Energy Finance

Nanotechnology breakthroughs will be essential in developing game-changing solutions to address world issues, such as energy shortages, environmental concerns and greater connectivity, said Alcoa Executive vice president and chief technology officer, Mohammad A. Zaidi, at Rusnanotech ’09, the second international nanotechnology forum held in Moscow Oct. 6, according to Alcoa’s press release.

Alcoa produces aluminum, fabricated aluminum and alumina for the aerospace, automotive, packaging, building and construction, commercial transportation and industrial markets. The company has been named one of the top most sustainable corporations in the world at the World Economic Forum in Davos, Switzerland and has been a member of the Dow Jones Sustainability Index for eight consecutive years. Alcoa employs approximately 63,000 people in 31 countries across the world.

“I believe that future growth drivers in business will focus on energy, environment, connectivity and the biomedical field,” he said. “In all of these fields, we know that nanotechnology could enable huge opportunities for advancements. Based on what I’ve seen in the field of nanotechnology in the last five years, it’s obvious that the future rate of change will far surpass anything we’ve ever experienced to date.”

The international forum was attended by more than 6,550 representatives of industry, government and science from 36 countries.

“At Alcoa, we are a world leader in light metals technology. We invented the commercial aluminum smelting process in 1888 and haven’t stopped innovating since,” he said. “Nanotechnology enables us to explore new game-changing solutions for our customers, offering products that are more durable, scratch resistant, abrasion resistant, heat resistant and blast resistant. For our market segments, we see nanotechnology as a huge enabler of new functionalities and an enabler of energy and environmental efficiencies.”

Rusnanotech ’09 highlighted a number of initiatives that Alcoa scientists, researchers and engineers are working on for the major markets that Alcoa services. Examples include nanotechnologies that enable stronger electrical transmission cables at higher temperatures, with greater electrical conductivity and reduced transmission losses to fulfill growing urban load demands, and nano-coatings for the oil & gas market that provide more durable oil risers and drill pipes enabling deeper off-shore exploration at lower cost.

“As a global, Fortune 100 corporation with operations in 31 countries around the world serving such a wide range of markets, nanotechnology offers Alcoa tremendous opportunities,” Dr. Zaidi said. “In the same light, we believe that we offer the field of nanotechnology tremendous opportunities as well. Our breadth of market intelligence, combined with our expertise in material and design integration and our presence in both the U.S. and Russia, enables us to be in a unique position to be an industrial test bed for the most promising developments in this exciting field of technology.”

Cross-border M&A activity by Asia-Pacific corporations will increase during the next few years, notably in the energy and commodities sectors, according to a new report by Fitch Ratings’ managing director and head of the Asia-Pacific corporates team,Tony Stringer. The report, Asia-Pacific Corporates in 2012, finds that China in particular seeks to secure the natural resources necessary to support its continuing strong growth.

“Securing sufficient supplies of energy and raw materials is one of the biggest challenges facing high-growth economies and their leading industrial companies,” he writes.

A recent flow of transactions, mostly involving Chinese companies in the mining and metals sectors acquiring Australian resource-based assets, highlights this growing trend.

According to Stringer, China’s status as the world’s largest importer of iron ore to feed its voracious steel sector is a good example of the type of dynamic that will drive M&A in the region. To sustain double-digit growth rates being targeted by the Chinese government, security of supply of raw materials is paramount and becomes a political, as well as a corporate priority.

Yet, the expectation of increasing cross-border M&A may be tempered by the natural risk aversion of senior corporate executives, who may have little financial or career motivation to pursue deals, according to Stringer.

“As was seen in the aborted Chinalco tie-up with Rio Tinto Ltd. earlier this year, the viability of a transaction can be impacted by political concerns. Fitch anticipates that future proposed M&A transactions in Asia will continue to be affected by such considerations, particularly given the ongoing heavy involvement of sovereign governments in the ownership of large Asian corporate entities.”

Stringer believes that while the nature of the financing of such transactions will influence the effect on the acquiring company’s credit quality, the business-risk benefits derived from supply-chain integration could, in some cases, effectively mitigate the negative impact of more aggressive capital structures in the event that acquisitions are debt-funded. Fitch plans to assess this dynamic on a case-by-case basis.

The following are comments by Paul Horsnell and his team at Barclays Capital Research. Because I couldn’t say it any better myself, I have posted the comments in their entirety:

Japan and the US have been the main sources of weakness in global oil demand this year. With the improvement in US demand, at least everywhere except in the middle of the barrel, the weakness in Japan had become even starker. However, the latest Japanese monthly numbers show the first strength this year, with the sharp improvement led by gasoline demand.

We remain somewhat downbeat on the scale of oil demand growth in 2010, although the recent flow of global data has shown an upside oil demand surprise, leading us to cut the expected scale of global demand decline in 2009. We now expect global oil data to fall by 1.55 mb/d this year, which is some 1 mb/d better than consensus put the fall when at its most bearish.

US distillate inventories continue their now highly counter-seasonal increase, leading us to reiterate last week’s desire to avoid any positive distillate exposure at this point. The strength of the data remains in crude and in the improvement in top of the barrel demand. In stark contrast to diesel, gasoline demand finished September and started October at parity with the all-time record highs for demand in those months.

Reduced gas demand and oversupply are leading to a strategic change for suppliers and a tougher long-term pricing outlook, according to Neil Thomas, head of gas research for Scottish consulting firm Wood Mackenzie.

The fundamentals of the gas industry have shifted due to significant changes in the macro environment, he said, citing analysis from Wood Mackenzie’s Global Gas Service. As a result, Wood Mac’s global gas demand outlook is 200 billion cubic meters per year less in 2015 than it was in first quarter 2008 (before the economic crisis). The firm’s long-term forecast for global gas demand from 2008 to 2020 includes a compound annual growth rate of 2.4%. The Asia-Pacific region has the strongest demand growth at 4.5%.

“The new reality for the global gas industry is reduced demand and oversupply, the effects of which will be felt in the medium and long term,” he said. “The reduced demand outlook is being realized at the same time as significant additional supply is coming to the market, including considerable unconventional gas from onshore North American producers, something not anticipated just a few years ago.”

Wood Mackenzie’s findings revealed that major suppliers such as Russia and Qatar will need to adjust their export strategies to the new external environment as a result of faltering demand. Russia’s challenge will be to develop their “massive potential gas supply” and “diversifying markets away from Europe,” he said. Also, it will require capital-intensive infrastructure development, including new liquefaction facilities and new pipelines to China. However, the pipelines could face competition for capital from some current European-pipeline plans.

Meanwhile, with Atlantic spot gas prices depressed, Qatar may seek to re-route much of its LNG earmarked for the Atlantic to the Pacific instead, he said. This additional supply competition in the Pacific could be “bad news” for new Australian LNG projects seeking markets and could further deteriorate Pacific LNG pricing levels.

According to WoodMac’s analysis, China is in the best position to take advantage of the changing dynamics as it gains renewed import options from Central Asia and Russia.

Globally, gas markets are no longer operating in isolation and interconnectivity is a feature of the “new, truly global gas industry,” he said.

PLS Inc.’s and Derrick Petroleum Services’ October M&A report show an increase in U.S. and Canadian E&P deals. Global M&A activity for the third-quarter 2009 totaled nearly $21 billion in 112 separate transactions, the firms reported.

According to Brian Lidsky, managing director of research at PLS Inc., “Oil and gas deal volume increased markedly beginning in late August 2009 due to a confluence of events.”

Those events included a growing consensus that the economy bottomed in the second-quarter 2009 and that economic recovery is now underway, as well as a perception of oil price stability in the $65 to $75 per barrel range. Also, a “dramatic drop” of U.S. gas prices in late August through early September, near $2.50 per thousand cubic feet (Mcf), signaled a buying opportunity to the markets, the firms reported.

Oil and gas forward 12-month strips for third-quarter 2009 to year-end were $73.00 per barrel and $5.93 per Mcf, versus year-ago numbers of $99.02 per barrel and $8.15 per Mcf, they report.

Canada led the world in oil and gas transactions with total deal volume of $6.9 billion in 35 deals and “was home to the two largest deals of the quarter.” The largest global deal of the quarter was the $2.5-billion merger of Petrobank Energy and Resources and TriStar Oil and Gas Ltd., a value of $27.79 per barrel of oil equivalent of proved reserves. The merger formed a Bakken-focused light oil and gas E&P, PetroBakken Energy Ltd., to focus on the Bakken oil-shale and the Big Horn and Montney gas-shale plays of northeastern British Columbia.

The second largest deal was also an unconventional play in Canada. PetroChina International Investment Ltd. paid $1.7 billion to acquire a 60% working interest in Athabasca Oil Sands Corp.’s MacKay River and Dover in-situ oil sands projects. Recent independent assessments estimate 5 billion barrels of bitumen resources for the projects with regulatory approval expected in late 2009 for the first 35,000 barrel-per-day project.

Globally, the U. S. ranked as the second most active country in terms of deal value with $4.4 billion deals announced in 45 separate transactions, the firms reported. Regionally, Asia ranked second to North America with 11 deals totaling $3.8 billion, primarily in Kazakhstan and Turkmenistan. Africa saw seven deals for $2.4 billion while Europe had six deals for $2.3 billion. Australia accounted for six deals for $827 million. South America had only two deals worth a total of $187 million.

Meeting the world’s growing energy needs while managing the risks of climate change will require the development of all viable sources of energy and policies that support business investment and technology development, according to Rex Tillerson, chairman and chief executive officer of Exxon Mobil Corp.. Tillerson made his comments to The Economic Club of Washington, D.C.

“Our best hope is to harness the power of new technologies and free markets to meet the world’s energy and environmental challenges,” he said. “By allowing nations and peoples to work together, we can invest in integrated solutions that expand energy supplies, increase efficiency and reduce emissions. Time and time again, our industry has proven that innovation and cooperation unleash human ingenuity and bring far-reaching technological advances that can transform the economy, protect the environment, and increase energy security.”

The challenge facing America and the world is how to ensure the availability of energy supplies required for economic growth while simultaneously addressing the risks of climate change, he said.

Tillerson said there is an advantage to implementing a revenue-neutral carbon tax as an effective policy option, compared to the shortcomings of cap-and-trade systems, which can increase price volatility and cause economic harm while failing to reduce carbon emissions.

“For businesses and industry, volatile carbon prices under cap-and-trade would undermine the ability to invest in the advanced technologies that are our best hope for expanding supplies, increasing efficiency and reducing emissions. Such an approach would also create economic inefficiencies and invite market manipulation,” he warned.

Conversely, a carbon tax is a more direct, transparent and effective approach and would be easier to apply globally while avoiding the establishment of new mechanisms for trading emissions and new regulators to monitor them, he advised.

“It is the most efficient means of reflecting the cost of carbon in all economic decisions, from investments made by companies, to fuel and product choices made by consumers. If implemented on a revenue-neutral basis, a carbon tax would ensure that government policy is specifically targeted to reduce emissions and not to creating a new revenue stream.”

However, Tillerson noted that punitive taxes targeting the energy industry are detrimental to economic growth, environmental innovation and energy security. Such policies ultimately raise energy costs for consumers and undercut America’s future by hindering ability to invest in new supplies.

He pointed out that new investment is important to the American economy of the oil and gas industry, which supports more than nine million jobs and provides hundreds of billions in tax revenues for federal and state governments.

ExxonMobil, the largest publicly traded international oil and gas company, has an industry-leading inventory of resources, is the largest refiner and marketer of petroleum products, and its chemical company is one of the largest in the world.

Due to overwhelming response, Hart Energy Publishing announces its inaugural Developing Unconventional Gas (DUG) East Conference in Pittsburgh, Pennsylvania, on Monday, October 19, 2009, is relocating from Westin Hotel to the adjacent David L. Lawrence Convention Center, 1000 Fort Duquesne Boulevard, in downtown. The Westin and the convention center are located across the street from each other and are connected via a sky bridge over Penn Avenue – about a three-minute walk.

Registration for the event, which has been wait-listed for the last two weeks, is now reopened at www.dugeast.com. There is also space to accommodate additional sponsors and exhibitors in the pre-function area directly outside the conference ballroom at the new venue. For more information about sponsorship and exhibiting opportunities, contact Craig W. Moritz, Director of Events, at 713-260-6455 or cmoritz@hartenergy.com.

DUG East is the only Marcellus Shale conference with executives from leading operators discussing their drilling plans and programs, and the unique characteristics and take-away issues for one of the nation’s largest unconventional gas plays.

Confirmed speakers include:
– Aubrey K. McClendon, Chairman and CEO, Chesapeake Energy Corp. (NYSE: CHK)
– Jeff Ventura, President and COO, Range Resources Corp. (NYSE: RRC)
– Murry S. Gerber, Chairman and CEO, EQT Corp. (NYSE: EQT)
– Mike Walen, SVP and COO, Cabot Oil & Gas Corp. (NYSE: COG)
– Ben W. Hulbert, CEO, Rex Energy Corp. (NASDAQ: REXX)
– Randall Albert, SVP Emerging Business Unit, CNX Gas Corp. (NYSE: CXG)
– Frank Semple, CEO, MarkWest Energy (NYSE: MWE)

Attendees will learn how operators are improving well results, reducing drilling costs and taking gas to market. DUG East will also feature industry experts providing updates on geology, resource potential, technology and pipeline plans.

“DUG East is bucking the trend of nearly every B2B conference in the U.S. I cannot think of a stronger endorsement of Hart’s position as the leader in unconventional resource and specifically Marcellus shale content, than to have to relocate this event, due to popular demand, in the current economic environment.” says Rich Eichler, Hart President and CEO. “I would like to thank our current registrants, sponsors and exhibitors for their support and invite others active in the Marcellus or wanting to establish a presence in this prolific region to become a part of the biggest and best conference in this industry sector.”

Headquartered in Houston, Hart Energy Publishing’s market-leading publications include Oil and Gas Investor, E&P, PipeLine and Gas Technology and FUEL. Hart also offers online information services OilandGasInvestor.com, A-Dcenter.com, EPmag.com, and UGcenter.com, and produces newsletters, including Oil and Gas Investor’s A&D Watch,Oil and Gas Investor This Week and OilandGasInvestor.com Today, custom publishing products, conferences and electronic media. Hart Energy Consulting, a division of Hart Energy Publishing, offers a diverse array of informational products for the worldwide energy industry. Multi-client consulting services include the International Fuel Quality Center, the Global Biofuels Center and an annual Crude, Refining & Clean Transportation Fuel Outlook to 2030.

On September 24, the first liquefied natural gas (LNG) terminal built on the east coast of North America in 30 years became operational. The $935-million Canaport LNG terminal, built in Saint John, New Brunswick, is also the first LNG receiving and regassification terminal in Canada.

The terminal, with a sendout capacity of 1.2 billion cubic feet per day (enough to heat 5 million homes), and storage capacity of 9.9 billion cubic feet of gas equivalent, is owned by Spain’s Repsol YPF (75%) and Canadian refiner Irving Oil Ltd. (25%).

“Natural gas from Canaport LNG ensures that Irving Oil’s and Repsol’s clients have access to competitively priced and readily available gas,” reports the company. “In the northeastern U.S., Repsol has firm supply contracts with a number of sources that will complement the operations at Canaport LNG.”

Regasified LNG from the Canaport LNG facility will flow through the 145-kilonmeter Brunswick Pipeline to connect the terminal to the existing Maritimes & Northeast Pipeline near St. Stephen, New Brunswick, and from there to other pipelines and markets.

Since March 2009, E&P companies (proxied by Amex Natural Gas Index, AMEX: ^XNG) have outperformed the broader energy sector (proxied by Energy Select SPDR, NYSEArca: XLE) by about 17%, according to Barclay Capital analysts Maneesh Deshpande, Venu Krishna and Kannan Venkateshwar. XLE is dominated by the integrated oil companies that are more dependent on crude prices while the E&P companies are also driven by natural gas prices.

However, this outperformance of XNG is at odds with the analysts’ weak outlook for gas prices and strong outlook for crude. “Using an average historical valuation of 6.0x forward-year cash flows and current stock prices, E&P names appear to be implying gas prices of $7.50 per million Btu, assuming $70 per barrel of crude, or $6.80 per million Btu assuming $80 per barrel of crude,” they report. “In contrast, E&P analysts expect that gas will average $6.0 per million Btu in 2010.”

Meanwhile, Barclay’s oil-equity analysts estimate that oil stocks presently discount a $70 per barrel at current levels. The oil equity analysts expect crude to cross $100 per barrel by 2011 or 2012.

According to the analysts, “In order to express a view on the convergence between stocks exposed to natural gas and crude we recommend the following trade: Long a basket of integrated oil equities and short a basket of natural gas exposed E&P names in a 1:1 ratio.”

On September 25, the Energy Information Administration of the U.S. Department of Energy reported that 18 major energy companies reported a 67% decrease in net income relative to the second quarter of 2008. The fall represents a 62% decrease relative to the second-quarter average for 2004 through 2008, it reported.

Also, returns on sales (net income ÷ revenue) decreased from 7.3% to 4.7% in the second quarter of 2009 due to the 67% decrease in net income.

According to the report, the effects of higher worldwide production of crude oil and natural gas from these companies and European and Asia/Pacific refining margins were “overwhelmed” by the effects of lower oil and natural gas prices, worldwide refinery throughput and domestic refining margins, leading to lower revenues and net income.

“Upstream capital expenditures by these companies declined but by much less than the fall in net income, while capital expenditures for refining/marketing increased slightly,” the agency reported.

How about a stimulus package for these poor guys?