Saturday, May 28, 2011

Oil Prices Will Move Higher Again

Oil prices have been in the news again lately...but this time because of a drop, not a rise in price.

It, like many other commodities, slid due to fears whether these markets were frothy amid apparent slackening demand around the world.

But fears of an even deeper sell-off in oil may be overblown. Wall Street, as usual, is looking at only one side of the equation – the demand side.

Demand is indeed slowing from the torrid pace of a year ago. The International Energy Agency (IEA) forecast a growth rate of just 1.3 million barrels a day this year. This is down from a near record rate of increase of 2.8 million barrels a day last year.

However, oil investors should not lose sight of oil supply growth which is also slowing down. It is the supply side of the oil equation which remains very positive over the long term for higher oil prices.

Iraqi Oil

One area that oil bears have been pointing to lately is Iraq. The country has the stated intention of raising its oil production from 2.6 million barrels of oil per day to more than 12 million barrels of oil per day by 2017.

But now some Iraqi oil officials have hinted that this goal is unattainable due to mounting constraints in pipelines and export terminals.

An official downgrade from the government on its oil target is expected soon. The target is likely to be at most in the range of 5-6 million barrels a day by 2015. And even that target may not be hit.

The head of Lukoil in the Middle East, Gati Al-Jebouri, said “Whether that [2015 goal] is achievable given the infrastructure is a difficult question to answer.”

A senior official from a western oil company in the region was quoted as saying that Iraq was moving from “propaganda to the reality” regarding oil output targets.

Yet, many on Wall Street continue to believe the propaganda and think that oil supplies in the future are not a problem at all.

The projected huge increase in Iraqi oil along with increased production from non-Opec producers such as Brazil is critical to hopes for lower oil prices in the years ahead.

Do these hopes have any chance of becoming reality? Most likely not.

Supply Problems

The reality is that oil supplies are slowing despite the incentive of higher oil prices.

This trend is important because supply growth in non-OPEC countries over the past two years has been exceptionally strong. It averaged about 1 million barrels per day annually. This is the highest two-year period since 1996-97. Last year's 1.1 million barrel growth spurt was the biggest annual increase since 2002.

This surge in production was critical in actually holding down oil prices somewhat. But this surge seems now to be coming to an end.

The IEA forecasts growth from non-OPEC sources to be only 750,000 barrels per day. And even this forecast is highly suspect.

It has a lot of very optimistic assumptions built into it. One of them is that, despite the turmoil, Middle East oil production will only drop by 100,000 barrels a day until July and then resume full production. Not likely.

Other assumptions include troubled Yemen producing its full output...and the North Sea fields, some of which shut down every summer for maintenance, not shutting down at all this year.

Oil Prices' Future Course

Wall Street though is partially right. Strong global demand, especially from emerging markets, has played a part in driving oil prices ever higher over the past decade.

But even more critical to surging oil prices has been the lack of growth in supplies of easily accessible oil.

As famed commodities investor Jim Rogers has said time and time again “where is the oil?” He's right – there hasn't been a large discovery of easily accessed oil in decades – that era is over.

Oil investors need to keep in mind that, barring a major surprise discovery, the situation with oil supplies in the years ahead will lead to an oil price rise. And most likely, as Jim Rogers recently told the BBC, “beyond expectations”.

Saturday, May 21, 2011

The Nuclear Waste Problem

We've all seen the headlines – the nuclear accident at Japan's Fukushima plant may rival the 1986 nuclear disaster at Chernobyl.

It is a multi-pronged nuclear problem at the tsunami-stricken site. Some of the gravest dangers there involve decades worth of spent fuel rods crammed into cooling tanks. Each fuel rod is packed with fatal levels of radioactive isotopes, including several types of plutonium.

This mess serves to expose just how far the world is from finding a permanent solution for the tens of thousands of tons of high-level radioactive waste being stored in temporary facilities. No country yet has come up with the right solution.

Japan's Solution

Japan itself has long sought to reprocess its nuclear waste into mixed plutonium-uranium fuel, known as MOX. This is a fuel that could be fed back into reactors.

The Japanese opted for this type of nuclear waste disposal because of their geography. The country's location on the so-called 'Pacific Ring of Fire' makes it very vulnerable to earthquakes. This is turn makes it a bad idea to try to bury nuclear waste underground.

But the Japanese plan has suffered from accidents and delays.

In 1999, two workers at a reprocessing plant in Tokai were killed when they mistakenly mixed buckets of uranium in an unprotected tank. This caused a nuclear chain reaction that spread radiation throughout the plant.

A second reprocessing plant in Rokkasho is still not fully operational 17 years after construction began.

The US Solution

The United States has not had much better luck than Japan at coming up with a more permanent solution for nuclear waste.

It already has 62,500 metric tons of high-level nuclear waste stored in dozens of locations around the country. And according to the Nuclear Energy Institute, it producers 2,300 tons more of nuclear waste annually.

The US does have the world's only operating deep level repository for nuclear waste. But the facility in New Mexico only accepts waste from military weapons research and production.

This means that nuclear waste from civilian operations have no permanent place for storage. Some of this nuclear waste is stored in pools such as those at Fukushima. Other such waste is stored in steel containers using a method called dry cask storage.

Billions of dollars were spent planning a permanent repository for civil nuclear waste in Nevada. But the project was scrapped President Obama amid strong local opposition as NIMBY (Not In My Back Yard) raised its head again in the United States.

The opponents of the Nevada facility claimed that there is no reason to worry. Until further research is done on a more permanent solution, waste can be “safely” stored for decades using dry cask storage or pools. In the light of the events at Fukushima, that position is almost laughable now.

Swedish Solution

The search for a more permanent solution for nuclear waste disposal takes us across the Atlantic to Europe. Here we find perhaps the country furthest along the road to a solution: Sweden.

After three decades of planning and 15 years spent trying to win local support, a formal application was submitted recently to build a permanent repository for high-level nuclear waste.

If approved, the plan would make Sweden the first country to start burying highly toxic, spent nuclear fuel until it no longer poses a threat to life. A process, mind you, that can take at least 100,000 years.

The plan does still need to be approved by the Swedish Radiation Safety Authority. If approved, the facility will be built at Osthammar, a small town two hours north of Stockholm, near Sweden's existing low-level nuclear waste disposal site.

Construction is due to start in 2015 and the plant is to go operational in 2020. A 5 kilometer ramp will connect 60 kilometers of of tunnels covering 4 square kilometers. The construction and operating cost for the facility is expected to be about $3.8 billion.

The repository will sit 500 meters below the surface in granite bedrock that is nearly 2 billion years old, using a clay buffer for protection.

The spent fuel rods themselves will be put into copper canisters, with 12 fuel assemblies per each canister. It is expected the facility will have the capacity for 6,000 such copper canisters.

The entire future of the nuclear industry may depend on how successful the Swedish solution is for burying nuclear waste. Needless to say, there will be many keen observers around the world with their focus on the happenings in the years ahead in that small Swedish town of Osthammar.

Saturday, May 14, 2011

Investing in Ethanol

There is little doubt that the biofuel industry is a future global growth industry. The International Energy Agency predicts that global biofuel consumption will increase from 55 million tons of oil equivalent today to 750 million tons in 2050. This will raise biofuel's share of the transportation fuel market from 2 percent to 27 percent.

Here in the United States though there is controversy surrounding biofuels. With the rising price of corn there comes a renewed debate on corn-based fuel for our vehicles – ethanol.

It is a simple food vs fuel debate. It centers on whether the United States should be using ethanol – and 40 percent of our corn crop – as fuel. Such demand for corn from the US ethanol industry is one of the factors driving up the price of corn for consumers around the world.

But there is an alternative to corn-based ethanol as in the US. And I'm not talking about sugar-based ethanol from Brazil or sugar beet-based ethanol from Europe either.

Cellulosic Ethanol

The alternative is a second-generation ethanol called cellulosic ethanol. It is derived from agricultural waste products such as straw husks and sugar cane off-cuts. Its production avoids entirely competing with food producers for crops.

According to consultancy McKinsey, the cellulosic ethanol market will be worth between $75 billion and $140 billion worldwide by 2020. McKinsey forecasts this will happen as the United States, Europe, China and others promote biofuels as a way to reduce carbon emissions and oil dependency.

However, the cellulosic ethanol industry has be slow out of the gate. This is amid doubts about its economic viability and wrangling over government support in the United States. Apparently, the corn ethanol industry does not like the competition for space at the government trough.

But there was a breakthrough this month...putting Europe in the lead for now in this new industry.

Construction started on the world's first commercial-scale production facility being built in Italy. The plant, due for completion next year, will have capacity of 13 million gallons a year. And its production costs will be about $2.50 per gallon. This is similar to corn-based ethanol and competitive with current fuel prices.

The United States was thought to be the leader in cellulosic ethanol. The US government had been aiming for 250 million gallons of the fuel to be produced this year. But the Obama administration was forced to cut the target to a mere 6.6 million gallons because of delays to planned US production facilities.

The US had better addition to Europe, both China and Brazil are on course to start full-scale production by 2013.

DuPont and Danisco

For investors looking to get in on this nascent industry, an interesting play is DuPont which launched a takeover offer for a leader in the cellulosic ethanol industry.

The company is trying to buy Danisco, the Danish maker of enzymes and food ingredients, for nearly $6 billion. It produces the enzymes that enable biomass like switchgrass to be broken down and fermented into ethanol

DuPont already has a joint venture with Danisco developing cellulosic ethanol at a demonstration plant in Tennessee. The planned acquisition would give it full control.

Cellulosic ethanol contributes just a fraction of Danisco's $2.67 billion of annual revenues. However, if second-generation ethanol fulfills even a fraction of its forecast potential, the product could transform the company's growth prospects.

Danisco is currently a strong number two in the market behind another Danish company, Novozymes. That company is also investing heavily in cellulosic ethanol and will build a demonstration plant in China this year.

Enzyme makers would get just a small slice of the billions of dollars of revenue the industry will generate. But many in the industry predict that nonetheless it could double the size of the overall global enzyme market to more than $5 billion annually.

So it looks like a wise acquisition for DuPont to make. If the deal goes through, it will pay off over the long term.

Saturday, May 7, 2011

Can the Blackberry Compete in the Smartphone Market?

The stock of Research in Motion is on the skids again as the company guides lower its earnings forecast for the first quarter of 2011. The reduced guidance came on the back of lower BlackBerry shipment volumes and increasing sales of lower-priced Blackberrys in the company's mix.

The company is also losing ground as new products are being delayed until later this year while RIM develops models with touchscreens and tries to shift to a new operating system.

RIM continues to have problems as its BlackBerry smartphone struggles to retain market share in the ultra-competitive smartphone market. According to research firm Canalys, the company's share of worldwide smartphone sales slipped to 14 percent in the fourth quarter from 20 percent a year earlier.

Industry forecasts are for Blackberry's global smartphone market share to fall to 11 percent by 2015. Amazingly, it is even expected to fall behind a somewhat resurgent Microsoft, thanks to its recent tie-up with Nokia.

Many in the industry are ready to write off Research in Motion as a non-competitor to the hevyweights in the industry. Apple and phones using the Android operating system from Google continue eating its lunch. Android-powered phones are forecast to have nearly half of the 2015 global smartphone market.

Blackberry's BBM

However, there is one hope for the company to retain a decent percentage of the smartphone market...BBM or Blackberry Messenger.

Many young people around the globe between the ages of 15 and 24 are buying the Blackberry phone in great numbers for one single feature – BBM, which is an instant messaging application only available on RIM devices.

It looks similar to SMS text messaging. But BBM is both faster and cheaper, coming free without the need for a data package.

It is used by more 39 million people worldwide, although its usage has yet to take off in the United States. BBM is extremely popular in the UK, Netherlands, Brazil, Indonesia, South Africa and Middle Eastern countries.

And its usage is up 500 percent over the the past 12 months, making it a real threat to phone companies' text-message revenues in some markets around the globe. In fact, the consultancy Mobile Youth forecasts that SMS volumes will drop by 20 percent in the next two years in countries like the UK

RIM's management team did not even realize they had a winner on their hands at first... which does not say much about their acumen. Graham Brown, a director at Mobile Youth said BBM took off “before RIM saw it on their radar”.

RIM's Hope

The growth of Blackberry Messenger globally could be a significant event for RIM. It is the reason that consumers now outnumber business users of Blackberry.

What Research in Motion hopes will happen now is that BBM's entrenchment in the youth market globally will spread back up to their parents. The company believes if this happens, it will prevent older customers from switching to their rivals.

The company is now building on this opportunity by providing new “gifting” capabilities in BBM. This allows people to send each other talk-time vouchers. Other virtual items such as music tracks are expected to follow.

RIM is also opening up BBM to third-party developers. This will allow the company to build other services on top of or incorporating into its messaging system. This development may lead to BBM being opened up to ads and marketers, which will lead to increased revenues.

There are even rumors that the company is considering opening up BBM to other mobile platforms, through an iPhone or Android application.

However, this Blackberry Messenger “social platform” is still in beta testing mode. And as if they still don't believe it, RIM's management remains cautious about its outlook.
It really does say something about how the company is run. RIM finally has a weapon it can yield in the war against Apple and others...yet its management is reluctant to push it.

Instead, it should be pushing BBM every chance it gets, particularly here in the United States.