consultant Wood Mackenzie Ltd. estimates. For an industry that hauls everything from oil to steel to coal, higher operating costs will compound the financial strain on cash-strapped ship owners, whose vessels earn an average of 70 percent less than they did just before the 2008-09 recession.

The consequences may reach beyond the 90,000-ship merchant fleet, which handles about 90 percent of global trade. Possible confusion over which carriers comply with the new rules could lead to some vessels being barred from making deliveries, which would disrupt shipments, according to BIMCO, a group representing ship owners and operators in about 130 countries. Oil refiners still don’t have enough capacity to supply all the fuel that would be needed, and few vessels have embarked on costly retrofits.

“There will be an absolute chaos,” said Lars Robert Pedersen, the deputy secretary general of Denmark-based BIMCO. “We are talking about 2.5 million to 4 million barrels a day of fuel oil to basically shift into a different product.”

 

Eoin Treacy's view -

Until ship owners have visibility on whether refiners will be changing the delivery conditions on futures contracts for fuel oil/gas oil, they will be unwilling to commit to multi-million dollar retrofits of existing ships. This news comes on top of last year’s decision by the Ballast Water Management Convention which requires all ships sailing in international waters to install a Ballast Water Management System by September 2017 which also necessitates a significant additional cost for maintaining existing shipping inventory. 



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April 05 2017

Commentary by Eoin Treacy

Musings from the Oil Patch April 4th 2017

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

As we contemplate the next cycle, we cast our view back on the industry’s history. The last great cycle came out of the explosion in oil prices in the latter half of the 1970s due to geopolitical events, but realistically it resulted from the peaking of U.S. oil output and the transferring of pricing power to the OPEC cartel. What broke the back of that price explosion was new, large sources of oil – offshore basins in the North Sea and West Africa, in particular, along with Alaska. Those were the resources that drove the industry over the subsequent 30 years. Shale is what is driving the industry now, and likely will drive it for the foreseeable future. What could that mean for oil prices? Look at Exhibit 1 where we show the inflation-adjusted oil prices from the late 1960s to 2016. After the bust of the early 1980s, the oil price traded for 18 years without ever going above $45 a barrel in current dollar prices except in response to one-off geopolitical events. 

The recent oil price bust followed a much longer period of super-high oil prices than in the 1970s. To our way of thinking, we are likely to experience another extended period of lower, but stable, oil prices. Will it be 18 years? We don’t know. Will oil prices stabilize around $45 a barrel? We don’t know. Might the price range be $55-$60 a barrel? It could be. Will it be $70 a barrel or more? We doubt it, except for brief periods. This isn’t because we think history always repeats itself, but rather because the oil industry is fighting maturing economies around the world, meaning slower demand growth. Developing economies are where oil demand is growing the fastest, but those countries have the benefit of employing the most recent equipment designs and technologies, suggesting their economies will be much more energy-efficient than earlier developing economies at the same point in time. Think about how no country now would consider string telephone wires to allow communication – cell towers are the answer. The oil industry is also fighting a global push to de-carbonize economies in order to fight the damage of climate change, which has the potential to significantly lower global oil consumption growth.

Eoin Treacy's view -

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

This piece rhymes very strongly with our long-held view that shale oil and gas represent game changers for the energy complex. This has resulted in US onshore shale now representing an important swing producer for the global market. 



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March 29 2017

Commentary by Eoin Treacy

Email of the day on hydrogen versus electric vehicles

I hope you are well. I was wondering what you thought of this article (Japan gambles on Toyota’s hydrogen powered car) about Toyota’s lack of faith in electric vehicles because 'a battery breakthrough is not in prospect'

Eoin Treacy's view -

Thank you for this email raising an important issue regarding energy density. Here is a section from the article:

Fuel cell vehicles, by contrast, need all the manufacturing skills of a car company. “From the industrial strategy point of view, fuel cell technology is extremely difficult, it’s in the world of chemistry not machinery,” says Hiroshi Katayama at the advanced energy systems and structure division of the ministry of economy, trade and industry (METI). If auto technology goes down the hydrogen path, Japan will be well placed. But if it doesn’t, Tokyo will have made a major miscalculation.

Toyota’s faith in hydrogen is best understood by looking at a car it never made: a pure electric vehicle. For the 20 years since it invented the Prius hybrid, Toyota has been the carmaker best-placed to launch a fully electric vehicle. It had the batteries, the motors and the power electronics but chose not to deploy them because of concerns about range limits, refuelling time and the risk of batteries degrading as they age.

It has announced plans for its own electric vehicle to exploit the demand from the premium segment opened up by Tesla and to meet emissions standards in the US and China. Yet Toyota’s fundamental doubts about battery-powered vehicles have not gone away.

The long dreamt-of Sakichi battery would store energy at the same density as the chemical bonds in petrol: roughly 10,000 watt-hours per litre — enough to power a family car for hundreds of kilometres on a single tank. The low energy density of the best batteries, about one-twentieth that of petrol, is why today’s electric cars have limited range.



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March 27 2017

Commentary by Eoin Treacy

Decarbonisation

Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section: 

Investors should be particularly sensitive to indicators that are associated with being in a misaligned world. This analysis can be applied both to sunk capital and new investment. For companies with low growth capex, margins on existing production will clearly be more important than incremental value creation or destruction on new investment. For high growth companies, returns relative to the cost of capital on new investment will be more critical. 

Investors should be wary of high-carbon companies where decarbonisation is likely to be demand driven (for example coal generators facing lower production as subsidised renewable production is built). However there may be value opportunities where decarbonisation is supply driven (for example restrictions on coal production, or forced coal closures could increase margins on remaining capacity even while overall volumes drop). 

Investors should look for low carbon companies in sectors where supply constraints are likely to be more significant than demand constraints as volumes grow. They should be wary of sectors where the mechanisms for growth are likely to drive down returns (for example long asset lives with technological progress and short-term market pricing). 

By understanding the positioning of companies in the matrix of volume and value, investors can make an informed judgment. Market valuations can be set against current opportunities and future expectations. Shareholder engagement can help ensure the right corporate strategy

Eoin Treacy's view -

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

Governments need revenue so regardless of what one’s feelings are with regard to climate there is a strong potential for higher taxes, particularly in Europe which is a major fossil fuel importer. The impetus for similar taxes in energy producing nations, not least the USA, is less compelling.  



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March 23 2017

Commentary by Eoin Treacy

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?

 

Eoin Treacy's view -

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

I had not previously seen the statistics about peak demand for Europe and Japan so I found this report enlightening and commend it to subscribers. Peak demand is an important theme and explains why Saudi Arabia guards its Asian markets so jealously; offering discounts again as recently as two weeks ago. Asia and Africa represent the two big growth markets for international oil products just as they represent the major growth areas for coal consumption. 



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March 21 2017

Commentary by Eoin Treacy

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.)

And

“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. 

Eoin Treacy's view -

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

There are four major themes in transportation at the present time. These are electric vehicles, automation, connectivity and sharing. Let’s for a moment take the environmental question out of the argument for electric vehicles. Many people buy them because they are cheaper to run and have fewer moving parts so they tend to be reasonably reliable. 



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March 20 2017

Commentary by Eoin Treacy

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.

 

Eoin Treacy's view -

Artificial Intelligence (AI) is rapidly finding its way into systems which had previously always been managed by humans. You might have heard of the Google Deep Mind team’s victory against the Go world champion. It represented a landmark not so much because it overcame a human; we’ve seen that in chess before. It was the manner in which the victory was achieved that is so important. 



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March 15 2017

Commentary by Eoin Treacy

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.

Eoin Treacy's view -

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

India is a quickly growing economy that needs to take the greatest possible advantage of its democratic dividend before that massive young population ages. Smoothening out what has often been a distinctly anti-business regulatory regime with a reputation for fickle decisions has been one of Modi’s ambitions in taking on the bureaucracy. Therefore there is reason for some optimism that policy continuity can be achieved in more sectors. 



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March 09 2017

Commentary by Eoin Treacy

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.

 

Eoin Treacy's view -

OPEC is riddled with problems. The first is that members with large populations like Saudi Arabia might have control over some of the world’s cheapest to exploit reserves but they have allowed domestic financial commitments to essentially turn them into high cost producers. They no longer have the flexibility to curtail supply like they did in the 1970s. 

The second is that they have a lot more competition. OPEC was founded in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Today it has 13 members and all are competing for market share. That is quite apart from the fact that Russia needs exports to fund its domestic economy and adventurism, the USA is now exporting after a 40-year hiatus and Canada is actively exploring export options. 

 



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March 08 2017

Commentary by Eoin Treacy

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."

 

Eoin Treacy's view -

Any arbitrage in the futures curve has been squeezed out by hedging activity over the last couple of months as unconventional producers locked in what are economic prices for their activities. That has effectively kept a lid on prices despite OPEC’s quite disciplined cut to supply. The fact the USA is now both a major new source of supply and exporting is a challenge for the cartel. 



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March 08 2017

Commentary by Eoin Treacy

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?

 

Eoin Treacy's view -

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

The cost of producing solar cells collapsed as China introduced economics of scale to the market. That has been perhaps the greatest influence on the price of cells and has contributed to the collapse of the investable sector because so many companies are now running at a loss. There have already been a significant number of bankruptcies and remaining companies are still in a highly competitive environment. 



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February 23 2017

Commentary by Eoin Treacy

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.

Eoin Treacy's view -

When is the best time to IPO your company? When you can get more for it than you think it is worth. Saudi Arabia is one of the only participants in the oil business which has to have a really long-term perspective. Exxon Mobil and BP put out long-term forecasts for the energy market stretching into the 2030s but Saudi Arabia tends to think in 50-year timeframes. 



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February 21 2017

Commentary by Eoin Treacy

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.

Eoin Treacy's view -

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

The US oil sector remains highly competitive at today’s levels and the quantity of oil and gas available for export continues to increase. With a tight spread between near and far contracts, the futures curve is flat suggests a great deal of hedging has already taken place; supporting the view producers are profitable at today’s levels. 



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February 14 2017

Commentary by Eoin Treacy

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. 

Eoin Treacy's view -

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

azakhstan stamped its dominance on uranium market by engineering a multi-year decline and succeeded in driving a significant number of small explorers out of business.  Last week’s news Tokyo Electric cancelled a major Cameco contract highlights just how successful their policy of flooding the market with supply has been. Having achieve their goal, the decision to limit supply is an important catalyst for the uranium market. 



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February 13 2017

Commentary by Eoin Treacy

Silicon will blow lithium batteries out of water, says Adelaide firm

Thanks for a subscriber for this article by Benn Potter for the Australian Financial Review. Here is a section:

Chairman Kevin Moriarty says 1414 Degrees' process can store 500 kilowatt hours of energy in a 70-centimetre cube of molten silicon – about 36 times as much energy as Tesla's 14KWh Powerwall 2 lithium ion home storage battery in about the same space.

Put another way, he says the company can build a 10MWh storage device for about $700,000. The 714 Tesla Powerwall 2s that would be needed to store the same amount of energy would cost $7 million before volume discounts.

 

Eoin Treacy's view -

A race is underway to develop new types of batteries and, for the foreseeable future, there is room for a number of competing technologies. The reason for this is the pace of innovation is slower than in other sectors but also because energy storage is required for widely differing sectors. Batteries need to be small and light for handheld devices, big and have almost infinite recharging capabilities for utilities and need highly efficient power to weight ratios for transportation. That suggests there is ample potential for a number of different technologies to play roles in all of these sectors. 
 

 



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February 09 2017

Commentary by Eoin Treacy

Musings from the Oil Patch February 7th 2017

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

Prior to OPEC’s Vienna Agreement last November, putting oil in storage because of its higher future value was a strong motivation for growing storage volumes. Now the curve is much flatter, and for oil priced three years in the future, that price is lower than the current one, providing a strong disincentive for putting oil in storage. Backwardation plays a significant role in oil producers’ decisions to hedge their production since they risk the potential of the price moving higher if the more traditional contango environment returns. As Rob Thummel, a managing director and portfolio manager at Tortoise Capital Advisors LLC put it, "What happens to the curve does depend on how the OPEC cuts will be carried out. The oil futures curve is indicating that the current OPEC cuts are here to stay for a while." U.S. oil producers will be very happy if that proves to be the case. While history would suggest otherwise, the pending (early 2018) initial public offering for Saudi Arabia’s state oil company, Saudi Aramco, an important component of its domestic economic restructuring effort, might force the country to hold its output down much longer than it has indicated. The reality may be that hundreds of small U.S. oil producers may screw up Saudi Arabia’s grand plan while hurting speculating oil traders with their record bullish oil price bet. A lower future oil price after a record bullish oil futures bet would be consistent with our recent history.

Eoin Treacy's view -

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

BP and Exxon Mobil spend a great deal of time and effort producing annual reports on energy use and issue predictions on how it will evolve over the time. That helps keep investors informed on how the companies plan to mobilise capital to take best advantage of how they see events unfolding. Saudi Arabia, as the world’s largest low cost producer, does not issue public annual reports. However its plans to IPO the company tell us more than any report ever could about the conclusions the Saudi Arabian administration has reached about the future of the oil market.



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February 08 2017

Commentary by Eoin Treacy

Email of the day on uranium charts

There seems to be an error with the chart of uranium which you referenced last month, would it be possible to please update it (see the enclosed chart)?

Eoin Treacy's view -

Thank you for this email which may be of interest to subscribers. Uranium is not a freely traded commodity so there is only one daily price. Therefore it is best to view it as a line chart. I am not sure why we receive open, high, low, close data but I have now switched the chart to default to line in the Chart Library.



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January 25 2017

Commentary by Eoin Treacy

Canada Faces Era of Pipeline Abundance After Keystone Move

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

More pipelines from Canada would also “generate greater competition for crudes of comparable quality such as those imported from Mexico or Venezuela,” Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas SA in London, said in an instant message.

The administration moved to expedite approval and construction of the Keystone XL pipeline as well as the Dakota Access line through North Dakota. Trump said he wanted to renegotiate terms to get a better deal for the U.S., including more U.S.-made materials in the lines.

The 830,000-barrel-a-day Keystone XL has been blocked since it was first proposed in 2008. TransCanada said in a statement it will reapply for the project.

 

Eoin Treacy's view -

Canada represents a problem for OPEC. It has vast reserves which are largely economic at today’s prices and it borders the world’s largest consumer. Despite that proximity its tar sands have been stranded, inhibited by lack of access to key global markets, which has made Canada something of a bit player in the global market. With the development of pipelines West, East and South that could all change in the coming decade. 



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January 20 2017

Commentary by Eoin Treacy

Donald Trump's Presidency: A Look at His Proposed Policy Shifts

This compendium from the Wall Street Journal of some of the primary issues facing the incoming US administration may be of interest to subscribers. Here is a section on energy:

At the top of Mr. Trump’s energy and environmental agenda will be unraveling Obama administration policies that touch on everything from carbon emissions to water.

Much of the action out of the gate will focus on rolling back regulations. Mr. Trump has said he would withdraw Mr. Obama’s signature policy to address climate change, a rule that cuts power-plant carbon emissions. The rule already has faced legal challenges and has been temporarily blocked by the Supreme Court.

The Trump administration, with the help of the Republican-controlled Congress, also will work toward repealing an Environmental Protection Agency rule bringing more bodies of water under federal jurisdiction. Also targeted for repeal: Interior Department rules that require tougher standards for coal mining near streams and that set new standards for emissions of methane, a potent greenhouse gas, from oil and natural-gas wells on federal lands.

While the Trump administration can’t unilaterally repeal most rules right away, it has several options. The EPA and other agencies can immediately start the process to withdraw regulations, and they can relax compliance requirements over time. Meanwhile, Congress can pass measures nullifying rules that have been completed most recently.

Immediately confronting Mr. Trump is a decision regarding the Dakota Access oil pipeline, which extends from North Dakota to Illinois and is nearly built except for a crossing of a Missouri River reservoir.

Mr. Trump may also have a decision to make on the Keystone XL oil pipeline if its developer, TransCanada Corp., reapplies for a State Department cross-border permit the Obama Administration denied in 2015.

On the campaign trail, Mr. Trump said he would withdraw the U.S. from the global climate agreement signed in Paris in late 2015. He couldn’t immediately pull out of the agreement, but he could begin the process of withdrawing.

 

Eoin Treacy's view -

I watched the end of the inauguration speech at my club following my Friday morning HIIT class and the facial expressions of the desk staff were a picture of just how much work needs to be done to reunite the country. High energy costs, high healthcare costs, high education costs and no wage growth combined to create the conditions that got Trump elected. He is going to need to deliver on solutions to some of those problems if he is going to receive the second term he wishes. 



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January 13 2017

Commentary by Eoin Treacy

The FTSE-100

Eoin Treacy's view -

The UK’s largest cap index is in the process of completing a 16-year range by breaking on the upside. The Index has rallied for six consecutive weeks, hit new all-time highs last week and improved on that performance this week. Prior to this breakout it had spent three years ranging below, but in the region of, its previous peaks. While a short-term overbought condition is evident that is consistent with what is to be expected from a major breakout. 



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January 10 2017

Commentary by Eoin Treacy

Musings from the Oil Patch January 10th 2016

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

As for a new Ice Age, the Russian Academy of Science’s Pulkovo Observatory in St. Petersburg, considered one of the world’s most prestigious scientific institutions, recently issued a new study titled, “The New Little Ice Age Has Started.” According to the study, the average temperature around the globe will fall by about 1.5o C (2.7o F) when the planet enters the deep cooling phase of this new Little Ice Age, expected in the year 2060. The study goes on to predict that after 2060 the Earth will experience four-to-six 11-year solar cycles of cool temperatures before beginning the next quasi-bicentennial warming cycle around the turn of the 22nd century.

Habibullo Abdussamatov is the head of space research at Pulkovo and the author of the study. He has been predicting the arrival of another ice age since 2003, based on his study of the behavior of the sun’s different cycles and the solar activity that then results. His model is based on data from the Earth’s 18 earlier little ice ages over the past 7,500 years, six of them experienced during the last thousand years. Based on his model, he began predicting over a decade ago that the next little ice age would start between 2012 and 2015. Abdussamatov’s models have been affirmed by actual data, including the rise of the oceans and the measurable irradiance sent earthward by the sun. Given the accuracy of his predictions, which have been demonstrated in numerous studies since 2003, he now predicts that we entered the 19th Little Ice Age in 2014-2015. This forecast would appear to fly in the face of climate change scientists pointing to 2015 and 2016 as being the warmest years on record – and forecasts that we will experience more record warmth in coming years.

Mr. Abdussamatov’s views stand in opposition to the conclusions of climate models, as he has tied his forecast of a prolonged cooling spell to solar, not man-made, factors. The recent disappearance of sunspots from the face of the sun, which also occurred during the Little Ice Age in the late 1600s, has made Mr. Abdussamatov’s contention no longer an isolated view. In fact, organizations such as the National Astronomical Observatory of Japan and the Riken research foundation have reached similar conclusions. The battle over whether man-made or natural forces are the primary driving force behind global warming and climate change will likely become more contentious in the next few years. The key point is that the world’s population is at greater risk of serious harm from colder temperatures rather than warm temperatures, which seems to be ignored by government officials and the media. We guess, cold and ice doesn’t lend themselves to as spectacular disaster scenes as heat-related weather events.

Eoin Treacy's view -

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

I am more than willing to accept that humans have an impact on our environment. After all there are a lot of us and we engage in a great many industrial activities. However the sun is a major contributor to weather patterns and its cycles cannot simply be ignored. I predicted back in 2009 the most recent solar activity peak would represent a lower low and that has now come to pass. As we head into another solar minimum we can anticipate colder winters in the years ahead. However to go from there to a prediction of an impending mini-Ice Age is quite a leap. 



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January 06 2017

Commentary by Eoin Treacy

World's Worst Commodity Radioactive for Investor Portfolios

This article by Joe Deaux, Natalie Obiko Pearson and Klaus Wille for Bloomberg may be of interest to subscribers. Here is a section:

“It’s the world’s best asset in the world’s worst market,” said Leigh Curyer, chief executive officer of NexGen Energy Ltd., a Vancouver-based uranium producer. “I don’t think there’s a mine profitable at current spot prices. This short-term spot price isn’t reflective of the cost of producing a pound globally.”

The outlook isn’t entirely bleak. Losses are forcing uranium mines to cut production or close, which may eventually create a supply crunch, while accelerated building of nuclear plants in China and India could help revive demand. But it may take a while for those developments to take hold, according to a report last month from Morgan Stanley, which said it can’t identify any medium- or long-term driver for prices.

Uranium extended its fade last year even as most other raw materials recovered. The Bloomberg Commodity Index of 22 items posted its first annual gain since 2010, advancing 11 percent.

 

Eoin Treacy's view -

When Tata Motors bought Land Rover it held onto the name for obvious reasons. It knew it didn’t stand a chance of selling a luxury vehicle under the moniker Tata Motors. If nuclear energy could do the same it would be in a much better position. Reactors being built today bear little resemblance to those which have garnered such a bad reputation over the last number of decades. However that is not the point. Public opinion is not yet in favour of uranium fuelled energy and there is little evidence that is about to change not least because it simply does not have a high profile credible spokesperson to champion it. 



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December 30 2016

Commentary by Eoin Treacy

Solar Panels Now So Cheap Manufacturers Probably Selling at Loss

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

“Certainly it would be a challenge for anyone to make money at that price,” Osborne said in an e-mail. “The blended cost for most last quarter was about 36 cents to 38 cents.”

The current price is also lower than cost estimates from Trina. The biggest supplier of 2015 expected to reduce costs to about 40 cents a watt by the end of the year, from 45 cents in the second quarter, Chief Financial Officer Merry Xu said in an August conference call. The Changzhou, China-based company’s shareholders on Dec. 16 agreed to a $1.1 billion deal to take the company private. A spokesman declined to comment Friday.

Some companies’ cost structures remain competitive, even with prices this low. Canadian Solar Inc., the second-biggest supplier, reported costs of 37 cents in the third quarter, down from 39 cents in the second quarter. The company has said its costs are among the lowest in the industry, and it expects to reach 29 cents a watt by the fourth quarter of 2017. Many of its competitors expect costs in the low 30s by then, Osborne said.

 

Eoin Treacy's view -

Producing solar cells in an environment where prices are falling and likely to continue to fall as new technologies are integrated into the manufacturing process is a highly competitive business. Companies unable to compete will go bankrupt and even the most successful face the threat of obsolescence. Consumers are the primary beneficiaries. 



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December 29 2016

Commentary by Eoin Treacy

Musings from the Oil Patch December 28th 2016

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

With the election of Donald Trump as the nation’s 45th president, there are signs environmental restrictions on fossil fuels will be loosened and more room will be made for fossil fuels. That will be a significant shift in the recent trends for environmental and energy regulation. Whether it significantly alters the current trajectory for the dirtiest of our fossil fuels – coal – remains to be seen. Clearly, short of an outright ban on renewable energy plants, the current backlog of new, cleaner power plants will not change, so our near-term energy mix will continue to shift toward more renewable fuels. The issue for the energy industry is whether the economic trends in place boosting renewable fuels are altered and slow down the pace of additions of new renewable fuel plants. That will partially depend on whether current renewable fuel mandates and subsidies are renewed once they reach their expiration dates, or even if they are outright cancelled early.

At the present time, businessmen, energy executives and consumers are struggling to understand the true economics of electricity. Analysts have strived to produce cost estimates for electricity produced by different fuels in such a way that they can be analyzed on the same basis. Standardized cost estimates provide a means to assess the impact on different fuel sources of various environmental policies. The process is called levelized cost of electricity. This tool enables direct comparison of electricity costs from power plants fueled by either fossil fuels or renewables. One drawback from this tool is that it assumes every kilowatt of power generated has the same value to consumers regardless of when during the day it is produced. It ignores the reality that during summer days in the southern regions of the United States, electricity to power air conditioners in the afternoon when temperature reach their highest levels is of greater value to consumers than during the middle of the night when temperatures drop.

 

Eoin Treacy's view -

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

Electricity pricing is a moving target for both energy companies and environmentalists alike. The challenge is to deliver energy when it is most required rather than when it is easiest to produce and the only way of solving that issue for renewables is with storage or back-up conventional capacity. 



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December 23 2016

Commentary by Eoin Treacy

U.S. shale is now cash flow neutral

This article from Mining.com may be of interest to subscribers. Here is a section:

Oil prices are probably already high enough to spark a rebound in shale production.

The IEA says that in the third quarter of 2016, the U.S. shale industry became cash flow neutral for the first time ever. That isn’t a typo. For years, the drilling boom was done with a lot of debt, and the revenues earned from steadily higher levels of output were not enough to cover the cost of drilling, even when oil prices traded above $100 per barrel in the go-go drilling days between 2011 and 2014. Even when U.S. oil production hit a peak at 9.7 million barrels per day in the second quarter of 2015, the industry did not break even. Indeed, shale companies were coming off of one of their worst quarters in terms of cash flow in recent history.

That all changed around the middle of 2015 when the most indebted and high-cost producers went out of business and consolidation began to take hold. E&P companies began cutting costs, laying off workers, squeezing their suppliers and deferring projects that no longer made sense.

By 2016, oil companies large and small had shed a lot of that extra fat, running leaner than at any point in the last few years. By the third quarter, oil prices had climbed back to above $40 and traded at around $50 per barrel for some time, replenishing some lost revenue. That was enough to make the industry cash flow neutral for the first time in its history.

 

Eoin Treacy's view -

The price of anything is heavily influenced by the marginal cost of production. If US onshore domestic unconventional oil plays are cash flow neutral at $50 it is reasonable to expect they will invest any free cash flow in expanding production at prices above that level. 



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December 23 2016

Commentary by Eoin Treacy

Gleanings

Thanks to a subscriber for this report from Raymond James which may be of interest. Here is a section:

Another theme we think is surfacing is inflation driven by Trump's potential fiscal stimulus program. Hence, a return to "real assets," or stuff stocks, should have an increased weighting in portfolios. Verily, the price of real assets, relative to financial assets, is at historic lows. Consequently, investors' mindsets should be focused towards higher inflation, higher interest rates, and reduced disinflation. As an example, China's PPI hooked up in September for the first time since 2012. We believe the same thing is happening here in the U.S. 

Accordingly, REITs, timber, agriculture, collectibles (wine, art, diamonds, precious metal coins, farmland, etc.), and MLPs should have an increased weighting in portfolios, in our view. To this MLP point, we recently met with one of the savviest MLP-centric portfolio managers on Wall Street, who believes the midstream and downstream MLPs are ripe for a number of good years going forward. He suggests the bad news is in the rearview mirror: the capital markets are wide open for the MLPs; we are consuming an extra 1 million barrels of crude oil per day, and the MLPs traded at around a 30% discount relative to par.

 

Eoin Treacy's view -

The MLP sector is highly leveraged as a rule so it collapsed when oil prices fell. By the same token it is also benefiting from the rise in oil prices and with the high yields evident, particularly in the pipelines sector, it now offers upside leverage. 

The Alerian MLP Total Return Index hit a new recovery high this week and a clear downward dynamic would be required to question medium-term potential for additional upside. 



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December 14 2016

Commentary by Eoin Treacy

Namibia's new uranium mine to boost growth, make it worl's third producer

This article by Cecilia Jamasmie for Mining.com may be of interest to subscribers. Here is a section:

The massive project, said to be the third largest uranium-only mine in the world, will boost domestic production from 2,900 tonnes in 2016 to 5,800 tonnes next year, according to BMI estimates.

Output will be gradually increased to reach the installed capacity of 50-million tonnes of ore a year, Swakop's chief executive Zheng Keping said in September.

Based on data from Namibia’s central bank, production of uranium will increase 63% this year and 90% in 2017.

Currently, the African nation is the world’s sixth biggest uranium miner, behind Kazakhstan, Canada, Australia, Niger and Russia.

 

Eoin Treacy's view -

China has long-term ambitions of cleaning up its toxic air and nuclear represents a big part of the anticipated solution. That is the primary reason the country has been so aggressive in securing uranium deposits wherever it can get a significant stake. 



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December 08 2016

Commentary by Eoin Treacy

In mammoth task, BP sends almost three million barrels of U.S. oil to Asia

This article by Florence Tan for Reuters may be of interest to subscribers. Here is a section:

While BP's operations are currently the most sophisticated, others have also begun developing U.S./Asia trade.

China's Unipec, the trading arm of Asia's largest refiner Sinopec (600028.SS), is shipping about 2 million barrels of WTI to China this month, while trading house Trafigura is also exporting some 2 million barrels of U.S. oil to Asia.

Incentives to bring U.S. crude into Asia have risen after the Middle East-led producer club of the Organization of the Petroleum Exporting Countries (OPEC) and Russia agreed to cut output, encouraging refiners across the region to seek alternatives to offset potential supply shortfalls.

"OPEC is putting U.S. shale oil to the test... (and) we will truly see what it can deliver," said Bjarne Schieldrop, chief commodity analyst at SEB. He predicted 2017 would be a "shale oil party" with a surge in U.S. exports after the OPEC production cuts.

The operation to send the oil, worth around $150 million, to Asia-Pacific buyers lasted four months and involved BP traders in the United States and Singapore, while colleagues from London were responsible for ship chartering, the sources said and data showed.

BP took advantage of arbitrage between cheaper U.S. West Texas Intermediate (WTI) CLc1 crude and the global benchmark Brent LCOc1.

The deal was aided by cheap tanker rates and a price/time curve, where future oil deliveries are more expensive than those for immediate discharge, making sourcing oil from as far away as North America profitable.

Eoin Treacy's view -

The US has just started exporting crude oil for the first time in decades and if the Keystone pipeline is finally permitted in 2017 if would give Canadian heavy crude an outlet to Texas’s refining and shipping infrastructure that would allow even greater volumes to be exported.

The expanded Panama Canal raises the prospect of a short-cut to Asia from Texas. That is of course once ships have been retrofitted to be tugged through the new canals which is taking somewhat longer than originally anticipated



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December 07 2016

Commentary by Eoin Treacy

Chinese-Korean group to build $2 billion lithium batteries plant in Chile

This article by Cecilia Jamasmie for mining.com may be of interest to subscribers. Here is a section:

Lithium, frequently referred to as "white petroleum," drives much of the modern world, as it has become an irreplaceable component of rechargeable batteries used in high tech devices.

The market, while still relatively small — worth about $1bn a year — is expected to triple in size by 2015, according to analysts at Goldman Sachs

That should be great news for Chile, as the country contains half of the world’s most “economically extractable” reserves of the metal, according to the US Geographical Survey (USGS). It is also the world’s lowest-cost producer, thanks to an efficient process that makes the most of the country’s climate.

Chile is essentially “the Saudi Arabia of lithium,” according to Marcelo A. Awad, executive director of the Chilean brand of Wealth Minerals, Canadian company that also has interests in Mexico and Peru.

The country, he noted in a recent interview, is perfectly positioned, with ports across the Pacific from the world’s largest car market, China, which is expected to increase electric vehicles production in years to come. There, lithium is also used to manufacture rechargeable ­batteries that power hundreds of millions of smartphones, digital cameras and laptops.

The challenge for foreign investors, particularly the Asian conglomerate, is to persuade Chilean authorities of making the leap from exporting the white metal to producing lithium batteries at the point of extraction.

Estimates from the group’s advisors believe opening the proposed plant would make the value of the product 35 times higher than what it could be obtained by just selling it as lithium carbonate

Eoin Treacy's view -

Elon Musk might be one of the world’s great promotors but there is no denying that he has upended the automotive sector with just about every major auto manufacturer planning to release a range of electric vehicles within the next few years. 



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December 05 2016

Commentary by Eoin Treacy

New efficiency record for large perovskite solar cell

This article by Eric Mack for Gizmag may be of interest to subscribers. Here is a section:

"Perovskites came out of nowhere in 2009, with an efficiency rating of 3.8 percent, and have since grown in leaps and bounds," said Anita Ho-Baillie, a Senior Research Fellow at the UNSW's Australian Centre for Advanced Photovoltaics. "I think we can get to 24 percent within a year or so."

The solar cells are made from crystals grown into a particular structure called perovskite. Smooth layers of perovskite with large crystal grain sizes allow the cells to absorb more light. The technology has been advancing fast and attracting plenty of attention thanks to its ease of production and low cost compared to silicon cells.

"The diversity of chemical compositions also allows cells be transparent, or made of different colors," said Ho-Baillie. "Imagine being able to cover every surface of buildings, devices and cars with solar cells."

Perovskite cells do have downsides like much less durability, something Ho-Baillie and her team say they're confident they can improve, while also shooting for higher levels of efficiency.

Eoin Treacy's view -

Perovskite is a development stage technology that is likely to play an important role in the future of solar cells but it could be a decade before it reaches commercial utility. The primary argument supporting perovskite is the relative cost of producing the crystals versus the panels used today. That enhances the technology’s competitiveness so that cells do not need to be as efficient because they are so much cheaper. However what do need to be overcome are the issues described above regarding durability which are non-trivial.



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December 01 2016

Commentary by Eoin Treacy

OPEC Meeting Review

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

OPEC has just decided a headline cut of 1.2 million b/d

We calculate that compared with October secondary sources in the OPEC report, the net OPEC cut from the 11 participating countries in the deal is 0.982 million b/d

Angola was allowed to use September output as the base instead of October

The cartel will use secondary sources to monitor output reductions
Indonesia, Libya and Nigeria is not part of the deal

Since the cartel has distributed quotas to the different countries, have organized a monitoring committee and are using secondary sources, the deal is very bullish to the oil price

 

Eoin Treacy's view -

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

Brent crude oil hit a new recovery high today and upside follow through tomorrow would confirm a return to demand dominance beyond what has been an impressive two-day rally. Considering the fact that the price has been rangebound for the last six months the potential for a breakout that is outsized relative to the amplitude of the congestion area cannot be discounted. 



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November 18 2016

Commentary by Eoin Treacy

Collision Course

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

While energy market watchers have highlighted President-Elect Trump’s nod towards drilling and fracking, we believe that a Trump administration will have a larger impact on the US demand side of the ledger. The two key regulations which, if repealed, could drive US gasoline demand materially higher are the Corporate Average Fuel Efficiency Standards (CAFE) and the Renewable Fuel Standard (RFS). The potential impact of a Trump presidency on US gasoline demand is not one that should be underestimated. After all, US gasoline demand comprises of nearly 10% of total global oil demand and has been the sole bright spot in the OECD region, which has otherwise been trending lower on a structural basis since the recession. The potential repeal of aforementioned regulations is unlikely to make a difference in his first 90 days in office, but it is a rather bullish potential catalyst in the quarters and years to come.

Eoin Treacy's view -

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

An additional bullish potential outcome for gasoline prices is that the millennial generation is increasingly turning towards car ownership after a delayed start which should at least put a partial floor under demand. 



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November 18 2016

Commentary by Eoin Treacy

Musings from the Oil Patch November 15th 2016

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

Another issue that has yet to be addressed is a proposed ban on oil tankers operating off British Columbia’s coastline that would effectively shut down the development of an oil export terminal at Kitimat and thus kill the proposed Enbridge (ENB-NYSE) Northern Gateway oil export pipeline. If the tanker ban is put in place, it will force the development of the Trans Mountain pipeline as the primary West Coast oil export pipeline. That would leave the Trudeau government to deal with TransCanada Corp.’s (TRP-NYSE) Energy East oil pipeline project to move Western Canadian oil to the East Coast where it could be exported to the U.S. East Coast or Europe. Despite being the “environmental” prime minister, Mr. Trudeau is recognizing that without more oil and gas export opportunities, his nation’s economy, which depends on a healthy energy economy, will suffer with many social and financial repercussions.

The Canadian federal government’s decision about Trans Mountain on December 19th will be an important milestone for the nation’s energy business. There are still numerous other policy decisions that must be addressed before Canada develops a full-scale oil and gas export expansion regime, but the first steps appear to have been taken last week.

Eoin Treacy's view -

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

Anyone who has ever been to Vancouver will understand how important pristine maritime conditions are when they sit down to taste some of the city’s delectable seafood. Whether it is salmon, sushi or Cantonese style seafood all are on par with what is on offer anywhere else in the world. However despite a deep interest in preserving the province’s wonderful maritime resources there are bigger questions that need to be addressed. 



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November 17 2016

Commentary by Eoin Treacy

Is the EV finally coming of age?

This article by Scott Collie for Gizmag may be of interest to subscribers. Here is a section:

One important breakthrough will be increasing the energy density of the battery through being able to cram more cells into the same volume of battery packs. The battery density doubled between 2009 and 2016, and this is definitely not the end. Just like with the technological development of the personal computer, there is something similar to a 'Moore's Law' in the battery development: currently, we recognize an annual improvement rate of 14 percent, which is quite immense."

Although 14 percent is significant, it's only just a start when it comes to battery technology. At the moment, electric cars make use of lithium-ion batteries, the type pioneered by the Tesla Roadster back in the mid-2000s. Schenk says there's plenty of improvement to come in lithium-ion tech, but greater leaps forward are in the pipe.

"New technologies, and especially those aimed at material-related improvements, plus ever-increasing production volumes leading to further price decreases, will determine the development stages of the next few years," Schenk says. "Within the next decade a major technological leap is expected with lithium-sulphur systems, and these are set to revolutionize costs and operating range as extraordinarily relevant buying criteria for electric vehicles."

Already, improvements to battery chemistry are starting to pay off, and people are starting to buy electric vehicles in greater numbers. Renault, one of the largest players in the European electric game, sold 23,087 electric cars in 2015 - a 49 percent increase on its 2014 numbers.

 

Eoin Treacy's view -

Advances in battery technology have been slower to manifest than in microprocessors because of limitations in chemistry but perhaps more importantly because there has just not been enough incentive for companies to spend money on innovation. 



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November 02 2016

Commentary by Eoin Treacy

Musings from the Oil Patch November 1st 2016

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

It appears to us that everyone in the energy industry is fixated on whether the OPEC oil ministers meeting in Vienna, Austria on November 30th will produce an agreement to limit the group’s output, and how that production volume will be shared among the group’s 12 members. Also, it will be important to see who among the 12 OPEC members will be exempted from a monthly production quota and what those countries near-term output goals are. Lastly, we need to see some support from Russia for OPEC’s production cap to have much strength. While all these details are important to the outcome of the OPEC meeting and how the energy world reacts to whatever is agreed to, the lack of executive thinking about what happens to energy demand if the U.S. enters a recession could be the pothole everyone steps in. The duration and depth on any recession will determine how much oil demand might be lost due to weaker economic activity. We suggest you should pay attention to this hidden elephant in the OPEC meeting room. 

Eoin Treacy's view -

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

While Allen Brooks is not predicting a recession more than a few analysts have floated the idea. It’s an important consideration that would of course have a significant impact on the energy markets but also on just about every other asset class. Perhaps it would be timely to review some of the leading indicators for recessions to see where we are in the cycle. 



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October 27 2016

Commentary by Eoin Treacy

OPEC May Need Help to End the Global Glut of Oil

This article by Grant Smith for Bloomberg may be of interest to subscribers. Here Is a section:  

If OPEC reduces output to 32.5 million barrels a day -- a cut of 900,000 a day from September levels -- it would be pumping slightly less than the amount needed to meet demand in 2017, the group’s monthly report from Oct. 12 shows. Inventories would contract as a result, but only by 36.5 million barrels over the course of the year, a negligible impact on a stockpile surplus the group estimated at 322 million barrels above the five-year average in August.

If OPEC doesn’t act to reduce stockpiles next year, Societe Generale’s price forecasts would probably have to be revised lower, Mike Wittner, head of oil-market research, said in an e-mailed note. Over the first three quarters of 2017, the bank currently sees Brent averaging $55 a barrel and West Texas Intermediate at $53.50.

 

Eoin Treacy's view -

If oil prices are to be massaged higher Saudi Arabia and Russia will have to come to an agreement to curtail supply and by more than has already been agreed. Such an agreement would require major sacrifices on both their counts since Saudi Arabia is engaged in a rationalisation of generous handouts its citizens have been accustomed to for decades. Meanwhile Russia is actively engaged militarily in both Ukraine and Syria as well as having expensive plans to revitalise its nuclear arsenal. These decisions would also have to be taken in the knowledge that any additional rally in oil prices will encourage even more US unconventional supply back into the market. 



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October 14 2016

Commentary by Eoin Treacy

Is the Deepwater Dead?

Thanks to a subscriber for this report from Deutsche Bank which may be of interest to subscribers. Here is a section:

Marky Mark-ing to market cost and efficiency gains: More competitive than you think
Contrary to popular belief, the US onshore isn’t the only sector seeing meaningful cost deflation and/or efficiency gains. While the ~60% reduction in DW rig rates has grabbed headlines, broad improvements, including drill-days (-30%-40%), steel costs (-30%), and various SURF/topsides costs (-10%-30%) have reduced total project costs by 30%-40%, in our view. And given the lag in response time, excess capacity and a moderate pick-up in activity, we expect cost and efficiency gains to be more durable than in the US onshore.

But not all barrels are created equal. Only high quality resource can compete While all deepwater tends to get lumped together, the range of economics across projects is diverse (sub $30/bbl-$80+/bbl breakevens), with only high quality resource set to compete. We examine various drivers of project economics, many poorly understood, including fiscal terms, resource size, resource density, and proximity to infrastructure, and potential impact. We see high quality, pre-FID deepwater projects breaking even at roughly $40-$50/bbl.

Meaningful challenges remain
Though more competitive than the market believes, meaningful challenges will continue to drive an increasing share of discretionary capital to US shale, including: geologic risk, project execution risk, geopolitical risk, and capital inflexibility. Adjustments to development strategies and scope can mitigate some risk, and large, diverse IOC budgets will invest across the spectrum, but failure to revolve would demand a higher rate of return, with an increase to 15% required IRR (vs. 10%) increasing average breakevens by $7.5/bbl.

Eoin Treacy's view -

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

Drilling for oil offshore is quite a bit more expensive and carries with more risk that drilling onshore. Nevertheless, before the evolution of unconventional onshore oil and gas wells in the USA, oil companies had little choice but to explore the world’s oceans. The question is not whether the oil is in place offshore but rather what is the cost of extraction and transportation to shore?



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October 05 2016

Commentary by Eoin Treacy

All eyes on the spending cap

Thanks to a subscriber for this note from Deutsche Bank focusing on the Brazilian market. Here is a section:

Speaking at the Senate Economic Committee on Tuesday, BCB President Ilan Goldfajn. Goldfajn repeated several statements that had already been published in the central bank’s Inflation Report last week, reaffirming the intention of making inflation converge to the 4.5% target in 2017. Goldfajn also repeated the remarks published in the Inflation Report about the three conditions for the authorities to initiate an easing cycle (namely limited persistence of food price shock, disinflation of IPCA components, and lower uncertainty about the fiscal adjustment implementation). The Goldfajn, however, added that the BCB “does not have a pre-established timetable for monetary easing,” as the COPOM decision will depend on several factors, including inflation expectations and forecasts. This comment suggests that the BCB has not yet made a final decision to cut rates, perhaps because market inflation expectations for 2017 have not converged to the 4.1% target yet. Despite Goldfajn’s cautious remarks, we still expect the COPOM to cut the SELIC rate by 25bps at the next meeting later this month.

Eoin Treacy's view -

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

Brazil has a number of challenges facing the economy not least corruption and the low standards of governance in its state institutions which have contributed to low approval ratings for the government regardless of who is in power. Controlling inflation will be one of the key tests from an international perspective because of the impact that would have on the currency. 



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October 03 2016

Commentary by Eoin Treacy

Adobe Expertly Balances Growth and Profitability

This article from MorningStar following Adobe’s results on September 20th may be of interest to subscribers. Here is a section:

Third-quarter revenue rose 26% year over year to $1.46 billion, driven by 51% growth in the firm’s subscription revenue base. Creative Cloud continues to serve as the company’s key revenue driver, as both greenfield customers and cloud migrators are providing a consistent lift in the annual recurring revenue base. We believe ample growth opportunities remain across both Creative Cloud and Digital Marketing, particularly as consumer users migrate and enterprise customers consolidate digital content creation and marketing spend around suites of applications versus point solutions.

The company is beginning to show the two main benefits of renewal billings in its subscriber base, which are higher prices and substantially lower customer acquisition costs. As a result, GAAP operating margin exceeded our forecast by more than 300 basis points at 25%, the firm’s best quarterly mark since the fourth quarter of fiscal 2012. While we suspect the firm will need to maintain aggressive investment in sales and marketing, particularly as competition for digital marketing wins remains intense, we think the increasing renewal mix of Creative Cloud billings will smooth this effect, yielding mid-30s operating margins in the long run.

 

Eoin Treacy's view -

I’m reminded of an old adage that “you can sheer a sheep every year, but only send him for slaughter once” when looking at the success of Adobe’s subscription pricing model. A significant number of companies are now adopting the same policy, opting for the relative security of payments over the long-term versus relying on “lumpy” sales of new software. 
 

 



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October 03 2016

Commentary by Eoin Treacy

Shale Oil Firms Hedge 2017 Prices in 'Droves' After OPEC

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

Harry Tchilinguirian, head of commodity research at BNP Paribas SA in London, said on Friday that OPEC had thrown a “lifeline” to U.S. shale firms, prompting them to hedge “in droves.” The bank has “seen many queries coming through” from producers, he said.

The West Texas Intermediate 2017 calendar strip -- an average of future prices next year that’s often used as a reference for hedging activity -- rose above $50 a barrel to its highest since August on Monday. “When calendar 2017 pricing rises into the low-to-mid $50s, as it is doing now, producer hedging rises materially,” Longson said.

U.S. shale producers used a similar rally to hedge their prices in May, when the WTI 2017 calendar strip also rose above $50 a barrel. The current activity comes after industry executives told investors in July and August they planned to use any window of higher prices to lock-in cash flows for next year.

"We would like to be a little bit further hedged than we are today," Pioneer Natural Resources Co. Chief Executive Officer Tim Dove said back in July, noting his company has locked in prices for up to 55 percent of its 2017 exposure. “I’d like to see us get that number up as we go towards at the end of this year.”

 

Eoin Treacy's view -

US unconventional onshore supply represents an important marginal producer that functions independently of the OPEC/Russia cartel. The level at which US producers are willing to hedge supply into next year tells us more about at what level they deem to be economic for their operations than probably any other factor. It is now possible to hedge December 2017 supply at over $53 so we can reasonably conclude that level represents where the incentive to drill and produce even more really becomes inviting. 



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September 29 2016

Commentary by Eoin Treacy

Beyond Algiers

Thanks to a subscriber for this report from Goldman Sachs which was issued on the 27th, ahead of the OPEC meeting. Here is a section: 

Nonetheless, our 4Q16 oil supply-demand balance is weaker than previously expected given upside surprises to 3Q production and greater clarity on new project delivery into year-end. This leaves us expecting a global surplus of 400 kb/d in 4Q16 vs. a 300 kb/d draw previously. Importantly, this forecast only assumes a limited additional increase in Libya/Nigeria production of 90 kb/d vs. current estimated output. As a result, we are lowering our 4Q16 forecast to $43/bbl from $50/bbl previously. While a potential deal could support prices in the short term, we find that the potential for less disruptions and still relatively high net long speculative positioning leave risks skewed to the downside into year-end. Importantly, given the uncertainty on forward supply-demand balances, we reiterate our view that oil prices need to reflect near-term fundamentals – which are weaker – with a lower emphasis on the more uncertain longer-term fundamentals.

Despite a weaker 4Q16, our 2017 outlook is unchanged with demand and supply projected to remain in balance. We expect demand growth to remain resilient while greater than previously expected production declines in US/Mexico/Venezuela/ Brazil/China are offset by greater visibility in the large 2017 new project ramp up in Canada/Russia/Kazakhstan/North Sea. While our price forecast remains unchanged at $52/bbl on average for next year with a 1H17 expected trading range of $45- $50/bbl, we continue to view low cost and disrupted supply as determining the path of an eventual price recovery with our forecasts conservative on both. As we wait for headlines from Algiers, it is worth pointing out that Iran, Iraq and Venezuela have each guided over the past month to a 250 kb/d rise in production next year.

Eoin Treacy's view -

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

Saudi Arabia’s commitment to support a production cut by OPEC of 750.000 barrels made headlines and has influenced the oil market by disrupting the perception, described above, of a balanced market overall. What appears to have made fewer headlines is that Iran will be omitted from the agreement and is therefore free to continue to increase supply in order to regain the market share it lost due to sanctions. Therefore the most likely result is a limited supply cut overall while any boost to prices will encourage unconventional drilling suggesting a cut may be short lived. 



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September 20 2016

Commentary by Eoin Treacy

Tesla Wins Massive Contract to Help Power the California Grid

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

Tesla Motors Inc. will supply 20 megawatts (80 megawatt-hours) of energy storage to Southern California Edison as part of a wider effort to prevent blackouts by replacing fossil-fuel electricity generation with lithium-ion batteries. Tesla's contribution is enough to power about 2,500 homes for a full day, the company said in a blog post on Thursday. But the real significance of the deal is the speed with which lithium-ion battery packs are being deployed. 

"The storage is being procured in a record time frame," months instead of years, said Yayoi Sekine, a battery analyst at Bloomberg New Energy Finance. "It highlights the maturity of advanced technologies like energy storage to be contracted as a reliable resource in an emergency situation."

 

Eoin Treacy's view -

Tesla is essentially a battery company which also happens to produce electric cars. It has been my argument for quite some time that the only way solar can achieve grid parity is if it is used in conjunction with batteries. As long as solar power is subject to intermittency which forces utilities to maintain excess capacity it will not be taken seriously as a viable alternative to fossil fuels. 



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