–Last Friday’s storm of biblical proportions briefly knocked the power out at your editor’s St Kilda compound. Like an idiot, we went to each room in the compound and flipped on the light switches, just to make the power was really out. It was. We lit a few candles and read our Kindle with a hand-held LED torch.
–Earlier that day we’d published Greg Canavan’s latest report, “Three Little Charts and the Coming End of Australia’s Economic Miracle.” The report shows how the decline in Australian manufacturing has left the economy incredibly vulnerable. We just had no idea the decline would come so quickly and knock out the power!
–But one of the consequences of a banking sector that over-invests in mortgage lending (because it’s safe) is an industrial and manufacturing sector that has trouble attracting capital for long-lived capital assets. You know…things like power plants…and power transmission lines…the assets that make your lights go on when you flick a switch.
–Greg revealed the Achilles heel of the Aussie economy. And today’s Australian Financial Review rubbed salt in the heel. “Australia will need to build at least two power stations a year to cope with surging demand over the next twenty years, as state governments and the private sector struggle to invest in new generation.”
–In the real world, building things costs money. And according to a report from the Australian Energy Market Operator, it’s going to cost Australia’s power industry $120 billion to build the energy infrastructure the country needs for the next twenty years. The report also said it could take as much as $9 billion in investment in the transmission network to keep the lights on continuously at the Crown Casino.
–The fact that Australia has seemingly under-invested in domestic power plants and fuel for those power plants may surprise you. After all, Australia is the sixth-largest exporter of liquid natural gas (LNG) in the world, according to the latest Australian Energy Resource Assessment from ABARE. The country is rich in energy commodities like coal and uranium and gas.
–But there are two problems (which may actually lead to an investment opportunity). The first problem is that Australia doesn’t have any plans to invest in nuclear power. This is a result of a childish and unserious attitude in public policy circles about nuclear power. It’s kind of embarrassing.
–By the way, you can still make money investing in Australian-listed uranium producers. The spot uranium price is over $70 now, making a nice recovery from the GFC lows. Australia may not be building any nuclear power stations. But China and India are. And the supply of nuclear fuel coming from old Soviet nuclear warheads is running out.
–But back to Australia and its own power reserves and requirements. According to ABARE, 92% of Australia’s conventional gas resources are located in the Carnarvon, Browse, and Bonaparte basins. Those are all off-shore in the North West Shelf. And most of that gas is exported to Asia and points north and west, as you can see on the chart below.
–So who is going to supply Australia’s East Coast with the gas it needs to fire power plants? It won’t be the producers in the North West Shelf. What isn’t exported from those fields is used to power the mining and power industries in Western Australia. It’s not coming back east, at least not in sufficient quantity to keep the Opera House lit up at night.
–And don’t forget Professor Ross Garnaut. He’s not a climate scientist. But he’s sure acting like one. And he’s haranguing Australia to introduce a carbon price while connecting the recent wild weather with global warming/climate change. If he gets his way, the price of power is going to go up at the wholesale and retail level. You wonder what business would be willing to invest in long-term, high-capital-cost assets in this kind of political environment.
—Kris Sayce correctly spotted coal-seam-gas from Queensland as the first major effort to produce more gas domestically. Yet most of this gas, if and when it is ever produced, will also be exported. Long-term off-take agreements with mostly Asian utilities have provided the certainty that there will be customers, which has allowed the projects to go ahead.
–Kris was also right in going after the small-fry developers and explorers to capture the big share gains. The big share price gains are to be had at the margins with new sectors and technologies. Maybe the operating profits will go to bluer chips like Santos. But the major producers and operators are not as leveraged to structural shifts in Australia’s energy mix.
–Our take is to bypass the unconventional gas sector in Queensland altogether. Instead, we just wrapped up a report on the unconventional shale gas sector in the Cooper Basin. That’s Australia’s most promising geologic basin for the kind of unconventional gas production that has turned the United States back into the world’s largest natural gas producer and an exporter.
–This shale gas is usually found at much lower levels that coal seam methane. Thus, the controversial process of horizontal hydraulic fracturing, or “fracking”. If you haven’t already heard of it, get used to it. A documentary about the process called “Gasland” is up for an Oscar. It could be the next big thing in energy documentaries since Al Gore’s elaborate Power Point presentation.
–Our take in the latest issue of the Australian Wealth Gameplan is that unconventional gas in the Cooper Basin can supply gas-fired power plants on the East Coast for years to come—if politics doesn’t quash the industry. As an early stage investor in companies that don’t even have proven reserves (or a defined resource) and may never produce anything, you can add a little political risk.
–That makes any energy investments in Aussie exploration stocks speculative in nature. But hey, in Ben Bernanke’s big global casino where everyone on Wall Street plays with house money, everything is speculative. As the dollar goes down, energy assets are going to go up, and take some shares with them.