Happy New Year. And a prosperous one for all. Our newsletter provides global energy insights. The New Year on the energy scene started with a mini-crisis:
Russian / Ukrainian Gas Price Spat: On 1st January, the Russia cut some 30% of it’s gas supply to Ukraine – who then took this from supplies heading for Austria, Hungary, Germany and other European countries further west. This precipitated a crisis which was short-lived but has triggered fierce debate in
LNG – a bright future: Alternative energy sources to gas are widespread but all have issues – one of the best is LNG (Liquified Natural Gas) because this can be shipped from any gas producing country to a market – albeit shipping and processing costs are relatively expensive. Security of supply is good since one can purchase spot cargos from different countries or engage in long term supply contracts with stable countries (e.g.
The main markets are:
The biggest project by far is RasGas in Qatar and this is expanding dramatically.
Investors keen to expose themselves in companies exposed to LNG processing and shipment should look at companies like ExxonMobil, BP, QatarGas, Shell, Total, BG, Woodside and ChevTex – plus the big state companies operating in those respective countries (Petronas, Oman LNG, ADNOC, ADCO, QatarGas). Other companies participating in the joint ventures are Matsui, Marubeni, Mitsubishi, Kogas etc
Companies both private and state run, are opening degasification plants – albeit returns on these plants and the pipeline transport to customers is lower risk and has lower returns. Many are being constructed for example in China and
Because an LNG processing plant costs upwards of $2 billion, only the larger oil companies and gas marketing companies have so far been involved. Barriers to entry into this business are very high – and although returns can eventually be very high, the up front capital costs puts a lot of banks and investors off.
Refining update – refinery capacity continues to be tight with utilization at well over 90% in most regions and countries. Hence refinery margins are particularly high. In the mid 1990s, refiners could commonly expect between $0.5 and $1.5 per barrel profit margin – now this has sky-rocketed to a range of $7 to $15 in most areas and for most products. Refining is now a business with healthy returns, albeit the initial capital cost of building a refinery is of course high – some $1 - $2 billion for a medium sized refinery complex. Because of the high initial capital costs, big cash sink, long pay back period, long planning periods, future environmental legacy issues/liabilities, plus memories of under-performing investments in the 1990s, banks are still reluctant to lent money for refinery building. Hence refinery capacity can be expected to be stretched for quite some years – and margins remain high. Smaller refineries with environmental issues have been forced to close or were closed in the 1990s because of over-capacity and non profitability. Companies that specialise in refining, and sweating old refinery assets that have mainly depreciated capital expenditures – can expect a profitable few years – as demand from
Further exacerbating the problem of capacity shortages are the ever increasing array of new products to meet differing environmental regulations and product qualities. This has affected product prices particularly in the
Companies heavily exposed to refining include Shell, ExxonMobil, BP, ConocoPhillips, CevTex, Caltex, Sinopec, Petrochina, Petronas, Petrobras and Valero. Valero is a specialist oil refining company, US based, which has expanding over the last 5 years to acquire old refineries – one of only a few pure refining (non integrated) oil companies. The Ultramar refineries were integrated into this company some years ago.
Outlook for energy - For those who are interested in the ExxonMobil outlook for energy, you can view this full presentation by clicking here. Anyone in any doubt about whether the energy business is a growth business or not should read this presentation. There will be a massive demand for energy of all types from the Far East and as populations grow and people become more wealthy and demand energy for transport, home electricity, heating and air conditioning, plus manufacturing – the oil majors along with state oil and energy companies will need to provide sources of energy into the market – be it oil, gas, coal, nuclear, renewables, electricity or any other type of fuel/energy source. Skills shortages for engineers who are capable of finding and developing new energy sources will likely stay a major constraint moving forwards for the next few decades – and countries are likely to get ever more desperate for secure energy sources, leading to political tensions (as seen recently with the Russia/Ukraine disagreement).
Sugar – so what’s sugar got to do with energy? It’s a commodity that can be produced from sugar cane, sugar beat, or corn that can then be converted into ethanol and methanol to power cars, relatively easily. It’s also renewable – e.g. it grows, can be harvested and grown back again – and hence it is broadly carbon neutral. The price of sugar has barely moved higher in the last few years because of improving farming methods and efficiencies. But EnergyInsights.net predicts that sugar prices will start to follow oil and gas price escalation trends as countries “cotton on” to the potential of sugar to provide a secure energy source via indigenous farming. Hence, investors looking for the next big trend should seriously consider investing in sugar and land where sugar is farmed. Example could be the corn belt of