The global fight for resources

Nothing is more telling of the global fight for resources than a few trips to Asia and long conversations with clients as I have learned this past year.

To build the roads, bridges, cars, planes, and power plants their people need, policy makers, CEOs, and consumers in India, China, Thailand, and Malaysia in Asia are all consumed by sourcing the traditional commodities of coal, oil, and gas but also metals, minerals, and chemicals.  The same stakeholders in resource-rich nations such as Australia and Indonesia are focused on keeping their customers happy while fighting cost inflation and talent shortages.

Even so, companies across the value chain are proactively investing in innovation to improve extraction productivity, find substitutes for increasingly scarce ingredients, and promote recycling.  As a result, Mosaic now extracts 97% — up from 90% — of phosphorus from phosphate rock, BASF is developing alternatives to rare earths in key refining catalysts, and Dewalt is offering discounts to incentivize lithium battery recycling.

You, however, need not necessarily travel to Asia to learn more.  Three books — Winner Take All, The Race for What’s Left, and The Oil Curse — provide interesting if sometimes biased accounts of these issues.

                    

Coal’s future

A client meeting yesterday on shale gas monetization began interestingly with questions on coal’s future.  Cheap natural gas and sluggish economic recovery are making it difficult for coal to be a competitive fuel for power in North America.  Overseas, Europe continues to suffer from economic weakness and uncertainty, while emerging economies such as China and India are not growing as fast as they did in the past decade.  Collectively, the outlook is bleak, a number of miners reported disappointing quarterly results this year, and the depressed prices are impacting exporters globally.

But this would not be the first time that the industry’s future has been questioned.  Coal is cheap and abundant making it a very competitive fuel for power and with technology advances in generation efficiency and emissions reduction, it will be difficult to displace coal as Europe is finding out.  Further, although China and India may have recently slowed, they will inevitably drive a disproportionate share of global economic growth in the long-term.  That growth will be fueled by thermal as well as metallurgical coal driving exports from various regions including American miners.

U.S. as a Natural Gas Exporter?

It’s a far cry from the situation five years ago when oil and gas majors were scrambling to build LNG import terminals in the U.S.  But a lot has changed in the past five years with the shale gas revolution.  So today companies are exploring terminals to export gas from the U.S.

Notwithstanding the promoters’ enthusiasm, it is hard to be optimistic of such ventures for three reasons.

First, although shale gas supply in the U.S. has increased dramatically and more could be produced at short notice if prices rise, natural gas continues to be dominated by three regional markets:  Americas, Europe and adjoining areas, and the Middle East.  Historically, there has been little exchange between these markets.

Second, structural changes in demand such as a global climate change accord are not on the horizon.  A global climate change accord could dramatically drive demand for natural gas, which is a lower-carbon fuel relative to coal and oil and could serve as a “bridge fuel” during the transition to a word dominantly supplied by renewables.

Third, demand growth in Asia, in particular China and India, are not sufficient to justify gas export models because shale gas supplies are not limited to the U.S.  Significant exploration is underway and discoveries are anticipated in the emerging economies too.

China is the New Energy Dragon

It’s official.  China is the world’s largest consumer of energy.

This happened a lot sooner — at least five years — than projected thanks to the disproportionate impact of the Great Recession on the U.S. relative to China.  More significantly, this is an inexorable phenomenon as the IEA announcement notes:

Since 2000, China’s energy demand has doubled, yet on a per capita basis it is still only around one-third of the OECD average.  Prospects for further growth are very strong considering the country’s low per-capita consumption level and the fact that China is the most populous nation on the planet, with more than 1.3 billion people.

Of course, this is no surprise to energy industry observers.  In the recent past, energy growth in China has been the subject of numerous anecdotal tales.  More importantly, it has cast a long shadow on energy dynamics in the developed world.

For example, higher power prices in the first half of this decade were attributed to the 10% annual growth rate of coal consumption in China.  Two years ago, the high diesel-gasoline price differential was because of China’s dramatic spurt in diesel imports to fuel marginal power generation capacity in the wake of  an unusually harsh winter.  In the past year, energy circles have been abuzz with China’s green energy plans.  The “Green Giant,” as it has been dubbed, built 12 gigawatts of wind capacity in 2009, has retired or plans to retire up to 35 gigawatts of small and relatively inefficient coal-fired power plants, build 20 nuclear reactors, and has committed to reduce its energy intensity by almost half.

In addition, it is implementing an aggressive outreach program to access energy assets globally.  Recovering from a failed bid to acquire Unocal in 2005, China has purchased oil and gas fields in Central Asia, South America, Africa, and the Gulf of Mexico.  It has supplemented asset acquisitions with a concerted diplomatic effort.  As a result, it now attracts more barrels of Saudi crude oil than the U.S. and gas from places such as Australia, Malaysia, and Qatar, and even coal from the U.S.  In similar vein, it continues to invest in critical energy infrastructure.  For example, it has just completed a 1,100-mile pipeline to import gas from Central Asia and is amplifying its R&D and technology development capabilities in energy.

Interestingly, China has disputed IEA’s conclusion “highlighting the lack of clarity in China’s energy sector as well as the country’s unease at its growing global impact.”  The IEA and China have been at loggerheads regarding data quality and access.  Even so, China’s official estimate of energy consumption is a measly 1% lower than that of the U.S., a difference that would be most likely met in 2010.

While energy consumption per capita is much lower, China’s energy consumption per GDP is much higher than that of the U.S.  Further, its energy mix is heavily dependent on coal, which contributes 66% of total demand in comparison to 22% in the U.S.  Collectively, these two pieces of data show the intense draw of energy by the Chinese manufacturing sector.

Altering this energy mix will be very expensive but far more doable than suggested by some observers.  This is because China’s energy infrastructure is not at a steady state and the large investments it will need to support higher energy demand per capita can be directed far more easily (given its political economy) to renewable energy sources.  Indeed, the country’s on-going investments in green energy and its commitment to reduce emissions intensity reflect this thinking while responding to global pressure around climate change.

China as the New Energy Dragon is just the beginning of a fascinating story in the future of energy.

If China is the “green giant,” how far behind can India be?

If China is the “green giant,” how far behind can India be?  A recent story documents how companies are trying to develop technologies, plants, and businesses that convert rice husk into power, recycle electronic waste, commission green data centers, consolidate wind and solar power, and mass produce electric cars.

Unlike China where its government is carefully orchestrating the new green revolution, India’s cleantech story is being fueled by entrepreneurs and venture capital.  Although India’s government is increasingly supporting the cleantech industry with policy, regulatory, investment, and tax incentives, its deeply democratic institutions ensure that it will be a slow albeit sure story.

European refineries on sale

Several refineries are being sold in Europe — see table below based on Reuters data — because of moderating demand for fuels, the resulting overcapacity, growing share of biofuels, and anticipated expense associated with reducing carbon emissions.  It is interesting that most bidders are the emerging economies such as India, China, and Russia, where rapid economic growth will continue to drive demand for transportation fuels.

Deal pricing, however, has not dropped as much as one might have expected.  Lukoil’s purchase of a 45% stake in the Vlissingen refinery apparently cost $10,530 per barrel of installed capacity.  This is a trifle lower than the $11,000-12,000 paid during 2004-2007, the most recent golden age of refining.  Of course, building a new refinery still costs almost twice at about $20,000 per barrel of installed capacity, unless you are Reliance, which built its 660,000 bpd refinery for less than $9,000 per barrel of installed capacity.

Solar energy’s growth pangs

First Solar, the Arizona-based world’s largest maker of solar cells, breaks into the difficult Chinese market with a $5-6-billion deal to build a two gigawatt plant and a stock analyst downgrades the company’s stock from “hold” to “sell” and halves the target price.  Why?  In the analyst’s words:

Even the best thin-film manufacturer in the world is not immune to the effects of over-capacity and the downward spiral that is occurring in solar module pricing … FSLR will remain the low-cost producer of a solar module over the next several years … There is widespread recognition that the polysilicon industry is moving into a period of overcapacity….

China — which was building one coal-fired power plant a week until recently — may have something to do with this overcapacity.  Thanks to its lower costs and government subsidies, Chinese companies are rapidly growing market share and setting up plants in the U.S. to overcome protectionist policies.  China’s Suntech is on track to surpass Germany’s Q-Cells and become the second-largest solar cell maker this year.

As capacity grows in the emerging economies, business models will be challenged leading to a different set of growth pangs for incumbent companies.