Oil & Energy
The Nuclear Industry’s Trillion-Dollar Question
Contd. from last Monday
As customers rethink the balance between safety and price, will safety now win out?
Just over a year ago, price was still a potent factor.
In early December 2009, Areva was convinced it would win a landmark contract with Abu Dhabi to build four reactors — the first nuclear power plants in the Gulf Arab region. Also in the running were Westinghouse, GE Hitachi and a consortium of South Korean firms with no prior experience of selling reactors abroad.
The final offers, according to a WikiLeaks cable, were “followed by intense political lobbying by Korean, French, Japanese and US officials, including French President Sarkozy”, and the Japanese and Korean prime ministers “who all repeatedly called the Crown Prince.” South Korean President Lee Myung-bak even flew to the United Arab Emirates to personally defend the Korean bid with UAE President, Sheikh Khalifa bin Zayed al-Nahayan.
In the end it came down to price. The consortium led by GE Hitachi dropped its final price by “double-digit billions” according to a WikiLeaks cable. But the Gulf state chose the rookie South Korean nuclear consortium, which proposed a price per kilowatt/hour that was 82 per cent lower again according to a US embassy cable obtained by WikiLeaks.
The winning consortium was led by state-run utility, Korea Electric Power Corp (KEPCO) and included Hyundai Engineering and Construction and Samsung C&T Corp.
The Emirates Nuclear Energy Corporation (ENEC) said the value of the contract for the construction, commissioning and fuel loads for the four 1,400-MW APR1400 reactors was about $20 billion, with a high percentage of the contract offered under a fixed-price arrangement.
Insiders say that it was not just price or safety considerations that drove ENEC’s decision. “Areva’s schedule slippage of over three years and cost overrun of over $3 billion on Olkiluoto did not help Areva,” an industry source said.
The French still hope that Abu Dhabi might change its mind and the market has been thick with rumors about a possible review, although industry watchers say French diplomats may have spread these in order to test Abu Dhabi’s resolve.
A spokesperson at Emirates nuclear corporation ENEC said that the UAE will continue to work with the South Koreans and is not looking to change partners.
The biggest prize remains China, which is buying reactors from American, French and Russian builders while working hard on developing its own.
Beijing favored Westinghouse’s plant over Areva’s in March 2007 when the Toshiba-owned firm signed a technology transfer agreement worth about $5.3 billion that put the AP1000 at the core of China’s plans to develop its own “localized” reactors.
Industry experts say that Areva’s failure was caused by its reluctance to give away its patents. In 2007, China ditched plans to build two EPRs in Yangjiang on the southeast coast, choosing to use its own second-generation CPR1000 designs instead after growing frustrated at the pace of negotiations.
So far, the AP1000 is on budget and on schedule in China.
But Areva has fought back and has subsequently won its own deal to build two EPRs at Taishan, also in the southeast, after finally agreeing to transfer key technology to the China Guangdong Nuclear Power Corporation.
Beijing’s impatience over third-generation plants has led to the fast-tracking of dozens of second-generation reactors, which led to charges of corner-cutting even before the Japanese quake.
In a paper published in January, scholars at the State Council Research Office said China was moving too fast and that many regions were bucking worldwide industry trends by building less reliable second-generation reactors. It recommended that apart from plants that have already been approved, all new nuclear projects should, “in principle”, be based on third-generation designs.
Li Ning, a nuclear expert and director of the Energy Research Center at China’s Xiamen University, said that because of the Fukushima crisis, China’s focus would now shift further to third-generation technology.
That could give Westinghouse and Areva a competitive advantage, although it may not last very long. Just as Areva precursor Framatome adopted US technology in the 1960s, the Chinese are learning quickly from their Western suppliers. Li expects that in the near future China will be capable of building projects abroad.
US-based independent nuclear consultant John Polcyn, who has worked in the nuclear industry worldwide for utilities as well as reactor vendors, expects that the Chinese will align with both Areva and Westinghouse to sell third-generation reactors abroad.
“The Chinese have publicly stated they can build nuclear power plants, including the EPR for 30 per cent less than Areva. It could help Areva to be more cost-competitive,” Polcyn said.
He believes the two big Chinese firms will also market, build and operate China’s indigenous CNP1000 reactor. “The Chinese will claim the CNP1000 as a Generation III nuclear power plant, and I cannot disagree. The plants are designed to today’s latest requirements, have state-of-the-art, world-class digital control systems and use the latest materials,” he said.
The Chinese arrival on the reactor market will put pressure on the existing reactor suppliers, forcing them to take more cost and schedule risk for plant completions. Fukushima might buy the incumbents a bit more time, as China tries to incorporate the lessons learned, but not much.
Concluded
Culled from Reuters
The Federal Government has expressed optimism in attracting more investments by International Oil Companies (IOCs) into Nigeria to foster growth and sustainability in the energy sector.
This is as some IOCs, particularly Shell and TotalEnergies, had announced plans to divest some of their assets from the country.
Recall that Shell in January, 2024 had said it would sell the Shell Petroleum Development Company of Nigeria Limited (SPDC) to Renaissance.
According to the Minister of State for Petroleum Resources (Oil), Heineken Lokpobiri, increasing investments by IOCs as well as boosting crude production to enhancing Nigeria’s position as a leading player in the global energy market, are the key objectives of the Government.
Lokpobiri emphasized the Ministry’s willingness to collaborate with State Governments, particularly Bayelsa State, in advancing energy sector transformation efforts.
The Minister, who stressed the importance of cooperation in achieving shared goals said, “we are open to partnerships with Bayelsa State Government for mutual progress”.
In response to Governor Douye Diri’s appeal for Ministry intervention in restoring the Atala Oil Field belonging to Bayelsa State, the Minister assured prompt attention to the matter.
He said, “We will look into the issue promptly and ensure fairness and equity in addressing state concerns”.
Lokpobiri explained that the Bayelsa State Governor, Douyi Diri’s visit reaffirmed the commitment of both the Federal and State Government’s readiness to work together towards a sustainable, inclusive, and prosperous energy future for Nigeria.
While speaking, Governor Diri commended the Minister for his remarkable performance in revitalisng the nation’s energy sector.
The Federal Government has assured investors in the nation’s gas sector of the security and safety of their investments.
Minister of State for Petroleum Resources (Gas), Ekperikpe Ekpo, gave the assurance while hosting top officials of Shanghai Huayi Energy Chemical Company Group of China (HUAYI) and China Road and Bridge Corporation, who are strategic investors in Brass Methanol and Gas Hub Project in Bayelsa State.
The Minister in a statement stressed that Nigeria was open for investments and investors, insisting that present and prospective foreign investors have no need to entertain fear on the safety of their investment.
Describing the Brass project as one critical project of the President Bola Tinubu-led administration, Ekpo said.
“The Federal Government is committed to developing Nigeria’s gas reserves through projects such as the Brass Methanol project, which presents an opportunity for the diversification of Nigeria’s economy.
“It is for this and other reasons that the project has been accorded the significant concessions (or support) that it enjoys from the government.
“Let me, therefore, assure you of the strong commitment of our government to the security and safety of yours and other investments as we have continually done for similar Chinese investments in Nigeria through the years”, he added.
Ekpo further tasked investors and contractors working on the project to double their efforts, saying, “I want to see this project running for the good of Nigeria and its investors”.
Earlier in his speech, Leader of the Chinese delegation, Mr Zheng Bi Jun, said the visit to the country was to carry out feasibility studies for investments in methanol projects.
On his part, the Managing Director of Brass Fertiliser and Petrochemical Ltd, Mr Ben Okoye, expressed optimism in partnering with genuine investors on the project.
Crude oil prices recently logged their second monthly gain in a row as OPEC+ extended their supply curb deal until the end of Q2 2024.
The gains have been considerable, with WTI adding about $7 per barrel over the month of February.
Yet a lot of analysts remain bearish about the commodity’s prospects. In fact, they believe that there is enough oil supply globally to keep Brent around $81 this year and WTI at some $76.50, according to a Reuters poll.
Yet, like last year in U.S. shale showed, there is always the possibility of a major surprise.
According to the respondents in that poll, what’s keeping prices tame is, first, the fact that the Red Sea crisis has not yet affected oil shipments in the region, thanks to alternative routes.
The second reason cited by the analysts is OPEC+ spare capacity, which has increased, thanks to the cuts.
“Spare capacity has reached a multi-year high, which will keep overall market sentiment under pressure over the coming months”, senior analyst, Florian Grunberger, told Reuters.
The perception of ample spare capacity is definitely one factor keeping traders and analysts bearish as they assume this capacity would be put into operation as soon as the market needs it. This may well be an incorrect assumption.
Saudi Arabia and OPEC have given multiple signs that they would only release more production if prices are to their liking, and if cuts are getting extended, then current prices are not to OPEC’s liking yet.
There is more, too. The Saudis, which are cutting the most and have the greatest spare capacity at around 3 million barrels daily right now, are acutely aware that the moment they release additional supply, prices will plunge.
Therefore, the chance of Saudi cuts being reversed anytime soon is pretty slim.
Then there is the U.S. oil production factor. Last year, analysts expected modest output additions from the shale patch because the rig count remained consistently lower than what it was during the strongest shale boom years.
That assumption proved wrong as drillers made substantial gains in well productivity that pushed total production to yet another record.
Perhaps a bit oddly, analysts are once again making a bold assumption for this year: that the productivity gains will continue at the same rate this year as well.
The Energy Information Administration disagrees. In its latest Short-Term Energy Outlook, the authority estimated that U.S. oil output had reached a record high of 13.3 million barrels daily that in January fell to 12.6 million bpd due to harsh winter weather.
For the rest of the year, however, the EIA has forecast a production level remaining around the December record, which will only be broken in February 2025.
Oil demand, meanwhile, will be growing. Wood Mackenzie recently predicted 2024 demand growth at 1.9 million barrels daily.
OPEC sees this year’s demand growth at 2.25 million barrels daily. The IEA is, as usual, the most modest in its expectations, seeing 2024 demand for oil grow by 1.2 million bpd.
With OPEC+ keeping a lid on production and U.S. production remaining largely flat on 2023, if the EIA is correct, a tightening of the supply situation is only a matter of time. Indeed, some are predicting that already.
Natural resource-focused investors Goehring and Rozencwajg recently released their latest market outlook, in which they warned that the oil market may already be in a structural deficit, to manifest later this year.
They also noted a change in the methodology that the EIA uses to estimate oil production, which may well have led to a serious overestimation of production growth.
The discrepancy between actual and reported production, Goehring and Rozencwajg said, could be so significant that the EIA may be estimating growth where there’s a production decline.
So, on the one hand, some pretty important assumptions are being made about demand, namely, that it will grow more slowly this year than it did last year.
This assumption is based on another one, by the way, and this is the assumption that EV sales will rise as strongly as they did last year, when they failed to make a dent in oil demand growth, and kill some oil demand.
On the other hand, there is the assumption that U.S. drillers will keep drilling like they did last year. What would motivate such a development is unclear, besides the expectation that Europe will take in even more U.S. crude this year than it already is.
This is a much safer assumption than the one about demand, by the way. And yet, there are indications from the U.S. oil industry that there will be no pumping at will this year. There will be more production discipline.
Predicting oil prices accurately, even over the shortest of periods, is as safe as flipping a coin. With the number of variables at play at any moment, accurate predictions are usually little more than a fluke, especially when perceptions play such an outsized role in price movements.
One thing is for sure, though. There may be surprises this year in oil.
lrina Slav
Slav writes for Oilprice.com.
