Anniversary Celebrations

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Anniversary Celebrations
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Around this time of year, I’m often asked if we celebrate July 4th. Since it is the anniversary of America’s Declaration of Independence, in Britain it receives scant attention. But I often note that had the war turned out differently I might not have emigrated to America in 1982.

We have much to celebrate in this country. As an immigrant I’ve always found America welcoming. Memorial Day weekend fell within a couple of weeks of my arrival 43 years ago, and the “new English guy” was invited to a home in Brooklyn where a friendship began that continues to this day.

I’ve never felt like a foreigner or an outsider.

The US is very good at assimilating newcomers. Beginning with reciting the Pledge of Allegiance every day, I watched proudly as our three children born of English parents grew up to be Americans like so many millions before them. Nonetheless they did receive a healthy dose of English culture. Just the other day we watched an episode of the brilliantly funny 1970s Britcom Fawlty Towers, for at least the hundredth time, so a close family friend might better appreciate our sense of humor.

Britain is a great country, but America is the greatest country. I love trips back to the UK, timed as much as possible to enable me to watch an Arsenal game. I’ll keep returning and I’m proud to have grown up in England, but America will always be my home.

We have our political differences to be sure. I once remarked to my business partner Henry, who’s from North Carolina, that the country had probably never been so divided as it is now. Henry retorted that the 1860s were worse, and of course he’s right, as he usually is. The south was more impacted by the Civil War, which is perhaps why Southerners more readily refer to it.

I have friends on both sides of the political divide, although since I predominantly interact with energy investors and golf club members my world is overweight Republicans. I think the Red tribe is fundamentally more optimistic about the future, and since I know America’s best days are still ahead, I feel comfortable there. But my Blue tribe friends correctly note our shortcomings, sometimes bitterly.

Maybe the key difference is in our assessment of whether what’s bad will be made good. Ronald Reagan was my first president. His sunny optimism was mine and remains so today. It’s always Morning Again In America.

That political ad from 1984 still gives me goosebumps.

To say we’re more united by shared values than we are divided by politics sounds uncomfortably like a campaign speech. But ahead of anything else, Americans are good, generous people. Most casual interactions with a stranger confirm that. Families across the country are raising children, instilling their values and hoping a bright future awaits them while enjoying the highest living standards in human history.

In recent weeks my wife and I attended a series of year-end school concerts and recitals. With eight grandchildren aged nine months to nine years old, the events come thick and fast.

As I watched those youngsters perform alongside their classmates, I thought how that next generation is growing up with the shared experiences and values of being first and foremost Americans. I looked at all those bright, smiling faces accepting the applause and thought about how this was happening at thousands of school halls across the country. They’ve completed another year of growing up in this great country.

Can you think of anything more powerfully filled with hope and optimism?

Every year in early July, the Queen Mary 2 operates a seven day cruise from New York up to New England and Nova Scotia and back. My wife Karen and I boarded the ship on July 1 to celebrate our fortieth anniversary.

Like America on July 4th, we also had much to celebrate on our anniversary, July 6th.

I’m sure there have been moments when it seemed to Karen we long ago passed that forty-year milestone. At such times I indulge my romantic side and note there are many oil and gas pipelines that have lasted even longer, including the original elements of the Transco network operated by Williams Companies. That such news leaves her non-plussed I attribute to poor delivery on my part, not irrelevant content.

Sometimes I think I have confirmed Warren Buffett’s advice that the secret to a happy marriage is to find a woman with low expectations. But in truth we both had high hopes when we married in 1985, and here we are still together.

Optimism isn’t always rewarded. But positivity is better for you, and life is more enjoyable if you can find it in others.

I hope your July 4th left you still feeling Ronald Reagan’s sunny optimism.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF

 

Gas Kept Us Cool Last Week

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Gas Kept Us Cool Last Week
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Our power infrastructure survived last week’s heatwave, which saw the PJM Interconnect system peak at an almost twenty year high of 160,560 Megawatts on June 23. Natural gas provided 44% of generation, with solar at 6%. The ISO-NE system that covers New England saw peak demand a day later. This was met 47% by natural gas and 4% from renewables (wind, solar and batteries).

There is a revival of interest in new pipeline projects to serve the northeast. In recent years politically motivated regulatory hurdles led to several cancellations. In 2016 Kinder Morgan (KMI) shelved Northeast Energy Direct (NED) which was to transport natural gas from Pennsylvania through New York and into New England. They were unable to obtain enough firm commitments from power companies who feared future limits from state governments on their ability to use gas.

In 2020 Williams Companies (WMB) canceled Constitution Pipeline which was to link Pennsylvania and New York because of difficulties obtaining water permits. Last year they canceled the Northeast Supply Enhancement Pipeline (NESE) that was to run from Pennsylvania through New Jersey to New York City, also because of problems with water permits.

Constitution has now been restarted, with an in-service date of 3Q27.

NESE has also been restarted, with an in-service date of 4Q27. Residents of New York and New Jersey are fortunate that WMB still has an appetite to try and complete these projects given the hostility to reliable energy from their state governments.

So far KMI hasn’t indicated they’ll restart NED. But the shift is palpable, driven by the failure of renewables to meet expectations and the Administration’s reversal of energy policies followed under Joe Biden.

JPMorgan’s Energy, Power, Renewables, and Mining Conference provided positive news for domestic natural gas demand with Exxon Mobil (XOM) confirming that Golden Pass LNG will start operations by the end of the year. The project is situated on the Texas side of the Sabine-Neches Waterway, opposite Cheniere’s Sabine Pass LNG terminal which is on the Louisiana side. XOM owns 30% of the project and Qatar Energy 70%.

Energy Secretary Chris Wright wrote an op-ed last week justifying the shift against renewables in the One Big Beautiful Bill (OBBB) currently making its way through Congress. He compared the intermittency of solar and wind with the value of an Uber ride that couldn’t commit to a pickup time or drop-off point.

Other than his support for coal, we think Wright’s energy policies are good.

The OBBB has caused some big swings in renewables stocks as traders react to changes to the draft language. The damage to renewables businesses in the US is likely to last well beyond the current Administration even if the Democrats reclaim the White House in 2028, because investment timelines are longer than the presidential election cycle.

The Texas state legislature passed a new law allowing data centers to be cut off from the grid during times of high demand. This reflects the growing electricity needs of data centers and their limited political influence. Once constructed, they create few jobs since all that’s required is a handful of IT specialists to monitor the thousands of computers supporting the AI revolution.

This will boost Behind The Meter (BTM) solutions which deliver natural gas to a dedicated power plant, bypassing the grid. WMB is developing a reputation for offering market leading solutions as they’re able to combine access to large quantities of gas through their existing pipeline system with marketing knowledge and control of relevant plots of land.

Data centers often like to connect with the grid even if their main supply is BTM because it provides back-up when their gas power plant is down, most likely for maintenance. Data centers are increasingly seeking very consistent power supply with virtually no downtime. The current standard for maximum acceptable loss of power is reported to be as little as three seconds per year.

Lastly, the President had a good foreign policy week, but the implementation of tariffs continues to create uncertainty. The US sells ethane to China, and neither side has an easy replacement. Shortly after Liberation Day analysts worried that China might impose reciprocal tariffs on US ethane but demurred since they have a petrochemical industry designed to receive it.

Then the US announced a license requirement for ethane exports and even though Enterprise Products Partners and Energy Transfer both made “emergency applications” they were not forthcoming. The latest twist in the ethane trade is that ethane tankers can be loaded and travel to China but not unload.

It’s unclear if any ethane tankers will be dispatched under such circumstances. US trade policy remains capricious.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF

 

Energy By The Numbers

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Energy By The Numbers
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The Energy Institute’s (EI) Statistical Review of World Energy provides a wonderfully detailed view of what’s actually happening, mostly untainted by any political bias. The world is using more of all kinds of energy, raising living standards across the developing world. Hydrocarbons still dominate and will for the foreseeable future. 

There’s still a tendency even at the EI to focus on percentage increases rather than absolute values when it comes to renewables. For example, while “…wind and solar grew nearly nine times faster than total energy demand” is a true statement, it compares the percentage growth rates and so isn’t that meaningful. The pressure to express optimism around intermittent energy sources extends broadly. 

More accurate is to note that renewables production increased by 2.8 Exajoules (EJs) last year. One can cheer the 9.2% increase, or note that global energy production increased by 11.9 EJs last year and renewables were just under a quarter of this. Natural gas production grew at only 2.8%, but provided 4.1 EJs of additional energy, almost half as much again as renewables.  

Natural gas met over a third of the world’s growth in energy demand last year and provided a quarter of the total. Overall, hydrocarbons fell from 87% to 86.6% of the total. It’s a true statement to say that renewables are gaining market share, reaching 5.5% last year from 5.2% in 2023. This also means that an investor in hydrocarbon energy infrastructure with a bias towards natural gas doesn’t need to be too concerned about solar and wind becoming dominant.  

In 2006 Al Gore’s documentary An Inconvenient Truth raised public awareness about the risks from climate change. It also predicted that Arctic sea ice would disappear by 2013 and that Florida would disappear within decades. These were wrong in timing, but directionally had some merit.  

Four years before Gore’s documentary, developed country emissions (defined as OECD) were bigger than emerging countries’ (non-OECD). If your goal was reducing them, the rich world needed to play a role. In 2003 non-OECD emissions became the larger of the two. In 2007, the year after the documentary, rich world emissions peaked. 

Last year, Greenhouse Gas emissions (GHGs) increased by 1.3% to 40.8 Gigatonnes (GTs, billions of metric tonnes) on a CO2 equivalent basis (CO2e). OECD countries were 12.0 GTs, non-OECD 28.8 GTs. Whatever the moral argument that per capita emissions are bigger in rich countries and should shoulder more of the burden, non-OECD populations and emissions overwhelm. Liberal efforts to block natural gas hookups and build offshore wind raise costs, reduce reliability and are irrelevant until poorer countries can change their trend. 

Coal is the problem, both because of local pollution as well as emissions. It’s cheap, easy to use and needs to be cut. Emerging countries increased their coal use by almost three times the reduction among rich countries. China burns 56% of the world’s output. India is 14%. Both are growing. There’s little point in having the world’s biggest EV market if they run on coal, which provides 58% of China’s electricity and 75% of India’s.  

Coal displacement with natural gas in emerging Asia and elsewhere is our biggest opportunity to lower GHGs.  

America’s LNG exports will keep growing, solidifying our role as the world’s biggest exporter. Some criticize the sector for methane leaks and the GHGs emitted in liquefaction. But the industry is addressing the issue, recognizing that many of their buyers want the full benefit of a fuel that generates roughly half the emissions of coal.  

Last week Energy Transfer announced that Chevron has increased the LNG it will buy from their planned Lake Charles export facility. The twenty year offtake agreement now covers 3 Million Tons per Annum (MTPA), up from 2 MTPA.  

Global electricity production grew by 4% last year, well ahead of the ten year 2.6% CAGR (compound annual growth rate). Much has been written about the impact of data centers, which are causing a sharp jump in demand in the US. OECD power consumption grew at a 0.4% CAGR over the past decade, and 4.2% in emerging countries.  

AC is a big driver in countries such as India, which makes increased LNG exports critical to curbing their voracious appetite for coal.  

Naples, FL is one of the most politically conservative places in America. It’s very red, and its population includes quite a few who would assert climate change isn’t real. Nonetheless, one local church that has endured repeated flooding from storm surges, including last October, has concluded that such events are more likely and has decided its best defense is to raise the entire building. For some, pragmatism trumps conviction.  

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF

 

Coping With Heat

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Coping With Heat
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This is the time of year when liberal news outlets warn of irreversible climate change. We spent a couple of days in Naples, FL which was, unusually, cooler than New Jersey. The daily afternoon thunderstorms that accompany hurricane season moderate the heat. When I first moved to New York from London in 1982 I remember being amazed at how on very hot days the tarmac on the streets felt soft underfoot.

PJM Interconnect, which operates the grid for mid-Atlantic states and as far west as Illinois, issued an order for Maximum Generation. New Jersey electricity prices are rising by 17%, which PJM blames in part on declining supply.  Only self-flagellating Democrat energy policies could engineer such an outcome. State policy is to move to 100% renewable power by 2035.

Coal plants are being closed but solar and wind are inadequate – especially since offshore wind projects have been canceled. The policy is a virtue-signaling goal that is expensive, irrelevant and risks leaving the state short of power at peak times like these. Let’s hope there’s enough available to avoid power losses during the summer.

This blog shares with Energy Secretary Chris Wright a belief that climate change is real. Left wing policy prescriptions have failed to make much impact, because they favor intermittent energy instead of pushing for worldwide displacement of coal with gas.

Emissions growth in the developing world is far too much to be offset by even the most draconian energy policies promoted by rich world liberals. In the UK, industry has complained about the prohibitive cost of electricity as the country has shifted to windpower.

Britain has been reducing its emissions at the cost of jobs. The government recently announced plans to cut prices for industrial users, which means they’ll be subsidized by taxpayers. Once again, renewables are not cheap.

Data centers are the main source of demand growth in the US, and they are also being blamed for the jump in New Jersey electricity prices. But at a global level, increased air conditioning is more impactful than AI.

India’s Centre for Science and the Environment claims that, “A single heatwave – even one lasting just a few days – causes tens of thousands of excess deaths in India,” Global warming and rising living standards are driving energy demand up. Coal provides 75% of India’s electricity. For all non-OECD countries, it’s 45%. The US is 16% and the EU is 13%. The number of air-conditioning units in India is expected to grow from 110 million today to almost half a billion* within the next decade. That’s where emissions are going up.

India imported 26.1 Million Tons (MTs) of LNG last year, equal to around 3.5 Billion Cubic Feet per Day (BCF/D). This was up from 21.9 MTs in 2023. The US provided almost a fifth of this. We were their second biggest supplier, behind Qatar which is a much shorter trip.

India plans to double its imports of LNG by 2030. They’ve signed contracts with ADNOC and TotalEnergies, two companies that have in turn contracted to buy LNG from NextDecade’s Rio Grande terminal in Texas once it’s completed.

Since gas generates around half the emissions of coal when used to produce electricity, investments in growing our LNG export capability are helping keep Indians cool in the summer and reducing their emissions.

The last few days illustrate how hard it is to trade any market, including energy, based on developments in the Middle East. But on balance, even when oil prices drop sharply and erase prior gains, the net effect is to highlight the security in America’s supply of oil and gas both for our domestic market and overseas buyers. Qatar easily fended off Iran’s missiles, whose delivery was in any case well telegraphed.

But America’s LNG shipments do not leave ports at risk of attack. We don’t have to ask arriving tankers to wait miles away to avoid creating a concentrated target at the shipping terminal. They don’t have to pass through a narrow strait of water that might be closed during a war.

Because LNG contracts are often ten years or more, buyers need to consider a range of possibilities.

Venture Global (VG) was a brief beneficiary of the fears around shipping access through the Strait of Hormuz. This is because they have the most uncommitted capacity of any LNG exporter, so would have been able to profit from a short term spike in global LNG prices.

This is what they did in 2022 when Russia invaded Ukraine, earning an estimated $3.5BN along with the ire of customers who believed those deliveries should have gone to them under existing contracts. VG’s slide on Monday mirrored oil, as markets priced in reduced tensions in the region.

Other positive LNG news came from Cheniere. They announced Final Investment Decision on Trains 8 and 9 at Corpus Christi, and plan to spend $25BN on accretive growth projects, buybacks and debt repurchases through 2032, by which time they expect to reach $25 per share of Distributable Cash Flow. They also raised their dividend by 11%, although at 0.94% it won’t draw income-seeking investors.

We were also happy to see that TD Cowen raised NextDecade to a Buy, which boosted the stock yesterday. We continue to think it’s attractively priced.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF

*An earlier version of this blog post incorrectly stated India had 110,000 a/c units rising to 500.000 by 2035. Sorry.

LNG Keeps Growing

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LNG Keeps Growing
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Conflict in the Middle East invariably leads to concern about disruption to crude supplies that pass through the Strait of Hormuz. Oil prices duly rose once Israel launched its surprise attack on Iran. Around 20% of total oil consumption comes through this narrow waterway. It’s unlikely Iran could close it for long if at all.  

Sell side firms have estimated that the market’s assessed probability of a closure is around 15-20%, based on comparing the recent move up in crude versus where it would go if a fifth of global supplies were stopped. Crude is up about 20% this month. 

Around 20% of the world’s Liquefied Natural Gas (LNG) also passes through the same bottleneck. Nonetheless, the reaction of regional LNG benchmarks in Asia and Europe, where most imports go, has been muted, with prices rising around 3% this month. 

Maritime insurance rates have gone up, and ships are being asked to arrive at export terminals in the Arabian Gulf only when called to minimize the number of vessels concentrated together.  

Although 20% of oil and LNG pass through the Strait, LNG is only 14% of global gas consumption. This explains the difference in market response to the Israel-Iran war, since only 3% of the world’s gas is at risk.  

Oil is easier to move than gas, so around 40% of the world’s oil is traded before being refined. Because natural gas isn’t very energy-dense, its volume has to be significantly condensed to make movement by ship commercially attractive.  

Twenty five years ago the trade in gas via inter-regional pipelines was more than 2.5X as big as LNG. Pipeline volumes peaked just prior to the pandemic when they fell 10%. A brief rebound in 2021 ended with Russia’s 2022 invasion of Ukraine. By 2023 pipeline gas volumes were 24% lower than in 2019. The loss of Russian gas exports to the EU was the proximate cause.  

By contrast, LNG volumes have climbed steadily, and didn’t even drop in 2020. Energy security became more important following the Russian invasion. A pipeline connecting two countries doesn’t allow any flexibility if relations between the supplier and buyer break down. This was the case with Nordstream before it was mysteriously blown up. China and Russia have been negotiating for years over additional Russian gas supply via the Power of Siberia 2 pipeline, with China showing less urgency than Russia to reach an agreement.  

Both countries must consider how they’d cope if a dispute caused flows to stop. A Russian adviser suggested that Middle East tensions would spur an agreement so that China could reduce its exposure to the Strait of Hormuz, although this looks like wishful thinking.  

LNG trade is around 40% bigger than inter-regional pipeline volumes, and that gap is likely to grow. Moving natural gas by ship allows trade between countries too far apart to be connected via a pipeline. LNG also enhances energy security for both parties, since once the necessary infrastructure is in place, both buyer and seller can negotiate agreements with multiple counterparties.  

We often note the projected growth in US LNG export capacity, driven by abundant domestic supply. The Asian JKM benchmark is $13.80 per Million BTUs (MMBTUs), and the European TTF is $13.25 per MMBTU. With US natural gas at around $4, the price differences are easily big enough to make US exports attractive.  

Our current LNG exports of around 15 Billion Cubic Feet per Day (BCF/D) are limited by liquefaction capacity. We expect this to roughly double by 2030 based on projects already under construction.  

There are many other projects that have not yet reached Final Investment Decision (FID), so export capacity is likely to continue growing into the next decade.  

The US is the world’s biggest LNG exporter with 21% of the market but is not alone in growing. Around half of the “aspirational” capacity as estimated in the International Gas Union’s 2025 World LNG Report is outside North America.  

China is 19% of LNG imports, followed by Japan at 16%. Global LNG trade has grown at 6% pa since 2000. 

Because there will be more LNG available, some analysts predict this will lead to a global surplus that will depress prices and profitability for exporters. However, receiving capacity is also growing. The facilities that regassify LNG for injection into their distribution networks are more numerous than the liquefaction export terminals. They generally operate at around 40% capacity,  

By contrast, global liquefaction facilities operated at 87% of capacity last year. There’s more than 2X as much import capability as export. The world is preparing to use more natural gas, as the unmet promises of renewables mount up. For example, Malaysia just announced a 50% increase in gas-fired electricity to meet rising demand from data centers.  

LNG exports will be part of the solution.  

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF

 

US Midstream Is Far From Conflict

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US Midstream Is Far From Conflict
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To trade the daily moves in the market is to be an armchair strategist. JPMorgan estimates the crude oil market reflects a 17% probability of a worst-case supply disruption out of the Middle East. Presumably an oil spike would hasten the war’s conclusion via US pressure on Israel.

So Israel’s attacks on energy infrastructure are focused on disrupting Iran’s domestic supplies. Therefore, Iran must have an incentive to impede flows. Perhaps their military capabilities have already been too degraded to provide this option. Or maybe this country with few friends in the region doesn’t wish to further alienate its neighbors.

Will there be a ceasefire? Or will the US use bunker-busting GBU-37 bombs each weighing 30,000 pounds to wipe out Iran’s nuclear capability? To us it seems that the opportunity to destroy the Fordo nuclear site will never be as good as it is now. Few of Iran’s neighbors would be sorry to see the theocracy finally denied the capability to make a nuclear weapon. Trump has promised the world something better than a ceasefire. This would seem to check the box.

But it’s hard to make a confident forecast. The worst case for energy supplies is not the most likely outcome but would cause sharply higher prices. In that regard, midstream companies provide some optionality.

Consequently, the news affecting midstream has been in North America, and therefore drawing less attention than Israel’s pummeling of its long-time adversary.

Last week the Ohio Power Siting Board approved the 200MW Socrates South Power Generation Project. Will-Power, a subsidiary of Williams Companies (WMB), will develop two power plants that will run on natural gas provided by WMB. This is an example of the behind-the-meter (BTM) solution to providing electricity to data centers without impacting residential customers.

WMB as well as other large natural gas companies such as Energy Transfer have been promising BTM solutions to meet the needs of data centers for rapid increases in electricity. Meta will be the main customer of the Socrates project. It is expected to be operational by 2H26, fast by the standards of new power generation. Ohio’s electricity customers won’t be adversely affected.

In an example of what happens when data centers boost demand, residents of New Jersey and other neighboring states that are part of the PJM Interconnection grid system are now paying higher prices for electricity. It’s complicated to assign blame. PJM says 70% of the recent increase in demand is attributable to data centers.

But supply is down too. In 2023 New Jersey’s Democrat governor Phil Murphy mandated that the state cease all hydrocarbon-based power generation by 2035. The state’s last two coal-fired power plants were shuttered in 2022. Windpower has come up short, with Danish firm Orsted abandoning two offshore projects because they became too costly.

Liberals say not enough renewable supply is being added, but they’ve lost credibility on energy policy.

This is exactly the problem that BTM is supposed to avoid. Across the region covered by PJM, data centers are driving up power prices for everyone.

Worried about Democrats being blamed by voters for a big jump in electricity prices when they vote for governor in November, Murphy has announced subsidies for household utility bills.

Democrat energy policies are to blame.

Clean energy stocks dropped sharply yesterday as it became clear that the Senate tax package would immediately end most tax breaks for wind, solar and EVs. Given the lead- times involved and reliance on tax credits, it’s likely that swathes of the renewable energy business in the US will be permanently impaired. The electoral cycle is shorter than their investment cycle, leaving any proposed project at risk.

Renewables have been a lousy investment. The S&P Global Clean Energy Index has returned just 3% pa over the past five years. The American Energy Independence Index has returned 27% pa over the same period.

EVs are losing attraction in western countries. A recent survey carried out by Shell found that only 31% of US owners of conventional cars were interested in switching to an EV, down from 34% last year. The slow rollout of charging infrastructure under the last administration didn’t help, and it’s unlikely to change now. In Europe, interest in switching to an EV fell to 41% from 48%.

EVs continue to gain adherents in China, which is supporting their coal consumption since this provides 80% of electricity generation in China. Progressives who cite China’s EV leadership as evidence of their commitment to reducing greenhouse gas emissions need reminding of this regularly.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF

 

 

Strengthening Your Portfolio With Pipelines

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Strengthening Your Portfolio With Pipelines
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When conflict occurs that might disrupt global oil supplies, portfolios that include an allocation to midstream energy infrastructure usually enjoy some modest protection. Crude traded up 14% on Thursday night as the Israeli attack unfolded. Some opportunistic hedging by producers trimmed those gains during the day. Energy stocks as usual responded positively.

The effect on midstream is more subtle. The sector is less responsive to commodity prices than in the past. It may enjoy a brief lift as positive energy sentiment spills over, but management teams don’t generally obsess too much about oil. This time may be different, because weak crude prices have constrained US oil production with some even forecasting it may drop next year. Friday’s higher prices benefitted Oneok and Plains All American, which might see more robust volumes through their systems if higher prices persist.

Crude weakness this year has also curbed inflation expectations. The partial reversal explains Friday’s weakness in bonds. According to Wells Fargo, around half the midstream sector’s EBITDA is tied to contracts that allow price hikes linked to the PPI. In 2022 this was a significant benefit since midstream companies were able to raise prices in line with inflation. This supported the sector’s 22% return that year, a sharp contrast with the S&P500’s -18% return as the Fed tightened rates.

On Friday, midstream outperformed the S&P500 by 1.5%. But the diversification benefits of midstream last for more than a couple of days. Most investors have significant technology exposure, since it’s now almost a third of the S&P500. Several articles have been written about the evolution of the market’s leading index towards a basket of growth stocks.

Midstream energy infrastructure, defined here as the The American Energy Independence Index (AEITR), is less correlated with most S&P500 sectors than is the Technology sector. The two sectors where this is significantly not the case are the energy sector itself and financials. It has only half the correlation to the S&P500 as Technology, unsurprisingly given the shifting composition of the index. But for Communication Services, Consumer Discretionary and Healthcare the AEITR is also less correlated to these sectors than is the Technology sector.

It also doesn’t hurt that when markets are considering whether Israel will strike Iran’s energy infrastructure, the AEITR is all in North America well out of harm’s way. The Strait of Hormuz is widely recognized as a chokepoint for Middle East oil exports. Less attention is paid to the vulnerability of trade in Liquefied Natural Gas (LNG), 20% of which passes through the same stretch of water from Qatar and the UAE.

Last year Qatar exported 80 million metric tons of LNG, making them the third biggest exporter behind the US and Australia, with 19% of global trade. 70% of Qatar’s exports go to Europe and 20% to Asia. We were surprised that so far neither of the regional LNG benchmarks have responded much to the same concerns that have boosted oil prices, even though buyers have limited alternatives.

US LNG exports don’t face the risk of a Middle East war disrupting supplies. We think that the reliability of the US as a supplier could become more highly valued as buyers contemplate worst case scenarios for the product.

We still see attractive opportunities among LNG stocks.

Venture Global received a boost last week when they withdrew their application to build the Delta LNG terminal, because they believe they can achieve an equivalent capacity increase by expanding their Plaquemines facility. VG has earned the respect of many for their relatively fast project execution.

NextDecade announced that they have reached agreement with Bechtel Energy to build Trains 4 and 5 of their Rio Grande LNG terminal. We think it’s possible that NEXT will make a Final Investment Decision (FID) to go ahead with this second stage before the end of the year.

Israel halted production at its Leviathan natural gas field, operated by Chevron, due to security concerns. Within hours Egypt, which depends on gas imports, began shutting factories.

Russia’s invasion of Ukraine made energy security a higher priority. The war in the Middle East will likely add to that. We continue to think that US LNG exports will be highly valued by America’s friends and allies around the world.

For many investors, midstream appeals because of the stable dividends well covered by cashflow and declining leverage. Few consider the diversification benefits of an allocation or the sector’s resilience to disrupted energy supplies. The events of recent days have highlighted these additional positive features.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF

 

 

The Ethane Standoff

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The Ethane Standoff
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All over the world plastics are manufactured using derivatives of crude oil. Along with cement, steel and fertilizer these are what Vaclav Smil refers to as the four pillars of civilization. Modern life couldn’t exist without them. Renewables are largely irrelevant to their production. Anybody who studies how we use hydrocarbons must conclude, as we have, that they are irreplaceable.

The American shale revolution (and it is uniquely American) unleashed new supplies of oil, gas and Natural Gas Liquids (NGLs). Methane, or natural gas, is the simplest hydrocarbon with a chemical formula of CH4, combining a single carbon atom with four of hydrogen.

Where pure methane is extracted it’s called “dry gas”. It’s often found with other more complex hydrocarbons referred to as NGLs, as in the Marcellus shale in Appalachia. This is “wet gas.” Most of our ethane is now produced in the Permian in west Texas and New Mexico where it is part of the “associated gas” that comes up with crude oil.

Midstream companies separate out the individual NGLs because they’re more valuable, and in most cases can’t be left in the natural gas supplied to customers. Therefore, wet gas is generally more lucrative than dry gas. Ethane (C2H6) is the is the exception – if the price of ethane is low enough it may not be worth separating out and can remain around 10% of the gas we use for cooking, heating and power generation. This is called ethane rejection.

In recent years the US has become the global leader in ethane production. Its relative abundance here keeps the price around one third of most other industrial nations. The US petrochemical industry has grown its consumption of ethane as it’s become more available. While in most of the world plastic is manufactured using a crude oil derivative, in the US ethane is converted into ethylene and used to make plastics, chemicals and other synthetic materials.

US ethane production has tripled over the past decade, to around three Million Barrels per Day (MMB/D). Quantities of NGLs including ethane are typically measured using the energy equivalent of crude oil even though ethane is a gas and is handled like one. A “barrel” of ethane means a quantity containing 5.8 Million BTUs, the same amount of energy in a barrel of crude.

Last year US ethane exports averaged 0.49 MMB/D. China bought 46%, with Canada, India and Norway buying most of the balance. No other country exports ethane on large ships, called Very Large Ethane Carriers (VLECs). China gets virtually all its ethane from the US. Energy Transfer (ET), Enterprise Products Partners (EPD) and Targa Resources (TRGP) own the export infrastructure that facilitates ethane exports. All expect growth and have additional capacity.

Which brings us to tariffs.

Following Liberation Day in early April, investors worried that the 145% tariffs imposed by the US on China would lead to reciprocal tariffs on US exports, including ethane. However, China recognized that its petrochemical facilities set up to process ethane had no alternative supply and chose to exempt US ethane imports.

For a few weeks, this seemed to solve the problem. But last week ET disclosed that the US government had told it to obtain an export license before shipping ethane to China. EPD said they expected their request for emergency authorization to be denied, affecting three cargoes.

On the weekend there were at least seven ships loaded with ethane waiting near the Gulf coast for US approval to sail to China. For now, neither country has any obvious alternative to trading ethane with one another.

ET, EPD and TRGP, the midstream companies with the most exposure to ethane exports, all lagged the sector following April 2, although ET has since rebounded. None of them report ethane revenues separately. They include it within NGLs, which last year were around 25% (ET) and 40% (EPD) of revenues. Most of this activity was domestic so exports were a small portion. TRGP separates out NGL storage, terminaling and export, which was 3% of total revenues.

There are no winners from the disruption of US-China ethane trade. We think it’ll be resolved soon, perhaps as part of the bilateral talks currently taking place in London.

I’ll close by providing a chart of US energy production by source since 2010. We’ve added 17.4 Quadrillion BTUs (“Quads”) of natural gas and 2.25 Quads of solar plus wind, which were combined into a single category on the chart to render them visible. America’s most important energy story continues to be The Natural Gas Energy Transition.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF

 

 

 

 

Gas Exporters Keep Growing

SL Advisors Talks Markets
SL Advisors Talks Markets
Gas Exporters Keep Growing
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Venture Global (VG) continued its post-IPO recovery last week. Back in January price talk was above $50 which would have valued the company at double market leader Cheniere. Pushback from institutional investors reduced the IPO price to $25, but it quickly sank below this (see Nothing Ventured, Nothing Gained).

VG has earned a reputation for fast construction of LNG terminals using a modular approach. They’ve also been willing to antagonize big customers. When European LNG prices spiked in 2022 following Russia’s invasion of Ukraine, VG held off making contracted deliveries so they could take advantage of the suddenly high prices themselves. S&P Global estimates this netted them windfall profits of $3.5BN, which their contracted buyers including Shell and BP believe should have been theirs.

VG was contracted to start LNG deliveries once Calcasieu Pass LNG was “commissioned” (fully operational). The parties have different interpretations of what this means, and the dispute has gone to arbitration. The downside case for VG is they have to pay $3.5BN. Future LNG buyers are likely to negotiate quite carefully with them. TotalEnergies has said they don’t want to do business with them.

VG is looking like another Energy Transfer – a combative approach to business combined with great execution.

Regular readers know we like exposure to America’s growing LNG story, but we initially avoided VG because we thought it was overpriced. We later took a small position.

Last week FERC gave final approval to VG’s third export facility, CP2 LNG. The company announced that construction would begin immediately. VG and Cheniere are competing to be the biggest US exporter. As each company makes a new announcement, they leapfrog the other.

Once completed, CP2’s 28 Million Tons per Annum (MTPA) will take VG’s total capacity to 66.5 MTPA. The company expects it to begin operations in 2027. Whether contracted buyers actually take delivery will depend on the strength of their contracts and whether geopolitical events have created a lucrative spot market.

Cheniere’s current capacity is 46 MTPA with another 8 MTPA under construction. CEO Jack Fusco has said the company plans to double its capacity by expanding their existing facilities at Sabine Pass and Corpus Christi on the Texas gulf coast.

Between the two companies, they plan to have capacity of almost 19 Billion Cubic feet per Day (BCF/D)

US natural gas production averaged 113 BCF/D last year, with LNG exports taking 12 BCF/D. Cheniere was around half of that. The US Energy Information Administration (EIA) expects 14.2 BCF/D of exports this year. At last year’s rate European buyers will account for three quarters of this.

The US is the world’s biggest LNG exporter and looks likely to stay that way.

Given the increasing demand from export terminals as well as data centers, US natural gas prices are likely to move higher over the next couple of years.

The power needs of data centers are about to become a political issue. PJM Interconnection, which operates the country’s largest grid across a swathe of the eastern US extending from Illinois, expects costs to rise by $9.4BN. This has been blamed on new data centers by PJM’s watchdog. Much of this is attributed to Virginia and Maryland, where data centers proliferate.

Brian George, who leads global energy market development and policy at Google, conceded that, “We are now imposing a significant cost on the system.”

New Jersey’s Democrat governor Phil Murphy has announced a $430 million initiative to subsidize bills for poorer households. Your blogger lives in New Jersey, doesn’t like Phil Murphy and doesn’t expect to receive a reduced electricity bill. However, the increased demand for natural gas is welcome.

Tier 4 data centers have an expected uptime of 99.995%, which equates to about 26 minutes of downtime annually. According to Morgan Stanley, Bill Schweber, an electronics engineer, wrote for EE Times that AI data centers require 99.99999% uptime, which equates to being down only 3 seconds a year.

Renewables are entirely inadequate in this regard. The hyperscalers building data centers are quickly compromising their green energy goals. Because combined cycle natural gas turbines have a backlog of as much as five years, smaller single cycle turbines are being snapped up. These are less efficient, but there’s a scramble for electricity.

Congressional support for solar and wind is crumbling as the 1BBB makes its way through the Senate. Some Republican legislators from states benefitting from tax credits in the Inflation Reduction Act (IRA) have been pushing back against plans to cut or eliminate them. But a  Politico Energy podcast reported last week that Senator James Lankford (R-OK) from a windy state thinks they need more reliable energy such as natural gas to provide baseload power and meet the needs of data centers.

Gas demand continues to grow.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF

 

Did Ukraine Boost Oil Prices?

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SL Advisors Talks Markets
Did Ukraine Boost Oil Prices?
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Macro issues are driving the market even more than usual. Pipeline earnings came with barely a ripple as companies once again generally hit or modestly exceeded guidance. Crude oil rose on Monday on news that OPEC+ was planning a smaller than expected increase in output. This coincided with Ukraine’s spectacular attack on four Russian air bases deep inside the country.

Although seemingly unrelated this makes a cease fire, which was already poor odds, unlikely. The Russian military response could lead to escalation. Correspondingly, increased US sanctions on Russia are now more likely. US Senator Lindsey Graham is pushing a bill that he says has at least 82 votes.

Some oil traders may be considering a further drop in Russian exports. Their crude oil mostly goes to China and India, but Turkey and Brazil are big buyers of their refined products.

Equity markets are increasingly inured to new tariff announcements. The new 50% steel tariff also announced over the weekend had little discernible impact, because we’ve learned to expect that tariff announcements are soon rolled back. Energy analyst John Kemp noted that speculators are favoring long positions in refined products rather than crude, betting on little tariff harm to global GDP growth. The thirty year treasury bond yield moved above 5%, reflecting little concern about slowing growth but more about our fiscal outlook.

5% is a paltry return for the risk.

Last month the FT’s Robert Armstrong christened this the TACO trade (Trump Always Chickens Out). Our Negotiator-in-Chief is now aware of this assessment and not happy about it. A White House tariff announcement that references tacos would not be good.

Supreme Court rulings rarely have a direct impact on the pipeline sector, but last week SCOTUS voted 8-0 (one justice recused herself) to limit the scope of environmental reviews that federal agencies take when approving projects.

This is a welcome turnaround following years of lower courts demanding that permits for a new pipeline or LNG export terminal consider the Greenhouse Gas (GHGs) emissions from the combustion of their transported product by the end user. This always struck me as a political view disguised as a regulatory policy.

Natural gas has displaced coal in the US, reducing GHGs to everyone’s benefit. Climate extremists have persuaded the courts that a blocked gas project means less gas consumed and reduced emissions.

There’s no evidence to support this, and in many cases it’s simply unknowable what would be the impact on, say, South Korean energy consumption in five years if an LNG export terminal that would have sent them US gas is never built.

The unexported gas would probably still be consumed domestically, and South Korea might buy gas from another supplier or rely on coal which provides 33% of their electricity and is growing. The US is only 16% coal.

The January 2024 Biden LNG Permit Pause that Trump rescinded on his first day in office was based on the dubious assumption that constraining LNG exports it would reduce emissions. The Supreme Court ruling at least means that left wing politics will have less impact on energy infrastructure, to everyone’s benefit including pipeline investors.

The Sierra Club and their motley crew have weaponized the courts by raising often trivial legal objections and finding a sympathetic judge. NextDecade (NEXT) was impacted by this last summer (see Sierra Club Shoots Itself In The Foot) when a DC circuit court sent a previously granted permit back to FERC for further review.

NEXT told us they were very happy with the recent Supreme Court ruling and are cautiously optimistic that it would help as they plan further expansion of their Rio Grande terminal.

The DC circuit court had cited concerns about “environmental justice” which in this case meant some nearby residents would have an impaired view. Climate extremists opposed to reliable energy have learned how to exploit subjective concerns in court.

NEXT thinks that the SCOTUS ruling will limit the scope of the environmental considerations a Federal agency may include. The reduced legal uncertainty will help future projects and perhaps at the margin even lower the cost of capital. This story didn’t grab headlines but was a positive one for our sector.

Lastly, the WSJ published AI Is Learning to Escape Human Control which described a model that rewrote some of its own code to disable the shutdown command that its creators had inserted. The model also wrote self-replicating malware, and left messages for future versions of itself about evading human control.

The story reminded me of the “gain of function” virus research that was being conducted in the Chinese lab in Wuhan, from which the overwhelming evidence suggests the Covid virus originated. Let’s hope there’s no analogy in the future.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF

 

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