The Energy World Is Flat : Opportunities From the End of Peak Oil

A stronger, more informed approach to the energy markets The Energy World Is Flat provides a forward-looking analysis of the energy markets and addresses the implications of their rapid transformation. Written by acknowledged expert Daniel Lacalle, who is actively engaged with energy portfolios in the financial space, this book is grounded in experience with the world of high-stakes finance, and relays a realist's perspective of the current and future state of the energy markets. Readers will be brought up to date on the latest developments in the area, and learn the strategies that allow investors to profit from these developments. An examination of the markets'history draws parallels between past and current shifts, and a discussion of technological advancements helps readers understand the issues driving these changes. Energy has always been at the forefront of the economic agenda, being both the key to and a driver for development and growth. Its centrality to the world of finance makes it imperative for investors and analysts to understand the energy markets, irrespective of where on the wide range of energy spectrum observers they fall. The Energy World Is Flat is a guide to the past, present, and future of these crucial markets, and the strategies that make them profitable. These include: Understanding the state of the energy markets, including key developments and changes Discovering the ten pillars of a successful energy investment strategy Reviewing the history of the energy markets to put recent changes into perspective Learning which technologies are driving the changes, and how it will affect investors The recent energy market changes were both unexpected and so fundamental in nature that they represent a true shift in the energy macro- and microeconomic landscape. Investors and analysts seeking a stronger approach to these markets need the expert guidance provided by The Energy World Is Flat. Cover 1 Title Page 5 Copyright 6 Contents 9 Disclaimer 11 Chapter 1 The Mother of All Battles. The Flattening and Globalization of the Energy World 13 Nuclear politics 14 The sustained spike in natural gas prices 14 Fracking and the collapse in US natural gas prices 16 US tight oil 17 Geopolitics and high crude oil prices 18 Expensive oil, cheap natural gas 20 The market does not attack, it defends itself 21 Winners and losers 22 Chapter 2 Lessons from the Internet Revolution and the Dotcom Bubble 23 The bubble path 24 Technological revolutions that increase supply. The “game changers” 25 High expectations attract large amounts of capital 26 Excessive expectations for demand growth result in overcapacity 28 Think “against the box” 29 The strategic premium results in overcapacity 30 Overcapacity eventually reprices assets and the cost of services 33 New technologies displace older and more expensive ones 34 New technologies increase competition and create deflationary forces 35 The bubble accelerated the impact of the revolution 36 Timing: there is no such thing as a crystal ball 38 Investors must avoid the growth mirage and value traps 39 Lessons not to forget 41 Chapter 3 The 10 Forces that are Flattening the Energy World 43 Is the energy world flat? 43 Chapter 4 Flattener #1 – Geopolitics: The Two Sides of the Energy Security Coin 47 The oil weapon 47 The revenge of the oil economy 50 The Arab Spring 52 Iraq 2014, the crisis that brought prices . . . down! 53 The Venezuelan Spring 55 Reserve nationalism and barriers of entry 57 The gas weapon 59 Russia versus Ukraine and the west? 59 Ukraine shale gas 61 The annexation of Crimea 61 Europe needs Russia’s gas . . . but for how long? 62 Notes 63 Chapter 5 Flattener #2 – The Energy Reserves and Resources Glut 65 What energy scarcity? 66 Reserves and resources 67 Crude oil concentration, but no shortage 68 OPEC almighty 69 Reserve protectionism 71 Marginal cost of production 72 The “unconventional” resources 72 Discoveries vs. additions: “can we rely on finding new oil fields?” 74 Sorry, no peak oil 76 Peak oil is a myth 76 The spirit of peak oil 78 No Peak Gas Either 88 Gas formulas: “Water at Coca-Cola prices” 89 Finally an Asian benchmark 90 Let’s buy Africa! 91 Notes 92 Chapter 6 Flattener #3 – Horizontal Drilling and Fracking 97 Never bet against an engineer 97 Technology increases volume 98 Innovation vs. imitation 100 “Fracking” and horizontal drilling 102 Myths and realities of shale gas and tight oil 102 What environmental impact? 103 What contamination of drinking water aquifers? 103 What flow back? 104 How about water scarcity? 105 What induced seismic activity? 106 What methane migration? 107 Are horizontal drilling and fracking commercially viable? 107 Are governments supportive of fracking? 108 How about shale gas and tight oil in China? 110 What about the EROEI of shale gas? 112 Notes 112 Chapter 7 Flattener #4 – The Energy Broadband 115 Pipelines open new markets 116 Pipelines are very capital- and time-intensive investments 117 The Eurasian continental network 118 LNG and the globalization of natural gas 119 From regional to global 120 LNG super-cycle 121 The winners and losers of the big asset write-off 121 Solid methane 122 Storage bottlenecks and commodity islands 122 The high watermark and volatility dampeners 124 Global strategic petroleum reserves 124 Shipping, floating pipelines and storage 125 The boom and bust of shipping 125 Debottlenecking and super-backwardation 127 Notes 128 Chapter 8 Flattener #5 – Overcapacity 129 Déjà-Vu 130 Diplomatic demand outlook 131 Saudi Arabia heavy sour crude oil 131 Location, location, location 133 Pro-cyclical behaviour 134 Notes 134 Chapter 9 Flattener #6 – Globalization, Industrialization, and Urbanization 135 Testing the hypothesis of “Ever-Increasing” demand 137 Demographic trend #1. The global population is growing, but at a slower pace 137 Population growth vs. economic growth vs. energy demand growth 138 The “Diplomatic” demand clause 140 Notes 141 Chapter 10 Flattener #7 – Demand Destruction 143 More with less 144 The “Invisible Hand” of efficiency 145 The “Visible Hand” of efficiency 145 Note 145 Chapter 11 Flattener #8 – Demand Displacement 147 The Battle for Transportation Demand 147 What the production engineers missed 148 The “Challengers” 150 Biofuels 150 Natural gas 151 Bi-fuel engines 152 Coal to liquids (CTL) and gas to liquids (GTL) 152 Electric vehicles (EVs) and hybrids (HEVs) 152 Air transportation 153 Sea transportation 153 The end of crude oil’s monopoly in transportation 153 #1 Upfront cost 154 #2 Running cost 154 #3 Range and convenience 154 The “Chicken and Egg” of Refuelling Stations 155 Re-fuelling at home 155 #4 Performance 156 #5 Environment and subsidies 156 #6 Safety 157 #7 Security of supply 157 The new frontier: hydrogen fuel 157 “Who killed the electric car?” 158 #1 Government bail-outs and subsidies 158 #2 The tax cash cow 159 #3 The wrong model for the industry? 160 The Battle for Electricity and Industrial Demand 160 Future fuel mix 161 The Energy Domino 163 Natural gas displaces coal in power generation 164 US natural gas displaces diesel in transportation 165 Solar displaces crude oil for power generation in Saudi Arabia 166 Renewables displace natural gas from peak power demand 166 The “visible hand” of environmental regulation displaces coal 167 The “visible hand” of politics displaces nuclear 167 The transmission to equity valuations 167 Notes 168 Chapter 12 Flattener #9 – Regulation and Government Intervention 171 The role of the government 171 Regulation vs. free markets 172 The virtuous mix of regulation and free markets 172 The vicious mix of regulation and politics 172 Carrot and stick 173 Privatization and deregulation are not the same 174 Independence of the regulator 175 The political cycle is too short 176 The War on Pollution and Coal 177 The war on pollution 177 The war on coal 179 Technology vs. pollution 179 Regulatory constraints to coal plants 180 Coal subsidies 181 The clean and dirty spreads 182 Second order effects from cheap coal 182 The world of coal is flat 183 Renewable Energy and the Disinflation of Power Prices 184 Negative electricity prices 184 The collapse in the valuation of European utilities 185 Renewables have changed the rules of power generation 186 Implications from the new rules 188 Are retail consumers better off? 195 The world of wind power is becoming flat 197 Don Quixote’s windmills 197 Wind power 198 Wind competitiveness 199 The world of solar power is far from flat 200 Germany and the European Union love affair with solar 200 The debacle of solar equities 201 What went wrong? 202 Marginal cost of solar PV is getting cheaper 203 Solar leasing and green bonds 204 Biofuels and Food Inflation 205 Energy security in disguise 205 The “regulatory carrot” 206 The “regulatory stick” 206 Renewable Identification Numbers (RINs) 207 The “ethanol blend wall” 208 Food inflation and inequality 208 Shortages and physical hoarding as flatteners 209 Energy efficiency of biofuels 209 Meat prices: “corn with legs” 210 The super-cycle of farmland and agricultural logistical infrastructure 211 Genetically modified crops 212 A flatter agricultural world 212 Notes 213 Chapter 13 Flattener #10 – Fiscal, Monetary, and Macroeconomic Flatteners 219 The “OPEC put” 220 At what level would OPEC stop defending the price? 220 The Btu that broke OPEC’s back 221 Energy consumption in producing countries 222 Mortgaged future production 224 The paradox of plenty 225 The Oil Tax Weapon 226 Consumer governments addicted to oil taxes 226 Consumer governments hostage of oil subsidies 228 Government defence budgets 229 Marshmallow behaviour 230 Let’s change the tax rules 231 Monetary Experiments and the Credit Risk Time Bomb 232 Monetary experiments 232 Black gold 232 The race to the bottom 235 The generational debate 236 The monetary time bomb of credit risk 237 Financial Flows. Let’s Blame the Speculators 244 Politicians and regulators pass the blame 246 Causality 247 Market manipulation 248 Investor blow-ups 249 Value at risk 251 Notes 254 Chapter 14 Implications and Opportunities in the Financial Markets 257 Concluding Remarks 287 Notes 290 Appendix For A Competitive European Energy Policy 291 Index 301 EULA 314 A stronger, more informed approach to the energy markets The Energy World Is Flat provides a forward-lookinganalysis of the energy markets and addresses the implications oftheir rapid transformation. Written by acknowledged expert DanielLacalle, who is actively engaged with energy portfolios in thefinancial space, this book is grounded in experience with the worldof high-stakes finance, and relays a realist's perspective of thecurrent and future state of the energy markets. Readers will bebrought up to date on the latest developments in the area, andlearn the strategies that allow investors to profit from thesedevelopments. An examination of the markets' history drawsparallels between past and current shifts, and a discussion oftechnological advancements helps readers understand the issuesdriving these changes. Energy has always been at the forefront of the economic agenda, being both the key to and a driver for development and growth. Itscentrality to the world of finance makes it imperative forinvestors and analysts to understand the energy markets, irrespective of where on the wide range of energy spectrumobservers they fall. The Energy World Is Flat is a guide tothe past, present, and future of these crucial markets, and thestrategies that make them profitable. These include: -Understanding the state of the energy markets, including keydevelopments and changes -Discovering the ten pillars of a successful energy investmentstrategy -Reviewing the history of the energy markets to put recentchanges into perspective -Learning which technologies are driving the changes, and how itwill affect investors The recent energy market changes were both unexpected and sofundamental in nature that they represent a true shift in theenergy macro- and microeconomic landscape. Investors and analystsseeking a stronger approach to these markets need the expertguidance provided by The Energy World Is Flat Chapter 1 The Mother of All Battles. The Flattening and Globalization of the Energy World Chapter 2 Lessons from the Internet Revolution and the Dotcom Bubble Chapter 3 The 10 Forces that are Flattening the Energy World Chapter 4 Flattener #1 Geopolitics: The Two Sides of the Energy Security Coin Chapter 5 Flattener #2 The Energy Reserves and Resources Glut Sorry, No Peak Oil No Peak Gas Either Chapter 6 Flattener #3 Horizontal Drilling and Fracking Chapter 7 Flattener #4 The Energy Broadband Chapter 8 Flattener #5 Overcapacity Chapter 9 Flattener #6 Globalization, Industrialization, and Urbanization Chapter 10 Flattener #7 Demand Destruction Chapter 11 Flattener #8 Demand Displacement The Battle for Transportation Demand The Battle for Electricity and Industrial Demand The Energy Domino Chapter 12 Flattener #9 Regulation and Government Intervention Regulation vs. Free Markets The War on Pollution and Coal Renewable Energy and the Disinflation of Power Prices Biofuels and Food Inflation Chapter 13 Flattener #10 Fiscal, Monetary, and Macroeconomic Flatteners 7 The Btu that Broke OPEC s Back The Oil Tax Weapon Monetary Experiments and the Credit Risk Time Bomb Financial Flows. Let s Blame the Speculators Chapter 14 Implications and Opportunities in the Financial Markets.