Energy and Capital Blogs

• T. Boone's Natural Gas Crusade
• Kazakhstan Oil Production
• Small-Cap Wildcatters ETF Launches
• Haiti Energy Supply
• China Magnesium Stock

While flipping through channels a few nights back, I came across T. Boone Pickens on John Stossel's new show (scroll down for the clip).

The Texan billionaire was pitching his revised "Pickens Plan" for energy independence. The latest version advocates compressed natural gas as a replacement for diesel fuel.

Stossel — a libertarian — thinks T. Boone's plan is nothing more than dressed-up corporate welfare; Pickens says that CNG needs "help" from the government to get off the ground. The contrast made for a good show.

Pickens' plan relies on a big expansion in federal tax credits. The aim is to get trucking companies to switch their fleets from diesel to CNG. His goal — to eliminate America's dependence on imported diesel — seems like a pipedream... but I have to admit that the concept is compelling.

What's not to like?

Energy independence, less pollution, and cheaper fuel. The new Pickens Plan looks great on paper, at least. Major players are lining up behind it, from Harry Reid to Orrin Hatch. There's a bill floating around Capitol Hill to fund the tax credits (H.R. 1835), and Pickens says it could pass by May 2010.

Risks, Pitfalls, Conflicts of Interest

There are plenty of CNG critics out there. We heard from them last month, responding to a CNG article by my colleague Christian DeHaemer (founder and editor of Crisis and Opportunity).

Here are some thoughts from an Energy and Capital reader, Lou:

Do not hold your breath on CNG vehicles in general usage. Because of the high pressure tanks, such vehicles are or should be limited to use by fleets where trained technicians can fuel and maintain them. Ford and GM both gave up on their programs when 2 vehicles blew up during the fueling process because of tank failures. 6000 PSI gas, even inert nitrogen, is not something the general public is qualified to play with. Any new program for such vehicles will be instantly aborted when the first one blows. I know, because I was involved in those programs, trying to design fuel injectors for some. Very tricky business because one is dealing with a gaseous media.

Pickens may be smart, and he may be rich, but he's just proven that he does not understand the issues of alternate sources of energy. I knew the minute I first read of his scheme that he had not even been reading the papers re the NIMBY issues with wind turbines. Rich liberals that want this transition scream the loudest when anyone mentions wind turbines in their back yards. See: Teddy Kennedy.

Reader Wallace Henderson shared his first-hand experience running a fleet of CNG-powered airport shuttles:

Before you jump fully on the CNG bandwagon check the New Zealand experience. On my first tour of the country in 1988 almost every filling station had a CNG pump. On my last trip in 2007 very few had such pumps.

Personal experience trying to run an airport shuttle van service with CNG powered vehicles adds to my skepticism. To get about half the range of a tank of gasoline required a very large CNG tank pressurized to 3000 psi which was once the favored component in IEDs in the Middle East. Also filling time added about an hour of unproductive time on the clock for the drivers. After a very sincere try at being green we gave up after 9 months. Only government fleets where cost effectiveness is not a requirement are compatible with CNG.  

Lou and Wallace highlight some of the biggest hurdles CNG needs to overcome. But with dozens of cities around America running fleets of CNG buses, the safety issues seem manageable — at least for larger fleets.

So far I'm not sold either way. Both sides make good points.

My biggest problem is that success of the plan hinges on tax breaks, at a time when the government is near-broke.

Conflict of Interest?

T. Boone could get even richer if his plan succeeds, thanks in part to the massive tax credits he's pushing. For example, he's the largest shareholder in Clean Energy Fuels Corp (NASDAQ: CLNE), a company poised to profit from the buildout of CNG fuel stations. Filling stations that add natural gas would also get up to $100,000 in tax credits under H.R. 1835.

This conflict doesn't mean the Pickens Plan is a scam, or that it won't work. But it does raise questions about T. Boone's partiality. So while the Pickens Plan is sometimes sold as humanitarian effort, we should remember that big business is the real driving force behind it.

Chesapeake Energy (NYSE: CHK), a natural gas giant, is also working with Pickens to promote CNG. They run CNGnow.com, which promotes expanded use of the fuel. They're also running TV ads in support of Pickens.

Like Stossel, I generally don't like the government meddling in markets. T. Boone argues that a tax credit is different from a handout, since it technically just reduces a company's tax liability... But it still comes down to the government playing favorites.

Here's the clip from Stossel's show. It's worth a watch.

Fourth quarter results showed more bad news than good for Chevron, America's second largest oil producer.

Even though the company boosted production at its fields in Nigeria and Kazakhstan as oil prices justified an output increase, the company's Q4 profit dropped by 37% from the same period in 2008. That loss was attributed to losses in refinery operations.

Worse news for Chevron is developing now, because the government of Kazakhstan is essentially promising a reversal of its no-tax policy for foreign oil companies operating in that Central Asian nation.

Kazakh President Nursultan Nazarbayev said on Friday, January 29 that his country will establish a $90 billion fund with oil revenues by  2020. That money will be spent $8 billion per year on developing Kazakhstan's industrial base, which would lead the country's economy to be less reliant on oil revenues.

Good news for Kazakhstan's economic diversification is bad news for Chevron, Exxon, Shell, and other majors.

Energy Minister Sauat Mynbayev put it pretty clearly on Tuesday, Jan. 26 when he said, "If we abandon tax exemptions for these three or four projects [Chevron's Tengiz and one other unnamed project] ... then of course that means only annulling them because it's quite a radical review."

The first time I read that, I really did think it was a Chevron exec making that statement. The fact that Kazakhstan's leadership is upfront about the changes it's putting in place should send jitters through oil markets.

Production sharing agreements (PSAs) under which foreign oil companies operate in countries like Kazakhstan and Libya are the tenuous grip that those majors have on their operating costs on site.

Kashagan, Kazakhstan's largest oil field where several companies both foreign and domestic have a stake, was the largest oil field find in 40 years, and changing the terms on which that abundant new supply is pumped could severely impact oil prices in 2010.

-Sam Hopkins 

This new ETF from Jefferies (NYSE: WCAT) is composed of 55 small and mid cap oil/gas exploration stocks. The weighting leans towards natural gas, with 2/3rds of the stocks' proven reserves in that form.

From the press release:

"An investment in natural gas is an investment in the future of American energy independence," said Adam De Chiara, Co-President of Jefferies Asset Management. "The Wildcatters index provides exposure to a corner of the market to which most investors are underexposed, with minimal duplication of holdings. At the same time, the components of the index are companies that are small enough to benefit from possible changes in drilling restrictions and from expansion of natural gas infrastructure."

The expense ratio isn't bad at .65%. It only launched yesterday, so volume is thin and the index may not be completely filled out yet. If you want to get in, it's probably best to wait a couple weeks.

I'd rather stick to picking individual stocks, but this looks like a decent option for passive investors. Passive doesn't mean it won't be volatile, of course. The ETF should act like a leveraged play on the price of oil and natural gas.

Here's a look at the top 15 holdings (you can find the full list here).

As the world watches and contributes relief assistance to the Caribbean country of Haiti following the earthquake that ravaged it on January 12, energy supplies will play a key role in the recovery effort.

So what does Haiti normally do for power?

The United States Department of Energy's Energy Information Administration shows that Haiti has absolutely zero oil and gas production, and that nearby Trinidad & Tobago is the biggest hydrocarbon producer in the Caribbean.

Though the country also uses relatively little energy, Haiti's energy intensity has been on the rise since the mid-90s, more than tripling to 1,298 BTU per $2000 of economic output. 

Haiti's economic output has been extremely low in any case, keeping its status as the poorest country in the Western Hemisphere.

As the United States marshals resources and equipment, the large machinery and ad hoc emergency stations that are set up throughout Haiti will require massive amounts of fuel. Since there is no electricity, generator power will provide most of the light and power for the country for the foreseeable future, and of course automobiles and other petroleum-fueled vehicles will need gasoline and diesel to run.

Today's problems require immediate solutions, and we at Energy and Capital encourage you to contribute to the Haitian disaster recovery effort in any way you can. Looking forward, though, we hear many commentators on television and in the news talking about how Haiti can help itself more in the future, whether with better building codes or more robust relief systems.

Renewable energy can and must be a part of reshaping Haiti for better economic and energy health.

Regards,
Sam Hopkins

International Editor

In another example of China sucking up the mineral and energy resources of the world. China Direct Industries, Inc. (CDII:NASDAQ) sees a future of growth.

The company produces and sells magnesium to the Middle Kingdom. Two days ago they announced that annual forecasts were back on the menu. The scales have fallen off their eyes and the company can now see the future. Needless to say, the future looks good.

China Direct now expects full-year 2010 revenue of $130 million to $150 million. And surprise, surprise, this is in line with the consensus target of $145.3 million.

China Direct has a market cap. of $58 million and a price to sales of 0.29 (which is low). They have $19 million in cash and $2.8 million in debt.

Over the past three years Magnesium has climbed from $0.60 per pound to $2.00 a pound today. I haven't done any real due diligence on it but it looks like a buy on a pull back. Put it on your radar.

Sincerely,

Christian DeHaemer

Crisis & Opportunity

Editor's Note: The following article, Oil Price Outlook 2010, first ran in Energy and Capital's sister publication, Wealth Daily, on Monday, December 14, 2009.

As of the first trading day in 2010, USO is up to $40 per share, a 14% gain since we first noted the trend reversal.

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There's no better time than now to go long oil.

NYMEX futures hit a 9-day slide downward. A rising dollar, robust U.S. domestic petroleum stockpiles, and a potentially momentous Fed announcement are all being counted against crude.

From a technical standpoint, though, we're staring at a key reversal point for oil heading into 2010.

Below, we see a chart of the United States Oil Fund ETF (NYSE: USO). USO tracks high-quality West Texas Intermediate crude through bets on black gold and various refined oil products in forward-looking trades:



Watching Technical Indicators for a Reversal in United States Oil

The first thing to note is that since late October, USO (shown here in candlestick view to give more information than just day-to-day plot points) has traded in a similar channel to the S&P 500, shown in red.

By setting Bollinger Bands to show relative price levels over this 3-month period, USO is clearly nearing oversold territory and even threatening to break below the lower boundary.

Our candlesticks point to similar potential for a bounce here. The 8-day slide of crude futures into Friday, December 11, led traders to become more ambivalent about USO's direction, and that gave us a Doji cross that can signal a reversal.

The Williams Percent Range (W%R), another favorite technical indicator you've heard about from my colleague, trading guru Ian Cooper, also shows "Oversold" in big neon letters.

With the W%R down near 100, this is textbook technical fodder for an upswing play — just look at what has happened the other times W%R dipped this low!

Of course, we need confirmation of all these reversal signals in the actual price movement, which we can't see... yet.

That's why it's important to establish a long position in oil now, whether through USO or an ETF like AMEX: OIH that holds oil services companies. There are even supercharged long positions you can take, like the ProShares Ultra Dow Jones-AIG ETF (NYSE: UCO). UCO will double every one of oil's upside moves, offering you the opportunity to reap quick rewards in the imminent upswing.

Now, both of the ETFs I've mentioned here are based on domestic oil price action in the U.S. But there's a lot more to crude market dynamics than just American economic forecasts, Fed interest rate levels, and the greenback's value...

Looking Beyond the Oil Market's "Dollar Obsession"

A rising dollar could weigh on commodities as traders flock away from oil, metal and other material investment havens in favor of the global reserve currency. After all, the inverse relationship between the U.S. dollar and oil ("Dollar up; oil down") is practically part of investing Canon Law.

There's also new talk of Iraq's pent-up oil reserves flooding into the global crude market. (I've seen that same movie every year since 2003!)

You're putting your money in peril, however, if you ignore the news out of China. Coinciding with a fresh International Energy Agency forecast that global petroleum consumption will increase by more than previously expected in 2010, last week the Middle Kingdom let us know just how rapidly its manufacturing economy is recovering from the credit crunch and market downturn.

Industrial output in China rose by 19% in November over the same month in 2008. Though the U.S. Department of Energy's Energy Information Administration (www.eia.doe.gov) and oil cartel OPEC don't see the demand scenario as fleshing out until 2010, the IEA outlook is bolstered by JP Morgan Chase (NYSE: JPM), a U.S.-based financial services giant.

JP Morgan analysts upped their oil price forecast for 2010 from $67.50 to $78.25 last Thursday, which would put crude about 12% higher than current levels around $69.90 per barrel.

JPM's 2011 view puts prices even higher at $90, meaning you stand to gain nearly 29% if you get in now. It's a simple medium-term trade for those bold enough to ignore what the Wall Street Journal has rightly called a "dollar-obsessed oil market."

Oil Companies Won't Let the Rug Get Pulled Out

If the dollar is a haven for commodity and forex traders, let's consider oil companies' own sense of safety, too.

The biggest petroleum players are now investing record amounts in non-traditional revenue streams like natural gas for transportation and clean energy (see BP Wind Energy, for just one example).

Those investments rest on sustained higher oil prices as their capital base. If the oil price keeps plummeting, intensive exploration will also drop precipitously, which will lead firms like OIH components Schlumberger (NYSE: SLB) and Halliburton (NYSE: HAL) to raise hell. There is simply too much energy market momentum today that is banking on high oil for this drop to continue.

Today you've seen the technical case for a rebound in oil, and hopefully the logic of why the 9-day freefall will end is clear to you, too.

For more about the shifting energy investment tide and some astounding trends now playing out in the world's oil producing heartland, check out this special report from my Green Chip International energy investment service: The World's Longest-Running Drug Deal.

Regards,

Sam Hopkins

International Editor

The chart below shows the PowerShares DB US Dollar Index Bullish ETF (NYSE:UUP) compared to the S&P 500 and United States Oil Fund (NYSE:USO). The dollar carry trade is apparently unwinding, with international traders no longer eager to borrow in low-interest dollar assets to finance purchases of higher-return currencies and commodities.

Investors are expecting a rate increase in the U.S., and confidence in the euro has been shaken by the fiscal fall of Greece, a eurozone country. Greece had its sovereign credit rating downgraded by ratings agency Fitch during the business day Tuesday, and even though Fitch's peer Moody's issued a debt warning on the U.S. and U.K., the euro bore the brunt of the day's ratings melee. 

Gold is falling along with oil, as those two favorite commodities bear out their traditional inverse variation to the greenback's movement. Check out the SPDR Gold Trust ETF (NYSE:GLD) to see its drop on the week.

Will this dollar dynamic steer us irreversibly away from $100 oil? Does it mean that the U.S. is out of the woods, debt-wise? Stay tuned to Energy and Capital for more.

-Sam Hopkins

In the battle against Climate Change, many are looking for the proverbial "silver bullet" that will solve all the world's energy problems at once...

Whether with ethanol from corn or with energy from nuclear fusion reactors, the public expects to power their cars and homes on "the gasoline of tomorrow" — made from an inexhaustible and carbon-free resource that is accessible and abundant.

And while that kind of ideology is great — acceptance of the need to edge away from oil and embrace and develop other fuel sources — the reality of our future is looking increasingly electric, with a number of alternative energy projects like solar, geothermal, wind, hydrothermal, and nuclear plants teaming up to power the world's increasing energy needs.

The good news: as the power structure becomes less centralized, more and more innovations will sprout up and we will move forward in efficiently using power that we already produce.

And the Europeans aren't waiting for us. They are already taking steps to make sure they are ready long before Americans even notice we are running out of oil...

"The Helsinki Heaters"

In Helsinki, -20º is not an uncommon reading to see on the thermometer.

Add on the fact that it's -20° degrees Celsius, and you know it's cold! And that means when energy prices are high, heating homes can be an expensive and difficult prospect for Finnish families.

Proving invention is the product of necessity, Helsingin Energia (a utilities provider in the Nordic capital), has come up with an innovative way to fully utilize energy that they already use...

Helsingin Energia (HE) plans to use a new heating and cooling pump to recycle excess heat from a large data center to generate serious amounts of energy. The data center is being built in an old bomb shelter connected directly to HE's direct heating system — a set of pumps that move boiling water through a system of pipes to heat the city's homes.

How It Works

First, cold water is pumped through the data center to cool the servers; the now-warmer water is then drawn into a large pump, where it is further heated to boiling temperatures.

Once the water is hot enough to actually heat a building, it is pumped underground to Helsinki's residential districts to heat homes. The water is then pumped back to the server room to restart the cycle.

The idea: you have hot air that needs to be cooled in the data center, in close proximity to cold air that needs to be heated in residential buildings.

This system is extremely efficient and 5 times cheaper than traditional energy sources. By using water as the transport medium, Helsingin Energia can provide more energy much more cheaply.

Putting It Into Perspective

This technology is not limited to Helsinki. Not in the least.

In fact, the people at Helsingin Energia want business leaders worldwide to know that this technology can be applied in a variety of settings and installed on a mass scale.

When you consider that nearly .5% of the world's total energy use is dedicated solely to cooling IT servers, you can see how much power could be saved by making this type of HVAC system smarter.

It's innovation like this that almost seems too simple. There are no overly complex power transfer locations or new infrastructures to install; rather, people have found a way to utilize power that they already produce smartly and efficiently. The simple and proven principle of using water as a medium for exchanging heat proves to save a frozen city millions of euros, all the while still looking forward in regards to protecting the environment.

And, as Americans look to address our own energy issues, one can only hope that our leaders look to Europe's success as a model for our own infrastructure's development.