More Oil, Less Gas

Jim Brown
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That seems to be the recurring theme in the U.S. and that was the topic again last week.

Baker Hughes (BHI) said active oil rigs rose +19 to 1,517 and active gas rigs declined -6 to 310. That is another 25 year high in oil rigs and 19 year low in gas rigs. It should be no surprise to anyone when supplies of natural gas run short later this year. We already have an 11 year low in gas in storage.

We saw the first injection of gas into storage last week at 4 Bcf. Analysts had expected something closer to 15-22 Bcf. The never ending winter is keeping gas demand high and slowing production growth is preventing supplies from being replenished.

Gas prices are rising because a survey of analysts showed none of them expected supplies to return to the 4,000 Bcf level needed by November. The long term outlook is for higher prices.

Baker Hughes also said the number of wells drilled in Q1 declined from Q4. BHI said there were 8,853 wells drilled in Q1, up +319 from Q1-2013 but down -230 from the 9,056 drilled in Q4. The Eagle Ford was down -61 wells (-5%), Marcellus -52 (-9%), Barnett -47 (-13%) and Williston (Bakken) -30 (-4%). The Permian gained +23 or +1%. Thanks to new drilling efficiencies the average onshore rig drilled +3% more wells in Q1 than the same period in 2013. Cheniere Energy (LNG) is the largest potential exporter of LNG with first deliveries expected late next year. The CEO was interviewed last week and asked if the U.S. could export enough gas to solve the supply problem in Europe and remove the Russian energy supply risk. He said there was no way anything the U.S. could do would help fix the European gas demand. The CEO said when the Sabine Pass LNG terminal was in full production it would only export 2.2 Bcf per day. European demand is in the range of 40-50 Bcf per day. The Sabine Pass terminal will be the largest terminal in the U.S. when completed.

He was also asked about fast tracking all the other applications currently pending. He said only 6-8 of the proposed export projects under consideration by the Dept of Energy were "real" and the rest were "nonsense." A total of 24 applications were submitted with a total capacity of 38.5 Bcfpd. The CEO said only the 6-8 projects that had started the separate process of gaining permits from the Federal Energy Regulatory Commission (FERC), which assess environmental and safety standards, were real projects. This process costs about $100 million and takes several years to complete. Cheniere is the only company to complete the process and gain the permits.

Even if the process was fast tracked it would take years to complete and the eventual construction is a 5-7 year process. It would be 2020 or later before any new projects could be permitted, designed, constructed and begin exports. The CEO suggested Europe find its own solution to gas consumption rather than shift dependence on the U.S. and force our gas prices to double or triple.

One of the ways to reduce dependence on Russian gas is to drill for their own. Unfortunately the citizens of Europe have almost completely ruled that out. No fracking in my backyard! Ok, freeze in the winter after Russia turns your gas off.

Another option is to increase the number of nuclear plants producing electricity. France is on the leading edge of this effort with ten new plants either under construction or in the planning stages.

A UN report last week called for a dramatic shift to green energy after a study found greenhouse gases rose at the highest amount on record. The report called for a sharp increase in the number of nuclear reactors because of the rapid increase in greenhouse gases from coal and fossil fuels. While calling for more reactors and getting more reactors are entirely different events the warning should support the base case for nuclear energy.

The report showed no discernible changes in the rates of cancer and other diseases after the Fukushima nuclear disaster. While it may still be too early to tell at least there is no apparent increase in cancers.

The Japanese government is quickly preparing to restart the majority of its reactor fleet. Many analysts have studied the reactor types, ages, geography and potential risk from seismic events. Japan had 48 reactors in operation when the disaster happened with 2 under construction. Conservative analysts predict 28-34 of those reactors will be restarted. Cameco (CCJ) predicts 35-40 will eventually be restarted although some will require extensive modifications before they begin operations again.

Using the lower estimates of 28-34 this will represent an increase in annual demand for uranium of 12.5 to 15.5 million pounds. This is a huge increase from current demand levels.

When Japan shutdown all their reactors all the uranium slotted for those reactors went on to the global market and prices declined to 50% of the pre disaster levels. Countries with operating reactors took advantage of the surplus and stocked up at a discount. New reactors appearing completion also added to their inventories. We are now at the point where that entire surplus has been consumed and utility companies are starting to place new orders.

We currently produce less uranium than we consume. This was offset for the last 20 years by a deal with Russia where the U.S. converted uranium previously used in nuclear weapons and reducing its purity level to work as reactor fuel. This program ended in December and Russia has said it does not want to further reduce its weapons stockpile.

China is also rapidly adding to its reactor fleet. Chinese Premier Li Keqiang said China had 19 operating reactors with 6 more to begin operation by the end of 2014 an another 28 will come online before 2020.

With China adding 34, France adding 10, the U.S. adding 4 and various other countries adding new reactors the demand for uranium is going to surge over the next several years. Zimtu Capital did extensive research into the supply problem and they calculated up to 97 reactors would be started by 2020. That means annual uranium demand will increase by 47.7 million pounds.

That number is significant because total mine production in 2012 was only 68,800 tonnes of uranium. If demand is expected to increase by 23,850 tonnes that would be a +35% jump and there is no way for production to increase by 35% without a significant increase in prices.

The major suppliers like Cameco and Areva can produce more as their new mines come online later this decade. Many of the smaller miners have curtailed production because their costs are over the current $35 price of uranium. If prices were to return to the +$60 range we saw prior to the Japanese disaster they could restart production. However, most of these miners are working low purity mines and actual production of the refined uranium is very small.

We are rapidly reaching the point of a uranium shortage. By that I mean uranium demand will continue to outpace gains in mine production and prices are going to rocket higher. While most analysts believe we will see $65 uranium again in the near future I think we will see $100 uranium or higher within 10 years.

The cost to mine uranium is surging. This chart from the World Nuclear Association shows the rapidly rising prices.

A typical reactor uses about 450,000 pounds a year. As the reactor fleet continues to grow by 100 per decade or even faster the resulting demand is going to be huge. New reactors have significant improvements in technology and safety. As the world grows towards 9 billion in population we are going to need significantly more energy than we have now. Just look at all the electrical devices you have in your home and office compared to 10 or 20 years ago. That is only going to rise as previously unreached populations are electrified. Two billion of the world's 7 billion population today does not have electricity or only in marginal amounts.

The fact above should only lead a rational person to one conclusion. Uranium prices are going higher and possibly a lot higher. Buy quality uranium stocks now and forget you own them for a few years.


The markets appear to be setting up for a deeper plunge into correction territory. The major indexes broke below support levels, several of which were significant. The Nasdaq closed right on critical support at 4,000 and the Dow at 16,000. Any further declines should trigger panic selling as the bulls begin to run for the safety of the sidelines.

S&P futures are down -6 points and falling early Sunday evening.

Jim Brown

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