Why The Navy Can’t Help With Nuclear
Last week I gave a lunchtime presentation to a local investment club organized by Elliot Miller, a friend and long-time investor in midstream energy. Afterwards one of the participants came up to me and, disclosing that he used to work as a nuclear physicist, asked me what I thought of the prospects for Small Modular Reactors (SMRs).
We recently received similar questions in response to a video (watch Why Not Nuclear?). Given my interlocutor’s background, I thought his opinion of SMRs was more relevant than mine, so I turned the question back to him. He was hopeful but not optimistic. SMRs have offered promise for many years. They could power some of the many data centers that are being built. Modular construction has lowered costs in many areas. Venture Global (VG), the LNG exporter that recently IPOd, has shown that modular construction of LNG export terminals can cut costs and construction time in half.
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VG’s public flotation was a bust for investors, with the stock soon losing 40% of its initial value. But few dispute that the company has demonstrated excellence in construction.
I’ve sometimes mused that the US Navy, with 99 SMRs powering aircraft carriers and submarines, might have something to teach the civilian sector on the topic. This is not an original thought, and I learned some of the key reasons why it won’t work.
One is that military vessels use highly enriched uranium, as much as 70%. This is far above the levels deployed in civilian reactors and presents the risk of theft by terrorists. It’s covered under nuclear non-proliferation agreements, and there are no civilian reactors anywhere (apparently not even in China) that use this.
Trying to steal weapons grade uranium from an aircraft carrier or submarine would likely be brief and fatal.
There are other challenges. Military SMRs aren’t designed with cost per Megawatt Hour as a major consideration. They also operate under different regulations than the civilian nuclear sector. And they often use proprietary technology. It seems it’s impractical to copy what the US Navy has done.
Returning to VG – we continue to research the stock but haven’t yet invested. As we’ve noted previously, VG upset some of the world’s biggest LNG buyers. Their interpretation of “fully commissioned”, the point at which an LNG export terminal is ready to begin shipments under long term agreements, was different than buyers including Shell, BP, Galp and Repsol (see Nothing Ventured, Nothing Gained).
Arguing that some remaining project elements were not yet resolved, VG sold LNG shipments themselves at the high global prices that followed Russia’s invasion of Ukraine. Their long term contract partners felt those shipments, along with the outsized profits, should have gone to them. The case is now in arbitration. It may cost VG up to $5BN. But they reaped $BNs in profits which they plowed into added capacity.
Perhaps worse than the potential settlement is the reputational hit. There’s aren’t hundreds of LNG buyers out there, and they know each other. Future contract negotiations are likely to eliminate the ambiguity VG relied upon. TotalEnergies CEO Patrick Pouyanné recently said they rejected overtures from VG due to a lack of trust. Pouyanné added, “I don’t want to be in the middle of a dispute with my friends, with Shell and BP.”
Unlike Cheniere, which is the leading LNG exporter with half of US volume, VG doesn’t plan to rely heavily on long term contracts. Cheniere enjoys good cash flow visibility since 90% of its capacity is committed, which eliminates most of their exposure to gas prices. By contrast, VG plans to retain 50% of their capacity for resale in the spot market.
This is similar to Charif Souki’s strategy with Tellurian. If you believe a wide spread will persist between US prices and those in Europe/Asia, it can be attractive to retain this risk. However, Tellurian found it hard to obtain financing, because commodity price exposure can run in both directions. Higher US prices could eliminate the arbitrage, leaving an LNG business reliant on the spot market stranded with no customers.
As it became clear Tellurian couldn’t line up the financing to proceed, Souki memorably confessed in a video that he’d made a big mistake. He was soon forced out and the company was acquired by Australia’s Woodside Energy last year for $900 million.
VG has implemented Souki’s strategy with more success, albeit at the cost of relationships. Perhaps keeping more spot market exposure fits with a more limited set of potential long term customers anyway. Souki must be watching enviously, perhaps claiming insight as the architect of that strategy if not the successful practitioner.
VG remains an interesting stock but with high volatility given their history and embrace of gas price movements. We’ll be watching them closely.
We have two have funds that seek to profit from this environment: