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Mark Anthony
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Mark Anthony, is an IT professional and who had a scientific research background before joining the information revolution. Visit his blog: Stockology (http://stockology.blogspot.com/)
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  • Is Natural Gas Really Displacing Coal Demand? - Data Speaks

    I have heard lots of claims that the US coal demand is being displaced by natural gas, as natural gas is at un-precedent low price. Is it really so? I will let the data speaks.

    This will be an expanding and updating instablog post, as I attempt to add content to it and supplement with additional data. Please check back often. This instablog post will be linked to from one of my main Seeking Alpha articles.

    Here are some data of US electricity generation, provided by EIA:

    (click to enlarge)

    In the above data table, row 2, 3, 4 are electricity from coal, from NG, and total, respectively. For the past 13 years. Row 5 and 6 are installed coal and gas electricity generation capacities. Row 7 is the ratio of coal electricity versus all electricity except for NG. Row 8 is the ratio of NG electricity versus all electricity except for NG. Row 9 and row 10 are coal and NG unit usage rate, defined as percentage of hours that the coal or NG units are likely running.

    The usage rate is calculated by averaging the total electricity generated in a year, over number of hours in that year to get average power. Then the average power divided by installed capacity, is thus the capacity utilization rate.

    What can we tell from the data? Row two remains essentially flat, meaning coal's consumption remains roughly flat. Despite of increase of NG consumption. The coal usage was down in 2009 only to go up again in 2010. It was down a bit again in 2011, which probably like 2009 will go up again. Row 7, which is the ratio of coal electricity versus all electricity except for NG, remains at roughly 60%, which is another evidence that coal consumption was not displaced by NG.

    Particularly interesting is the NG's installed capacity has consistently expanded, roughly double in 12 years, or about 5% a year increase. In the most recent 4 years, from 2007 to 2011, the increase slowed down to an average of 3.2% a year. Whether 3% or 5% a year, this is not a big pace of capacity expansion.

    Note NG generated electricity grows at the same pace of capacity growth, but not faster. The year around NG unit usage rate remain flat at about 28%. If utility companies try to run the NG units as base supply unit, we should see this usage rate begin to deviate towards 50% or higher. That is not occurring. Once again it shows natural gas displacing coal demand is not occurring.

    Was 2011 really a year that NG displaced coal? Based on EIA data on 2010 and 2011, coal generated electricity droped from 1847.090 to 1734.265 (in units of giga-KWH), a net drop of 112.825, or 6.1%.

    Total electricity generated dropped by 19.326, mostly due to a year of mild weather. This drop is responsible for 17.13% of the coal drop.

    Hydroelectricity went up from 260.203 to 325.034, up 64.871, or responsible for 57.5% of the coal drop, a big chunk. Higher generation of hydroelectricity was largely due to the weather as well.

    Other renewable went up by 27.82, or responsible for 24.66% of coal drop in 2011. This is mostly due to wind turbine. Again it was purely a weather effect: It was due to stronger wind.

    Let's add up the above three weather related contributions to coal's drop in 2011: Less electricity due to mild weather; more hydroelectric; more wind power. The total comes to 99.3%, almost 100%.

    Coal's in 2011 displacement was entirely due to weather, not NG.

    NG electricity in 2011 was up from 987.697 to 1016.595, up by 28.898, or 25.6% of coal's drop. As we discussed, NG's usage could change drastically due to weather condition. So this might also be due to weather, not due to cheaper NG price!

    Let's dig out other EIA data. From the data of electricity generated and fuel consumed. I reached the average of 1 metric ton of coal generates 1900 KWH of electricity, while one mmBtu of natural gas generates 128 KWH of electricity. This gives a coal to natural gas equivalence ratio of 1900/0.128 = 14.85. Thus one ton of coal equals to 14.85 mmBtu of NG. One ton of coal also contains 22.4 mmBtu of energy. 22.4/14.85 = 150%. So NG is roughly 50% more efficient than coal in generating electricity.

    The actual fuel cost per mmBtu from EIA was $2.41/mmBtu for coal and $3.73/mmBtu for NG. Adjusted for energy efficiency, coal is priced to the equivalent of $3.62 for NG. Thus coal is (surprise!) still cheaper than NG as recently as January, 2012.

    Dr. Arthur Berman has been one of the outspoken experts who point out that shale gas is a commercial failure. He pointed out that typical shale wells ultimately will produce 1 BCF of natural gas, a far cry from the rosy prediction of 5 BCF or more. One thousand cubic feet of NG is about one mmBtu. So one BCF is roughly one million mmBtu, or worth $2M. Drilling a shale well alone costs $15M or more, not counting the production and maintenance cost. There have been a lot of attacks and rebuttals to Dr. Arthur Berman, but I see NONE of them challenging the conclusion that the ultimate recovery per well is roughly only 1 BCF of NG, way below original expectation.

    Read this TOD piece on shale gas boom and burst: Shale Gas - Abundance or Mirage?

    A more technically oriented detailed discussion on both sides of the shale debate: A Miracle in the Marcellus Shale? By Dave Cohen.

    Dr. Arthur Berman himself discussing why the hyperbolic decline model does not work and what the ACTUAL production data from the Barnett Shale wells told us: Lessons from the Barnett Shale suggest caution in other shale plays by Arthur Berman. Taken from the article, there are 12,000 Barnett shale wells and cumulative production is only 5.64 TCF, averaging only 0.47 BCF per well.

    Another nice piece by Chris Nelder: What the Frack? Is there really 100 years' worth of natural gas beneath the United States?

    Disclosure: I am long JRCC, PCX, ACI, ANR, BTU.

    Tags: BTU, JRCC, PCX, ACI, ANR, WLT, ARLP, UNG, EOG, CHK
    Apr 23 6:27 PM | Link | 11 Comments
  • Natural Gas Storage - Correlation Between Storage Lows And Peak Injections

    In my article Rebalancing of the US Coal and Natural Gas Industry, I show a chart which shows that the natural has storage low point, and subsequent net gas injection volume before the peak is reached, has an inverse linear correlation relationship, such that of the storage low is lower, more gas will be injected to bring the storage peak up, vise versa, if the storage season begins from a high point, less gas will be injected to maintain the storage peak at roughly the same level.

    That correlation does exist, but the first chart in that article does not show the correlation well, because the total storage capacity has expanded over the years, therefore the target storage peak is not a fixed number, but one that gradually goes up over the years. Once this effect is taken into account, the linear correlation looks perfect.

    See the revised chart below:

    (click to enlarge)

    I am publishing the second part of the sequel article, Rebalancing of the US Coal and Natural Gas Industry. Please check back and read it on Monday or Tuesday. It explains the correlation in details. Enjoy!

    Another question to ask: Is natural gas usage really displaying coal in electricity production? Let's look at the actual data from EIA, for the past 12 years, for an answer. The data table is below:

    (click to enlarge)

    From row 2 of the table, it is evident that coal generation is essentially flat and only dent slightly in the most recent three years, due to the financial crisis.

    Natural gas usage did go up significantly, but it did not display coal, it just brings up the total electricity generated. More over, usage of natural gas goes up in proportion to the NG capacity going up. The NG turbines' usage rate, defined as percentage of hours of running, remains some where around 28% and does not go up. Neither is usage rate of coal units going down much.

    This debunks the notion of Paul Santos that utilities are trying to run NG units more often and coal units less often in an effort to switch more coal usage to natural gas. That did NOT happen.

    What happened is over the years more NG units are installed expanding the ability to burn more natural gas. However that is a long term slow process, and expanded natural gas usage does not displace coal. The existing coal units are still used, not sit idled.

    Disclosure: I am long JRCC, PCX, ACI, ANR, BTU.

    Apr 17 6:12 PM | Link | 28 Comments
  • The Darkest Star In The Commodities Boom
    In 2008 I wrote an Editor's Pick article The Brightest Stars in the Commodities Boom, Part I, and Part II. By luck I correctly called the topping of JRCC as well as the general coal mining sector at the time, on the exact day. Please read those old articles again, as they contain good principles of how to determine the rally potential of specific commodity sectors.

    As every one focus on the brightest spots in the market, let me talk about the darkest star instead. Physicists say that the darkest matter also shines brightest when it glows. A savvy investor would notice what others ignore, and would appreciate the beauty of Cinderella before she is invited to a royal party and be admired by all.

    The darkest star is literally dark in color. This sector is also at its darkest moment now. It will soon glow from the darkness and become the brightest star. I am talking about coal.

    While the Dow and S&P index hit multi-year high, and famous adult toy maker AAPL reaches half a trillion dollar, the US coal mining sector is at its darkest moment. Coal mining shares PCX, ANR, ACI and BTU are at or near multi-year lows. US coal price is at two year low and natural gas price is at the lowest in 10 years.

    Pessimistic views are rampant. Fellow SA contributor Peter Epstein wrote about the bearish views and quoted pessimistic views from mining executives themselves. But I am bullish. I believe this is the best time to invest in coal mining stocks. An incredible US coal rally, unlike any of the previous ones, is coming imminently.

    How dare I differ from the opinions of coal mining executive? Do I know something that experts in the coal business don't know? Well, back in late 2008 I urged management of PAL and SWC, the only two North America palladium mining company, to utilize their cash at hand to acquire palladium stockpile at the low price of $200 or even $165 per ounce. I told them to produce from a European palladium mine with 99.9% purity ore grade and below $200 production cost. The mine is called Swiss Bank Vault. I told them when a commodity is sold below production cost the low price could not last long.

    No one listened, instead PAL made secondary public offerings at rock bottom stock price, hurting their share holders. The PAL to SWC share price ratio used to be 2:3, now it is 1:5. Had they listened they would have turned the $80M cash into $280M as palladium rallied to $700+ an ounce, and they would not have diluted their shares. Therefore savvy investors generally have a broader view than near-sighted executives who know little beyond their own company. It is no wonder that the executives often predict the market wrong.

    Let me say it again, commodities can not be sold below production cost for long. If the price is too low, money losing producer will have to cut production or go out of business, leading to tighter supply and price recovery. On the opposite, when price is too high, producers will rush to produce more (if they can), leading to price collapse. It keeps going up and down in repeated cycles, like seasonal changes.

    The US coal market is such, as I discovered, that it only takes a small percentage of supply/demand imbalance to tilt the market either way, causing extreme swings of coal mining share prices in relatively short period of time, providing excellent opportunity to reap huge profits from such big swings.

    Most US coal miners are now un-profitable. Some have started to cut production. That gives us the confidence that we are at or near the bottom. The downside of the sector is limited and will be over soon. So what will continue to keep it down? What about the up side potential?

    US coal price is dragged down by several domestic factors. Warm winter cut electricity demand; abundant natural gas production depressed the price of both natural gas and coal, as utility companies switch to the cheaper fuel for electricity generation.

    Are these bearish factors exaggerated? First let's look at some numbers. In fuel energy equivalence:

    1 ton of coal = 4 barrel of oil
    5.6 mmBtu gas = 1 barrel of oil (1 mmBtu is about 1000 cubic feet)

    Today Brent crude oil is $125 per barrel. US coal is $60 per ton. US natural gas is $2.50 per mmBtu. Thus coal is priced at $15 per barrel of oil while natural gas is priced at $14 per barrel of oil. Isn't $15 or $14 per barrel ridiculous, when the Brent crude oil is $125 a barrel?

    The so called natural gas glut due to shale gas over production is exaggerated. The EIA gas storage data was 3805 BCF and 3850 BCF, respectively for Thanksgiving Day 2010 and 2011. That was little build up in a year, indicating balanced supply/demand. Currently the storage is about 700 BCF above average. It was entirely due to a warm winter, a one time event. 700 BCF is worth about 9 days of US natural gas consumption in the winter, not a big chunk in terms of annual demand.

    Do you know that USA is still a net natural gas importer? We import from Canada. Canada has oil sand, which is cooked using natural gas to produce crude oil. Due to extreme price disparity between crude oil and natural gas, Canada is better off keeping the natural gas to itself to produce more oil sand. We imported 371 BCF in January, 2011, by Nov. 2011, the import dropped to 246 BCF, losing 125 BCF a month, or 1500 BCF a year. If the imports from Canada continue to drop, the pathetic 700 BCF extra storage people talk about will be gone before you notice it. Good for Canada as its LNG export to Asia now fetches $15 per mmBtu, when the US gas is selling for only $2.50.

    The new US shale gas wells are said to have very steep decline rate, with a production drop of 65% to 85% within the first year. Current low natural gas is un-profitable for shale gas producers. As they reduce the rigs drilling wells, the glut may turn into a shortage soon.

    Japan boosted its LNG import in January, 2012 by nearly 30%, and boosted coal import by 7.9%. Japan pays $15 per mmBtu for the LNG. Europe is paying $12 for the LNG. There is no glut of natural gas. There is a shortage of LNG vessels so all the countries desperate for energy needs will have to turn to coal importation instead.

    There is no coal glut in the US, either. Based on EIA data, US coal stockpile is smaller than it was the same time last year. The stockpile was 243M tons in Oct., 2010, and 209M tons in Oct., 2011. Restocking alone would require 34M tons of coal. So much for the 50M ton less US coal demand that coal mining executives were worried about.

    50M tons of coal is a significant number to tilt the supply and demand of the US coal market of about 1 billion tons a year. But it is a small number compare with the big scheme of things globally. US exported nearly 110M tons of coal in 2011, a record year, beating 2010's 82M tons and 2009's 59M tons exports. At this pace of rapid increase US could easily add another 35M tons coal exports this year, to 145M.

    India is projected to import 140M tons of coal this year versus 114M last year. So here comes another 36M tons extra demand from India.

    But the biggest story is China who has a giant and rapidly growing coal demand. China's coal production and demand saw double digits growth for more than ten years and it is not slowing down any time soon. Last year China produced about 3.78 billion tons of coal and imported 182 million tons, thus become the world's No. 1 coal importer only 2 years after it became a net coal importer in 2009.

    Chinese government agency predicts a 30 to 40 GW power shortage this year, worse than 2011. China has enough installed fire powered generation capacity. The problem is government control of electricity price makes power plants reluctant to buy coal to generate electricity at a loss. They will have to wise up and let the free market determine the prices. China needs 200M tons of extra coal just to plug the hole of 40GW power shortage. (0.55 kg coal is needed to generate 1 KWH of electricity)

    The Chinese demand growth is not slowing down any time soon. The numbers are still small comparing with the Chinese population. China generated 4.7 trillion KWH of electricity in 2011, versus 4.1 trillion KWH in the US. Averaged over the population, each Chinese enjoyed an average of 390 watts constant electricity power, barely enough to light a bulb and run a computer at the same time.

    But China's coal production growth may slow down or even slide in 2012. According to BP, EIA and World Energy Council, China's coal reserve is roughly 100 billion tons. That is not a lot of coal comparing with 3.5+ billion tons a year production.

    I predicted that China has reached or is near Peak Coal production. There are a few signs that China has reached Peak Coal. Industry users have been complaining about inferior quality of coal: the same amount of coal containing less amount of heat. Coal miners would not intentionally produce inferior coal: They would always dig the best qualify coal first to fetch good money. They only turn towards low quality coal as the mines begin to deplete and the low hanging fruits have been picked. There are reports of whole villages in Shanxi collapsed as the ground itself collapsed due to hallowed out coal mines underneath. How long can they keep digging?

    Peak Labor also plagues the Chinese coal mining industry. The method of coal mining has not changed dramatically. To produce 10% extra coal, you would need to dig 10% more coal wells, utilize 10% more equipments and electricity, and hire 10% more miners to do the job. As the Chinese coal mining industry expanded rapidly over the decade, there was never a shortage of young migrant workers from the poor rural villages willing to take up the dirty and dangerous job for a very moderate salary. The army of coal miners kept expanding rapidly.

    But the unlimited expansion is coming to a sudden end. China's One Child policy is finally taking its toll and ending the much talked about demographic dividend. After the Chinese New Year break at the end of January, 2012, when factories throughout China reopened and wanted to expand their business, they found they could not find many migrant workers to hire! "Yong Gong Huang"(labor source scarcity) became a new buzz word in Chinese blogosphere. Worst hit must be the coal mining industry. I saw job ads of up to 10,000 yuan ($1600) per month for freshman coal miners! Typical city jobs for migrant workers pay about 2000 to 3000 yuan. There must be a coal miner shortage.

    As the reserve depletion and labor shortage limits growth of Chinese domestic coal production, the authority also realized the need to limit growth and preserve the resource for longer. Inner Mongolia, whose coal production reached 979 million tons in 2011, announced that it will cap the production below one billion tons before 2015, which means little more growth allowed from the 2011 production level. Shanxi province announced that they will limit 2012 production to 850M tons, which is a drop of 22M tons from the 2011 level.

    Inner Mongolia and Shanxi alone accounted for the entire Chinese coal production growth from 2010 to 2011. If these two provinces do not see higher production in 2012, China will see little production growth.

    As China's coal demand continue to grow aggressively while domestic coal production is limited by reserve depletion, labor shortage and the authority's conscious decisions to limit production to preserve the energy resource longer, China must rely more on coal imports.

    The outlook for US coal market can not be better and there can not be a better entry opportunity into the US coal sector but right now. Coal mining stocks like JRCC, PCX, ACI, ANR, BTU, etc. are at their lowest levels since 2009. During the US coal rally from 2007 to 2008, I reaped only a small profit but missed the big part of the JRCC rally, from $3.56 to $62 in only ten months (+1700%). I regretted ever since then.

    But the darkest star in commodities is going to grow brilliantly soon!

    I am so happy that history repeats itself and I can try to do my best this time around in the US coal sector, are you ready to do the same?

    Full disclosure: At the time of writing, the author continues to hold a core position in palladium mining stocks SWC and PAL and is heavily invested in coal mining stock JRCC, PCX and others. I have no position in AAPL yet but am looking for good entry price to short it.

    Disclosure: I am long JRCC, PCX, SWC, PAL.

    Mar 03 6:58 PM | Link | 9 Comments
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