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Wednesday, July 12, 2006

News From the Energy Patch

By William Trent, CFA of Stock Market Beat

Last week we took issue with the idea that higher absolute inventories of oil products in the US suggest oil prices should be lower, arguing that it was the number of days’ demand that the inventories could supply that was the more relevant number.

Jay Walker hit on the other major reason that US inventories should not have the predictive power they once might have: increased demand from India and China. He points to a New York Times article that makes the following points about China:

Total miles of highway, now some 23,000, more than doubling what existed just six years ago;
Year over year growth of car sales of 54%;
Passenger cars on the road, now 20 million, compared to about 6 million in 2000;
Government announced target of 56,000 miles of freeway by 2035 (the US has 46,000 miles of interstate highways);
and by 2030 carbon dioxide emissions are projected to exceed those of the US.
Walker goes on to make his own point, with which we heartily agree:

Anyone who thinks that the demand for global fossil fuels will abate anytime soon, should also consider that the average American uses about 25 barrels of oil annually, versus 1.8 barrels in China and 0.8 in India. Those latter two figures are obviously going to move upwards at a rapid rate, considering those countries recent growth rates in the 7-10% range annually and the apparent embedding of the car culture in China particularly.

Which of course provides a long tailwind to investing in the fossil fuel industry.

And, of course, alternative energy sources. Last week we chuckled at calling coal an “alternative energy” but now we read that Watch List member Sasol (SSL), which has long converted coal into traditional liquid fuels, is going a step further and converting it into hydrogen for fuel cells.

In a global first, American fuel-cell development company Intel-ligent Energy has announced the development of a new hydrogen-generation system, which is the product of a collaborative effort between itself and local fuel giant Sasol.

The ‘Hestia’ system converts Sasol’s Fischer-Tropsch (FT) fuels into hydrogen. The high-purity hydrogen is then transformed into electricity and heat for practical applications, using Intelligent Energy’s fuel-cell systems.

Sasol is also taking its coal conversion skills to India in a big way.

This could turnout to be a boon to the country which imports 70% of its crude oil requirement. Also India is endowed with one of the largest coal reserves to the tune of 253 billion tonnes.

Sasol wants to invest in India initially perhaps with $1 billion investment. But for this “we have to give them identified coal blocks to get on to the job. This is a very exciting opportunity and investments are likely to run into $6 billion,” Chidambaram said after his two-hour long meeting with the Investment Commission, which also has HDFC Chairman Deepak Parekh and ICICI Onesource Chairman Ashok Ganguly as members. has also shown some love to energy stocks lately, noting their single-digit multiples and double-digit growth rates.

In the meantime, expect producers to look for ways to get more product out of the ground.

Venezuela hopes to nearly double its production of extra-heavy oil in the Orinoco tar belt within three years by increasing drilling efficiency, a director of state oil company PDVSA told Reuters on Saturday.

Venezuela, the world’s No. 5 oil exporter, is already producing 620,000 barrels per day (bpd) of synthetic crude drawn from an estimated 235 billion barrels of extra heavy oil in the Orinoco Belt.

“It would be feasible within the next three years to double production to 1.1 million barrels per day in the existing areas,” PDVSA Director Eulogio Del Pino said in an interview.

And meanwhile, Watch List conglomerate Norsk Hydro (NHY) is cleaning up its portfolio. Hydro has decided to sell its 50 percent shareholding in the gasoline retail chain Hydro Texaco in Norway and Denmark to the Scandinavian retail company Reitan Servicehandel for approximately NOK 1 billion. It has also reached agreements to divest the industrial site in Stade Germany after the closure of its primary aluminum plant there by the end of 2006. These deals make a small dent in the company’s $34.5 billion market cap, but can help it focus on more profitable enterprises.

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