Two Big Trends Will Fuel The Renewable Energy Boom For Years

This is the big picture.

Carlos Barria/Reuters
The renewable energy revolution is happening faster than many expected.
According to recent report from Citi Research, renewables will continue their market share grabs from coal and gas forSome of this can be explained by the need for cleaner energy.

“Environmental pressures on coal consumption are rising not only in Europe and North America, but also in China and other emerging markets,” according to the Citi analyst’s note. “The most significant change has been in China, where increasing regulations and the establishment of carbon markets should limit the attractiveness of coal power. Moreover, the country is aggressively pursuing an ‘everything but coal’ development plan for the power sector, with rapid growth in capacity for alternative energy sources.”

Coal power plants are increasingly being pushed into “retirement.”

Most people have been expecting natural gas to be coal’s major substitute. However, Citi’s forecast suggests that growth in natgas demand is going to be way less than previously anticipated.

Renewables should take ever-increasing amounts of market share in an environment like this, according to the report.

In the figure above, you can see that coal’s utilized capacity (measured in GW) is projected drop from 198 GW in 2011 down to 181 GW by 2020. Natural gas slightly increases from 115 GW in 2011 to 132 GW by 2020, although that number is less than previously expected (and you can see there’s a dip from 2012 to 2014). Nuclear sees no major change in either direction, starting at 90 GW and ending at 92 GW.

On the flip side, renewables in 2011 were at 50 GW and are expected to rise to 68 GW by 2020.

two reasons.

First, renewables are rapidly becoming cost-effective, and second, environmental restrictions are becoming an increasingly high hurdle.

Renewables Are Getting Cheaper

Thanks to tech advances, the cost of renewables is finally dropping to affordable levels, which is allowing them to proliferate, according to Citi.

“Costs for solar and wind energy are falling rapidly, with learning rates of around 30% for solar and 7.4% for wind,” the report states.

Wind power has already achieved cost parity with the most expensive coal power plants in Europe (slightly above $80/MWh), and by the end of the decade it’s expected to reach cost parity with the majority of plants (around $70/MWh).

Solar is still the most expensive major electricity source at the moment (around $160/MWh), but Citi is projecting that by 2020 solar will drop to wind’s current prices (slightly above $80/MWh).

“Natural gas has already eroded coal’s cost competitiveness in the US, with decreasing costs for wind, solar and ex-US natural gas to follow,” according to Citi.

Below is the global electricity cost curve.

Citi Research
Environmental Restrictions Favor Renewables

Historically there has been a correlation between economic growth and electricity demand growth. But right now we’re seeing the opposite: during a period of economic growth, electricity demand growth has been relatively flat or declined for some regions.

Some of this can be explained by the need for cleaner energy.

“Environmental pressures on coal consumption are rising not only in Europe and North America, but also in China and other emerging markets,” according to the Citi analyst’s note. “The most significant change has been in China, where increasing regulations and the establishment of carbon markets should limit the attractiveness of coal power. Moreover, the country is aggressively pursuing an ‘everything but coal’ development plan for the power sector, with rapid growth in capacity for alternative energy sources.”

Coal power plants are increasingly being pushed into “retirement.”

Most people have been expecting natural gas to be coal’s major substitute. However, Citi’s forecast suggests that growth in natgas demand is going to be way less than previously anticipated.

Renewables should take ever-increasing amounts of market share in an environment like this, according to the report.

In the figure above, you can see that coal’s utilized capacity (measured in GW) is projected drop from 198 GW in 2011 down to 181 GW by 2020. Natural gas slightly increases from 115 GW in 2011 to 132 GW by 2020, although that number is less than previously expected (and you can see there’s a dip from 2012 to 2014). Nuclear sees no major change in either direction, starting at 90 GW and ending at 92 GW.

On the flip side, renewables in 2011 were at 50 GW and are expected to rise to 68 GW by 2020.

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Mexico’s President Signs Energy Overhaul Into Law

Wall Street Journal

LATIN AMERICA NEWS

Mexico’s President Signs Energy Overhaul Into Law

Legislation Ends Monopoly of State-Owned Petróleos Mexicanos

By

JUAN MONTES
Dec. 20, 2013 3:06 p.m. ET
MEXICO CITY—Mexican President Enrique Peña Nieto signed into law Friday a bill that ends the monopoly of state-owned Petróleos Mexicanos in oil and gas, opening new horizons for private-sector investment in the world’s ninth-largest oil producer.

The energy bill, Mr. Peña Nieto’s wager to lift stagnant oil production and unleash economic growth, was passed by lawmakers in just 10 days. Congress gave final approval on Thursday of last week after two days of debates, and a required majority of state legislatures, 26 of the country’s 31, approved the constitutional amendment by this week.

“This year, we Mexicans have decided to overcome myths and taboos in order to take a large stride toward the future,” Mr. Peña Nieto said in a speech at the National Palace.

Mr. Peña Nieto became the first president in more than 50 years to propose and pass in Congress changes to the constitution on the subject of oil. The last one was Adolfo López Mateos in 1960, and that was to reinforce a state monopoly set up in 1938 when former President Lázaro Cárdenas expropriated the oil industry and turned oil into a nationalist symbol of Mexican sovereignty.

Under the changes, Mexico’s oil market will go from being run by a single player, state-firm Petróleos Mexicanos, or Pemex, to a competitive one in which private oil and gas firms will be allowed to explore for and produce hydrocarbons. Pemex will continue to be state-owned, with preferential rights to bid for oil blocks.

The process of implementing the law kicks off immediately. Pemex has three months to choose which of its existing exploration and production areas it wants to retain for itself and demonstrate that it has the capacity to exploit them. The Energy Ministry will have up to six months to approve Pemex’s choice.

The Energy Ministry will then launch the first bidding rounds for new areas of exploration for oil and gas, mainly in deep water and shale gas, which could happen in the last quarter of next year or in 2015.

The government will be able to become a partner with private firms in these new areas through different types of contracts, including licenses and deals to share the oil production. Pemex also will be able to award the new contracts, which go beyond the restrictive service contracts that the state firm always has used to farm out exploration and production work. Private firms will also be allowed to own and operate oil refineries.

The energy overhaul also liberalizes the generation, distribution and sale of electricity, opening up the state-owned utility CFE to direct competition.

The bill amends three key articles of the Mexican constitution—25, 27 and 28—which form the legal core of the country’s nationalistic oil laws. Constitutional changes are accompanied by several temporary dispositions detailing points that secondary legislation must contain. Congress has until the end of April pass the legislation.

Write to Juan Montes at juan.montes@wsj.com

Shale Grab in U.S. Stalls as Falling Values Repel Buyers

Shale Grab in U.S. Stalls as Falling Values Repel Buyers

The spending slowdown by international companies including BHP Billiton Ltd. and Royal Dutch Shell Plc comes amid a series of write-downs of oil and gas shale assets, caused by plunging prices and disappointing wells. Photographer: Julia

Schmalz/Bloomberg

Oil companies are hitting the brakes on a U.S. shale land grab that produced an abundance of cheap natural gas — and troubles for the industry.
The spending slowdown by international companies including BHP Billiton Ltd. (BHP) and Royal Dutch Shell Plc (RDSA) comes amid a series of write-downs of oil and gas shale assets, caused by plunging prices and disappointing wells. The companies are turning instead to developing current projects, unable to justify buying more property while fields bought during the 2009-2012 flurry remain below their purchase price, according to analysts.

Shale Grab in U.S. Stalls as Falling Values Repel Buyers
The deal-making slump, which may last for years, threatens to slow oil and gas production growth as companies that built up debt during the rush for shale acreage can’t depend on asset sales to fund drilling programs. The decline has pushed acquisitions of North American energy assets in the first-half of the year to the lowest since 2004.
“Their appetite has slowed,” said Stephen Trauber, Citigroup Inc.’s vice chairman and global head of energy investment banking, who specializes in large oil and gas acquisitions. “It hasn’t stopped, but it has slowed.”

Shale Grab in U.S. Stalls as Falling Values Repel Buyers
North American oil and gas deals, including shale assets, plunged 52 percent to $26 billion in the first six months from $54 billion in the year-ago period, according to data compiled by Bloomberg. During the drilling frenzy of 2009 through 2012, energy companies spent more than $461 billion buying North American oil and gas properties, the data show.
Lost Ranking
Prior to this year, oil and gas transactions ranked among the top two in total deal values every year since 2005, except 2008 when they were fourth. So far this year, oil and gas isn’t among the top five.

Shale Grab in U.S. Stalls as Falling Values Repel Buyers
The land grab began more than a decade ago when improved drilling methods and a process called hydraulic fracturing, which cracks rock deep underground to release oil and natural gas, opened up new production in previously untappable shale fields.
The rush accelerated in 2004 as more shale fields in North Dakota, Pennsylvania and Ohio were identified, opening new troves of petroleum and the prospect of energy independence in North America.
As overseas buyers moved in, booming production soon led to oversupplies, and gas prices plunged to a 10-year low in 2012, forcing companies to write-down the value of some of their assets. Companies were also hurt when some fields thought to be rich in oil proved to contain less than anticipated.
Write Downs
That shortfall caused Shell to write down the value of its North American holdings by more than $2 billion last quarter. Shell, based in The Hague, paid $6.7 billion for North American energy assets in seven transactions since 2009, according to data compiled by Bloomberg.
The company told investors this month that it expects its North American oil and gas exploration to remain unprofitable until at least next year. “The major acreage deals are behind us now,” Shell Chief Executive Officer Peter Voser said in a conference call with analysts.
BHP said it would cut the value of its Arkansas shale assets by $2.8 billion. During a May 14 conference presentation, CEO Andrew Mackenzie said capital and exploration spending will “decline significantly” to around $18 billion in 2014, and continue to fall after that.
As companies reassess holdings, they’ve begun curtailing drilling in some fields, selling off lackluster properties and redirecting investments to storage terminals and gas processing plants.
Cash Shortfalls
Firms depending on asset sales to help finance drilling may not have enough money to pay for higher oil and gas production, said Eric Nuttall, who oversees C$70 million ($68 million) at Sprott Asset Management LP in Toronto. That could slow output growth, especially as companies try to avoid taking on more debt.
“A lot of companies have let leverage get out of hand,” he said, speaking about Canadian firms.
Those companies that have to sell assets will likely fetch lower prices, said Fadel Gheit, an analyst at Oppenheimer & Co. Inc. in New York. Producers with the highest debt levels that need cash to fund development, such as Chesapeake Energy Corp. (CHK), of Oklahoma City, are most at risk of having to accept lower offers from buyers, Gheit said in a phone interview.
“People do not sell unless they really need the money to invest in better options,” he said.
Chesapeake Sale
In one of only three oil and gas deals valued at more than $1 billion this year, according to data compiled by Bloomberg, Chesapeake sold 50 percent of its oilfield in the Mississippi Lime formation for $1.02 billion to China Petrochemical Corp. in February.
Jim Gipson, a spokesman for Chesapeake, declined to comment.
International buyers that branched into North America in recent years don’t need to buy anything else — for now, said Toshi Yoshida, a partner with law firm Mayer Brown LLP, which advises on cross-border oil and gas deals. A lot of them achieved their primary goals of obtaining a supply of long-term, dollar-denominated commodities and the technology needed to turn shale into energy, Yoshida said.
“They will stay here for a long period of time,” Yoshida said. “They will make additional acquisitions when the time is right.”
To contact the reporters on this story: Matthew Monks in New York at mmonks1@bloomberg.net; Rebecca Penty in Calgary at rpenty@bloomberg.net; Gerrit De Vynck in Toronto at gdevynck@bloomberg.net
To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net