Energy Sector

[petec]

On 8/31/2022 at 2:14 PM, SharperDingaan said:

Discounted gas supply.

We know that Russian oil currently sells at a discount of roughly $35/bbl, gas has a similar % discount. These discounts also rise 01/01/2023 when ships with Russian cargos can no longer offload at European ports. Given that investment to build the pipeline is coming from China (the party), the discount will be permanent for the length of the supply agreement, and structured; higher at start (40-50%?), tapering to zero by the end of the agreement. Neither party are angels.

 

To minimize the payback period, China will need to dump as much as possible, as soon as possible, and take LNG prices down. Even if they sell at a net 75c on the dollar, and only pay 50-60c, they will still do very well.

 

Cheap LNG in quantity will take away much of Canadas Asian market, AND either push prices down in Alberta, or flow up the pipe - if there is a big and long-term user in Alberta (global refinery) it's almost guaranteed. Take or pay gas coming up the pipe, in return for a twinning and refined product going down the twinned pipe.

 

Changes the game.

 

SD

 

 

 

A net 75c, assuming they pay 50c and given the cost of the pipe/cooling infrastructure and the shipping, is still going to result in a delivered gas price above the cost of developing WCSB gas. China will lose money hand over fist doing this, when they could easily ship that gas to markets that don't have local supply and where they can make significant profits (Japan, Korea, Europe). 

 

To put it another way, redirecting Russian gas from Europe to China does not increase global gas supply. It solves China's supply problems while creating supply problems elsewhere. North American gas will flow to those places. I may be wrong, but I suspect even Mr. Trudeau would see that there is no business case for importing gas to North America when (for example) JLK has never spent much time below $10.

[Spekulatius]

1 hour ago, petec said:

 

A net 75c, assuming they pay 50c and given the cost of the pipe/cooling infrastructure and the shipping, is still going to result in a delivered gas price above the cost of developing WCSB gas. China will lose money hand over fist doing this, when they could easily ship that gas to markets that don't have local supply and where they can make significant profits (Japan, Korea, Europe). 

 

To put it another way, redirecting Russian gas from Europe to China does not increase global gas supply. It solves China's supply problems while creating supply problems elsewhere. North American gas will flow to those places. I may be wrong, but I suspect even Mr. Trudeau would see that there is no business case for importing gas to North America when (for example) JLK has never spent much time below $10.

It takes about 5 years (until 2027) to bring the Russian gas that has been shipped to Europe to China. this assumes that they start to work on the pipelines now.

 

Until then , the world will probably be structurally short NG, since Europe will crowd out other buyers for LNG by bidding more.

 

Right now, Russia is flaring gas that is currently excess (they they don't ship to Europe), per satellite photos.

Edited September 2, 2022 by Spekulatius

[nafregnum]

3 hours ago, CorpRaider said:

Yeah, I would only do the Ford Escape (40 miles), Sorento or Tuscon (33), Rav4 (42), or Kia SantaFe (32).  I've seen some estimates that 30 miles round trip would over the commutes for like 70% of Americans.  Pump that up to 50 and add some charging at the office/CBD and it should be yuge.  

 

Hey, I read that a lot of people are passing on the reservations for RAV4's and others because of the loss of the tax credit (and potential for new credits/changes in incentives based on the IFRA).  So maybe you will get bumped.

 

I bought a RAV4 Prime back in May and love it!  Love the electric acceleration -- I'm calling it my mid-life crisis car.  I didn't want a Tesla because in my state there are only 3 places you can get them repaired.  We pull out the RAV4 for all our errands, and still haven't gone through a full tank of gas yet (4 months on 1 tank!)

 

Totally agree with @CorpRaider that it'd be more rational to make 3x to 5x more PHEVs than Teslas since it would result in a more effective reduction of emissions without spiking lithium demand so much.

 

[CorpRaider]

3 hours ago, nafregnum said:

 

I bought a RAV4 Prime back in May and love it!  Love the electric acceleration -- I'm calling it my mid-life crisis car.  I didn't want a Tesla because in my state there are only 3 places you can get them repaired.  We pull out the RAV4 for all our errands, and still haven't gone through a full tank of gas yet (4 months on 1 tank!)

 

Totally agree with @CorpRaider that it'd be more rational to make 3x to 5x more PHEVs than Teslas since it would result in a more effective reduction of emissions without spiking lithium demand so much.

 

Nice.  I know I'm over simplifying too, but I figure 'yota has basically been building this system for a long time and they just added a charging plug.  Yeah I would not touch a tesla with a 10 foot pole with their lack of service infrastructure and horrible manufacturing problems.

Edited September 2, 2022 by CorpRaider

[LearningMachine]

5 hours ago, nafregnum said:

 

I bought a RAV4 Prime back in May and love it!  Love the electric acceleration

@nafregnum, RAV4 prime is almost impossible to get, especially at Costco price. How were you able to get one? Did you pay a lot over MSRP? Any tips? Which state?

[nafregnum]

8 minutes ago, LearningMachine said:

@nafregnum, RAV4 prime is almost impossible to get, especially at Costco price. How were you able to get one? Did you pay a lot over MSRP? Any tips? Which state?

 

I didn't get it new, and I didn't get the $7,500 rebate - it's a 2021 that was manufactured in November and delivered to a dealership in Alabama, purchased by a guy in Dallas who already had one RAV4 Prime -- he had gotten himself on three or four different waiting lists with refundable $500 deposits at whatever nearby dealerships he could find which weren't charging above MSRP. 

 

When I was trying at first, I called all kinds of dealerships in California, Oregon, Washington and Colorado and all of them either (1) charged a dealer markup of 5-10k over MSRP with short-ish waiting lists, or (2) charged normal MSRP and had huge 12+ month waiting lists or (3) some dealerships said they only sell their Primes to locals (one in Oregon said within 25 miles of their address) ... I was too proud to put myself on any of the (1) lists and all of the (2) lists were so long they weren't accepting.  One dealership in San Diego told me they had one on the lot that their waiting list people had passed up, but then revealed that they charge a 10k dealer markup on top of MSRP.  

 

Reddit has a r/rav4prime subreddit and I was reading posts for tips and tricks and just saw a guy there who posted that he had an XSE fully loaded that he'd be willing to sell for what he owed on it.  I messaged him and he still had it -- he could've sold it for $5k over if he had put it in local classified ads, in fact a guy he met at the grocery parking lot offered to buy it off him a few days before the day of the sale.  He sent some pictures of it and of the dealer paperwork to show how much they had charged him for it, right around $55k (this included his taxes and a few non-negotiable dealer add-ons that the dealership said they always put on, which amounted to like $2k more -- so technically I did pay over MSRP for it -- it had 3,800 miles on it ... I did a bunch of online reading to make sure I knew exactly how the process would work for buying a car from a guy out of state... then got a cheap Southwest flight out to Dallas and we met up.  The guy had LOTS of solar capacity on his back roof and in his back yard.  He said you can get 2 of the $7,500 tax credits per year -- this year he's still on waiting lists at a couple of Texas dealerships but he told me that Toyota had only delivered like 2 RAV4 Primes to all of Texas for the month of May, and they were shifting deliveries to places like Europe where they could still take advantage of tax incentives.  That's scuttlebutt I don't know how to confirm for sure.  He's on waiting lists to get the new Subaru Solterra, which will have the $7,500 tax credit now that Toyota's tax credits are phasing out due to having hit their 200k vehicles limit (I think it happened this summer, but haven't verified since reading about that in June)  ... the Solterra will have plenty of tax credit available -- he mentioned Subaru is 20% owned by Toyota.  I really only wanted to get a PHEV since I'd like to not worry about charging during potential road trips.

 

All of the Primes are being manufactured in Japan, and allocations just trickle in slow -- I wish you could just put an order in for exactly what you want and then just make a down payment and wait for it, like you can do with some other car brands.  

 

The best advice I found was on that r/rav4prime subreddit ... there might be an updated advice post -- there was someone maintaining a spreadsheet of allocations -- the link to it is in this post:

 

https://www.reddit.com/r/rav4prime/comments/rwhvzg/2022_rav4_prime_allocation_spreadsheet/

 

I gave up the idea that I'd be able to get the $7,500 tax credit in time, but I might have just been too impatient - there might still be a half credit of $3,750 or so for another 6 months, so getting on a few different waiting lists might still work.  Good luck!  

 

[nafregnum]

I was curious yesterday, so I ran some basic calculations on how much wind or solar capacity it would take if all of the miles driven in California were EV miles instead of gasoline miles.

 

https://www.energy.ca.gov/data-reports/energy-almanac/california-electricity-data/2021-total-system-electric-generation

 

In 2021:

340 billion miles driven

13.8 billion gallons of gasoline sold.  (implying 24.6 mpg average fuel efficiency)

If at the current $5.25/gallon that'd be $72 billion in gasoline sales.

260 Terawatt hours of electric power consumed in the year

(33 Terawatt hours came from in-state solar)

(15 Twh from in-state wind)

Electricity costs $0.26 per Kwh in California (expensive compared to my state!)

RAV4 Prime car has 18.1 Kwh battery times 0.26 = $4.706 is cost to charge about 40 miles of range

 

If all the cars there were RAV4 Primes, and could get 40 miles on a charge of 18.1 kwh then in order to drive 340 billion miles it would take 8.5 billion charges, times 4.706 which would cost 40 billion dollars (less than 72.45 billion spent on gas) ... 8.5 billion charges times 18.1 kwh per charge would require

 

8,500,000,000 * 18.1 * 1,000 or 153,850,000,000,000wh which is 153 Twh

 

I used the RAV4 Prime as the hypothetical every-car, it gets 2.8 miles per Kwh of battery charge (0.36 Kwh per mile) -- not super efficient - the best are doing 0.25 Kwh per mile or 4 miles per Kilowatt hour, so these numbers are probably a little on the high side.

 

So it would take 153 Terawatt hours of power to charge EV cars to drive 340 billion miles in a year.  California currently uses 260 Twh in a year (of course, some of that is for battery charging of whatever EVs and PHEVs are already in state)

 

SOLAR

 

In California in 2021, the installed 15.2 Gw of solar capacity made 33.26 Twh in the year. So, you can take the Gigawatt capacity of the solar farms and just about double it and change Giga to Terawatt hours (2,188x)

 

This means that if we want to make 153 Twh we divide 153 by 2.188 and get 69.9 Gw of needed capacity. Call it 70.

 

[ land space requirements ]

 

70 gigawatts is 70,000 megawatts of capacity.  Each megawatt of installed solar takes about 2.5 acres.  175,000 acres is just 273 square miles.  The Mojave desert has 47,877 mi² in it, and about half of it is in California, so 273 might fit in there somewhere without too many objections.

 

Using an estimated cost of 890k per megawatt of solar capacity buildout... The state would need to pay 70 * 0.89 billion dollars = $62.3b to build 70 Gw of solar capacity.

 

WIND

 

https://weatherguardwind.com/how-much-does-wind-turbine-cost-worth-it/

 

Looks like it costs 1.3 million per megawatt of capacity, so to make a gigawatt of capacity it'd cost 1.3 billion in investment...

 

California has 5.7 Gw of built-out wind capacity, which generated 15.1 Twh in 2021.  At that ratio, the state would need to build 58.5 gigawatts of wind capacity to generate 153 terawatt hours in a year.  Building that much would cost around $76 billion (58.5 * 1.3)

 

https://www.aeraenergy.com/8-facts-you-might-not-know-about-oil-and-gas-in-californias-economy/

 

California produces about 400k barrels of oil per day, and uses 1.8m barrels.  So if you said that the locally produced 400k per day would still be needed for jets and other uses, you might be able to free up 1.4m barrels of demand on the ~99m barrels of global oil demand.  

 

Soapbox moment:

 

What my estimation game made me think about is this...

 

(1) Unfortunately for the global emissions problem, the barrels of oil that are not demanded by California would likely flow to many other places where emissions standards and fuel efficiency standards are crap, meaning that those 1.4m barrels/day would cause even more emissions.  

 

(2) Since we don't have unlimited yearly production of lithium for batteries, the transition to EV cars is a little like the trolley problem where 1 full EV car is on the tracks and 3 or 4 plug-in hybrid cars are on the other path.  If we want to maximize EV miles driven and minimize gasoline miles driven, we'd have to sacrifice the full EVs for now so that WAY MORE plug-in hybrids can be produced.  But so many of us are so individualistic, we put cheesy virtue signaling vanity plates like "NOPLANETB" or "LOL OIL" on our full EVs and think "I'm saving the planet!" while doing slightly less than we imagine.

 

https://www.notateslaapp.com/tesla-reference/774/tesla-vanity-license-plates-clever-ideas-for-a-custom-plate

 

(3) Building enough solar and/or wind capacity to power all cars in California is a lot cheaper than I guessed it would be.  It's about the same as all the gasoline sold in a year.

 

(4) California is likely to be unusually blessed with Solar and Wind capacity compared to other regions (coastal is good for wind, plus a lot of desert for solar) so what works there likely wouldn't work as well for other states.

Edited September 3, 2022 by nafregnum

[SharperDingaan]

"A net 75c, assuming they pay 50c and given the cost of the pipe/cooling infrastructure and the shipping, is still going to result in a delivered gas price above the cost of developing WCSB gas. China will lose money hand over fist doing this, when they could easily ship that gas to markets that don't have local supply and where they can make significant profits (Japan, Korea, Europe). 

 

To put it another way, redirecting Russian gas from Europe to China does not increase global gas supply. It solves China's supply problems while creating supply problems elsewhere. North American gas will flow to those places. I may be wrong, but I suspect even Mr. Trudeau would see that there is no business case for importing gas to North America when (for example) JLK has never spent much time below $10."

 

Net 75c, is net of the costs of infrastructure (annual depreciation/amortization) and variable costs of delivery. As long as it sells for more than what China paid for it - they make money. How much, and how soon, depends primarily on the long term take-or-pay volumes they can sell. As they need to recover their outlay as rapidly as possible, they are incentivized to offer the LNG at an below market initial price that progressively rises over time. Obviously, the closer the buyer is to China, the less shipping cost - and the more of a market price discount available - tough to compete against.

 

A big, and new, refinery in Alberta would need to both diversify its feedstock supply and ensure egress for its refined product. An obvious solution is to lock-up 30-50% of its long term feedstock supply (especially if China is offering it cheap) via an offshore take-or-pay sending gas up the pipe. Alongside issuing a long term take-or-pay commitment to support a twinned line carrying refined product to tidewater. The WCSB supplies the remaining feedstock, and that pipeline take-or-pay agreement acts as a regulator on the long term price they pay for local gas. Canada gets more for its raw materials, higher employment, less environmental risk (LNG + refined product vs crude), etc.  Smart for everybody involved.

 

Of course if there is no refinery ... the WCSB can continue to call its own tune, the basin remains landlocked and dependent on the US for egress, there is little/no change, and local politicians can remain kings in their own fiefdoms. Good if you are the existing establishment, not so much otherwise.

 

However, it is impossible to damn up change forever - eventually the damn breaks and you drown. 

Heretical thinking  but hard to imagine gas not coming up the pipe from time to time.

 

 

SD

 

[LearningMachine]

16 hours ago, nafregnum said:

 

I didn't get it new, and I didn't get the $7,500 rebate - it's a 2021 that was manufactured in November and delivered to a dealership in Alabama, purchased by a guy in Dallas who already had one RAV4 Prime -- he had gotten himself on three or four different waiting lists with refundable $500 deposits at whatever nearby dealerships he could find which weren't charging above MSRP. 

 

When I was trying at first, I called all kinds of dealerships in California, Oregon, Washington and Colorado and all of them either (1) charged a dealer markup of 5-10k over MSRP with short-ish waiting lists, or (2) charged normal MSRP and had huge 12+ month waiting lists or (3) some dealerships said they only sell their Primes to locals (one in Oregon said within 25 miles of their address) ... I was too proud to put myself on any of the (1) lists and all of the (2) lists were so long they weren't accepting.  One dealership in San Diego told me they had one on the lot that their waiting list people had passed up, but then revealed that they charge a 10k dealer markup on top of MSRP.  

 

Reddit has a r/rav4prime subreddit and I was reading posts for tips and tricks and just saw a guy there who posted that he had an XSE fully loaded that he'd be willing to sell for what he owed on it.  I messaged him and he still had it -- he could've sold it for $5k over if he had put it in local classified ads, in fact a guy he met at the grocery parking lot offered to buy it off him a few days before the day of the sale.  He sent some pictures of it and of the dealer paperwork to show how much they had charged him for it, right around $55k (this included his taxes and a few non-negotiable dealer add-ons that the dealership said they always put on, which amounted to like $2k more -- so technically I did pay over MSRP for it -- it had 3,800 miles on it ... I did a bunch of online reading to make sure I knew exactly how the process would work for buying a car from a guy out of state... then got a cheap Southwest flight out to Dallas and we met up.  The guy had LOTS of solar capacity on his back roof and in his back yard.  He said you can get 2 of the $7,500 tax credits per year -- this year he's still on waiting lists at a couple of Texas dealerships but he told me that Toyota had only delivered like 2 RAV4 Primes to all of Texas for the month of May, and they were shifting deliveries to places like Europe where they could still take advantage of tax incentives.  That's scuttlebutt I don't know how to confirm for sure.  He's on waiting lists to get the new Subaru Solterra, which will have the $7,500 tax credit now that Toyota's tax credits are phasing out due to having hit their 200k vehicles limit (I think it happened this summer, but haven't verified since reading about that in June)  ... the Solterra will have plenty of tax credit available -- he mentioned Subaru is 20% owned by Toyota.  I really only wanted to get a PHEV since I'd like to not worry about charging during potential road trips.

 

All of the Primes are being manufactured in Japan, and allocations just trickle in slow -- I wish you could just put an order in for exactly what you want and then just make a down payment and wait for it, like you can do with some other car brands.  

 

The best advice I found was on that r/rav4prime subreddit ... there might be an updated advice post -- there was someone maintaining a spreadsheet of allocations -- the link to it is in this post:

 

https://www.reddit.com/r/rav4prime/comments/rwhvzg/2022_rav4_prime_allocation_spreadsheet/

 

I gave up the idea that I'd be able to get the $7,500 tax credit in time, but I might have just been too impatient - there might still be a half credit of $3,750 or so for another 6 months, so getting on a few different waiting lists might still work.  Good luck!  

 

 

Thanks @nafregnum for sharing your experience in detail.  I had an inkling it was going to be hard.  Good to hear your first-hand experience :-).

 

Have you looked into the battery replacement cost down the line, or you are thinking you will sell it long before battery depreciation gets priced in?

[bizaro86]

5 hours ago, SharperDingaan said:

"A net 75c, assuming they pay 50c and given the cost of the pipe/cooling infrastructure and the shipping, is still going to result in a delivered gas price above the cost of developing WCSB gas. China will lose money hand over fist doing this, when they could easily ship that gas to markets that don't have local supply and where they can make significant profits (Japan, Korea, Europe). 

 

To put it another way, redirecting Russian gas from Europe to China does not increase global gas supply. It solves China's supply problems while creating supply problems elsewhere. North American gas will flow to those places. I may be wrong, but I suspect even Mr. Trudeau would see that there is no business case for importing gas to North America when (for example) JLK has never spent much time below $10."

 

Net 75c, is net of the costs of infrastructure (annual depreciation/amortization) and variable costs of delivery. As long as it sells for more than what China paid for it - they make money. How much, and how soon, depends primarily on the long term take-or-pay volumes they can sell. As they need to recover their outlay as rapidly as possible, they are incentivized to offer the LNG at an below market initial price that progressively rises over time. Obviously, the closer the buyer is to China, the less shipping cost - and the more of a market price discount available - tough to compete against.

 

A big, and new, refinery in Alberta would need to both diversify its feedstock supply and ensure egress for its refined product. An obvious solution is to lock-up 30-50% of its long term feedstock supply (especially if China is offering it cheap) via an offshore take-or-pay sending gas up the pipe. Alongside issuing a long term take-or-pay commitment to support a twinned line carrying refined product to tidewater. The WCSB supplies the remaining feedstock, and that pipeline take-or-pay agreement acts as a regulator on the long term price they pay for local gas. Canada gets more for its raw materials, higher employment, less environmental risk (LNG + refined product vs crude), etc.  Smart for everybody involved.

 

Of course if there is no refinery ... the WCSB can continue to call its own tune, the basin remains landlocked and dependent on the US for egress, there is little/no change, and local politicians can remain kings in their own fiefdoms. Good if you are the existing establishment, not so much otherwise.

 

However, it is impossible to damn up change forever - eventually the damn breaks and you drown. 

Heretical thinking  but hard to imagine gas not coming up the pipe from time to time.

 

 

SD

 

 

The cost of liquifying gas, shipping it across the ocean, and re-gasifying exceeds the cost of producing gas in the WCSB by at least 2-3x. The Chinese would have to sell it at a negative price to make the economics work.

 

And since their domestic demand is huge, and there are large sources of high priced LNG demand in the immediate area (eg Japan) this whole idea is ludicrous.

 

If WCSB gas was priced high enough to incent imports it would also incent huge amounts of new supply. The shallow gas machine across the prairies would ramp back up, and it is very short cycle. In the longer term, there is plenty of new dry gas that would come into play at those prices as well (eg Horn River).

[nafregnum]

2 hours ago, LearningMachine said:

 

Thanks @nafregnum for sharing your experience in detail.  I had an inkling it was going to be hard.  Good to hear your first-hand experience :-).

 

Have you looked into the battery replacement cost down the line, or you are thinking you will sell it long before battery depreciation gets priced in?

 

https://www.reddit.com/r/rav4prime/comments/so3t6h/in_case_anyone_was_curious_as_to_how_much_the/

 

I remember looking it up and thinking about it some - it looks like the battery costs $10k at present, but it does come with a 10 yr 150k mile warranty for the battery specifically ... 

 

https://www.toyota.com/electrified/warranty/

 

I think I'd most likely swap to a newer PHEV model before 10 years are up.  

[Pelagic]

1 hour ago, nafregnum said:

 

https://www.reddit.com/r/rav4prime/comments/so3t6h/in_case_anyone_was_curious_as_to_how_much_the/

 

I remember looking it up and thinking about it some - it looks like the battery costs $10k at present, but it does come with a 10 yr 150k mile warranty for the battery specifically ... 

 

https://www.toyota.com/electrified/warranty/

 

I think I'd most likely swap to a newer PHEV model before 10 years are up.  

 

Let's say the battery fails out of warranty, can the car still operate on the ICE only if you choose to not have it replaced? Have to figure for a lot of drivers the ICE is going to have relatively few miles on it (I guess hours would be a better metric here) if they're mainly using the battery to commute to and from work and the ICE for the occasional longer trip.

[SharperDingaan]

22 hours ago, bizaro86 said:

 

The cost of liquifying gas, shipping it across the ocean, and re-gasifying exceeds the cost of producing gas in the WCSB by at least 2-3x. The Chinese would have to sell it at a negative price to make the economics work.

 

And since their domestic demand is huge, and there are large sources of high priced LNG demand in the immediate area (eg Japan) this whole idea is ludicrous.

 

If WCSB gas was priced high enough to incent imports it would also incent huge amounts of new supply. The shallow gas machine across the prairies would ramp back up, and it is very short cycle. In the longer term, there is plenty of new dry gas that would come into play at those prices as well (eg Horn River).

 

This is a misunderstanding here.

China sells at world price, and pays the costs of gasifying/shipping etc. to get it to Canada; their netback after costs is 75c on the $. As long as their netback is > cost (50-60c on the $), it makes economic sense to ship.  Nothing to do with the production cost in the WCSB.

 

Agreed, just because there is an economic case to ship, doesn't mean they will. Highest and best applications are domestic use first (coal replacement net of solar/wind), then to ship to a Japan, then a  Canada/US. However, Russia>China throughput is huge, and they will need to offset it with long-term China(Net)>World throughput as much as possible. Whatever is left feeds spot market volatility.

 

Point here is that if their netback - cost allows it, and they anticipate having surplus long-term gas, all that China need do to lock up additional throughput is to offer the gas to a refiner at world price minus 5%. Done to move the excess gas and protect the spread.

 

The problem for the WCSB is that if a big refinery were located in Alberta, a deal like this would cut off the basins west coast gas egress, as gas would flow up the pipe. If there is to be a refinery, feedstock diversification demands that it be located at BC tide water; if excess WCSB gas is to flow down the pipe.  And If WCSB gas is to flow .... the netback to a local producer has to exceed what they could get if they just sold locally.

 

We know there is a big refinery being discussed, the principals have the $ to build it, it will need lots of feedstock and there are two suppliers (Russia/China + WCSB) with a lot of it to offer. 1930's-50's history also tells us that China has a strong incentive to make a deal.

• When Germany lost WWI, the victors made Germany pay war reparations. The problem was that the amounts demanded were so high, that they caused widespread resentment, and went a long way to creating the conditions that enabled a Hitler to emerge, and the subsequent WWII.
• Russian gas can be diverted to China, but when you only get a fraction of its value ... it is the same as paying a war (Ukraine) reparation - at some point, Russia will deliberately turn off the taps. China needs to ensure that costs have been recovered, and as much juice as possible extracted from the orange ... before that eventually occurs. They need to skew the discount structure, and dump as much as possible, as soon as possible.

We're just mindful that as soon as there is a pipe, it is possible for the flow to go either way.

There's a need to keep an open mind.

 

SD

Edited September 4, 2022 by SharperDingaan

[bizaro86]

13 hours ago, SharperDingaan said:

 

This is a misunderstanding here.

China sells at world price, and pays the costs of gasifying/shipping etc. to get it to Canada; their netback after costs is 75c on the $. As long as their netback is > cost (50-60c on the $), it makes economic sense to ship.  Nothing to do with the production cost in the WCSB.

 

Agreed, just because there is an economic case to ship, doesn't mean they will. Highest and best applications are domestic use first (coal replacement net of solar/wind), then to ship to a Japan, then a  Canada/US. However, Russia>China throughput is huge, and they will need to offset it with long-term China(Net)>World throughput as much as possible. Whatever is left feeds spot market volatility.

 

Point here is that if their netback - cost allows it, and they anticipate having surplus long-term gas, all that China need do to lock up additional throughput is to offer the gas to a refiner at world price minus 5%. Done to move the excess gas and protect the spread.

 

The problem for the WCSB is that if a big refinery were located in Alberta, a deal like this would cut off the basins west coast gas egress, as gas would flow up the pipe. If there is to be a refinery, feedstock diversification demands that it be located at BC tide water; if excess WCSB gas is to flow down the pipe.  And If WCSB gas is to flow .... the netback to a local producer has to exceed what they could get if they just sold locally.

 

We know there is a big refinery being discussed, the principals have the $ to build it, it will need lots of feedstock and there are two suppliers (Russia/China + WCSB) with a lot of it to offer. 1930's-50's history also tells us that China has a strong incentive to make a deal.

• When Germany lost WWI, the victors made Germany pay war reparations. The problem was that the amounts demanded were so high, that they caused widespread resentment, and went a long way to creating the conditions that enabled a Hitler to emerge, and the subsequent WWII.
• Russian gas can be diverted to China, but when you only get a fraction of its value ... it is the same as paying a war (Ukraine) reparation - at some point, Russia will deliberately turn off the taps. China needs to ensure that costs have been recovered, and as much juice as possible extracted from the orange ... before that eventually occurs. They need to skew the discount structure, and dump as much as possible, as soon as possible.

We're just mindful that as soon as there is a pipe, it is possible for the flow to go either way.

There's a need to keep an open mind.

 

SD

 

It's not a misunderstanding, you just made something up that is logically ridiculous and got called out on it. 

 

There are multiple huge flaws with that idea.

 

I'll start with the idea that the construction of a large refinery could cause the WCSB to need gas imports. The largest refinery in the world is Jamnagar in India doing 1.24 MMbbl/d. That is multiple times larger than anything in Alberta at present, and it's extremely doubtful something that large could be permitted or constructed in Canada. But lets assume foreign money convinces the government to give them permits on the world's largest refinery in Alberta. 

 

On average refineries use 0.2 mmbtu per bbl of refined products. Let's assume our new refinery is less energy efficient than average (to benefit your case) and uses 0.3 mmbtu per bbl. The conversion rate from MMBTU to MCF is ~0.975, so that implies the world's largest but not very efficient refinery uses 241,800 MCF/d, which is 0.24 BCF/d. Exports from Canada of natural gas are around 7.2 BCF/d. Those 7 BCF of gas that the WCSB still needs to export are going to bid pretty strongly for the pipeline space out of the basin. 

 

And while you're correct that the steel in a pipeline is direction neutral, the other infrastructure isn't. Everything from compression to check-valves would need to be changed. The idea that you could get permission to build giant compressor stations on the BC coast to import gas (even through an existing pipeline) is probably the most laughable part of this idea. 

 

Getting back to that 7 BCF of gas. The reason I mentioned the marginal cost of producing gas in the WCSB is that it is extremely relevant to this discussion. That 7 BCF of gas that gets exported either needs to get sold to someone or get shut in - those are the only two choices. As long as the price in the WCSB is above the marginal cost of production it isn't getting shut in. And the cost of liquifying and regasifying natural gas is well over the marginal cost of production. So just the transportation costs from China exceed the cost of WCSB gas, so that 7 BCF of gas isn't getting shut in, which means its going somewhere. Why would the Chinese try and underbid that gas? If that 7 BCF gets exported to the US (as is currently the case) then the WCSB price has to be lower than NYMEX by at least the cost of transportation. Why would the Chinese choose to land LNG cargoes at the cheap end of North America instead of the expensive end? As an example, Mexico imports from the USA, the USA imports from Canada, and the WCSB imports from no one. LNG cargoes landing would land at the high price end of the continent not the low price end of the continent. 

 

Speaking of the Chinese, I think a quick look at their incentives would demonstrate another reason that this whole idea is absurd. The Chinese will be very pleased if they get a supply of cheap gas. The first thing they would do is displace their own LNG imports, which at 16 MT/y are a shade over 2 BCF/d. Now, the entire quantum of Russia's gas exports are only around 24 bcf/d, so that alone is a pretty good start. The next thing the Chinese would be likely to do is to use cheap gas for internal priorities. I believe their primary internal priority is economic growth (to preserve social order for the CCP). Cheap natural gas gives you easy economic growth because you can dominate energy intensive industries. European fertilizer, smelter, etc type industries are shutting down due to extremely high costs for energy inputs. The Chinese have an amazing opportunity to take market share in energy intensive heavy industries by leveraging cheap Russian natural gas along with low labor costs and low environmental standards. Even if they don't use up all the natural gas on that (and I think they would) the Japanese import around 11 BCF/d of natural gas, and that would be the obvious home for the next chunk of it. The Japanese would almost certainly import more were the price lower. Korea imports over 6 BCF/d of natural gas, and that pretty much gets you to the end of the line on that one. The Chinese wouldn't export gas to the cheapest developed natural gas market in the world, because they aren't idiots. They aren't going to fill expensive tankers with supercooled LNG and sail them past expensive markets to sell it into a cheap market. 

 

Basically, this would require the Government of Canada to approve a bunch of energy infrastructure projects over significant domestic objections and against previous precedent. Then it would require Alberta and BC producers to close in their production for no reason and/or the Chinese to sell a product for below what it costs them when they could sell the same product more conveniently at a higher price, or just use it themselves for significant economic and social benefits. Again, China+Japan+Korea existing LNG imports are approx equal to total Russian gas exports, and that doesn't include the huge amounts of Chinese domestic demand that would be incented if they get a bunch of cheap Russian gas. It's one thing to keep an open mind, but math is good sometimes to. 

[mcliu]

FYI: Canada probably has the cheapest natural gas in the world right now. AECO even turned negative for a few days in August. 

 

[Viking]

Well energy markets got two important pieces of news today:

1.) The main Nord Stream pipeline will not be restarted

2.) OPEC cut supply by 100,000 barrels/day

 

What to think?

1.) The energy crisis in Europe looks to be entering its next phase.

2.) OPEC wants to keep oil prices in the $90 to $100 range

 

What does it mean?

1.) Gas prices in Europe are going higher. The European economy is going to weaken further. If Russia cuts off gas from the pipeline flowing through Ukraine to Europe then things will get much worse for Europe. What a crazy set up. 

2.) even if we get a global recession oil prices might not correct much (perhaps to $80).

[SharperDingaan]

On 9/5/2022 at 12:07 AM, bizaro86 said:

 

It's not a misunderstanding, you just made something up that is logically ridiculous and got called out on it. 

Agree to disagree

 

There are multiple huge flaws with that idea.

 

I'll start with the idea that the construction of a large refinery could cause the WCSB to need gas imports. The largest refinery in the world is Jamnagar in India doing 1.24 MMbbl/d. That is multiple times larger than anything in Alberta at present, and it's extremely doubtful something that large could be permitted or constructed in Canada. But lets assume foreign money convinces the government to give them permits on the world's largest refinery in Alberta. 

SA/Canada have been in discussion on a 5B+ refinery investment for quite some time. 

 

On average refineries use 0.2 mmbtu per bbl of refined products. Let's assume our new refinery is less energy efficient than average (to benefit your case) and uses 0.3 mmbtu per bbl. The conversion rate from MMBTU to MCF is ~0.975, so that implies the world's largest but not very efficient refinery uses 241,800 MCF/d, which is 0.24 BCF/d. Exports from Canada of natural gas are around 7.2 BCF/d. Those 7 BCF of gas that the WCSB still needs to export are going to bid pretty strongly for the pipeline space out of the basin. 

Fully agree, which is why I suggested the refinery is at tidewater, and NOT in Alberta. The WCSB can flow gas down the pipe, and the refinery can diversify its feedstock source against shipborne LNG.

 

And while you're correct that the steel in a pipeline is direction neutral, the other infrastructure isn't. Everything from compression to check-valves would need to be changed. The idea that you could get permission to build giant compressor stations on the BC coast to import gas (even through an existing pipeline) is probably the most laughable part of this idea. 

Wrong, any WCSB gas bound for the Asian LNG market already has a compressor station at the coast, and the engineering to reverse flow is routine, but costly and time consuming. Agreed gas is not coming up the pipe unless it's very cheap for a very long time - but the price of west coast WCSB gas is going to be limited to whatever the China/Russia landed price is.  

 

Getting back to that 7 BCF of gas. The reason I mentioned the marginal cost of producing gas in the WCSB is that it is extremely relevant to this discussion. That 7 BCF of gas that gets exported either needs to get sold to someone or get shut in - those are the only two choices. As long as the price in the WCSB is above the marginal cost of production it isn't getting shut in. And the cost of liquifying and regasifying natural gas is well over the marginal cost of production. So just the transportation costs from China exceed the cost of WCSB gas, so that 7 BCF of gas isn't getting shut in, which means its going somewhere. Why would the Chinese try and underbid that gas? If that 7 BCF gets exported to the US (as is currently the case) then the WCSB price has to be lower than NYMEX by at least the cost of transportation. Why would the Chinese choose to land LNG cargoes at the cheap end of North America instead of the expensive end? As an example, Mexico imports from the USA, the USA imports from Canada, and the WCSB imports from no one. LNG cargoes landing would land at the high price end of the continent not the low price end of the continent. 

Agreed China maximizes the spread on its Russian gas, the more that it can reduce/eliminate transportation cost. I just don't assume that they will have sold all their surplus Russian supply - by the time they get to the Canadian west coast. Their marginal cost is what they paid for it, plus transport cost - and they are incentivized to keep dumping until  marginal revenue equals marginal cost. Gasification is a fixed cost recovered  across all users - and will have been almost fully recovered by the time gas is being sold on the west coast.

 

Speaking of the Chinese, I think a quick look at their incentives would demonstrate another reason that this whole idea is absurd. The Chinese will be very pleased if they get a supply of cheap gas. The first thing they would do is displace their own LNG imports, which at 16 MT/y are a shade over 2 BCF/d. Now, the entire quantum of Russia's gas exports are only around 24 bcf/d, so that alone is a pretty good start. The next thing the Chinese would be likely to do is to use cheap gas for internal priorities. I believe their primary internal priority is economic growth (to preserve social order for the CCP). Cheap natural gas gives you easy economic growth because you can dominate energy intensive industries. European fertilizer, smelter, etc type industries are shutting down due to extremely high costs for energy inputs. The Chinese have an amazing opportunity to take market share in energy intensive heavy industries by leveraging cheap Russian natural gas along with low labor costs and low environmental standards. Even if they don't use up all the natural gas on that (and I think they would) the Japanese import around 11 BCF/d of natural gas, and that would be the obvious home for the next chunk of it. The Japanese would almost certainly import more were the price lower. Korea imports over 6 BCF/d of natural gas, and that pretty much gets you to the end of the line on that one. The Chinese wouldn't export gas to the cheapest developed natural gas market in the world, because they aren't idiots. They aren't going to fill expensive tankers with supercooled LNG and sail them past expensive markets to sell it into a cheap market. 

Don't dispute they will do very well, but we are talking about what they do with the net SURPLUS gas - of course if there is none/very little, there is no discussion. But no matter what they need to get their capital outlay back as soon as practicable, and to do it - they need to be taking a great deal of Russian gas, and a great deal needs to be available (diversion of Nord Stream 1 & 2 supply) 

 

Basically, this would require the Government of Canada to approve a bunch of energy infrastructure projects over significant domestic objections and against previous precedent. Then it would require Alberta and BC producers to close in their production for no reason and/or the Chinese to sell a product for below what it costs them when they could sell the same product more conveniently at a higher price, or just use it themselves for significant economic and social benefits. Again, China+Japan+Korea existing LNG imports are approx equal to total Russian gas exports, and that doesn't include the huge amounts of Chinese domestic demand that would be incented if they get a bunch of cheap Russian gas. It's one thing to keep an open mind, but math is good sometimes to. 

Don't dispute the math, but the reality is that a good chunk of that existing supply will already be locked up under long term take-or-pay agreements. Until those existing contracts end, they can only absorb expected growth - so a lot of China/Russia gas is going to bypass them.

 

 

Replies are in bold. Fundamentally, we agree to disagree, no big deal.

We're looking at something at least 5+ years out, and lots can happen between now and then. We just attach a higher possibility to a large adverse presence - simply because we don't know the timing of the China/Russia gas, price paid for that gas, or the quantities involved.

 

SD

 

Edited September 7, 2022 by SharperDingaan

[Dalal.Holdings]

I've invested in Antero Resources and I think what's happening in the Nat Gas space right now *could* mark the beginning of a new era for the commodity which has spent over a decade in a shale induced glut (famous last words).

 

I've been thinking a lot along the lines of this post:

https://thelastbearstanding.substack.com/p/loads-of-natural-gas

 

The export of gas to Mexico & upcoming start of export terminals (to supply Europe, Asia) may indeed make U.S. domestic consumers the marginal buyers of the commodity. On top of that, misguided (liberal) policies curtailing drilling and pipeline development may put upward pressure on prices.

 

A lot of it will depend on winter and, for the time being, geopolitical events. If there is a warm winter or a sudden resolution of Russia-Ukraine, prices will head south for the time being.

[lnofeisone]

24 minutes ago, Dalal.Holdings said:

A lot of it will depend on winter and, for the time being, geopolitical events. If there is a warm winter or a sudden resolution of Russia-Ukraine, prices will head south for the time being.

Even if the war stops tomorrow, I can't see Putin/Europe normalize relationships so fast that sanctions are lifted and gas flow is restored. It will take time. Weeks, months, maybe?

 

As far as the weather, just about the whole planet is expected to have a cold winter. You only need cold weather in Europe or Asia and gas prices will stay high.

 

It makes 0 difference if US and Canadian E&Ps drill more. There is no LNG capacity to be had anywhere. Maybe once Freeport goes back online and then Europe gets roughly 2.5% of their LNG fill. 

 

Unfortunately, Europe is staring at a real crisis here. I'm hoping politicians use the real crisis as a shield to allow for somewhat more market-friendly policies (e.g., let Gronnigen field in Netherlands produce through 2030) at least until other energy alternatives are figured out. 

[Spekulatius]

36 minutes ago, lnofeisone said:

Even if the war stops tomorrow, I can't see Putin/Europe normalize relationships so fast that sanctions are lifted and gas flow is restored. It will take time. Weeks, months, maybe?

 

As far as the weather, just about the whole planet is expected to have a cold winter. You only need cold weather in Europe or Asia and gas prices will stay high.

 

It makes 0 difference if US and Canadian E&Ps drill more. There is no LNG capacity to be had anywhere. Maybe once Freeport goes back online and then Europe gets roughly 2.5% of their LNG fill. 

 

Unfortunately, Europe is staring at a real crisis here. I'm hoping politicians use the real crisis as a shield to allow for somewhat more market-friendly policies (e.g., let Gronnigen field in Netherlands produce through 2030) at least until other energy alternatives are figured out. 

I don’t think the NG will flow from Russia for a long time, regardless of how the war plays out,

 

@lnofeisoneRegarding the weather , what makes you think that next winter will be cold?

[lnofeisone]

@Spekulatius - there are now predictions of 3rd year of Le Nina which is rare. Le Nina mostly impacts the US, Asia/Australia and to a lesser degree Europe. When it does impact Europe, more often than not it hits it with cold weather. So basically, cold all around.

 

https://apnews.com/article/un-weather-la-nina-predictions-d81072d4b78112256e9807ba4178ae1c

[Dalal.Holdings]

Winter will be cold more likely than not and Russia-Ukraine will continue for much longer than people think (wars are fat tailed—see Iraq and Afghanistan and Syria Yemen etc).

 

I’m just talking about the potential downsides to nat gas in the near term. I think there are far bigger tail winds and status quo/a normal winter would cause prices to rise.

 

I think EU’s energy crisis is a culmination of decades of EU policy failure—in securing their energy sources, overdosing on ESG, underinvesting in defense, and over-reliance on Putin (Trump was right about this).

Edited September 7, 2022 by Dalal.Holdings

[SharperDingaan]

Keep in mind that Russia has 2 LNG export terminals; Sakhalin-II (2 x 4.8M ton/yr), and Yamal (16.5 M ton/yr). The LNG has to be loaded into LNG Carriers, ship to ship transfer at sea is extremely limited, and under the global Russian sanctions - ability to unload in EU ports is progressively tightening through 2022.

 

Of course, the cargos will still unload - but those carriers are going to Asia.

Europe gets shortages and higher prices, Asia gets surpluses and cheaper prices, and we all get less inflation as that cheap energy is used to produce more goods that we all consume (exported from Asia's workshops). 

https://en.wikipedia.org/wiki/List_of_LNG_terminals#Russia

 

SD

[Spekulatius]

54 minutes ago, SharperDingaan said:

Keep in mind that Russia has 2 LNG export terminals; Sakhalin-II (2 x 4.8M ton/yr), and Yamal (16.5 M ton/yr). The LNG has to be loaded into LNG Carriers, ship to ship transfer at sea is extremely limited, and under the global Russian sanctions - ability to unload in EU ports is progressively tightening through 2022.

 

Of course, the cargos will still unload - but those carriers are going to Asia.

Europe gets shortages and higher prices, Asia gets surpluses and cheaper prices, and we all get less inflation as that cheap energy is used to produce more goods that we all consume (exported from Asia's workshops). 

https://en.wikipedia.org/wiki/List_of_LNG_terminals#Russia

 

SD

Nope, that's not how it works:

 

LNG is up everywhere, because European buyers are crowding out others by bidden more. LNG is a worldwide market, just like oil  (with more infrastructure constraints). it's going to be tight for years and probably a better area to invest in than oil. Shell is the biggest integrated player on a world wide scale.

[mcliu]

https://www.reuters.com/business/energy/wide-demand-reduction-only-feasible-solution-europe-energy-crisis-equinor-2022-09-06/

• Margin calls in Europe exceed 1.5 trillion euros - Equinor exec

Maybe stagflation might is the best possible outcome for Europe. Worse might be depression or economic collapse.