By The Energy Report, on January 13th, 2012
 Retail and institutional traders invested record amounts in renewable energy producers in 2011, but separating the wheat from the chaff can be challenging. In this exclusive interview with The Energy Report, Jacob Securities’ Senior Vice President for Research John McIlveen shares how to pick and choose. For steady dividends, high-yield Independent Power Producers deliver shareholder value, while renewable projects in the developing world offer incredible potential returns. Whatever the project, it’s the internal rates of return that matter.
The Energy Report: John, what is your current investment thesis?
John McIlveen: Safety is still the dominant concern with small-cap companies, which are high-risk by definition. I mostly stick with power generators. High-yield Independent Power Producers (IPPs) returned over 20% in 2011, whereas manufacturing was slammed as many sectors entered cyclical lows. The generators have 20-year contracts, which provide highly predictable cash flow. To buy the manufacturers, you really have to understand the cycles.
TER: What’s the relationship between conventional energy prices and renewable energy stocks? Do higher conventional energy prices trigger a bounce in renewables?
JM: Optimally, it would be better for renewables if conventional energy prices were higher. However, the reality is that renewable prices do not fluctuate with conventional energy prices because renewable power generators operate on long-term contracts with fixed prices. In the power business it is natural gas, not oil that sets the marginal price of power in the developed world. Low gas prices actually reduce prices on new renewable power contracts, but they do not affect an existing contract. Oil and diesel dominate power prices in the developing world, and because of this, power prices are two to four times the developed world prices. This is why we’re seeing generators rush to the developing world. The generator can get twice the power price there and yet still save the host country 50%. There are much higher prices to be had for power in the developing world right now.
TER: Where would that be?
JM: Anywhere where oil or diesel are generating power. That would include most of the Caribbean and the Pacific islands. Even Hawaii is mostly on diesel.
TER: What’s the most workable alternative energy technology right now that can deliver for investors?
JM: I don’t see a surefire rocket ship growth story right now, but two technologies worth watching are algae and power storage. Algae consuming carbon dioxide (CO2) could be turned into a biofuel or a biomass, and it has the potential to be turned into human-grade protein. It has not been demonstrated on a large scale yet but if it works, it could supply us with clean fuel and power while consuming CO2.
Also, the lack of good power storage has held back many technologies for decades. A power storage system that could be sized to fit into a residential home and capable of storing a few kilowatts would enable a nationwide roof-top solar power system without new transmission lines.
TER: That sounds like the kind of thing that could take off in the developing world much the same way cellular telephone technology did in countries where there was no huge copper wire infrastructure in place. Is that fair to say?
JM: Yes, that would be completely applicable to the developing world as well.
TER: Which renewable energy technology could be the most profitable for investors and which the least?
JM: Once online, the generation method really does not matter. It’s the project’s internal rates of return (IRRs) that matter. Generally, investors should look for 10% or better unlevered IRR on a particular project. If investors are buying developers with little to no assets already online, then geothermal carries the most risk due to drilling, whereas solar carries the least risk due to its higher predictability and short installation time. However, having said that, geothermal stocks have been beaten up the worst of all these junior developers and may represent good value buys.
The biofuel area has some favorable political winds in its sails, as the biofuel volumes are mandated and increasing by 20% a year. However, there is still the double-ended commodity price risk, as you do not have the long-term contracts as you do in power production.
TER: I’m looking at an unweighted basket of conventional exploration and production (E&P) mid caps that were up nearly 19% over the last 52 weeks. I’m also looking at a basket of alternative energy stocks that were down 43% during the same period. What catalyst might induce a secular, upward movement in alternative energy shares?
JM: I think it’s more broad-market based as opposed to being simply about alternative energy. The non-yielding IPPs were down 40% in 2011. Only one of them had a positive return, that one being Western Wind Energy Corp. (WND:TSX.V), which was up 24%. However, most of these have bounced off their one-year lows, and the market now looks like it is anticipating the resumption of upward movement in the small-cap sector. The market must come to believe large-cap stocks are fully valued, and there are signs now that this is happening, and some investors are now looking for bargains in small caps.
TER: You mentioned that Western Wind was up 24% in 2011. It’s up more than 5% in just the first few days of 2012.
JM: Western Wind has been a unique story. It has brought 130 megawatts (MW) of wind online in 2011 without any equity dilution by using the investment tax credit (ITC) cash grants to secure bridge loans. It expects to add another 30 MW of solar the same way in 2012. There was also a $2.50/share takeover offer, which was withdrawn by the bidder after the huge stink that Western Wind put up. Now, there’s a possible proxy battle looming by disgruntled shareholders who would’ve preferred to see the bid entertained further.
TER: Solar is a new business for Western Wind, isn’t it?
JM: Yes. Up to this point, it had only 0.5 MW in operation. This new 30-MW project will be in Puerto Rico and should be online toward the end of 2012.
TER: Do you feel that’s a good fit for the company to be in both solar and wind?
JM: Yes, I do. You could even put solar and geothermal on the same site, thereby saving on a lot of infrastructure and transmission costs.
TER: What other companies are you talking to investors about today?
JM: I like Ram Power Corp. (RPG:TSX), and we are rating it Speculative Buy with a $0.74 target price. It’s just coming online with 36 MW of geothermal in Nicaragua. It will have another 36 MW in a year on the same site and could pay a dividend in 2013. So I think there is some good near-term potential to that one.
TER: Your implied return is more than 100%. After a tough year, the stock is up about 14% over the past four weeks. Are we looking at a turnaround?
JM: I think so, because all these junior developers now are show-me stocks. The market wants to see their projects come online on time, on budget and with cash flow. Once you see that, these values are going to move into these stocks very quickly.
Another is Etrion Corporation (ETX:TSX), which has 60 MW of ground-mount solar in Italy. However, it cannot pay a dividend now because its projects were 100% debt-financed. The stock is still too low to recapitalize, so I think what I’d like to see there is that it sell some assets at a good gain so that it can restart its growth.
TER: In your reports you refer to Etrion as a project company. Tell me more about that.
JM: It has about 10 different solar ground-mount projects, all of which it built over a two-year period. The company financed it all with debt; it didn’t raise any equity. Because it has such a high-interest and debt-repayment schedule, it will not be able to pay a dividend, and I don’t think it generates enough cash flow on its own to continue to grow. With the stock half what it was a year ago, I’m sure management doesn’t want to issue any equity to fund growth. A good alternative for Etrion would probably be to sell one or some of its projects in order to finance growth.
We like Ormat Technologies Inc. (ORA:NYSE), a solid company with free cash flow to grow its megawatts by about 20%/year. But without a significant dividend, the market punished it in 2011. I expect the company to beat the Street in 2012.
TER: You reduced your target price on Ormat from $34 to $24. What was going on there?
JM: It had nothing to do with Ormat. I had actually increased my estimates a little bit at the same time when I did that. Essentially I’m going from a 15x enterprise value/earnings before interest, taxes, depreciation and amortization (EV/EBITDA) multiple, which was what a bull market pays for a high-growth power company, down to 12x EV/EBITDA, which is more of what a slow-growth or bear market would pay.
Another is Alterra Power Corp. (AXY:TSX). It is a solid company with geothermal, wind and hydro assets. It would benefit the most if small caps return to favor, but it will not be able to pay a dividend for a few years given its current expansion program.
TER: Back in November, you raised your rating on Alterra from a Hold to a Buy. What was the catalyst for that?
JM: Two things: the company had turned cash-flow-positive with the consolidation and acquisition of Plutonic Power Corp. just as the general market began to move the stock. Eventually, with their declines, they all move into a Buy-position. Our criterion for a small-cap stock is it has to have a 25% potential return to the target price to be a Buy.
I might also mention U.S. Geothermal Inc. (GTH:TSX; HTM:NYSE), the only geothermal company not to have stumbled over drill results in 2011. Progress has been plodding but mistake-free. I think U.S. Geothermal is a good value, and unlike the other geothermals, it has not yet bounced off its one-year low.
TER: You also follow Just Energy Group Inc. (JE:TSX) and you have a $15 target price on it, which represents about 40% upside potential from here. This company has a significant market cap compared to most of your coverage universe, and it has a very different business model as well.
JM: Just Energy Inc. is essentially a reseller of gas and electricity, but the company has a small and growing renewable energy component to its business such that when it resells electricity, you can buy green power and buy green credits. This small part of its business is growing quite rapidly.
In its gas markets, it has a very high turnover in its contracts because that market is very fear-driven. End-users are only likely to lock into a five-year gas contract if they fear gas prices are going to be rising, but that’s certainly not the buzz we hear every time we read a newspaper. That part of the business is a little challenging.
Their electricity market is a little bit better because there is still upward pressure on electricity prices, and people are thus willing to lock into contracts. The company has made three good-sized acquisitions in the last few years and has levered up the balance sheet on the high side. The dividend here is yielding 11% in the market, but the market is worried that there might be a dividend cut.
TER: You have had some concerns about BIOX Corp. (BX:TSX), but the stock is up 120% over the past six months.
JM: I have some short-term concerns because the U.S. $1/gallon tax credit has expired. I think this is going to cause some short-term downward pressure on biofuel prices; however, because the volume mandates remain, it should correct later on in the year. I’d suggest watching for a technical bottom for an entry point.
TER: Do you think the U.S. tax credit could be renewed?
JM: I don’t think the tax credit will be renewed. Given the current budget-cutting Congress we have, perhaps it will just be allowed to expire like so many other renewable incentives. As for the Environmental Protection Agency’s volume mandates, Congress would actually have to take action to rescind the mandates, whereas in the case of the tax credit, Congress doesn’t have to do anything, just let it expire. The volume mandates look to be here to stay.
TER: I have enjoyed speaking with you very much, John. JM: Thank you.
Jacob Securities Senior Vice President for Research John McIlveen has been with the firm five years and has a total of 26 years experience in special-situations research and merchant banking. In 2004, he became Canada’s first sell-side analyst to focus solely on renewable energy research and consistently has been ranked a top performer by Bloomberg on accuracy of estimates and returns. He is currently treasurer of the Canadian Geothermal Energy Association and a published academic with 15 papers, including his and coauthor Alan Rugman’s 1985 best Canadian book-nominated Megafirms: Strategies for Canada’s Multinationals.
By The Energy Report, on July 6th, 2011
 Recently back from a trip to the Middle East, Casey Research Energy Division Chief Investment Strategist Marin Katusa shares some of his best energy investment opportunities. In this exclusive interview with The Energy Report, he explains why this is a good time to pick up uranium and geothermal stocks.
The Energy Report: As the Chief Investment Strategist for the Energy Division of Casey Research, you follow the whole range of energy segments and investments for your company. There have been quite a few changes on both the political and economic fronts since you spoke with The Energy Report last November. Can you bring us up to date on opportunities in your coverage area—petroleum, natural gas, uranium and geothermal?
Marin Katusa: When looking at the energy sector, one must start with petroleum, as that alone is a very large sector. Brent Crude is currently trading at a premium to WTI (West Texas Intermediate), mainly because of a political instability premium based on what’s happening in the Middle East. Speculators have propped up the prices because of the amount of demand required from Europe, which comes from the Middle East. The WTI price has lagged as the differentials increased since February because of the Middle East turmoil.
That said, in the last three weeks you’ve seen a significant pullback on the petroleum sector market-wide, in the spot price of the oil and equities in both big caps and the juniors. The main reasons are the weak economy and the U.S. Energy Information Administration report stating, “$100+ per barrel (bbl.) oil is just too much of a burden in this fragile economy.” That brings out the speculators, which comprises a 20%-25% premium in petroleum. Another reason for a big drop in the price of oil is that the United States is leading an international effort to release 60 million barrels (MMbbl.) of crude reserves to world markets.
TER: Natural gas is a little different story, isn’t it?
MK: Natural gas is a very localized market. If you look at North America, because of the success of the unconventional technologies, mainly shale fracking, the companies are a victim of their own success. Because these unconventional explorers have been so successful in finding unconventional sources of gas, there is a glut of gas. But that, too, shall pass as the cure for low prices is low prices. It’s just going to take some time—more time than most investors are willing to wait. We wrote a report a couple of years ago called, “The Hidden U.S. Supply of Gas.” It shined a light on the thousands of uncompleted wells that are drilled, but not completed and could be tapped into the pipeline structure in 72 hours if they were viable. You’re going to see sideways gas for the next 6-12 months in North America, and over the next 3 months you could see petroleum sideways to down.
TER: How about uranium in light of Fukushima?
MK: The uranium sector had a big fall, obviously, since the Fukushima disaster. Ironically, mainly by fluke, about 2.5 weeks before Fukushima, in our newsletter and on TV, we came out with a “take profits” opinion on the uranium sector mainly because we went very bullish on it eight months before. I think when this whole cloud has settled down, you’re going to see some really interesting buying opportunities in a few very select uranium companies.
The uranium companies you want to stick with are the lowest cost producers with no debt and explorers with tangible, real deposits that are very high-grade in areas of developed infrastructure (a pro-uranium mining culture helps) with defined resources within the NI 43-101 standard that look like take-out targets. You want to stay away from the early stage exploration projects in areas that lack infrastructure. The smart money is staying away from those types of projects. In my opinion, those projects are going to go sideways to down because explorers will always need to raise money to explore.
It’s a fact that the U.S. is the largest consumer of uranium, but the country only produces about 8% of that domestically. It purchases the rest. So there’s still plenty of existing demand. The uranium story isn’t dead, but an investor has to be much more careful in choosing investments. I’d also stay away from thorium. It’s shocking how many emails I get about thorium. We’ve written about all the reasons to stay away from thorium quite a bit in our Casey Energy Report.
Back to uranium, you’ve got Germany, where Chancellor Angela Merkel just said, “We’re going away from nuclear power” and the Japanese are saying the same. But you’ve got the RISC countries—Russia, India, South Korea, and China—and they’re going nowhere. They’re going to stick with the uranium demand that they have, and it will increase (they will be building nuclear plants fueled with uranium, not thorium).
TER: And what about geothermal?
MK: Now, the geothermals have taken a significant hit back, even though the current PPAs (power purchase agreements) provide significant profits. The actual public companies have taken a big fall following the Ram Power Corp. (TSX:RPG) disaster where they missed their wells and had cost overruns. Geothermal is currently a contrarian investment opportunity where these geothermal companies are trading at a fraction of what they were a year ago. I just wrote an article called “The Valley of Darkness” comparing the current geothermal sector to the copper sector in late 2008.
TER: So you think oil prices will be sideways in the next year because the market can’t sustain these kinds of prices. Is that correct?
MK: If the Arab Spring does shift—and the key here is whether Saudi Arabia falls—you will see $150-$200/bbl. oil overnight. If something were to happen to the flow from the massive Ghawar oil field in Saudi Arabia, that would result in the single largest increase in oil prices the world has ever seen. Otherwise, oil is sideways to down. My point is that we really are on the edge of chaos. Saudi Arabia is very important to keeping oil below $150/bbl.
TER: You mentioned the possibility of opening up fracked natural gas wells. Is that going to go crazy any time soon?
MK: A moratorium exists on a lot of new shale gas wells due to concerns about water supplies. We did a report a few years ago where we talked about how an unconventional well uses between 2 and 5 million gallons of water, of that you get back roughly half. The Marcellus Shale, the Utica Shale, the Paris Basin—all of these basins have moratoriums on them because some people are worried about polluting the water table. The fracking occurs many thousands of meters below the water table so I think it is a misplaced fear, but you’re dealing with politicians and NGO groups, so you aren’t really dealing with facts or science. If these groups are successful, further moratoriums could be imposed, but it would be a crying shame if these moratoriums extended into the Haynesville Shale in Louisiana or the Eagle Ford Shale in Texas. I don’t suspect we will see this happen, but if it did, you would see a significant pop in the price of domestic natural gas.
TER: Going to nuclear now, despite the Fukushima disaster, nuclear power is here to stay. How much effect is the current controversy over nuclear safety going to have on new plant development currently in the works?
MK: Global demand will be affected by countries such as Germany and Japan. They still have existing plants; remember they’re going to be operating until 2022, in the case of Germany. A lot of this is political lip service; they’re giving the people what they want to hear now. What are the Germans going to replace that production with?
TER: Well, maybe they think they can do it with solar?
MK: I don’t think so. They’re importing nuclear energy across the border from France. So, this is just political lip service. The politicians just want to stay in power long enough to get their juicy pensions. They don’t care about—or even if they did care, they aren’t able to find—real solutions, that is why they are politicians. I believe that before 2022 rolls around, the Germans will rethink their nuclear position. But remember, you have more than 20 nuclear plants being built in China; you’ve got South Korea, Russia and India looking to develop. So let’s just imagine that Germany and Japan do close down, whatever they shut down is going to be replaced by growth in other countries.
TER: Who will benefit from continued demand for uranium? Which uranium stocks do you think are going to continue to be attractive under the current scenarios?
MK: Let’s start with Uranium Energy Corp (NYSE.A:UEC), one of the lowest cost producers in the world. It has been a big win for our subscribers a few times, and it is a new producer led by Amir Adnani, who is in our “Ten bagger” club—a club for companies that delivered 1000+% gains for our subscribers.
I also like Denison Mines Corp. (TSX:DML; NYSE.A:DNN) a lot. It has production in the U.S. and access to a mill in the Athabasca Basin, which hosts one of the highest grade uranium projects on the planet. They made a major discovery at their Phoenix deposit—a very, very high-grade deposit. So, that’s a blend of low-cost production and high-grade deposits. We have a lot of technical research on both of these companies on our website at www.caseyresearch.com , as we’ve been to their projects, and our subscribers have done well on both of these companies.
If you want a higher risk story, we like Hathor Exploration Ltd. (TSX.V:HAT). We have had that in our portfolio for many years and they’ve made a great discovery of a high-grade deposit. So those are the three that we have in our Casey Energy Report that we follow.
TER: Any new developments with those companies?
MK: Uranium Energy Corp. has hit the numbers that they gave the public regarding production costs and are actually lower than originally stated—less than $18/lb. The company is growing production to 1 Mlb. annually. It’s very important to know that yes, the spot price of uranium has taken a big hit, but the spot market price is still north of $50/lb., and the long term price trades north of $70/lb. The netback—the differential between what the selling price and the production costs—are still very impressive profits.
TER: Any other juniors you think have merit at this point?
MK: In our Energy Confidential, we really like Fission Energy Corp. (TSX.V:FIS; OTCQX:FSSIF), which is adjacent to the Hathor deposit. The play there is that we believe that Hathor will buy out Fission so that they can have a large consolidated resource. At that point, we think Hathor will have over 60 Mlb. of very high-grade uranium. From there we believe the play would be that Denison will buy out the combined Hathor and Fission company.
The ultimate end game in the Athabasca Basin, we believe, would involve BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF). There’s good potential that they want access into the Athabasca Basin, and the only way that they can do that would be through access to a mill. It’s very difficult to get the permits to build a mill in the Athabasca Basin. Either it buys out Cameco Corp. (TSX:CCO; NYSE:CCJ), which is not going to happen; or the big French uranium company AREVA (PAR:CEI), sells an interest, which is not going to happen; or it buys Denison Mines, which owns a percentage of an operating mill.
So the key to the play there for the juniors like Hathor and Fission is to be bought out by a larger company. That’s why we like Fission, it has good management that discovered a very good project.
TER: The geothermal sector is obviously quite a bit smaller than the other energy sectors, but people are taking another look there also. There seems to be a lot of potential out there, but it’s not so easy to capitalize on it. What’s going on with the companies that you follow there?
MK: In our Energy Opportunities Newsletter, we follow Ormat Technologies Inc. (NYSE:ORA), the world’s largest, pure-play geothermal company. If you want lower risk, you probably want to stick with Ormat. If you’ve got an appetite for a higher risk junior, we think Alterra Power Corp. (TSX:AXY), which is Ross Beaty’s deal, is a good play. It’s the old Magma Energy merged with Plutonic Power Corp. Alterra just received $70M+ cash from the sale of a portion of their Iceland asset. They’re very sound; they make money. It’s one of the few junior companies that can stay afloat because it actually makes money. It has a sustaining business and Ross Beaty has done a great job building that. Don’t ever count out Ross Beaty, the guy is a legend. In time, he will build AXY into a winner. Investors have to be patient; the geothermal sector right now isn’t the place for fast money.
Ram Power seems to be fixing itself up here. It fell on its knees when founder and President Hezy Ram left after missing targets and cost overruns. The company has restructured the management, refinanced it and so far the results look promising. It still has to build up its San Jacinto plant and the geysers seem to be going on track. So, time will tell with Ram. It’s been very disappointing, but so far, it seems like they’re headed in the right direction.
Nevada Geothermal Power Inc. (TSX.V:NGP; OTCBB:NGLPF) has built the largest geothermal plant in the U.S. in the last decade. The company just bought out some Iceland assets in California. The geysers and the joint venture with Ormat on the Crump Geyser property in Oregon is moving as expected. So, all of these companies are doing the right things now, except the market is not reflecting it because no one really cares about it. It’s the unloved energy sector. The companies are cheap, but their time will come. We don’t know when it will happen, but because it is such a small sector, there are only a handful of companies, so when it does get attention these stocks are going to trade up multiples from where they are today.
TER: Years ago I visited the Geysers geothermal production facilities northeast of San Francisco. Who owns that now?
MK: I believe you are talking about the facilities about 100m northeast of San Francisco that are owned by Calpine Corp. (NYSE:CPN). The geysers are the largest group of geothermal plants in the world and Calpine has some good assets and production, but geothermal production is a very small percentage of Calpine’s overall electricity production. Their main electricity plants are natural gas. It’s a very large company; they’ve done very well, and they’ve got a good portfolio of geothermal assets.
TER: So, that’s not a clean geothermal play by any means.
MK: No, and that’s why we’ve avoided Calpine. If you want exposure to the geothermal sector, that’s not the one you want to be in.
TER: Are there any other companies you would like to bring up at this point that you think our readers should be looking at?
MK: I think in general you want to stick with management teams that are proven; they’ve done it before; they’re heavily invested in the companies themselves and they have a focus factor. One of my favorite companies right now is a company called East West Petroleum Corp. (TSX.V:EW). The company just signed a massive deal in Romania with a large energy company called NIS, which is more than half owned by the Russian gas company Gazprom. NIS is going to drill 12 wells on their unconventional gas assets in Romania, which is over US$50M worth of exploration on EW 100%-owned assets over the next 24 months. The company also signed a deal in India with three of the four largest Indian energy companies and has a deal in the Middle East with one of the largest independent oil producers, Kuwait Energy Corp. You want to stick with a company whose management team can attract a major company and use the major company’s money to develop the assets that they own. It’s kind of like the joint venture model in mining, the OPM, where you use other people’s money. East West is a company we really like, and own a lot of shares.
Another one we really like is Niko Resources Ltd. (TSX:NKO). It’s a much larger company, but we believe in the next 12-18 months they’re going to have a lot of news coming out on their drill programs. In this market, it’s time to pick your favorite stocks and be patient; put in your stink bids and see if you get a hit. Unfortunately, the company has recently gotten itself into some trouble that will cost it about CASD$10M-CAD$12M in fines. That’s very disappointing, but the assets sure look good.
TER: Yes, it’s summertime and nobody cares about the market.
MK: It’s also the time to be accumulating your favorite stocks on sale. Buy on fear; sell on greed.
TER: Do you have any other thoughts you would like to leave with our readers?
MK: I think the reality of the sector is, regardless of what happens with the equities in the near term, if you’re patient, the solid companies will grow their assets and either produce higher cash flows or get bought out by a major who needs to replace reserves. So, just because the market right now has a lot of negative sentiment, we look at this as a buying opportunity to pick up more shares of your favorite companies. They’re on sale right now. Fortune favors the bold. Just make sure you do your homework and control your emotions. Don’t let the fluctuations in the stock price take a toll in your personal life. Don’t invest more than you can afford to lose. Juniors stocks are risky, but if invested in the right management teams, the risk is definitely worth the potential rewards.
TER: That’s certainly true. Thanks for taking time out of your busy schedule to talk with us today. We appreciate your thoughts and input and hopefully our readers will also find them useful.
MK: Thanks for the opportunity.
Investment Analyst Marin Katusa is the senior editor of Casey’s Energy Report, Casey’s Energy Opportunities and Casey’s Energy Confidential. He left a successful teaching career to pursue what has proven an equally successful—and far more lucrative—career analyzing and investing in junior resource companies. With a stock pick record of 19 winners in a row—a 100% success rate last year—Marin’s insightful research has made his subscribers a great deal of money. Using his advanced mathematical skills, he created a diagnostic resource market tool that analyzes and compares hundreds of investment variables. Through his own investments and his work with the Casey team, Marin has established a network of relationships with many of the key players in the junior resource sector in Vancouver. In addition, he is a member of the Vancouver Angel Forum, where he and his colleagues evaluate early seed investment opportunities. Marin also manages a portfolio of international real estate projects.
By Cheryl Grey, on September 12th, 2008
Although it’s debatable whether transforming a percentage of the U.S. corn crop into ethanol is responsible for recent hikes in global food prices, even the most enthusiastic industry supporter must admit that, in the long run, domestically-produced ethanol is not a viable substitute for 100% of the crude oil currently being imported.
Ethanol proponents point to the “Brazilian miracle” with the inference that, if transportation fuel independence can be achieved there, it can also happen in the United States. However, the situations of the two nations are totally different and cannot be used as any basis for comparison.
The Brazilian Solution
Brazil achieved transportation fuel independence in 2006 through domestic production of ethanol and crude oil. Although that latter is often overlooked by advocates, aggressive deepwater exploration by Petrobras and some massive offshore oil discoveries in the first few years of this century have contributed at least as much as ethanol production toward achieving this goal. Among South American nations, only Venezuela has larger crude oil reserves than Brazil, which is now one of the fastest growing oil-producing nations in the world.
For light domestic use, Brazilian refiners cut gasoline with at least 20–25% ethanol made from sugarcane. The Flex-Fuel technology operating on 87% of local vehicles allows them to burn any mixture from pure gasoline to pure alcohol, thus freeing drivers to purchase the most economical fuel available at any given time. Because ethanol only offers 70% of the efficiency and therefore only 70% of the miles per gallon of gasoline, drivers have learned that, unless it’s at least 30% cheaper than petrol, ethanol is actually more expensive in operation. On long roads with few filling stations, gasoline remains the fuel of choice.
In Brazil there are around 85 cars per 1,000 people, restricting the demand for gasoline, as opposed to fuel oil for industrial purposes and electrical generation, or diesel fuel, which cannot be mixed with ethanol as gasoline can. For this reason, despite producing 327,000 barrels of ethanol per day in 2007, Brazil also consumed 2,307,000 barrels of oil per day. Despite the substitution of ethanol for 50% of Brazil’s light transportation needs, the greatest part of their economy is run on domestically produced crude oil.
The U.S. Situation
The United States, on the other hand, possesses approximately 765 cars per 1,000 people, leading to a much higher demand for gasoline. According to the U.S. Energy Information Administration, during the week ending September 5, those cars required 9,090,000 barrels of oil per day, down from 9,393,000 during the same week in 2007. However, the U.S. mainly uses coal and natural gas for electrical generation and industrial purposes, leading to a lower reliance upon fuel oil, which is why the U.S. possesses nine times as many cars as Brazil but only uses four times the amount of crude oil.
U.S. ethanol is fermented from corn, which is much less productive than sugarcane for the purpose, requiring an additional step in the process and providing one-seventh of the energy. While sugarcane does grow in the most southern and tropical of the states (Hawaii, Florida, Louisiana and Texas), it’s not a viable crop elsewhere, leaving the U.S. mostly dependent upon corn for ethanol.
The Renewable Fuels Association says that one bushel of corn makes 2.8 gallons of ethanol, while Purdue University informs us that the 2008 U.S. corn crop will average 155 bushels per acre. Based upon these production figures, there’s simply not enough cropland even in the U.S. heartland to produce enough ethanol to replace all the transportation fuel needed on a daily basis—not if we want to eat, too.
Although a nascent technology under development is capable of producing ethanol from any form of cellulosic matter from weeds to woodchips, even that won’t be sufficient to drive much more than 30% of America’s vehicles, according to a recent report jointly authored by the U.S. Departments of Agriculture and Energy.
All-Inclusive Solution
Replacing imported oil for transportation purposes in the U.S. is not a one-step process, and more than one substitute fuel will be required. Although ethanol is a piece of that puzzle, it cannot be the entire solution.
Perhaps that’s the lesson to be learned from Brazil—not necessarily to run cars on ethanol but to be flexible in the choice of fuels. Beyond Flex-Fuel vehicles arises the possibility of hydrogen, electrical and natural gas-powered cars. Perhaps our final choice should be all of the above.
By R. C. Anderson, on August 27th, 2008
Energy concerns top many American’s list of what worries them most. With gas prices at over $4 per gallon in many places, food prices soaring and the debate regarding food-based biofuels raging, it may seem difficult to see a way past the energy conundrum we find ourselves in. The answer to increasing America’s independence from oil pirates overseas may be found in the most abundant resource on earth: water. Until now, many have merely dreamed of engines that could split the hydrogen and oxygen atoms of water to create energy and release nothing but water back into the environment. Published in the August 22 issue of Science, Matthew Kanan and Daniel Nocera of the Massachusetts Institute of Technology address a new and efficient way to transform the dreams of engineers everywhere into a new and attainable reality1.
Energy can come from many sources. Fossil fuels are the most abundant and the most readily recognized by everyone. Unfortunately, they are also seen as a direct cause of pollution and several environmentally problematic consequences. Ethanol, from corn and sugarcane, is becoming an increasingly popular alternative2. However, many worry that we will convert too much agricultural land and crops to strictly energy-producing acreage. This is especially true since some already see conflicts between our food resources and a world where many are starving. Biodiesel is another alternative growing in popularity. Although more energy is obtained with this method than with corn ethanol, gasoline must still be used, and biodiesel uses the same ingredients needed to produce vegetable oil for cooking. Due to the prevalence of vegetable oil in our diet, only a small destabilization in supply can create a large increase in cost, making it too expensive to use for fuel2.
Problems such as these have led many scientists to strive for a way to use water as a fuel source. Water is abundant, environmentally friendly and a premium source of the hydrogen used to create hydrogen gas. Until recently, the only way to accomplish these goals was to use catalysts, which split the atoms of water molecules at an increased rate, though these were only active with ruthless chemicals and the very expensive platinum metal. Nocera and his colleagues, however, have finally found a catalyst which will allow water molecules to separate under environmentally-friendly conditions using cobalt and phosphorous which are both plentiful and inexpensive3. Although adjustments must be made before this technology can begin replacing current fuel sources, the future use and cost of this type of energy production could have a steep inverse relationship.
Ultimately, scientists would like to see a combination between solar power and splitting of the water molecule. If catalysts such as the one created by Nocera can be made for large-scale use, it could be possible to use seawater for the process3. This could circumvent the need to use fresh water or desalinize ocean water which could save money and allow the first ocean-based energy plants to be funded and erected sooner. Add to this, the possibility of using solar energy to drive the reaction and the overall cost of such a project could continue to decrease over time. This predicts, however, that the cost of alternative fuels will decrease as research increases. The expense will be forced to decrease if alternative methods are to be used since, in 2000, prices for wind and solar energy were two and 21 times as much coal, respectively5.
Even with this new method of separating the hydrogen and oxygen atoms in water, the amount of water necessary to fully replace fossil fuels is extreme. According to Nocera, it would require 1015, or 10,000 trillion, moles of water per year1. Fossil fuels provide the bulk of our energy at 95% which equaled 170 million barrels of oil per day in 20004. It is thought that oil from known deposits will continue to last for 42 years, natural gas 60 years and coal for over 200 years2. With these numbers, research such as Nocera’s is vital for a comfortable future.
Scientists aren’t the only ones to show concern over our current dependence on depleting resources. Congressman Tim Holden who is Chairman on the House Agriculture Subcommittee on Conservation, Credit, Energy, and Research has been noted as saying that “our energy demands are at a critical point6.” Congressman Frank Lucas went on to say, “Expansion of traditional forms of energy, such as oil, coal, and natural gas must be pursued alongside development of alternative and renewable sources6.”
In a written statement to the Subcommittee, Jetta Wong, a senior policy associate with the Environmental and Energy Study Institute, noted that in 2007 transportation in the U.S. was “96% dependent on petroleum and consumed 70% of total U.S. petroleum demand7.” More importantly, 60% of this was imported. Making oil more expensive are the subsidies given to oil companies. Over the last 32 years, they have received more than $130 billion. This does nothing if not push alternative fuels more forcefully. It has even pushed the government, which on December 19, 2007, approved the Energy Independence and Security Act. The act called for “36 billion gallons of renewable fuel” in only 14 years. From this, 21 billion gallons is required to be biofuel based7.
As views shift away from reliance on foreign oil and other polluting fuel sources, research into alternative fuels is bound to grow. While many of the alternative fuels may not be able to replace fossil fuels singly, a combination of hydrogen power, wind, solar and perhaps even food-based resources might show enough efficiency and promise in the future to relieve the existing pressure on non-renewable energy sources.
1 – Kanan, Matthew and Daniel Nocera. In Situ Formation of an Oxygen-Evolving Catalyst in Neutral
Water Containing Phosphate and Co2+. Science 321 (5892), 1072-1075. August 22, 2008.
2 – Somerville, Chris. Primer: Biofuels. Current Biology 17 R115-R119. February 20, 2007.
3 – Service, Robert. New Catalyst Marks Major Step in the March Toward Hydrogen Fuel.
Science 321 (5889), 620. August 1, 2008.
4 – International Energy Annual 2001 Edition (EIA, U.S. Department of Energy, Washington, DC, 2003).
5 – Commission of the European Communities, Green Paper Towards a European Strategy for the Security of Energy Supply. Commission of the European Communities, Brussels, 2000.
6 – Subcommittee Reviews Electricity Reliability in Rural Areas. News from the House Agriculture Committee. U.S. House of Representatives Committee on Agriculture, July 30, 2008.
7 – Written Testimony by Ms. Jetta Wong of the Environmental and Energy Study Institute to the U.S. House of Representatives Committee on Agriculture, Subcommittee on Conservation, Credit, Energy, and Research. July 24, 2008.
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