Fuel for Thought – Mar 16th

16 Mar, 2012

Energy from a 200 year perspective:  Gail Tverberg, an actuary with a passion for energy, has published a fascinating summary of trends in global energy use over the last 200 years.   One of the striking takeaways from this analysis is the extent to which recent Asian industrial and manufacturing growth has been fuelled by coal.  While most western nations have focused on reducing carbon emissions at home, they have effectively exported the emissions associated with their consumption of manufactured goods to China.  This illustrates a key flaw with global carbon policy, its failing to address lifecycle emissions.  Another interesting trend is the substitution from oil to gas consumption since the 1970’s oil price shocks.  Given natural gas is now only 15% of the cost of oil on an energy unit basis in the US, an all time low, the prospects for gas look bright.

Oil curve price dynamics:  In this week’s feature article we touched on the relationship between spot and forward prices in the European gas market.  In a sign of maturing market liquidity, forward season contracts are starting to respond to differences in fundamental drivers as well as front contract dynamics.  The Brent oil futures market is considerably more liquid than gas, with reasonable price visibility out towards the end of the decade.   But it is interesting to note that the rapid run up in spot oil prices this year has not been matched by a pronounced rally across the curve.  John Kemp explores current oil curve dynamics in the context of some recent history.

Utility balance sheet constraints:  E.ON reported a headline grabbing net loss of €2.2bn this week. This was driven primarily by the impact of German nuclear closures, but also by ongoing losses from oil-indexed gas contracts priced above spot.  E.ON’s pain is being shared by its primary competitor RWE, but also more generally across its peers.  Over the last five years, European utilities have been forced to shift the focus of their business models from debt fuelled expansion to deleveraging.  This is having a very real impact on utility risk appetite and the availability of capital at a time when infrastructure investment requirements are ballooning.

Picture of the week:

A winter storm viewed from the Troll C gas and oil platform in the Norwegian North Sea.  The Statoil operated Troll field off the coast of Bergen is home to 60% of Norwegian gas reserves.  The conventional steel hull semi-subermsible Platform C was commissioned in 1999.