Mark Anthony's  Instablog

You read that title right, I am talking about The Ultimate Energy Investments, not the "Alternative Energy" investments. Alternative energy is a very sexy word to the ears of investors, in recent years. I am all for alternative energy developments. But I am not a big fan of most of the alternative energy developments. They are too costly in terms of energy and money invested, in terms of energy return, and none of them can be ramped up quickly to meet even a fraction of energy demands in today's global economy. I believe LENR, or Cold Fusion, which involves precious metal palladium, is humanity's only solution to Peak Oil energy crisis.

 

We face the Peak Oil reality, a reality that the total energy supply of the world will begin to decline, instead of continue to increase. The world must cope with and live within the reality of ever declining energy supply, until a new abundant energy source can be developed to replace the depleting fossil fuels of the earth.

 

It makes sense to hoard something when supply is in shortage. Wouldn't it be nice to physically hoard energy itself, as a commodity investment? This is why I gave the title of this article as "The Ultimate Energy Investments". Yes I am talking about HOARDING ENERGY itself.

 

How do you hoard energy? Energy is invisible, has no shape or form. Energy price is still cheap but it won't stay cheap. One kilowatt hour of electricity is worth about 5 US cents at whole sale. You can hoard energy by storing it in a battery, but it is an ineffective investment: One set of Toyota Prius hybrid car batteries, costing a few thousand dollars, stores about 500 watt hour of energy fully charged, or less than 3 cents worth of energy. Is it so impossible to hoard energy?

 

It is not possible to hoard energy directly, but it is possible to hoard energy indirectly. It can be a very good investment. Energy drives all activities of the society. All goods or services we produce or consume ultimately depends on energy in one way or another, directly and indirectly. When you take a hair cut in a barber's shop it costs lots of energy: Electricity is used to drive the hair clipper. The hair clipper itself is made of plastic and metal parts. You need energy to produce the plastic and produce the metal from minerals. You need energy to turn raw plastic and metal into parts and then assembly into a hair clipper. The barber needs to eat food. You need energy to produce the fertilizer needed to grow grocery foods that the barbers and every one of us consume daily. Everything costs energy.

 

The ultimate energy investments are investments in commodities that cost a huge amount of energy to produce in the first place. Such commodities may be extremely rare, and can be very expensive, reflecting the huge amount of energy it costs to produce these commodities.

 

Precious metals, particularly PGM metals, platinum and palladium, are such ultimate energy hoarding investments, because these metals cost huge amount of energy to produce. According to the annual report of Anglo Platinum (AGPPY.PK), the direct electrical energy cost of producing just one ounce of PGM metal, is almost 7GJ in 2008, or 7x10^9 Joules. In terms of electricity that's roughly 2000 kilowatt hours of electricity to produce just one ounce of PGM metal. At retail electricity rate of US$0.15 per KWH, it costs US$300 just in direct energy cost to produce one ounce of PGM metals. Indirect energy cost, e.g. the energy cost to produce the mining equipments, explore and develop the mine, as well as costs to pay salary to feed the mining workers and their families, is probably several times higher.

 

I guestimate that all direct and indirect energy cost combined, it costs about 10,000 KWH of electricity worth of energy to produce one ounce of platinum or palladium, or the equivalence to the energy contained in six tons of coal.

 

ONE OUNCE of PGM metal equals SIX TONS of coal. Remember that and think about it!

 

The platinum engagement ring you bought for your wife contains about 1/6 of an ounce of platinum. It costed one ton of coal to produce the metal. Your wife is wearing one metric ton of coal right on her ring finger. Just tell her that there is one ton of coal sitting on her finger!!!

 

When you buy a one ounce platinum or palladium coin, you have hoarded 6 tons of coal under your pillow, without taking up any space in your backyard. When South Africa exports one ounce of PGM, they consume six tons of their coal. By the time South Africa depletes its coal reserves, they won't be able to produce a single more ounce of PGM metal, even if there is still be plenty of metal lying underground.

 

As energy becomes more expensive, it costs more to produce the precious metals. The value of a physical asset is generally decided by the replacement production cost, the ounces of precious metal you hoard will grow more valuable over time, as Peak Oil starts to take its toll in societies.

 

Isn't it great that you can hoard energy itself, by simply hoarding bullions of precious metals, without costing space in your backyard to store a small mountain of coal! Just remember this: one ounce of platinum or palladium equals to six metric tons of coal.

 

The concept can be applied to other precious metals and base metals. Gold production is also extremely energy intensive, having to sort through tons of rocks to extract just a fraction of an ounce of gold. One base metal that is tightly correlated to energy cost, is aluminum. There is no scarcity in the raw material to produce aluminum. Aluminum production is merely a matter of applying electricity energy to separate the aluminum metal by electrolysis. When you buy an aluminum bar, you bought a certain amount of electricity, stored in the metal, in the form of energy consumed to produce the metal.

 

If you want to hoard electricity, you can hoard aluminum bars instead. I do not know how many kilwatt hour of electricity it costs to produce one kilogram of aluminum. Probably you can check the annual reports of producers like Alcoa Inc. (AA) or Aluminum Corp. of China (ACH) to find out. One thing is sure, as electricity price goes up, so will the cost of aluminum production, and so will the market price of the metal.

 

Recently, another energy source, natural gas, has become a hot topic of discussion in the investor community. I agree with the general sentiments that current natural gas price is unreasonably too low in comparison with other energy sources. Current natural gas price does not fairly reflect the production cost, particularly the shale gas production cost. The low price is unsustainable. It must go up soon.

 

What can you buy to invest in natural gas, besides producers like CHK, COG, APC, PETD? Many people talk about natural gas ETF funds like UNG, FCG, UNL, WCAT. I must point out that people should NOT touch any of these ETFs that are based on nothing but paper. Ask managers of these ETF funds: Do you hoard even one cubic feet of natural gas? Do you have any facility they can show you that contains natural gas? If they don't have the physical goods, then they only have worthless papers created out of thin air by counter-parties. I have learned my lesson in UNG, fortunately without suffering any loss. I argued why people should NOT invest in UNG, USO, or any other paper based ETFs. It is extremely important that you read it and try to understand the difference between paper and physical goods.

 

Is there no way to hoard physical natural gas for an investment? Well, there IS a good way of hoarding natural gas, without giant steel storage tanks. Natural gas is used to produce a very important agriculture commodity whose other raw material for production is free: the air! It's called urea, a nitrogen fertilizer. The nitrogen comes from the air. The hytrogen, as well as the energy needed to produce urea, comes from natural gas. No other raw material is involves. Urea is stable, safe and cost effective to store. By hoarding urea, you are hoarding natural gas in solid form. Current urea price is at multi-year low, reflecting the current low natural gas price and therefore the low production cost of urea. The urea price must go up when natural gas price goes up, and when global food demand goes up, driving more urea demand in agriculture.

 

Go ahead to hoard urea at current low price if you want to invest in physical natural gas.

 

As for me, I have been a long term advocater of palladium investment. There is now even more reason to invest in palladium, besides the bullish factors I have talked about repeatedly. At current price of only $578/oz, it is nice to know that one ounce of palladium represents at least six metric tons of coal, right at your finger tip. Since the December, 2008 lows of precious metals, the performance of palladium has beaten other precious metals: gold, silver and platinum. Palladium will continue to outperform the other precious metals, until at least it reaches a price parity with platinum.

 

Not to mention that there are hundreds of gold or silver mining stocks to pick from, notably like ABX, GG, AU, NEM, PAAS, SSRI, CDE, HL, just to name a few.

 

When it comes to platinum, there are much fewer choices: AGPPY.PK, IMPUY.PK, LNMIY.PK, AGPBF.PK and NMPNF.PK.

 

When it comes to palladium, the only primary mining plays available is Stillwater Mining (SWC), and North American Palladium (PAL).

 

 

BP scientists puzzled on why closing the new sealing cap of the Macondo well did not raise the well pressure to the expected 8000 to 9000 PSI pressure, but reached only 6700 PSI after the first 24 hours and 6745 PSI after 48 hours. If the well did not leak underground, with oil from the underground reservoir could only gush into the well but not leak out of it, the pressure should promptly reach equilibrium with the reservoir pressure. The reading at the sealing cap should then reach between 8000 to 9000 PSI, calculated based on reservoir pressure which is estimated based on conditions when the well blew out on April 20, 2010.

BP scientists offer only two possible explanations:

1. There is a significant underground leak from the well.
2. The oil reservoir pressure has dropped due to depletion from 80 days of spill.

I believe the pressure deficiency clearly indicates there is a big leak underground. Almost every one fail to notice to another data which is more important, and more disturbing: Why it is so slow for the pressure to approach its final equilibrium level. It's been more than two days and the pressure still hasn't fully stabilized yet! If the well has no leak, since the volume of oil in the well is small, and the liquid oil is hardly compressible, the well pressure should promptly raise to equilibrium level and stabilize within a few minutes after the sealing cap is shut off.

Let me explain the basic physics how fast the pressure in the well should raise, after the valves at the new sealing cap is shut off. If the well is not leaking, then all the oil already in the well has no where to go. Mean while at the bottom, the oil from reservoir continue to gush into the well. As the oil from reservoir squeezes in it builds up the pressure. This continues until the pressure reaches equiulibrium with the reservoir, and then there is no more oil getting in or out of the well any more and the pressure is stabilized.

What should BP do? BP should publicly publish detailed profile of pressure change over time, since the beginning of the pressure test. Let the experts look at the data and build physics model to discover what teh data tells us, and debate the scientific question whether there is a leak and how big the leak is, and/or whether the leak has penetrated all the way to the sea floor.

 

As for the relief wells, if the well casing has been dameged, then there is no point to proceed with the relief wells any more. Once the relief well is pierced through to the wild well, BP will continue to lose mud throught the leak in the wild well. Once all the mud is lost, BP will have a blowout at the relief wells, causing a much bigger disaster than the existing one.

 

It's time for BP to be honest with itself, publish all information and invite experts around the world to deal with the problem together. This is a disaster that BP can not handle on its own.

 

I issue a serious warning to BP: Stop it right now, do NOT drill the last few feet of the relief wells. Do NOT punch that hole through. Think everything through very carefully! If BP proceeds to puncture the hole through to the original blowout well, it opens up a Pandora's Box which may lead to a much bigger catastrophe than any one has ever bargained for!

BP must halt now and invite all experts for a good debate on exactly what could happen. Build a computer model and test all scenaries. Build a physical model and run tests on it. BP is foolhardy to just proceed and pray/gamble for a success. Because what could happen is not just another failure, but rather a much bigger catastrophe!

BP explains how a relief well works. You drill another well nearby which intercepts and punches a hole through the casing of the original well, at 18000 feet below sea level, or 135,000 feet below the sea floor. Then heavy mud is injected through the relief well into the original blowout well, filing it up from near the bottom. Since the density of the mud is heavy, the gravity of the mud column generates a pressure enough to counters the pressure of the oil and gas from the reservoir, hence the oil/gas flowis stopped. Once the oil/gas flow is stopped the well can then be sealed off using cement.

It sounds simple. But due the the extreme depth of the well and the extreme pressure from the reservoir, some technical details make the plan virtually impossible to work. Let me explain.

For the plan to work. BP needs to ensure several things:

1. The mud must have a density heavy enough to counter the pressure of the oil from the reservoir and to stop the flow of oil from the reservoir.

2. The mud must be pumped into the junction point fast enough to prevent it from being diluted by oil and gas coming from the reservoir. See condition 1.

3. The mud must not be too heavy that it seeps down into the fracture of rocks, damaging the rock formation, fracturing the sea floor which releases oil and gas in an uncontrolable way.

4. BP must have enough mud at hand. If it ever runs out of mud it's game over for BP. But not so much mud that it all go down into the rock fractures and causes the sea floor to rupture. See condition 3 again.

I don't see how BP can pull it off.

For the discussion below, let's keep one thing in mind, when liquid flows thorugh a path, pressure drops the further you go alone the path. Part of the pressure is lost to overcome the resistance to the flow. The higher the viscosity (sticker) is, the narrower the flow path is, the more pressure drops along the path. On the other hand, if the liquid is not flowing, then there is no pressure drop due to liquid flowing.

In the first phase of operation, mud is injected from the relief well through the junction point into the blowout well, expelling the oil and gas originally in the blowout well out of the exit point, while stopping the flow of oil and gas from the reservoir below.

When the oil from reservoir is to seep through the rock fractures and then gush out of the blow out well, the pressure at the junction point is way much lower than the reservoir pressure, because it is much harder for the oil to seep through the rock fractures then to flow through the blowout well. Hence more pressure is lost at the rock fractures, than the pressure loss needed to push the oil up through the well. What it means is once the oil below the junction point stops, the pressure at the junction point quickly raises to a much higher level. And BP needs to be able to counter this much higher junction pressure and still be able to push the mud in.

Now consider the path of the mud. It is pushed down the relief well and then it pushes the oil and gas up the blowout well. Note the exit point is free flowing. The pressure of the mud must be high enough that while the mud is flowing at very high rate, it still generate high enough pressure at the junction point to fight the static pressure from the oil in the reservoir. That goal is extremely hard to achieve, because most of the mud pressure is lost in pushing the mud through the resistance of the relief well.

Likewise, the original oil and gas must be pushed to gush out of the blowout well even faster than the free flowing rate, to generate enough back pressure to push back the oil coming from the reservoir. Failing that, the oil will continue to flow from below to mix with the mud, hence diluting the mud entering the blowout well. This, again, is virtually impossible for BP to achieve. We are talking about pushing the mud in at more than twice the rate how free flowing oil and gas gushes out of the blowout well.

To put things into formulas, let's call the pressure at the junction point Pj:

Formula One, Junction Pressure from the Relief Well:
(1) Pj = P(Pump) + P(Mud Column) - Q2(Mud Flow) * Rm(Mud Resistance in Relief Well)

Formula Two, Junction Pressure from the Blowout Well:
(2) Pj = P(Sea Floor) + P(Oil Column) + Q2(Oil Flow) * Ro(Oil Resistance in Blowout Well)

Formula Three, Junction Pressure from the oil from the Reservoir:
(3) Pj = P(Reservoir) - P(Oil Below) - Zero (Oil below not flowing)

Let's define net pressures, which is the pressures the three source of liquid would generate at the junction point if we put a flow stopper there, as such:

P(Net Relief Well) = P(Pump) + P(Mud Column)
P(Net Reservoir) = P(Reservoir) - P(Oil Below)
P(Net Blowout Well) = P(Sea Floor) + P(Oil Column)

The relationships can be re-written as such:

(4) (P(Net Relief) - P(Net Reservoir))/(P(Net Blowout) - P(Net Reservoir))
= Rm(Mud Resistance in Relief Well)/Ro(Oil Resistance in Blowout Well)

Let me explain it in layman's English. Let's imagine the reservoir is directly connected to the junction point with no resistance to the flow movement in either direction. The net force that pushes the mud down into the oil reservoir must be pushing the mud down at the same rate that the oil from the reservoir is able to push oil up to gush out of the blowout well, in terms of barrels per day.

I don't see how BP can have mud heavy enough to achieve this goal. The fact that viscosity of mud is significant higher than the viscosity of oil, hense mud flow experiences much higher resistance than the oil flow, makes it even harder.

Now that is just one condition, being able to inject mud and completely fill the blowout well with it, without being diluted by the gushing oil. It requires mud heavy enough. This condition directly contradict another condition, which is that the mud must not be so heavy that it is able to seep into the rock fractures, which requires mud that is not so heavy.

The second condition, preventing mud from seeping into the rock formation, can simply be written as:

(5) (P(Net Relief) - P(Net Reservoir)) <= 0

This second conditon, formula (5), can not be achieved at the same time that first condition, formula (4) is achieved.

I predict that BP's relief wells are not going to be successful.

A MORE SERIOUS warning to BP: If the relief wells fail as I predicted, do NOT resort to the desperate act of using nuclear options. If you use nuclear option, there is a good possibility it will trigger chain reaction of methane eruption on a global scale, turning the local catastrophe into a global catastrophe!!!