14: What future energy trends are important to consider when investing?

EnergyInsights.net report from Feb 2005

The global economy is fuelled by petroleum and hydrocarbon products, predominantly oil, coal and gas (see graph below).  Rapidly increasing demand from the Asia Pacific region, in particular China and India, is leading to a tightening of supply versus demand. Oil prices rose to $59 a barrel in early 2005 primarily because production capacity could not keep up with demand.

The Western Oil companies are finding it increasingly difficult to find additional reserves – most areas are out of bounds because government want control over their reserves and therefore get state run companies to extract their hydrocarbons (e.g. Aramco Saudi Arabia, Gazprom Russia, ONGC India). Of particular note is Shell and Exxon’s 5% reduction in production in 2004 despite high oil prices – BP was only able to increase production 5% of the back of a very astute investment in TNK in Russia (these fields have increased their reserves four fold since BP purchased a few years ago – this is not likely to be repeated in the current Russian investment climate).  OPEC has been in a good deal of control of oil prices since 2000 and have restricted supply and investment in new fields – either because they prefer to spend their revenues on social welfare and public projects and/or there is little incentive to boost production capacity since this would lead to oversupply and reduced oil prices.

Because of high oil prices, industries have tried to switch to gas – but gas prices have risen as this demand as increased. Gas prices in the US are now about four times higher than in the mid 1990s, and prices in Europe have doubled. LNG has become competitive to important into Europe as well as the USA – something which seemed unlikely to happened about ten years ago. The US Energy bill calls for a rapid expansion of LNG terminal building in the USA – many projects are also underway in the UK and other parts of Europe, India and China.

Renewables energy is becoming increasingly attractive economically – there has been  a big increase in wind projects in Germany, Spain, the UK and to a lesser extent the USA. Solar has become very common in Japan. Denmark supplies some 12% of its electricity requirements from wind, and the UK hopes to have over 12% by 2015 (currently 2%). It is commonly thought that wind and/or solar combined can rapidly increase to 20% of a countries electricity requirement before other more predictable sources of electricity generation need to take over the remaining 70-80%. With rapid growth and take up in the developed world, expect investments in wind energy to be rapid in the next 15 years.

There will be a shift to gas from oil since the world contains huge gas reserves in places like Russia, Qatar and Iran. Because these reserves are so far from markets, expect LNG to rapidly expand and the cost of shipment and de-gassing to reduce further, whilst the size and cost of LNG processing trains will reduce. Any company with exposure to LNG will likely benefit from this expansion – the global leaders in LNG are Exxon, Shell, BP, Total, Petronas, ChevTex and QatarGas.

Coal will likely become increasingly attractive as oil and gas price rise albeit the very high carbon emission will dull this growth in Europe, Japan and countries that are committed to the Kyoto accord. The USA is likely to expand it’s coal production rapidly – the USA has by far the highest coal reserves in the world – much is higher quality anthracite (Wyoming) and is contained in huge highly efficient open cast mines with seams up to 80m thick! In the short to medium term, these coal companies are likely to do extremely well – and investors will eventually catch on that indeed there is a sustainable long term future for coal to power generation – particularly in both power companies and governments start to stimulate clean-coal burning technology that dramatically reduces carbon dioxide emissions.   

Countries will increasingly look to additive to supplement high priced gasoline – examples include methanol, ethanol and alcohol. These sources of fuel can be processed from fuel crops very economically – an example is how Brazil uses Sugar Cane to produce methanol that is then added into gasoline. These crops are renewable are do not create and can be carbon neutral. So watch out for the agricultural investments that can grow from fuel crops – it is not beyond the realms of possibility that vast tracks of otherwise barren land could be generated into fuel crop land – and hence produce fuel to power automobile for many years. As an example, Switchgrass biomass under the right conditions in the mid west of USA produces some 500 US gallons of ethanol per acre. Corn is also used to produce ethanol – for instance in the corn belt of the USA (located in the north central plains centered in Iowa and Illinois and extends into S Minnesota, SE South Dakota, E Nebraska, NE Kansas, N Missouri, Indiana, and W Ohio).

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