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.

                    

A portfolio of renewables can supply India’s demand for electricity

The big energy challenge of the future will be supplying enough low-carbon power to meet the emerging economies’ growing demands.  Although renewable capacity continues to grow, as this blog has noted in the past, notwithstanding depressed financing, waning popular interest, disappearing subsidies, and slower technological progress, there is growing concern that renewables cannot be an important part of the supply solution.  A couple of recent papers have debunked this myth at least for India.

In a simple but rigorous and illuminating analysis, Professor S. P. Sukhatme shows that India’s annual demand for electricity in 2070 — when the country’s population is projected to be 1.7 billion — can be met to a large extent by a portfolio of renewable energy technologies, as shown in the figure below.  Further, this is a conservative estimate since contributions from a number of other renewables, e.g., geothermal, offshore wind, tidal, etc., have not been estimated.  Finally, the role of technology and innovation in improving both yield and economics have not been factored.  Even so, the traditional challenges with renewables, in particular intermittency, need to be overcome to ensure reliably supply.

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.

Geothermal energy in India

Thermax, a leading energy and environmental service firm in India, is partnering with Reykjavik Geothermal to develop power plants in India.  A 3 MW pilot project in Ladakh has been planned.  This deal is in alignment with similar deals Thermal has executed on in the recent past, seeking to strengthen its position as a supplier of clean energy projects in India.

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.

India’s policy on oil and gas exploration and production

I have just published an op-ed article on India’s oil and gas exploration and production policy.  It appeared in Business Line, India’s leading business newspaper.  The main argument is:

That India does not fit ‘Big Oil’s’ strategy need not be disappointing. As the country’s economy grows, ‘Big Oil’ will have to find new business models to engage an emerging market of more than a billion people.

Suzlon’s technology woes

Forbes has just launched a business magazine focusing on India and has done a great — if wordy — story on the Indian wind turbine maker, Suzlon.  Suzlon is the story of an entrepreneur — Tulsi Tanti — who sold his inherited textile business to start from scratch a renewable energy business installing and servicing wind farms in India.

Tanti ventured into manufacturing small wind turbines and expanded into the larger 2 MW+ turbines to exploit the supply-demand gap and long lead times required by the industry leaders, Vestas and GE.  It was an ambitious run that resulted in big sales in the U.S. and Europe but came undone by inferior technology.  Suzlon’s turbines broke and were often incompatible with grid systems in the U.S.  Along the way, Suzlon also made a German acquisition that was poorly executed.

The result is a company now straddled with debt, slowing orders and falling market share, a demoralized work force following the departures of its CEO and CFO, and a failing reputation.  Tanti, however, cannot be faulted for not being ambitious enough and, knowing what he has accomplished, a turnaround would not be surprising.

Global Wind Turbine Market Share in 2009

Continued growth for U.S. onshore wind energy projects

Executing on a strategic decision to focus on the U.S. onshore wind energy market, BP has exiting from other countries.  It has just sold 100 MW of wind energy capacity in India to Green Infra Limited, an independent power producer backed by India’s infrastructure-focused private equity group, IDFC.

BP’s decision mirrors those of Shell and other investors who have exited from Asia and Europe to focus on the U.S. onshore wind energy market.  Most European markets are saturated or lack competitive incentives.  In comparison, the U.S. has vast tracts of unexploited wind energy potential with excellent Renewable Portfolio Standard-driven incentives.  As a result, one can expect continued growth of the U.S. onshore wind energy market and slower development of global offshore wind energy projects.

Offshore wind will, in principle, leverage the project engineering and execution talents of the oil majors but is fraught with high cost, regulatory uncertainty, and technological complexity.  Offshore wind costs anywhere from two to three times the cost of onshore wind.  Regulatory and renewable certification policies for offshore wind are currently undefined.  Finally, no single technology platform has evolved as an industry leader for massive adoption — a strategy oil majors have found successful in their wind investments.

Sensing a long-term opportunity in this flux, GE has purchased ScanWind, a Norwegian wind turbine company.

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.