tag:blogger.com,1999:blog-9155696276373238012024-03-13T14:58:10.669-07:00Stock PsychologyDiscussions of stock picks. Stock Investment Philosophy. Precious Metals. Peak Oil and Commodity Bull.JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.comBlogger102125tag:blogger.com,1999:blog-915569627637323801.post-47328826483357401032013-11-14T08:46:00.003-08:002013-11-14T08:46:53.850-08:00How Much Natural Gas Reserve Do We HaveThere's been a propaganda that the world has a reserve of hundreds of years worth of supply of natural gas, in the form of shale gas. Nothing could be further from the truth, as natural gas is the least abundant of all three fossil fuels: coal, petroleum and natural gas.<br />
<br />
But exactly how much natural gas reserve the world has? And how much the USA has within its land?<br />
<br />
One thing can give us some clue, the oxygen in the earth's atmosphere,which can be calculated accurately.<br />
<br />
Oxygen does not exist without life form. Every free oxygen molecule that exists in the atmosphere was breathed out by an ancient life form, which uses the photo synthesize or other energy driven process to extract the oxygen either from carbon dioxide, or from water. So each and every oxygen molecule is associated with some alive or dead biomass on earth, or with some carbon scattered in the soil which originally came from biomass, or with buried fossil fuels. So let's do some calculation.<br />
<br />
The entire atmosphere of the earth, if condensed into a layer of uniform pressure of one standard atmospheric pressure, 101325 pascal, then it will be a layer of 26200 feet (8000 meters) thick.<br />
<br />
Oxygen is 20% of the atmosphere, in volume. So the atmospheric oxygen can be condensed into a uniform layer of 5240 feet deep on the earth surface. That gives us an idea of the quantity.<br />
<br />
Natural gas is mostly methane molecules, which contains one carbon and four hydrogen atoms. When one carbon atom is extracted from CO2 (carbon dioxide), two oxygen atoms are released. When four hydrogen atoms are extracted from water molecules, H2O, two oxygen atoms are released. So one methane molecule is associated with four oxygen atom, or two oxygen molecules. That's a 1:2 ratio.<br />
<br />
Thus, if the earth's 5240 feet thick layer of oxygen is completely associated with buried natural gas, and there is no other biomass or fossil fuel. That will give us a uniform layer of 5240/2=2620 feet of buried natural gas. That's the absolute theoretical maximum, assuming there is no live organs, no scattered biomass and no other fossil fuels, just buried natural gas only.<br />
<br />
But we know the distribution of biomass and fossil fuels are not uniform. The ocean is four times as active as the land area as a biomass circle. Consider 29% of the earth surface is land and 79% is ocean, the layer of biomass on land is only 32% (100%/(29%+4*71%) = 32%) of the global average. That's equivalent to a layer of 838 feet deep, if all the land biomass is converted to underground natural gas reserve.<br />
<br />
But not all biomass is converted to natural gas! Some of them are living organisms: animals, plants, insects, germs, etc. Some of them are scattered biomass int he soil. Only a small portion is converted to fossil fuel.<br />
<br />
Based on best available scientific estimates, vast majority of biomass either exists in live organisms, or in organic material scattered in soil. Only a small portion, less than 10%, forms ancient fossil fuels. So that cuts possible fossil fuel down to the equivalence of a 84 feet deep natural gas layer.<br />
<br />
But NOT all fossil fuels exist in the form of natural gas. Vast majority of buried ancient biomass becomes just carbon when they were compressed at high temperature and high pressure underground and dehydrated. That forms coal. A small portion, given existence of water and micro-organism and suitable conditions, can be converted into hydrocarbon by combining with hydrogen extracted from water by such germs. My estimate is 70% of fossil fuels became coal, and 30% became various hydrocarbon. Within the 30% hydrocarbon fossil fuels formed, 30% became the thicker and heavier hydrocarbon molecules, which is petroleum, and only 10% became the lightest hydrocarbon, methane, or CH4. So 10% of the 84 feet worth of natural gas equivalent layer will be actual natural gas reserves. That gives us 8.4 feet.<br />
<br />
The 8.4 feet deep is the average expected natural gas reserve you can find any where in land areas of the earth. How much is that for the USA? The USA has a land area of 9.3 million square kilometers, or 9.3 trillion square meters, or 328 trillion square feet. Multiply by 8.4 feet, the total expected buried natural gas reserve in the USA is 2760 trillion cubic feet of natural gas, or 2800 TCF (trillion cubic feet).<br />
<br />
The USA extracts 28 TCF ofnatural gas per year. So 2800 TCF of underground natural gas can provide 100 years of supply. But that's assuming every single buried natural gas molecule can be extracted. That is of course unrealistic. Most of buries natural gas molecules are either not concentrated enough to be extracted economically, or can not be extracted completely due to technology limitation.<br />
<br />
Take shale gas as an example. Geologists estimate that by hydraulic fracturing, only no more than 5% of the original gas in place can be extracted and produced. The other 95% stays underground.<br />
<br />
So that cuts producible natural gas to 5% of 2800 TCF, or 140 TCF, or a mere 5 years supply of shale gas.<br />
<br />
The USA does NOT have one hundred years of supply of shale gas. We have much less, five years worth, or maybe a little bit more. Not no where near one hundred year's worth of gas supply!<br />
<br />
<br />
<br />JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com10tag:blogger.com,1999:blog-915569627637323801.post-81045950843660084632013-03-05T15:57:00.001-08:002013-03-05T16:06:07.632-08:00Cabot Oil and Gas Bragged About EURsAll shale gas companies love to brag about the EURs (estimated ultimate recovery) of their best producing shale wells, Cabot Oil and Gas (COG) is no exception.<br />
<br />
On <a href="http://phx.corporate-ir.net/phoenix.zhtml?c=116492&p=irol-newsArticle&ID=1662908&highlight=" target="_blank">Feb. 20, 2012</a>, COG made mention of two most productive Marcellus shale wells on the same pad and claimed:<br />
<br />
<blockquote class="tr_bq">
Specifically, in data just released by the Pennsylvania Department of Environmental Protection (PaDEP) on cumulative production for the last six months of 2011, Cabot had eight of the top 10 performing wells. In addition, for two of the identified wells, Cabot booked initial estimated ultimate recoverys <strong>(EURs) in excess of 20 Bcf each</strong>. These two wells, on one pad, have been on production for about 275 days and have cumulative production of <strong>4.5 Bcf</strong> each. The Company does have one other well that has exceeded 5.0 Bcf of production since being placed on-line in the summer of 2010. "Also of note, is the result from our first pad drilling effort, which to date has produced 12.5 Bcf in less than 500 days and is still producing about 16 Mmcf per day from three wells," said Dan O. Dinges, Chairman, President and Chief Executive Officer.</blockquote>
<br />
<br />
An EUR of <strong>20 BCF</strong> each well? Wow. That would have been hugely profitable. These two wells are indeed exceptionally good ones. But I know that when a shale company claims that a well's EUR could reach such and such level, you'd better chop half off their numbers to get a more realistic number.<br />
<br />
How are the productions from these two wells stacked up so far?<br />
<br />
I identified those two wells as well no. 115-20375 and 115-20378.<br />
<br />
You can get the actual well production from the <a href="https://www.paoilandgasreporting.state.pa.us/publicreports/Modules/WellDetails/WellDetails.aspx" target="_blank">PA DEP</a> web site:<br />
<br />
Well No 115-20375:<br />
<ul>
<li>H1-2011: 898,773 MCF in 40 days, or 22469 MCF/day</li>
<li>H2-2011: 3,028,634 MCF in 184 days, 16460 MCF/day</li>
<li>H1-2012: 2,169,999 MCF in 181 days, 11989 MCF/day</li>
<li>H2-2012: 1,380,137 MCF in 184 days, 7501 MCF/day</li>
<li>Total production by end of 2012 was 7.48 BCF</li>
<li>Estimated end of 2012 production rate was 5880 MCF/day</li>
<li>Estimated end if 2012 decline rate: -0.255%/day</li>
</ul>
<br />
Well No 115-20378:<br />
<br />
<br />
<ul>
<li>H1-2011: 909,051 MCF in 40 days, or 22726 MCF/day</li>
<li>H2-2011: 2,884,292 MCF in 184 days, 15676 MCF/day</li>
<li>H1-2012: 2,029,866 MCF in 181 days, 11215 MCF/day</li>
<li>H2-2012: 1,270,247 MCF in 184 days, 6904 MCF/day</li>
<li>Total production by end of 2012 was 7.09 BCF</li>
<li>Estimated end of 2012 production rate was 5364 MCF/day</li>
<li>Estimated end if 2012 decline rate: -0.264%/day</li>
</ul>
<br />
Based on those data, well 115-20475 is expected to produce 2.3 BCF more, bring the ultimate production to 9.8 BCF. Well 115-20378 is expected to produce another 2.0 BCF, bring the total to 9.12 BCF. So the realistic estimate of those two wells are 10 BCF each. That is far from COG's 20 BCF original estimates.<br />
<br />
COG bragged. JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com48tag:blogger.com,1999:blog-915569627637323801.post-69844830625366804062013-02-24T10:15:00.000-08:002013-02-24T10:15:00.393-08:00Did CHK Counterfeit Marcellus Production Data?I looked at CHK production data at Marcellus closer, and find more disturbing pattern which suggest that they may have pulled a DATA SCAM on the production of their Marcellus shale wells.<br />
<br />
<br />
CHK had 321 Marcellus production in First half of 2012, By second half of 2012, 4 of the production wells were dropped and 94 new production wells were added.<br />
<br />
The 4 wells dropped were:<br />
<br />
015-20132, 015-20133, 015-21101, 015-21117<br />
<br />
The 94 new wells added were:<br />
<br />
007-20305,007-20344,015-20315,015-20375,015-20481,015-20495,015-20639,015-20665,<br />
015-20705,015-20706,015-20873,015-20941,015-20951,015-20966,015-21044,015-21060,<br />
015-21063,015-21121,015-21122,015-21139,015-21152,015-21159,015-21175,015-21214,<br />
015-21240,015-21241,015-21243,015-21246,015-21290,015-21358,015-21370,015-21403,<br />
015-21416,015-21429,015-21435,015-21511,015-21525,015-21528,015-21529,015-21601,<br />
015-21602,015-21652,015-21677,015-21700,015-21759,015-21994,015-22026,015-22029,<br />
113-20011,113-20019,015-21531,015-21535,015-21553,015-21555,015-21570,015-21571,<br />
015-21572,015-21588,015-21591,015-21600,015-21604,015-21622,015-21654,015-21813,<br />
015-21815,015-21827,015-21849,015-21850,015-21874,015-21924,015-21985,015-22003,<br />
015-22020,015-22030,015-22072,015-22114,015-22115,015-22138,113-20004,113-20020,<br />
113-20033,113-20110,113-20142,115-20507,115-20520,115-20605,115-20708,131-20033,<br />
131-20037,131-20064,131-20104,131-20231,131-20232,131-20234<br />
<br />
There were 317 wells that produced in both first half and second half of 2012. The top producing 62 wells shows little production decline, the combined daily production of these group actually <strong>INCREASDE by <span style="color: red;">7.7%</span></strong> from H1 to H2 of 2012, going from 365.3 MMCF/day to 393.4 MMCF/day, or 5.892MMCF/day to 6.346 MMCF/day on a average per well basis.<br />
<br />
The remaining 255 wells produced a combined 998.65 MMCF/day in H1-2012 and dropped to 737.25 MMCF/day, or dropped <strong><span style="color: blue;">-26.2%</span></strong>. This percentage drop is the NORMAL and expected percentagedrop in half a year, for the group of existing shale wells. On per well basis production dropped from 3.92 to 2.89 MMCF/day.<br />
<br />
I believe that CHK either unintentionally messed up the data and reported them wrong, or they intentionally pulled a DATA SCAM on the reported production data on some of the most productive wells.<br />
<br />
The 62 wells with questionally high productions which do not seem to drop much, are:<br />
<br />
131-20062, 115-20256, 115-20269, 131-20058, 115-20257, 115-20268, 115-20324, 131-20169,<br />
131-20121, 131-20125, 115-20296, 131-20138, 115-20458, 015-20673, 115-20279, 015-20242,<br />
015-20600, 115-20271, 115-20393, 015-20701, 115-20341, 115-20325, 015-20452, 115-20351,<br />
015-20458, 115-20244, 115-20272, 015-20488, 015-20482, 015-20645, 115-20303, 015-20997,<br />
115-20243, 015-21224, 015-21521, 015-20644, 015-20457, 015-21302, 015-20403, 015-21293,<br />
115-20498, 015-20646, 115-20426, 015-21980, 115-20424, 015-21979, 115-20593, 115-20592,<br />
115-20105, 115-20442, 015-20124, 015-20234, 015-20625, 115-20073, 115-20068, 115-20182,<br />
115-20108, 115-20066, 125-23943, 015-20410, 125-23944, 015-20425<br />
<br />
<br />
Study <a href="https://www.paoilandgasreporting.state.pa.us/publicreports/Modules/Production/ProductionHome.aspx" target="_blank">the data</a> and draw your own conclusion:<br />
<a href="https://www.paoilandgasreporting.state.pa.us/publicreports/Modules/Production/ProductionHome.aspx">https://www.paoilandgasreporting.state.pa.us/publicreports/Modules/Production/ProductionHome.aspx</a><br />
<br />
<br />
131-20062 1476659 179 8249 131-20062 1653825 183 9037 9.55%<br />
<br />
115-20256 1459709 181 8065 115-20256 1634887 182 8983 11.39%<br />
115-20269 1461695 182 8031 115-20269 1631246 184 8865 10.39%<br />
131-20058 1440822 182 7917 131-20058 1604633 181 8865 11.98%<br />
115-20257 1465199 181 8095 115-20257 1600436 184 8698 7.45%<br />
115-20268 1402920 179 7838 115-20268 1576530 183 8615 9.92%<br />
115-20324 1469184 182 8072 115-20324 1563409 184 8497 5.26%<br />
131-20169 330849 57 5804 131-20169 1547512 183 8456 45.69%<br />
131-20121 332043 57 5825 131-20121 1554890 184 8450 45.06%<br />
131-20125 777646 135 5760 131-20125 1542115 183 8427 46.29%<br />
115-20296 1416337 182 7782 115-20296 1524309 181 8422 8.22%<br />
131-20138 770648 134 5751 131-20138 1437812 173 8311 44.51%<br />
115-20458 1476401 182 8112 115-20458 1519707 183 8304 2.37%<br />
015-20673 1441316 181 7963 015-20673 1508240 184 8197 2.94%<br />
115-20279 1474577 182 8102 115-20279 1494398 183 8166 0.79%<br />
015-20242 1429295 182 7853 015-20242 1413111 177 7984 1.66%<br />
015-20600 1428242 182 7847 015-20600 1448489 183 7915 0.86%<br />
115-20271 1477172 182 8116 115-20271 1454022 184 7902 -2.64%<br />
115-20393 1472000 182 8088 115-20393 1434924 182 7884 -2.52%<br />
015-20701 499066 81 6161 015-20701 1441815 184 7836 27.18%<br />
115-20341 1479389 182 8129 115-20341 1407474 180 7819 -3.80%<br />
115-20325 1469388 182 8074 115-20325 1427779 183 7802 -3.36%<br />
015-20452 1044552 137 7624 015-20452 1432879 184 7787 2.14%<br />
115-20351 1406359 182 7727 115-20351 1398467 181 7726 -0.01%<br />
015-20458 1419562 181 7843 015-20458 1251273 162 7724 -1.52%<br />
115-20244 1460883 182 8027 115-20244 1396425 182 7673 -4.41%<br />
115-20272 1404935 182 7719 115-20272 1383846 183 7562 -2.04%<br />
015-20488 1428338 182 7848 015-20488 1269073 168 7554 -3.75%<br />
015-20482 1330503 164 8113 015-20482 1378817 183 7535 -7.13%<br />
015-20645 472839 80 5910 015-20645 1376408 183 7521 27.25%<br />
115-20303 1459934 182 8022 115-20303 1354704 181 7485 -6.70%<br />
015-20997 355326 72 4935 015-20997 1359431 183 7429 50.53%<br />
115-20243 1452286 182 7980 115-20243 1353519 184 7356 -7.81%<br />
015-21224 1433244 182 7875 015-21224 1296706 179 7244 -8.01%<br />
015-21521 98217 17 5777 015-21521 1314852 184 7146 23.69%<br />
015-20644 489638 80 6120 015-20644 1287480 182 7074 15.58%<br />
015-20457 1419537 182 7800 015-20457 1158702 164 7065 -9.42%<br />
015-21302 388357 66 5884 015-21302 1291010 183 7055 19.89%<br />
015-20403 1288945 177 7282 015-20403 1288649 184 7004 -3.83%<br />
015-21293 546162 121 4514 015-21293 1137136 183 6214 37.67%<br />
115-20498 383140 78 4912 115-20498 797474 129 6182 25.85%<br />
015-20646 796271 135 5898 015-20646 1087595 182 5976 1.31%<br />
115-20426 562665 102 5516 115-20426 1090302 183 5958 8.01%<br />
015-21980 529852 90 5887 015-21980 1083175 183 5919 0.54%<br />
115-20424 576143 101 5704 115-20424 1086960 184 5907 3.56%<br />
015-21979 501435 91 5510 015-21979 998933 184 5429 -1.48%<br />
115-20593 504734 102 4948 115-20593 967251 182 5315 7.40%<br />
115-20592 454040 100 4540 115-20592 975384 184 5301 16.75%<br />
115-20105 404616 127 3186 115-20105 890616 183 4867 52.76%<br />
115-20442 314250 78 4029 115-20442 874448 184 4752 17.96%<br />
015-20124 537558 182 2954 015-20124 493574 184 2682 -9.18%<br />
015-20234 501389 181 2770 015-20234 480784 181 2656 -4.11%<br />
015-20625 482920 181 2668 015-20625 436565 172 2538 -4.87%<br />
115-20073 440528 182 2420 115-20073 428935 177 2423 0.12%<br />
115-20068 403515 177 2280 115-20068 445109 184 2419 6.11%<br />
115-20182 280366 177 1584 115-20182 322340 184 1752 10.60%<br />
115-20108 331008 182 1819 115-20108 322502 184 1753 -3.63%<br />
115-20066 281002 182 1544 115-20066 271904 179 1519 -1.62%<br />
125-23943 224515 182 1234 125-23943 241290 184 1311 6.30%<br />
015-20410 207206 182 1138 015-20410 194015 178 1090 -4.26%<br />
125-23944 180793 182 993 125-23944 194181 184 1055 6.24%<br />
015-20425 204524 182 1124 015-20425 191805 184 1042 -7.24%<br />
<br />Explanation of the data above, with the first row as an example:<br />
<br />
131-20062 1476659 179 8249 131-20062 1653825 183 9037 9.55%<br />
<br />
<br />
131-20062 is well number<br />
1476659 is H1 2012 production in MCF (thousand cubic feet)<br />
179 is days of production in H1 2012.<br />
8249 is calculated average per day (=1476659/179)<br />
131-20062 is well number again<br />
1653825 is H2 2012 production in MCF (thousand cubic feet)<br />
<br />
183 is days of production in H1 2012.<br />
9037 is calculated average per day (=1476659/179)<br />
9.55% is percentage change of daily production, from H1 to H2.<br />
JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com7tag:blogger.com,1999:blog-915569627637323801.post-86638383903173931392013-02-22T19:29:00.001-08:002013-02-22T20:26:45.898-08:00The Marcellus Shale Production UpdateThe PA <a href="https://www.paoilandgasreporting.state.pa.us/publicreports/Modules/Welcome/Welcome.aspx" target="_blank">DEP</a> finally released Marcellus shale production data for second half of 2012. It shows significant production growth from the first half to second half. So I want to study the data closer to get an idea what's going on.<br />
<br />
Looking at the data I note the following summary:<br />
<br />
<ul>
<li>In H1-2012, there were 2835 wells produced a total of 895.555 BCF of shale gas in 442194 well production days. That figures to an averages of 4.92 BCF/day total production, and an average of 2.0246 MMCF/day per well.</li>
<li>In H2-2012, there were 3551 wells produced a total of 1146.8 BCF of shale gas in 558212 well production days. The average is 6.233 BCF/day total production, 2054.4 MCF/day per well.</li>
</ul>
There are two surprises to me. One is the data suggests that there seems to be 716 new wells added in H2-2012, averaging 3.9 new wells per day. I knew from my previous study that 4 wells per day in average is needed to maintain flat Marcellus production, and the well spud rate dropped to roughly 2.5 new wells per day starting in July 2012. Obviously the drop of spud rate has not translated into the drop of well completion rate so far yet. It will take a bit more time for the slow down of well drilling to lead to slow down in well completion.<br />
<br />
Another surprise to me is that the data seems to suggest that production from existing wells some how are not dropping as fast as I believe they should. Thus I looked at the data closer.<br />
<br />
I screwinized the production data and removed a few wells that were producing in H1-2012 but not in H2-2012, as they may distort the data. The remaining wells are in two categories:<br />
<br />
<ul>
<li>Existing wells that produced in both H1 and H2 of 2012. There are 2823 of them. They produced 892.7364 BCF in H1 in 436366 well production days. They averaged 4.905 BCF/day in total production and 2045.843 MCF/day per well. The average days of production is 154.6 days in the 182 days H1 period.</li>
<li>These same 2823 existing wells produced 881.8125 BCF in H2 in 490046 well production days. That averages 4.79 BCF/day in total production, and 1799.45 MCF/day per well. The average days of production is 173.6 days, in the 184 days H2 period.</li>
<li>There are 727 new wells in H2-2012. They produced 264.9895 BCF in 68165 well production days, averaging 1.44 BCF/day in total production and 3887.5 MCF/day per well. The average days of production of these wells is 93.8 days in H2-2012.</li>
</ul>
<br />
The data suggests that productivity of existing wells declined from 2045.843 MMCF/day to 1799.45 MCF/day in 182 days. The average decline is losing -0.07%/day. That's a far slower decline than my previous rule of thumb of losing -0.2%/day. What's going on? I will come back to look at this decline closer.<br />
<br />
If existing production rate of 5 BCF/day is losing 0.07% per day. That's losing 3.5 MMCF/day. Since each new well averaged 3.8875 MMCF/day, the data suggests that 0.9 new wells per day is the threshold needed to maintain flat production. My previous estimate was 4 new wells per day.<br />
<br />
Why the existing wells are declining at only -0.07%/day?<br />
<br />
I examined the individual wells closer.<br />
<br />
I find that MOST of wells indeed decline much faster than that. For example well 005-30503 declined 25% from H1 to H2. Well 015-20258 declined 43%!!! Well 015-20262 declined 40%!!!<br />
<br />
Nowever there are SOME exceptionally good wells from the seeming sweet spots. These wells have extremely high production rates, and they don't seem to decline much so far.<br />
<br />
For example well 015-20444 and 015-20488. The well 015-20488 produced at 7.848 MMCF/day in H1 and 7.554 MMCF/day in H2. That's hardly a decline of -3.75% in half a year. That well, owned by CHK, has produced 6.64 BCF so far. It has no sign of slowing down any time soon. That is really an amazingly high production well.<br />
<br />
Are these exceptionally good sweet spot wells the exception, or the norm? I do not know. I have to scrutinize the data further.<br />
<br />
But for H1 to H2 of 2012, lack of decline of existing wells supported the total production and pushed it higher. This trend may continue for Marcellus for a little while longer.<br />
<br />
But at least by now I know the EIA data on Marcellus production is off. According to EIA, who ontained the data from Bentek, the Marcellus production averaged 6.873 BCF in H2-2012.<br />
<br />
The PA DEP data, as discussed above, indicated an average production of 6.233 BCF/day in H2-2012. So the EIA data was off by 0.64 BCF.day. That is a pretty significant discrepancy.<br />
<br />
[UPDATE]<br />
<br />
I noticed one curious and interesting FACT.<br />
<br />
<br />
<br />
<br />
When looking at the wells individually, most of wells decline at rates where I expect them to be, losing 25% to 30% in half a year.<br />
<br />
<br />
<br />
However for those few wells that are exceptionally highly production, and also declines at incredibly low rate, there is NO EXCEPTION. Each and every one of such wells belongs to CHK. I have not find one such high productive and low decline well belong to another company.<br />
<br />
Here are just some of the well numbers<br />
<br />
131-20062<br />
115-20341<br />
115-20271<br />
015-20482<br />
115-20458<br />
115-20279<br />
115-20257<br />
115-20393<br />
115-20325<br />
115-20324<br />
115-20256<br />
115-20269<br />
115-20244<br />
115-20303<br />
115-20243<br />
015-20673<br />
131-20058<br />
015-20471<br />
015-21224<br />
015-20242<br />
015-20445<br />
015-20488<br />
015-20600<br />
015-20458<br />
115-20268<br />
015-20457<br />
115-20296<br />
115-20351<br />
115-20272<br />
015-20866<br />
015-20452<br />
015-21656<br />
015-20403<br />
015-21655<br />
015-20991<br />
115-20212<br />
015-21609<br />015-20646<br />
015-20423<br />
115-20424<br />
<br />
<br />
Very interesting.<br />
<br /><br />
Is CHK, Chesapeake Energy, pulling a <strong>DATA SCAM</strong> on the records?<br />
<br />
<br />
I don't know how they are going to explain who they have such high production wells that simply will not decline like most shale wells do.<br />
JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com17tag:blogger.com,1999:blog-915569627637323801.post-90276083392212845822013-02-08T13:54:00.002-08:002013-02-08T17:02:13.259-08:00The Real Bakken Shale Oil Well DeclinesI am about done with analyzing the real production data from Bakken shale oil wells. I am posting the charts I obtained:<br />
<br />
<img height="457" src="http://2.bp.blogspot.com/-tRT5NIA76z0/URVKN-yjPCI/AAAAAAAAAEQ/6gVlbQR61Qw/s640/BakkenPR_001.PNG" width="640" /><br />
<br />
The above are well decline history of all Bakken shale wells that has been producing continuously.<br />
<br />
The following shows the decline characteristics of Bakken wells started at different times:<br />
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<a href="http://3.bp.blogspot.com/-iWStnwIGCSw/URVxxBHM6vI/AAAAAAAAAEo/PhYLvlB1yTE/s1600/B0912.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="244" jea="true" src="http://3.bp.blogspot.com/-iWStnwIGCSw/URVxxBHM6vI/AAAAAAAAAEo/PhYLvlB1yTE/s320/B0912.PNG" width="320" /></a> <a href="http://3.bp.blogspot.com/-Gho1oQbFnhI/URVxyralt-I/AAAAAAAAAEw/nYznfvOckYU/s1600/B1001.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="244" jea="true" src="http://3.bp.blogspot.com/-Gho1oQbFnhI/URVxyralt-I/AAAAAAAAAEw/nYznfvOckYU/s320/B1001.PNG" width="320" /></a></div>
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<a href="http://1.bp.blogspot.com/-7iehIXeRIcU/URVxzxC_WUI/AAAAAAAAAE4/ofN7dKHq6uI/s1600/B1002.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="244" jea="true" src="http://1.bp.blogspot.com/-7iehIXeRIcU/URVxzxC_WUI/AAAAAAAAAE4/ofN7dKHq6uI/s320/B1002.PNG" width="320" /></a> <a href="http://4.bp.blogspot.com/-8181aZSVmiQ/URVx2JZP9xI/AAAAAAAAAFA/I94j-JmXtts/s1600/B1003.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="244" jea="true" src="http://4.bp.blogspot.com/-8181aZSVmiQ/URVx2JZP9xI/AAAAAAAAAFA/I94j-JmXtts/s320/B1003.PNG" width="320" /></a></div>
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<a href="http://2.bp.blogspot.com/-pnuMateXBj8/URVx3e2OM5I/AAAAAAAAAFI/07rlfyZVu3A/s1600/B1004.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="244" jea="true" src="http://2.bp.blogspot.com/-pnuMateXBj8/URVx3e2OM5I/AAAAAAAAAFI/07rlfyZVu3A/s320/B1004.PNG" width="320" /></a> <a href="http://4.bp.blogspot.com/---RzqZs9_3o/URVx4ZIQ3eI/AAAAAAAAAFQ/FGolCE6ZsuY/s1600/B1005.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="244" jea="true" src="http://4.bp.blogspot.com/---RzqZs9_3o/URVx4ZIQ3eI/AAAAAAAAAFQ/FGolCE6ZsuY/s320/B1005.PNG" width="320" /></a></div>
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<a href="http://4.bp.blogspot.com/-LAdp_uO9NLA/URVx5ST1xqI/AAAAAAAAAFY/TPPWPl8ZxSU/s1600/B1006.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="244" jea="true" src="http://4.bp.blogspot.com/-LAdp_uO9NLA/URVx5ST1xqI/AAAAAAAAAFY/TPPWPl8ZxSU/s320/B1006.PNG" width="320" /></a> <a href="http://4.bp.blogspot.com/-Io5PLfVPNPg/URVx7QUh7tI/AAAAAAAAAFg/H8sBzVHh5EQ/s1600/B1007.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="244" jea="true" src="http://4.bp.blogspot.com/-Io5PLfVPNPg/URVx7QUh7tI/AAAAAAAAAFg/H8sBzVHh5EQ/s320/B1007.PNG" width="320" /></a></div>
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<a href="http://1.bp.blogspot.com/-STUHk5m2bRw/URVx8ccvo_I/AAAAAAAAAFo/gJ2yOU7P3yo/s1600/B1008.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="244" jea="true" src="http://1.bp.blogspot.com/-STUHk5m2bRw/URVx8ccvo_I/AAAAAAAAAFo/gJ2yOU7P3yo/s320/B1008.PNG" width="320" /></a> <a href="http://4.bp.blogspot.com/-Yky3Q5Oxbc4/URVx98vC23I/AAAAAAAAAFw/8shnqvfTtME/s1600/B1009.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="244" jea="true" src="http://4.bp.blogspot.com/-Yky3Q5Oxbc4/URVx98vC23I/AAAAAAAAAFw/8shnqvfTtME/s320/B1009.PNG" width="320" /></a></div>
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<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">
In summary, the existing Bakken shale wells are collectively declining -0.2% per day. That's losing slightly more than HALF of production rate in one year.</div>
JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com22tag:blogger.com,1999:blog-915569627637323801.post-10515572451709591632013-02-08T11:40:00.001-08:002013-02-08T11:40:43.767-08:00The EIA Joked on Natural Gas Production DataHere is a definite proof that the monthly natural gas production data published by EIA is nothing but a JOKE. They have almost zero credibility.<br />
<br />
<br />
<br />
<br />
To start, go to EIA wek site and find the Weekly Natural Gas Update. At the bottom they have a chart showing productions from all shale plays. Below the chart there is a link allowing you to download the raw data used to create the chart.<br />
<br />
<br />
<br />
Do you notice something odd? Despite of massive drilling rig drop, and a lot less wells drilled, and despite of the fact that shale wells decline fast, as shown by EIA, the Marcellus production sems to defy gravity and continue to grow up without any slowing. How could it be possible.<br />
<br />
<br />
<br />
I extracted the Marcellus part of the data, it looks to me like a complete joke. Let me paste all the Marcellus data here, so you can judge whether this is ridiculous or not:<br />
<br />
<br />
<br />
Dry shale gas production (Billion cubic feet per day) <br />
<br />
Marcellus (PA and WV)<br />
<br />
1/1/2007 0.020414941<br />
2/1/2007 0.021928615<br />
3/1/2007 0.023202324<br />
4/1/2007 0.023539191<br />
5/1/2007 0.024270666<br />
6/1/2007 0.025593099<br />
7/1/2007 0.026332206<br />
8/1/2007 0.025327993<br />
9/1/2007 0.028556724<br />
10/1/2007 0.031472248<br />
11/1/2007 0.034466894<br />
12/1/2007 0.036114525<br />
1/1/2008 0.036439162<br />
2/1/2008 0.057211911<br />
3/1/2008 0.076914715<br />
4/1/2008 0.089541419<br />
5/1/2008 0.109314548<br />
6/1/2008 0.117205475<br />
7/1/2008 0.136433165<br />
8/1/2008 0.139649025<br />
9/1/2008 0.139340395<br />
10/1/2008 0.148172389<br />
11/1/2008 0.148962162<br />
12/1/2008 0.155200095<br />
1/1/2009 0.134042178<br />
2/1/2009 0.091690035<br />
3/1/2009 0.107014843<br />
4/1/2009 0.111614036<br />
5/1/2009 0.117017073<br />
6/1/2009 0.11661637<br />
7/1/2009 0.118719651<br />
8/1/2009 0.128221411<br />
9/1/2009 0.137161605<br />
10/1/2009 0.141329818<br />
11/1/2009 0.140823304<br />
12/1/2009 0.127659797<br />
1/1/2010 0.481882287<br />
2/1/2010 0.637744188<br />
3/1/2010 0.798307082<br />
4/1/2010 0.868073158<br />
5/1/2010 1.017980024<br />
6/1/2010 1.276166703<br />
7/1/2010 1.269514246<br />
8/1/2010 1.42571918<br />
9/1/2010 1.647672123<br />
10/1/2010 1.821883771<br />
11/1/2010 2.047449075<br />
12/1/2010 2.082841924<br />
1/1/2011 2.366314737<br />
2/1/2011 2.526894717<br />
3/1/2011 2.773444294<br />
4/1/2011 3.012380529<br />
5/1/2011 3.057075584<br />
6/1/2011 3.057975032<br />
7/1/2011 3.544594619<br />
8/1/2011 3.568587512<br />
9/1/2011 3.762196787<br />
10/1/2011 3.949613152<br />
11/1/2011 4.405352219<br />
12/1/2011 4.793736336<br />
1/1/2012 5.164640947<br />
2/1/2012 5.478762587<br />
3/1/2012 5.61576504<br />
4/1/2012 5.639587719<br />
5/1/2012 5.991993065<br />
6/1/2012 6.262796758<br />
7/1/2012 6.290871349<br />
8/1/2012 6.555845752<br />
9/1/2012 6.714694689<br />
10/1/2012 6.984281178<br />
11/1/2012 7.257084169<br />
12/1/2012 7.437482985<br />
<br />
<br />
It can be seen much clearer, if you plot the data into a chart. The chart basically is composed of two straight lines. One straight line is from Jan. 1 of 2007 to Dec. 31 of 2009. It was flat, very low production and virtually no growth. It took three years and production grew from 0.02 BCF/day to 0.128 BCF/day. Effectively no growth.<br />
<br />
<br />
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And then magic happened in Jan. 2010. The production suddenly jumped from 0.128 BCF/day to 0.482 BCF/day. And from then on it was no stop, constant growth at a uniform rapid pace.<br />
<br />
<br />
<br />
From Dec 31, 2009 up to Dec. 31, 2012, latest data available, the Marcellus production was basically a STRAIGHT LINE, going from 0.2 to 7.4 BCF/day in a straight fashion, adding exactly 0.2 BCF/day production rate each month. The growth was so uniform and so linear, it looks like rig count, well count, well declines, production rate change are all irrelevant and all had NO IMPACT on the production. It was just a straight line.<br />
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<a href="http://2.bp.blogspot.com/-pSl-vr7JiEU/URVUpSl2ObI/AAAAAAAAAEY/tdoMukAoe5M/s1600/EIA_Marcellus.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="440" jea="true" src="http://2.bp.blogspot.com/-pSl-vr7JiEU/URVUpSl2ObI/AAAAAAAAAEY/tdoMukAoe5M/s640/EIA_Marcellus.PNG" width="640" /></a></div>
<br />
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What a joke! EIA has lost all credibility in its data modeling!!! They even pretend it was actual production data. No, it was NOT actual production data. Actually None of the Marcellus producers has reported any H2 2012 production figure to any state government agency, except that they reported the production total in the Q3 quarterly report. The quarterly reports contradict EIA data, BTW.<br />
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JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com6tag:blogger.com,1999:blog-915569627637323801.post-35394609613279268602013-02-08T09:36:00.004-08:002013-02-08T10:57:44.720-08:00How Fast Does Bakken Shale Oil Wells DeclineArthur Berman is not the only shale gas skeptism. I am probably the most outspoken critic Shale Gas among all people who wrote on Seeking Alpha. They have now imposed worse censorship on me because I spoke out on the truth of shale gas. Not only they banned me from writting any article or instablog on Seeking Alpha. They banned me from making any comment or even communicate privately with any Seeking Alpha readers. In communist countries at least people are free to communicate privately.<br />
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This tells you that they feared people to hear the truth on shale gas. I intend to complaint to SEC about Seeking Alpha's blatant market manipulation by supressing truthful information. Some vested interest group played a dirty hand in getting me, Mark Anthony, completely banned on Seeking Alpha. My previous articles are still there. But I bet they will ultimately remove all traces of them eventually.<br />
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Now, Arthur Berman first got my attention to the potential scam in the US shale gas industry. But unlike most people, I do not take Arthur Berman's words on face value. I dig out data myself and do my own data analysis.<br />
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<br />
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Here is what I find out by studying data from several thousand Bakken wells. Bakken is a good study candicate thanks for excellent public data release by North Dakota Department of Mineral Resources. They have month by month production statistics of ALL Bakken shale wells. So you can track each well and see how the production declines.<br />
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My study shows that Bakken well declines MUCH FASTER than even Arthur Berman claimed. For example I summed up production from 3062 Bakken wells that has been continuously producing in all the months from May to Nov 2012, including 128 wells that only started in May 2012. That's the entirety of all wells I can find that has been producing continuously, but excluding a few that produced for a while and then shut down.<br />
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In May 2012, those existing wells produced at average of 506869 Barrels per day (BOE), with gas and oil production lumped together as Barrel of Oil Equivalence (BOE).<br />
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In Nov 2012, only six months later, these same 3062 wells produced at 353040 BOE/day. That's a drop of -30.35% in merely six months. That's averaging at -0.2% drop per day, or -5.9% drop per month, or -51.5% drop per year.<br />
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That's how fast the collective group of existing wells drop, with newest and oldest wells all included. That's losing slightly more than half of production rate in a year.<br />
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Identifying only the newest 128 wells which only started in May 2012. These 128 wells dropped from 62067.67 BOE/day to 27950.77 BOE/day, or losing -55.0% in six months. That's a -0.436% drop per day, or -12.5% loss per month, or losing 80% in a year. Here are just some of the well numbers in this group:<br />
<br />
<br />
<br />
21104,21088,21324,21796,18797,20170,20421,21399,<br />
<br />
21400,21582,21434,21587,21588,19416,19265,18939,<br />
<br />
21662,21627,20617,21640,21730,21731,21477,19456<br />
<br />
<br />
<br />
Now looking at the oldest wells within this group. There are 1244 Bakken wells that has been producing continuously since Dec., 2009. These wells produced at 111911 BOE/day in Dec. 2009. They dropped to 54539 BOE/day in May 2012 and further dropped to 50234 BOE/day in Nov 2012. So these vintage wells more than three years old were dropping at -7.9% every half year, or losing -15.2% per year. These wells show that even after more than three years, the well decline is still very steep.<br />
<br />
<br />
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Singling out wells first started in Jan. 2010, no early and no later. There are 31 of them:<br />
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17181,18141,17880,16323,16568,18193,17625,18023,<br />
<br />
18138,9253,7503,18115,17943,18260,18134,18223,<br />
<br />
17026,18061,17478,18230,17502,16877,18077,18109,<br />
<br />
9108,18163,17910,18251,18135,18172,17764<br />
<br />
<br />
<br />
These wells that started in Jan 2010 produced at 8052.68 BOE/day in that month, dropped to 2433.77 BOE in May 2012 and then to 2007.77 in Dec. 2012. So these three year old wells dropped at losing -17.5% in half a year, or losing -32% per year, or losing 0.1% per day.<br />
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At such steep decline, even Bakken shale, perceived as most profitable due to its high content of oil and high oil price, is NOT profitable currently. They need $20 or $30/barrel higher oil price to break even.<br />
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<a href="http://2.bp.blogspot.com/-tRT5NIA76z0/URVKN-yjPCI/AAAAAAAAAEQ/6gVlbQR61Qw/s1600/BakkenPR_001.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="285" jea="true" src="http://2.bp.blogspot.com/-tRT5NIA76z0/URVKN-yjPCI/AAAAAAAAAEQ/6gVlbQR61Qw/s400/BakkenPR_001.PNG" width="400" /></a></div>
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The US shale gas industry has created a Ponzi Scheme from over a trillion dollars of investor money. This is a bubble that will burst soon. What do they get after spending over a trillion dollars and accumulated half a trillion dollars of debts? They drilled roughly 36000 shale wells and produced roughly 23 TCF of shale gas. And they are left with shale wells that produce gas at 27 BCF/day and decline at roughly losing -0.2% per day. If they stop spending money and stop bringing any new wells onto production, the existing wells, producing at 27 BCF/day and continue to decline at losing 0.2% per day, will produce another 13.5 TCF of gas before they are exhausted. So that means the entire shale gas adventure so far, which counted the industry one trillion dollars, brings in 23 TCF pas production and 13.5 TCF future production, total 36.5 TCF of gas. At today's gas price of roughly $3.5/mmBtu that would be worth $128B of revenue. The shale gas industry is losing their collective arses and their collective minds. JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com22tag:blogger.com,1999:blog-915569627637323801.post-35865865896074276412013-01-15T08:39:00.002-08:002013-01-15T08:39:34.816-08:00Blatant Censorship By Seeking Alpha on Shale GasThey have finally imposed communist style information <strong>cersorship</strong> on the fact that the US shale gas industry is a bubble to be burst! People be aware, when vested interest group feel the need to use such extreme censorship to supress useful information that investors want to know!<br />
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Seeking Alpha author <a href="http://seekingalpha.com/author/mark-anthony/" target="_blank">Mark Anthony</a> has been critizing the US shale gas industry. He used compelling data and statistics to show that production of shale wells decline fast and fall far short of projection, and that the shale industry is deeply un-profitable, and it will lead to the collapse of the US natural gas industry. Read these pieces before they disappear altogether:<br />
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<a href="http://seekingalpha.com/author/Mark-Anthony/articles">http://seekingalpha.com/author/Mark-Anthony/articles</a><br />
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As a result of dirty hands of vested interest group from the industry, Seeking Alpha now completely <strong>banned</strong> Mark Anthony from writting any article or instablog posts, making any comment on any article, or even responsing to any private messages sent to him for private discussions. He can still receive private messages sent to him. But he cannot respond any more.<br />
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Mark Anthony is considering formally file a complain to SEC on blatant information supressions and market manipulation by Seeking Alpha. He has done tremendous research to dig out the truth of the shale industry. Agree with him or not, the public deserves to learn what Mark Anthony has discovered in his research. Especially when it involves a trillion dollar industry, the public need to know the truth. The public deserves to know the truth and hear different opinions.<br />
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The shale gas industry is a bubble to burst soon, due to high debts and deeply money losing shale adventure. As a result, natural gas supply will be disrupted, leading to much higher gas prices, benefitting the US coal sector. But I have repeatedly warned people that UNG, a paper future contract based ETF, is NOT the right vehicle to reap profits from the looming gas price rally. Stay clear of UNG and move to coal names JRCC, ANR, ACI, BTU, WLT etc.<br />
JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com54tag:blogger.com,1999:blog-915569627637323801.post-19740493338570684822013-01-12T23:00:00.001-08:002013-01-12T23:03:29.879-08:00How Many Marcellus Shale Wells Exist in PAThe PSU Marcellus Research Center has a <a href="http://www.marcellus.psu.edu/images/Permits_all.gif" rel="nofollow" target="_blank">map</a> showing all the shale gas well permits issued since 2007. See below:<br />
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<img src="http://www.marcellus.psu.edu/images/Permits_all.gif" /><br />
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The total comes to 11857 wells permitted as of the end of 2012.<br />
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Yet there are only 2000+ wells with reported production in PA DEP's twice per year production reports. WHY?JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com5tag:blogger.com,1999:blog-915569627637323801.post-59908500575737750992013-01-12T12:39:00.001-08:002013-01-12T12:39:15.404-08:00The US Natural Gas Industry is a ColloseumThe Colloseum is an ancient Rome amphitheatre where gladiators fight against each other until only a few strongest ones stand till the last.<br />
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In a sense, the US natural gas (<a class="ticker" href="http://seekingalpha.com/symbol/ung">UNG</a>) sector is now a colloseum. There are too many players in this sector. They just have to kill each other, until there are only a few left at the end. I guess that happens to all economic sectors where there are too many players. Competition always do the job of eliminating too many players.<br />
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In the beginning of 2012, as decade low natural gas prices hurt producers, we heard a lot of producers vowed to curtail production to bring supply/demand to balance. By the end of 2012, we found that few NG producers actually did what they promised and curtailed their production, or postponed bringing new wells to production. Only one who actually curtained any production is Chesapeake Energy (<a class="ticker" href="http://seekingalpha.com/symbol/chk">CHK</a>) who claimed that they ended the curtailment of about 0.2 BCF/day production as of end of Q2 of 2012. Why were producers eager to claim they were going to curtail production but were reluctant to do it?<br />
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If you go to investor presentation made by each individual producers, you heard the same story repeated: They all boast to investors how fast their productions have been growing, and how they project they will continue to grow.<br />
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Do you see the irony here? If every one keeps growing, the market will be more over-supplied, and the prices will continue to be killed, and it ultimately leads to the demise of their own industry. They understand it. They understand that the whole industry as a whole, they must keep production checked. They can not continue to grow recklessly. But as individual company, they want to see their own to continue to grow and expand. Because that is how they win the competition and get ahead of their competitors in attracting investment capitals.<br />
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It is a do or die situation. The shale oil and gas industry is a very capital intensive industry. They must spend large sum of capital money to drill and develop wells. So far the revenue stream is only a fraction of the capital spending. They can not sustain well drilling from cash flow from the business, they need continued injection of money from capital investment and from debt borrowing, in order to continue to drill wells. But the more wells they drill, the more they drive down the price and the more money they lose, which means they have to borrow more and beg the market for more capital investment money.<br />
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But then, it means they must continue to pitch an ever rosier pictures and try to portrait their business as rapidly growing, in order to make a case to continue to attract investment money and bank loan. Imagine the alternative. If the producers tell the truth that current NG prices are deeply non-profitable, and that they can not sustain their business from cash flow from revenue, and that they have no money to drill more wells, and that their production will fall and thus revenue stream will decline, and all that, and then they tell the banks and investors: please give up some more money so we can continue to drill more.<br />
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Imagine they say that to the banks and investors. Do they expect to get a dime of new loans or new investment capitals afterwards? No! They can not do that. Admitting facts and admitting failure will mean effective end of their business. Their competitors will win if they do so.<br />
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So that's why shale gas producers are getting bolder in projecting ever higher EUR (Estimated Ultimate Recovery) of their wells. That's why Cabot Oil & Gas (<a class="ticker" href="http://seekingalpha.com/symbol/cog">COG</a>) claims that they are profitable even at current gas prices. They are not profitable. They cannot sustain their business if bank loans and new market capital injection stops, and they are unable to rise cash by selling assets. A profitable business should be able to sustain its own business operation from revenue cash flow. A profitable business does not need to continue to borrow money or sell assets just to make it through another day.<br />
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I see a big Ponzi Scheme here which will collapse soon, leading to collapse of US natural gas supply. It will be a big bonanza for the US coal sector. So I am holding my coal stocks firm: James River Coal (<a class="ticker" href="http://seekingalpha.com/symbol/jrcc">JRCC</a>), Alpha Natural Resources (<a class="ticker" href="http://seekingalpha.com/symbol/anr">ANR</a>), Arch Coal Inc. (<a class="ticker" href="http://seekingalpha.com/symbol/aci">ACI</a>), Peabody Energy (<a class="ticker" href="http://seekingalpha.com/symbol/btu">BTU</a>).<br />
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In the next few posts I will analyze COG's business to show whether they are really making a profit as they claimed. Stay tuned!<br />
JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com49tag:blogger.com,1999:blog-915569627637323801.post-24824508168473277392013-01-08T18:17:00.001-08:002013-01-08T18:17:21.591-08:00The Real EUR of EOG's Bakken Shale WellsSA author Michael Filloon <a href="http://seekingalpha.com/article/1098261-bakken-update-eog-wells-model-eurs-over-2-million-barrels-of-oil">wrote</a> on the Bakken shale wells of QEP Resources (<a class="ticker" href="http://seekingalpha.com/symbol/qep">QEP</a>). He projected an EUR up to <strong>2 million</strong> barrels of oil equivalent. I disagree with his calculation. Real production <a href="https://www.dmr.nd.gov/oilgas/mpr/2012_10.pdf">data</a> does <strong>not</strong> support his conclusion. I pick the first well listed in his article, <a href="http://www.eser.org/parshall-field-long-1-01h-eog-resources-inc-mountrail-county-north-dakota-152n-90w-1">No. 16637</a>, owned by EOG resources (<a class="ticker" href="http://seekingalpha.com/symbol/eog">EOG</a>), for a case study.<br />
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<strong>Modeling Shale Well Declines</strong><br />
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Traditionally natural gas (<a class="ticker" href="http://seekingalpha.com/symbol/ung">UNG</a>) producers use the classical Arps formula to model a conventional oil or gas well's production decline.<br />
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As I discovered, and as many people pointed out, the classical Arps formula is not suitable for projecting shale well's decline patterns, as shale wells decline much faster than the formula projects in the long term. Specifically the terminal decline of Arps formula approaches zero, and the cumulative production it projects approaches infinity with a b-factor larger than 1.0. That's problematic, as in the long term, shale wells should decline a terminal decline rate above zero.<br />
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Let's re-cap about the classical Arps formula and how I modified it:<br />
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<em>(click to enlarge)</em><a href="http://static.cdn-seekingalpha.com/uploads/2012/12/11/121744-13552740408938413-Mark-Anthony_origin.png" rel="lightbox"><img alt="" hspace="6" src="http://static.cdn-seekingalpha.com/uploads/2012/12/11/121744-13552740408938413-Mark-Anthony.png" vspace="6" /></a><br />
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I am happy to find out that even though most producers insist on using the classical Arps formula, QEP does use the SAME modified Arps formula with a terminal decline term introduced. In that sense they <strong>agree</strong> with my own modeling method. I congratulate management of QEP for being a little bit more honest than Chesapeake (<a class="ticker" href="http://seekingalpha.com/symbol/chk">CHK</a>) and Cabot Oil & Gas (<a class="ticker" href="http://seekingalpha.com/symbol/cog">COG</a>).<br />
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But even QEP used the <strong>same</strong> correct modified Arps formula as I do, and admitted a reasonable terminal decline rate, they still pushed for a set of parameters that gave a higher EUR (Estimated Ultimate Recovery) than what is realistically possible.<br />
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<strong>Modeling Bakken Well No. 16637</strong><br />
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I extracted <a href="https://www.dmr.nd.gov/oilgas/mpr/2012_10.pdf">monthly production data</a> from ND DMR web site. I did the calculation on a spreadsheet. Here are the comparisons. Note that both QEP and I used <strong>the same formula</strong> with four parameters: IP, D, b-factor and terminal decline rate Beta. I just disagree with QEP on what parameters provide the best fit. Here is QEP's model:<br />
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<em>(click to enlarge)</em><a href="http://static.cdn-seekingalpha.com/uploads/2013/1/8/121744-1357692233229541-Mark-Anthony_origin.png"><img alt="" hspace="6" src="http://static.cdn-seekingalpha.com/uploads/2013/1/8/121744-1357692233229541-Mark-Anthony.png" vspace="6" /></a><br />
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According to the chart, here are QEP's parameters, versus mine:<br />
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<li>QEP adopts IP = 724 BPD, <strong>D = 0.0035/day</strong>, B = 1.80 and Terminal decline rate Beta = 0.000228/day</li>
<li>I adopt IP = 1250 BPD, <strong>D = 0.020/day</strong>, B = 1.80 and Terminal decline rate Beta = 0.000280/day.</li>
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Both QEP and I use the same b-factor of 1.80. I use slightly higher IP, slightly higher terminal decline rate beta. But the biggest difference is that QEP uses an extremely <strong>low</strong> initial decline rate, by the shale industry's standard. I think there is no justification for using such a low value of D. Shale wells decline extremely fast in the first few weeks. Other producer use a D ten times as higher.<br />
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As I said, I agree with QEP in the formula used, I disagree with them in the specific fitting parameters. Let's see who fit the data better:<br />
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<em>(click to enlarge)</em><a href="http://static.cdn-seekingalpha.com/uploads/2013/1/8/121744-13576937042531679-Mark-Anthony_origin.png"><img alt="" hspace="6" src="http://static.cdn-seekingalpha.com/uploads/2013/1/8/121744-13576937042531679-Mark-Anthony.png" vspace="6" /></a><br />
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It appears to me that my curve fit the actual production data much better. The QEP curve does not fit the well data very well.<br />
My speculation is that they know that they need a flat curve to obtain a higher EUR value. The more flat the curve is, the higher EUR it will calculate. Thus they probably deliberately pull the IP down to a much lower starting point.<br />
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To compensate for a lower starting IP, they adopt a much smaller initial decline rate D, which makes the curve flatter.<br />
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Finally, to further flatten the curve, they tried to fit the artificial local peak of production, at April and May of 2008, which resulted from re-fracing operation (re-stimulation). I believe the cur should follow the non-disturbed natural decline trend, instead of following the artificial temporary boost of production, to be realistic.<br />
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The chart above shows that my curve following the real production down closely, while the QEP curve deviate on the higher side.<br />
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<em>(click to enlarge)</em><a href="http://static.cdn-seekingalpha.com/uploads/2013/1/8/121744-13576943656358438-Mark-Anthony_origin.png"><img alt="" hspace="6" src="http://static.cdn-seekingalpha.com/uploads/2013/1/8/121744-13576943656358438-Mark-Anthony.png" vspace="6" /></a><br />
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The above chart, plotted in much longer time scale, and using logarithm scale, shows the deviation much better. Once again, my curve tracks the actual production data very closely. But the QEP curve clearly deviates from the real data and projects too high.<br />
As a result, when you integrate the cumulative production over time, QEP's curve would over-estimate while my curve gives the accurate projection. See below:<br />
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<em>(click to enlarge)</em><a href="http://static.cdn-seekingalpha.com/uploads/2013/1/8/121744-13576945738264353-Mark-Anthony_origin.png"><img alt="" hspace="6" src="http://static.cdn-seekingalpha.com/uploads/2013/1/8/121744-13576945738264353-Mark-Anthony.png" vspace="6" /></a><br />
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As shown above, my parameters leads to accurate projection of the actual production. The QEP curve clearly deviates on the high side.<br />
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I projected that the EIR of well No. 16637 will likely be 500 MBOE. The QEP projection is 750 MBOE. The chart clearly agrees with me.<br />
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<strong>Calculation and Discussion</strong><br />
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As of now, the well 16637 is a bit more than five years old, and has produced an accumulative 355.280 MBOE. Current production rate is 80 BOE/day. Current annual decline rate is -16% to -22%. Using -18% annual decline, and using 10 BPD as cut off, the well will produce another 145 MBOE, bring the total EUR to <strong>500 MBOE</strong>.<br />
This well is NOT a typical or average Bakken shale well. If it is, even if the EUR is only at 500 MBOE, producers would make an incredible profit at $100/barrel oil price. Unfortunately that is not the case. The average Bakken shale well has a much lower IP and much lower EUR, even if they are equally cost to drill.<br />
As of October 2012, there are 6349 producing Bakken shale wells. They collectively produced 821.30 MBOE/day. There are 6077 wells which were also producing in September, and 272 new wells which first show up in October. The 6077 wells producing in both months collectively declined from 790.33 MBOE/day to 715.820 MBOE/day from September to October, or -9.5%/month. That is a daily decline rate of /month, or -0.33%/day. At this decline rate, these well's future production will be equivalent to 1/0.33% = 303 days worth of production at current rate of 716 MBOE/day, or 217 million BOE. Divided by well numbers, each well has an average of 35.7 MBOE remaining production. That does not look like a lot of value to me. At $90/barrel, that's a remaining production value of $3.2M each.<br />
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Good luck drilling every well as productive as No. 16636, producers!<br />
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I repeatedly pointed out that shale oil and gas producers tend to over-exaggerate productivity of their wells, under-estimate the well declines, and under-calculate the fair capital amortization cost, in order to pitch their investment case to banks and investors, so they can keep borrowing more money to keep drilling shale wells.<br />
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In reality, even Bakken shale oil wells are hardly profitable at current oil prices and current development costs. My advice to investors is to do your own due diligence research and scrutinize the data. Avoid the hyped shale oil and gas sector. The sector you should get into, is the US coal mining sector. The meme that natural gas is replacing coal, is completely wrong. Natural gas will always be an important part of America's energy supply. But at fair cost, shale gas can not compete with the cheap king coal.<br />
The investment case in coal is made better as nearly 99% of investors made the wrong bet, as there is 75 times more market capital invested in the NG sector than in the US coal sector, while both sectors contribute about equal energy to the US economy.<br />
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Imagine what happens when the looming debt crisis in the NG sector unfold, and shale gas production collapses, sending prices of both NG and coal much higher, and 75 more market capital in the NG sector now moves to coal sector instead. This is not an opportunity you get to see every year. Now is the best time to get into coal. I recommend these names: <strong>JRCC</strong>, <strong>ANR</strong>, <strong>ACI</strong>, <strong>BTU</strong>.<br />
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JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com7tag:blogger.com,1999:blog-915569627637323801.post-57419771049671781992011-08-19T17:46:00.000-07:002011-08-20T19:02:48.314-07:00More On the Coming Palladium Paradigm ShiftIn <a href="http://seekingalpha.com/article/240878-new-palladium-paradigm-shift-coming">early December, 2010</a>, I pointed that there will be <a href="http://seekingalpha.com/article/240878-new-palladium-paradigm-shift-coming"><strong>a huge paradigm shift</strong></a> in the supply/demand of the global <strong>palladium</strong> and <strong>platinum</strong> market. <a href="http://www.nornik.ru/en/">Norilsk Nickel</a> (<a href="http://seekingalpha.com/symbol/nilsy.pk">NILSY.PK</a>), the largest nickel mine in the world who is also responsible for <strong>45%</strong> of the world's palladium and <strong>10%</strong> of platinum, is abandoning the traditional pyrometallurgy process and <a href="http://www.bloomberg.com/news/2010-10-18/norilsk-nickel-plans-20-billion-program-to-boost-arctic-output.html">adopting</a> the more efficient <strong>Activox Process</strong>, hydrometallurgy that extracts base metals from mineral ores by chemical leaching. The change is necessary due to <a href="http://www.time.com/time/specials/2007/article/0,28804,1661031_1661028_1661022,00.html">severe pollution</a> and <a href="http://seekingalpha.com/article/185739-palladium-the-bullish-case-now-looks-even-stronger">deteriorating ore grade</a>.
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<br />Knowing the physics in mining, I saw something with <strong>hugely significance</strong>: While the new technology can extract nickel and copper at near 100% efficiency at low cost, it also means that the chemically stable <strong>PGM</strong> contents, <strong>platinum</strong> and <strong>palladium</strong>, will be extremely difficult to extract. <strong>Norilsk</strong> will <strong><span style="color:#ff0000;">cease</span></strong> to be a major supplier of <strong>palladium</strong> and <strong>platinum</strong>. The supply disruption will cause a <strong>panic</strong> in the global market, <a href="http://seekingalpha.com/article/240878-new-palladium-paradigm-shift-coming">sending the price of palladium to the sky</a>!!!
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<br />After <a href="http://seekingalpha.com/article/240878-new-palladium-paradigm-shift-coming">my article</a> was published, some folks raised some questions. I have done more research on this issue and collected more information. The more I looked at it the more I am convinced of the unescapable conclusion. I will summarize the important points here:
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<br /><strong>1. Will Norilsk Nickel switch to Activox Process if they could lose PGM revenue?</strong>
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<br />They have to switch! Maintaining status quo is not sustainable:
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<br />a. Due to heavy pollution thanks to the traditional pyrometallurgy, Norilsk City tops the world's most polluted places. 98% of the people are sick. There is not a single live tree within a 30 miles radius. The company is <a href="http://www.themoscowtimes.com/business/article/industry-ramping-up-retention-programs/437628.html">paying 2.6 times higher salary</a> for mining workers, but still can not retain the workforce. If the cost is losing your heath and lose the ability to to raise heathy children, who would want to work in such a filthy place? The government would not turn a blind eye forever.
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<br />b. Pyrometallurgy is extremely energy intensive. Even though the technology can extract up to 70% of the base metals and palladium, higher energy cost and deteriorating ore grade means the process could become un-profitable, even if you don't consider the cost to the environment.
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<br />c. Activox Process consumes much less energy. The chemicals can be recycled and reused. Not to mention that it extracts nearly 100% of the base metals, versus 70% in pyrometallurgy. The lower cost, more efficient extraction of nickel and copper more than offset loss of PGM revenue.
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<br />d. All information indicates that Norilsk is making the switch. They paid <strong>US$6.5B</strong> cash to acquire LionOre to obtain the <strong>Activox Process</strong> technology, and rename it to <a href="http://www.nornik.ru/en/our_products/norilsk_process_technology/">Norilsk Process</a>. They <a href="http://www.bloomberg.com/news/2010-10-18/norilsk-nickel-plans-20-billion-program-to-boost-arctic-output.html">announced</a> aggressive projects to improve mining process. They <a href="http://www.nornik.ru/_upload/news_lang/filename_document2_5079.pdf">announced</a> that beginning in 2013, the <a href="http://www.nornik.ru/_upload/news_lang/filename_document2_5079.pdf">sulphur emission will be cut</a> from nearly one million tons a year, to only 0.2 million. Such drastic pollution reduction can only happen with the switch to <strong>Activox</strong>.
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<br />Although in the same <a href="http://www.nornik.ru/_upload/news_lang/filename_document2_5079.pdf">investor presentation</a>, Norilsk projected continued palladium and platinum production at near flat level. Many readers quoted that report and criticized my conclusion. My response is that Norilsk did not develop the technology, it purchased it. The investor report was prepared by high level management who know very little of the actual physics in mining process. From their point of view, whatever is in the ore, they assume it can be extracted. Whatever technology that do not exist today to extract certain metal content, they assume will become available some years down the road. When making long term projections you are not encumbed by limitation of what is feasible today, but you aim for the long term goal. So I don't blame Norilsk for making the projection that they are going to continue to produce palladium. But the projection is too rosy. It is unrealistic.
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<br />But investors need to scrutinize what can or can not be done today or in the near future. We have to get to the intimate details to dig out the facts. With known physics, I do <strong>NOT</strong> see how they can continue to extract PGM metals once they switch to <strong>Activox</strong>.
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<br /><strong>2. Is it really impossible to extract PGM metals once Activox Process is adopted</strong>
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<br />We have to look at the basic physics of mining process. After mineral ores are collecetd from a mine, the first step, called milling, is to crush the materials into small particles so the rocks and the metal containing grains can then be separated. In traditional mining process, a technology with over a hundred years of history is used, called Froth Flotation. Let me explain it.
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<br />Different material stick to oil or other liquid differently. Some will soak in the liquid, some will form oil like droplets as they don't stick. Using this property, we can pour the crushed mineral grains into certain water solutions, and then blow bubbled from the bottom. The metal grains will more likely stick to the bubbles and be bought to the surface, while rock particles remain on the bottom. We can then skim off the top layer which contains metal rich concentrates. This process is called <strong>froth flotation</strong>.
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<br />Mining engineers will tell you that for effective froth flotation, the ores must be <strong>grinded to proper particle size</strong>. If it is grinded too coarsely, then the metals and rocks are still mixed in the same particles. But if it is over-grinded, it results in particles so tiny that they are almost equally likely to stick to the bubbles, thus it is unable to separate metal and non-metal content. The <strong>over-grinding</strong> is also called sliming.
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<br />How much grinding is over-grinding? <a href="http://www.isamill.com/downloads/Improving%20Fines%20Recovery%20by%20Grinding%20Finer.pdf">This paper</a> and many others suggest that roughly <strong>30 to 80 microns</strong> is the ideal particle size for optimum froth flotation recovery. For particles 10 microns or less, the recovery rate quickly falls off.
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<br />Chemical leaching, like <strong>Activox Process</strong>, has a <a href="http://www.isamill.com/downloads/IsaMill%20Ultrafine%20Grinding%20for%20a%20Sulphide%20Leach%20Process.pdf">different</a> grinding requirement. For effective leaching, the ores must be <strong>ultra fine grinded</strong> so as to thoroughly expose the metals to the chemical solution. Literatures on <strong>Activox</strong>, like <a href="http://www.saimm.co.za/Conferences/Hydro2009/257-272_Robles.pdf">this</a>, and <a href="http://www.saimm.co.za/Conferences/BM2009/201-214_Nel.pdf">this</a>, describe that the ores are grinded to <strong>10 microns</strong> or less before feeding into the leach process.
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<br />Based on the <a href="http://www.saimm.co.za/Conferences/Hydro2009/257-272_Robles.pdf">flow chart</a>, the PGM metals are left in the solid leach residue. The material is then send to a Froth Flotation process to attempt to extract the PGM particles. That was <a href="http://www.marketwire.com/press-release/LionOre-Approves-ActivoxR-Refinery-and-DMS-Plant-at-Tati-Nickel-for-620-million-TSX-LIM-607226.htm">the original design intention</a>. In the actual Tati Nickel demostration plant, the PGM flotation unit was never actually built to test the feasibility of this extra PGM extraction step.
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<br />In <a href="http://www.nornik.ru/en/our_products/MineralReservesResourcesStatement/">Norilsk ores</a>, <strong>99.98%</strong> of the metal content is nickel and copper. Platinum and palladium is only <strong>0.02%</strong>. Starting with 10 microns metal particles, going through chemical leaching which dis-solves 99.98% of the nickel and copper, there is just a tiny bit of the original metal particles remaining. I calculated the resulting PGM particles will be less than <strong>0.6 microns</strong> in diameter.
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<br />The <strong>0.6 microns</strong> number assumes that during the chemical leaching, metal particles do not break down into bits, but remain whole grains. Most likely the particles do break into bits, thus the PGM content probably will become such tiny dusts that they are simply lost within the leach waste. It's just not possibel to recover anything through the conventional froth flotation method, which requires <strong>30 to 120 microns</strong> particles. There is no other known technology to pick up such metal dusts efficiently from the waste material.
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<br />So the inevitable conclusion, based on physics, is: Norilsk Nickel can <strong>NOT</strong> produce platinum and palladium any more once they move towards Activox. But they must switch over to the process!
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<br /><strong>3. How do you leverage the opportunity?</strong>
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<br />Buy any palladium coins or metal bars you can find; Purchase the PALL and PPLT, which are ETFs backed by physical palladium and platinum metals. But more attractive is to buy shares of the world's only primary palladium producers: <strong><a href="http://stillwatermining.com/">Stillwater Mining</a></strong> (<strong><a href="http://seekingalpha.com/symbol/swc">SWC</a></strong>) and <strong><a href="http://www.napalladium.com/">North American Palladium</a></strong> (<strong><a href="http://seekingalpha.com/symbol/pal">PAL</a></strong>).
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<br />I encourage metals analysts, and experts from major PGM metal industry users, to really look into this looming <strong>palladium</strong> supply issue, and consult mining experts to verify my conclusion.
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<br />Disclosure: The author is heavily invested in <strong>palladium</strong> and in stocks of <strong>SWC</strong> and <strong>PAL</strong>.
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<br />JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com19tag:blogger.com,1999:blog-915569627637323801.post-62105991032274715522011-08-11T12:28:00.000-07:002011-08-11T13:14:04.761-07:00How Fast Can The US Dollar Collapse?<p>Recent volatile and relentless surging gold price suggests that we are getting closer to the catastrophic collapse of the US dollar and other likewise fiat currencies of the world.</p>
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<br /><p>Remember, no matter how high gold price goes up, it is not the value of gold that's going up, it is the value of the dollar that's going down. Gold is just a commodity that happen to be commonly used as money. Gold does not pay interest or generate income. Gold has no investment value but has storage value. No matter how high gold price goes up, you are not going to be able to buy more stuff with gold, but you merely avoided the loss of value holding ever depreciating dollar.</p>
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<br /><p>How fast can the US dollar collapse is the same question as asking how fast can the gold price go up, in dollar terms. Let me try to come up with a model.</p>
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<br /><p>The gold price can be written in the following generic formula, which is always correct as long as you choose the proper time dependent function Y(T):</p>
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<br /><p>P = P0 * exp(Y(T))</p>
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<br /><p>The price of gold should increase or decrease in exponential terms. No matter where the price is, the change is alway in percentages, i.e., the change is reflected in the exponent Y(T). As time elapses, Y(T) increases over time, giving an ever increasing exponent and ever increasing gold price. So let's look at what Y(T) should look like.</p>
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<br /><p>In the constant inflation scenary, gold price should increase the same percentage each year, therefore Y(T) would simply be proportional to the time, t, Y(T) = C*T.</p>
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<br /><p>But we are not talking about constant inflation. The scenary looks like at first, there is almost no inflation. And then as inflation slowly kicks in, the problem becomes more and more serious, and they print more and more money to spend. Therefore, the higher the inflation pace, the more money they print, and the more money they print, the higher the inflation will go up. It all starts with almost no inflation, and ends with inflation approaching infinity.</p>
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<br /><p>In mathematics we can write such correlation simply as that the derivative of Y(T) is directly proportion to Y(T) itself:</p>
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<br /><p>dY(T)/dt = C * Y(T)</p>
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<br /><p>If you are familiar with math you immediately recognize what it is. It is the exponential function:</p>
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<br /><p>Y(T) = EXP(C*(T-T0))</p>
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<br /><p>Thus we obtain an elegant math formula of gold price, once you plug in the Y(T):</p>
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<br /><p>P = P0 * exp(exp(C*(T-T0)))</p>
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<br /><p>Let's pick the two constants. The current gold bull market starts in the beginning of year 2000. Let's use year for the variable T. T0 = 2000. For example today, August 11, 2011 is the 223th day of the year. So for today, T = 2011 + (223/365) = 2011.611</p>
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<br /><p>Let's use $200 as starting gold price at the beginning of 2000. That would require that</p>
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<br /><p>P = P0 * exp(exp(0)) = $200</p>
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<br /><p>Therefore P0 = $200/exp(1) = $73.5</p>
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<br /><p>I find that using the constant C = 0.1 gives a perfect gold price match for the past 10 years:</p>
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<br /><p>P = $73.50 * exp(exp(0.1*(T-2000)))</p>
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<br /><p>For today, T = 2011.611, the formula will give $1791. That's right where we are right now today on the gold price!</p>
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<br /><p>Hold your breath. And now, the following chart shows how good this elegant formula matches up with the past eleven years of gold price, and what the future trend will be!</p>
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<br /><p><img src="http://3.bp.blogspot.com/-jCAu5D55yWM/TkQ1P3Yhl8I/AAAAAAAAAEI/gi0AR0CfIsw/s1600/GoldChart2.JPG"></p>
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<br /><p>Folks, you still have some time, but clearly time is quickly running out before hyperinflation kicks in in full power. Buy physical precious metals now: Gold, silver, platinum and my favorite, palladium! Buy precious metal and commodity mining stocks: SWC, PAL, PCX, SSRI, CDE, JRCC, PAAS. These are the only things that can protect you in the coming years!</p>JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com6tag:blogger.com,1999:blog-915569627637323801.post-57353838957784749602011-07-09T15:51:00.000-07:002011-07-09T17:52:27.313-07:00White Gold, Black Gold and China's Energy CrisisChina has a looming energy crisis. There is a severe, ongoing electricity power shortage throughout most area of China since spring time this year. The power shortage occured long before the summer peak power consumption season kicks in. Mean while, city residents complain about high food prices while tearful farmers had to destroy their harvest corps of vegetables and bananas, because no one is buying their food produces even at dirt cheap give away price of a few cents per pound. The reason: even though the prices of produces may be dirt cheap where they are harvested, the cost of transportating them and distribute them into the basket of city dwellers is no way cheap at all. The transportation bottleneck in China is just another facet of the energy crisis in China: There are not enough truck and diesel fuel to transport the good around the country, because diesel fuel is also needed to generate electricity.<br /><br />China is a huge country with close to 1.4 billion people. The world population is now approaching the 7 billion mark. The rapid economic development in China and in other emerging market means a lot more energy is consumed to produce and transport all the goods and foods to feed the world's population. But we are quickly approaching the limit of how much planet earth can supply to feed the population of this world, both in terms of fossil fuels, and in terms of other natural resources.<br /><br />The reality of limit of growth is one that every investor needs to reckon with. The goal of any investment is the growth of fortune. Economists believe that sustainable growth is always possible given enough incentive of demands. But in a limited world, sustainable growth is not possible. How do individual investor grow his/her share of the fortune, when there is a limit of growth for the world as a whole? A while ago <a href="http://seekingalpha.com/instablog/121744-mark-anthony/165353-richest-billionaires-are-also-biggest-losers">I pointed out</a> thet fact that the most successful investor in the world, <strong>Mr. Warren Buffett</strong>, actually saw his fortune <strong>SHRUNK</strong> by 75%, in teh last 13 years, in real valuation term. It should make you pause and think about: Why Mr. Buffett could not grow his fortune in the last 13 years. What chance do we the small popatos have, in beating Warren Buffett and do much better than him in growing our investment fortune?<br /><br />Great investment opportunities can be discovered if you recognize how resource constraints are limiting the growth of China and other emerging markets. Let's look at some numbers in China's on going power shortage. According to <a href="http://www.bp.com/sectionbodycopy.do?categoryId=7500&contentId=7068481">BP World Energy Review 2011</a>: China produces and consumes more than half of the world's coal in 2011: China produced 1800.4 MTOE (million tons of oil equivalent) of coal out of the world's 3731.4 MTOE, and consumed about as much. One ton of coal in average is equivalent to 0.55 tons of oil in energy content. So in real tonnage, China produced and consumed 3.3 billion tons of coal per year. That number had been increasing annually at 10% pace in recent years!<br /><br />China's domestic coal production simply could not catch up with demand growing at such a pace. It has to turn towards importation. China only begin to import significant amount of coal in 2009. By 2010 the net coal import reached 150 million tons. The staggering growth <a href="http://www.reuters.com/article/2010/11/30/china-coal-citi-idUSTOE6AT07220101130">is sure to continue</a> in 2011, to <a href="http://www.reuters.com/article/2010/11/30/china-coal-citi-idUSTOE6AT07220101130">233 million tons</a> according to Citigroup.<br /><br />This year China faces a power shortage of 30G, or even 40G watts. In average it costs roughly 0.55 kilograms of coal to generate one kilowatt-hour of electricity. So 30GW shortage means a need of an extra 145 million tons of coal per year to fill the gap. That's more than the amount of coal burned by ESKOM in South Africa to generate electricity!!!<br /><br />But look at the world's major coal exporters you have to wonder where can China get its coal in the next few years. The total global coal export is only roughly 1 billion tons per year. At 3.3 billion tons per year basis, one year of China's demand growth at 10% pace is big enough to consume 1/3 of the world's total available exports. The world doesn't have any spare coal export to meet China's growing demand, unless major coal producers drastically ramp up their production and exportation.<br /><br />Don't forget India, a developing economy with a population that is about to exceed China, and one which is growing almost as fast as China. India also has an insatiable appetite for coal. It is also facing a severe domestic coal shortage and is looking around the world for coal. India produces 400 million tons of coal per year but consumes 555 million tons, numbers that are much lower than China's, meaning a much bigger potential for demand growth. The Indians are traveling around the world to sign coal contracts just as the Chinese do. So where can the Indians and the Chinese find extra coal supply?<br /><br />Let's turn attention to South Africa, the only place that foreign importers can hope to buy more. According to a <a href="http://www.bloomberg.com/news/2011-06-27/south-african-power-utility-eskom-s-profit-doubles-after-increasing-prices.html">recent report</a> on the operation of ESKOM, south Africa's national electricity company, they buy domestic coal at prices much lower than international market price, and collect electricity revenue at electricity prices much cheaper than any other countries. In last year, ESKOM burned 125 million tons of coal, paid 35.8 billion rands for the fuel and collected 91 billion rands from electricity tariffs. Using 0.55 kilogram of coal per kilowatt-hour electricity, and one US dollar equals to 6.70 rands, I calculated that ESKOM is paying less than $43 per ton of coal, and South Africa is paying an average of US$0.06 per kwh of electricity. Actually the subsidized big industry is paying way much less, at about 0.25 rands per kwh, or 3.73 US cents.<br /><br />The coal price ESKOM is paying is not competitive against potential international importers, who are <a href="http://www.globalcoal.com/">now paying</a> more than US$120 per ton just to load South African coal into ships waiting at the harbors. The country has such a crumbling electricity supply infrastructure that this year, before the arrival of the winter season, which is July in the southern hemisphere, ESKOM could not afford to shut down the power generators for routine maintenance on a rotational basis.<br /><br />With ESKOM's power generators working overtime without proper maintenance, burning lowest quality coal that frequently clogs up the equipments, and more over they probably will not be able to get supply of even such lowest quality coal for much longer because the Indian and the Chinese importers are eager to pay a much higher price to buy lower quality coal, how long will it be before the country's electricity grid crumble down once more, triggering a panic rally of prices of precious metals platinum and palladium like in early 2008? South Africa is the world's major producer of PGM metals, producing 85% of the world's platinum and 40% of palladium.<br /><br />Mining and production of PGM metals is extremely energy intensive. According to data from major platinum producers, it costs roughly 1x10^10 joules of energy, or 2778 kwh of electricity to produce just one troy ounce of PGM metals. That's only direct energy cost. Count in exploration and development of mines, mining equipments, and labor cost etc, the total direct and indirect energy cost could be 5 times higher at 13890 kwh. If fair cost of energy is US$0.15 per kwh, then the fair cost of PGM metals should be at least $2100 per ounce.<br /><br />So the best way to leverage on China's energy crisis due to shortage of the black gold, the coal, is surprisingly in metals that South Africa produces: the white gold, platinum and palladium. Coal shortage means platinum and palladium shortage one way or another: Either South Africa keeps price of its electricity low and it leads to a crumling electricity grid which collapses the country's PGM mining industry, or ESKOM has to pay fair market price for coal and charge big industry fair electricity cost, bringing the PGM mining industry out of business unless they ask for much higher prices for platinum and palladium.<br /><br />How to play platinum and palladium? Buy the physical precious metal, or the physcial metal backed ETFs, PPLT and PALL. As for mining companies, I would not recommend South Africa based PGM mining companies: they are restrainted by the country's electricity grid. Instead you should look in North America: Stillwater Mining (SWC) and North American Palladium (PAL) are the world's only primary palladium producers. Located in North American and being the world's only PGM producers with the capacity to grow production, they are best positioned to take advatnage of a situation created by China, India and South Africa.JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com9tag:blogger.com,1999:blog-915569627637323801.post-17530081342496547482011-05-13T17:33:00.000-07:002011-05-14T01:01:44.791-07:00Blatant Manipulation in the Precious Metal MarketRecently the CME Group had been raising margin requirements on silver and other commodities almost on a daily basis. The relentless margin hacking up ultimately caused a plummet of silver price from near $50/oz, to around $35/oz, a roughly 30% drop, in less than one week. Such plummet in silver price was un-precedent. The plummet in silver price wiped out a lot of speculative silver investors.<br /><br />A number of precious metal analysts call the CME margin increase blatant market manipulation. I agree. It's blatant market manipulation conducted by the CME exchange itself. It is unfair. The policy change is clearly tilted in favor of one group of market participants against another group. Whether such blatant market manipulation has broken any SEC regulation, or whether some one should go to jail for it, I will leave it to lawyers to decide. But one thing is clear: The actions of CME had caused disturbing disruption in the precious metal and commodity market.<br /><br />The problem is not with the increased margin requirement. It is completely in an exchange's right and duty to set proper margin requirements and adjust it periodically to ensure orderly market trading activities. The problem is with the manner in which the CME raises margin requirement.<br /><br />Instead of a gradual and smooth adjustment of the margin requirement over a long period of time, CME choose to leave the margin unchanged while the silver price was raising rapidly early in the year. And then, right before the "sell in may, go away" season, they suddenly begin to hack up silver future's margin aggressively on a daily basis. The consequence is predictable. Instead of stabolizing the market, they disrupted the market. Why they do not adjust the margin down accordingly, now that silver has lost 1/3 of its recent price high? Why are the margin adjustment asymmetic? One has to wonder whether the decision to successively jack up margin ratio was purposeful, with the goal of suppressing silver price in aim.<br /><br />The margin requirement in its current forms are asymmetric, because the long side is being punished while the short side is rewarded. It is unfair because it requires CASH deposits on both the long and the short. This torelates and encourages illegal naked shorting of futures contracts.<br /><br />Let me explain. A silver future's contract is a binding legal contract between the contract writer (the seller, or the short side), and the contract holder (the buyer, or the long side), that at a future time, the seller shall deliver an agreed amount of physical silver, for consideration of an agreed amount of cash tendered by the buyer. Alternatively, the buyer may choose to settle the contract in cash instead of take physical delivery. But that should be up to the buyer to choose, NOT up to the seller to decide whether the contract can be settled in cash or delivery be made. Failure to do either cash settlement or delivery by contract expiration date is a breach of the binding contract, and the side which causes the failure is the side at fault. Please note, if the contract buyer demands a physical delivery but the seller could not honor the request, it is a contract <strong>default</strong> even if the two sides could settle in cash.<br /><br />Margin requirement is a requirement of maintaining minimum asset, imposed by the exchange to ensure that futures contracts will be fulfilled, and no default shall occur. It is reasonable to impose a cash margin requirement, so in the case the contract holder is unable or unwilling to tender the full cash amount for delivery, he/she is able to choose instead settle in cash and be able to pay the difference in cash.<br /><br />But what about margin requirement on the contract seller side. The existing margin requirement on sellers is in CASH, just like the requirement on buyers. This ensures that the seller can pay the cash difference in the case the contracts are settled in cash. But what about the cases that the contract holder request physical delivery but the seller is unable to honor the request? Remember, it is up to the buyer, not the seller, to choose physical delivery.<br /><br />What assurance does the exchange has that when the contract buyer demands physical delivery, that it will be honored, and there will be no failure of delivery? Nothing. There is simply no such guarantee. I think that is a big problem. Maybe the exchange reason in imposing a cash margin requirement on the short is that as long as the short has the cash, he she can always go to the spot market to acquire physical silver, and make good on the delivery request.<br /><br />Such reasoning is frauded. The physical spot market is limited, while the volume of contracts that can be written and sold has no limit. It is impossible to deliver more silver that what's actually exist out of there. As a matter of fact, if all existing silver future's contracts are settled in physical delivery, the delivery requirement will be many times more than silver that is available.<br /><br />I believe silver future contract writers must be required to pose a certain amount of physical silver, or demonstrate ability to delivery physical silver (like for mining companies), instead of pose cash, to meet the margin requirement.<br /><br />Allowing silver future contract writers, most of them have no business in silver mining and have no possession of an ounce of silver, to meet their margin requirement in cash instead of silver bullions, not only is unfair and frauded, but probably is ILLEGAL, too.<br /><br />Knowingly enter into a business contract with knowledge that he/she can not and will not fulfill, is not just a SCAM, but a CRIME punisheable under contract laws and criminal laws.<br /><br />If one trader naked short 2 million shares of a company's stock, knowing there's only one million shares outstanding and that he/she could not possibly borrow two million shares, is ILLEGAL under SEC regulations. You can go to jail for doing that.<br /><br />If you write up a contract to sell a bridge in Brooklyn, New York, and actually collected an idiot's money from it, knowing full well that you do not own that bridge, is a crime. You go to jail for it. I am not sure though, about some one who sells real estate property on the moon, as some obviously is doing. But at least the guy claims he owns the moon, and the buyers do not insist on delivery.<br /><br />Shouldn't there be some legal repercussions for the nake shorters of silver, especially the biggest naked shorters of silver who happen to be big banks? They write and sell a huge volume of silver future contracts to knock price down within a very short period of time, rip profits doing so, knowing full well those futures contracts are <strong>invalid</strong>, because they could NOT be honored if physical delivery is requested. There were far more silver future's contracts sold and outstanding, than physical silver that is available.<br /><br />I hereby request that CME and other commodity exchanges consider imposing margin requirements in physical commodity, rather than in cash, on future contract writers. And I want to see if the authority is up to its task to investigate whether there has been illegal naked shorting in the precious metal and commodity future's market, activities that certain parties write future contracts that they know full well can not be honored. But I do not hold out hope on that happening any time soon.<br /><br /><a href="http://seekingalpha.com/article/225249-the-problem-with-almost-every-etf-investment">To precious metal investors</a>, I say you either take physical delivery, or do not even participate in the market. What is the point of buying a contract but do not take delivery? Future's trading is a zero sum paper game. As I explained in the past, if you want to profit from the commodity bull market, take possession of physical goods is the only way. If you don't hold it, you don't have it.<br /><br />Full Disclosure: The author is heavily invested in physical palladium metal, and have very large positions in palladium mining stocks <strong>SWC</strong> and <strong>PAL</strong>. The author also owns a number of silver mining stocks but does not own any share of <strong>GLD</strong>, the gold ETF, or of <strong>SLV</strong>, the silver ETF.JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com18tag:blogger.com,1999:blog-915569627637323801.post-57570653638919945012011-04-16T12:19:00.000-07:002011-04-16T15:59:00.628-07:00Richest Billionaires Must Also Be Biggest Losers<div align="left">It sounds ironic. People who worked their lifetime to become some of the richest billionaires must have some good quality in their characters to ensure their success. But some how once the richest billonaires reach their pinnacles, their fortunes inevitably begin to decline, despite of their best efforts and intentions to keep growing their stakes to something even bigger.</div><br /><div align="left"></div><br /><div align="left">But it is also absolutely true! The richest billionaires are also the biggest losers.</div><br /><div align="left"></div><br /><div align="left">I am not just talking about the financial crisis of 2008, in which probably most people lose money anyway. I am talking about it as a generally true fact, like in the last ten years. In 1999, Bill Gates was the richest person in the world, with a net worth of $90B. Remember that was in terms of 1998 US dollars, when gold was $288 an ounce by the year end. So Bill Gates was worth 313 million ounces of gold then. Warren Buffet's $36B would have been worth 125 million ounces of gold at the time.</div><br /><div align="left"></div><br /><div align="left">By 2005, Bill Gates was worth $46.5B, Warren Buffet was worth $44B, and Carlos Slim of Mexico was worth $23.8B. In terms of gold, which was $437/oz (end of 2004), Gates was worth 106.4M ounces, Buffet was worth 100.7M ounces, and Slim was 54.5M ounces. Gates was only 1/3 as rich as he was in 1999. Mr. Bill Gates probably wished that he had sold his company in 1999 and staked away his fortune in gold bars at a secret location.</div><br /><div align="left"></div><br /><div align="left">By today, after the market plummet in 2008 and then an incredible recovery in 2009 and 2010, let's check the score again. Carlos Slim is worth $74B, Gates is worth $53B, and Buffet is worth $47B. Gold was $1422/oz at the end of 2010. So in terms of gold, these three richest billionaires are worth 52M ounces, 39.4M ounces and 35.2M ounces, respectively. The combined fortune of all three is only worth 40% of what Bill Gates alone was worth in 1999.</div><br /><div align="left"></div><br /><div align="left">These two charts track the top billionaire's networth in US$ and in gold ounces, in last 10 years:</div><br /><div align="left"></div><br /><div align="left"><a href="http://3.bp.blogspot.com/-LqkbeDEZllM/Tan9dgf5EZI/AAAAAAAAAD8/8MsAg29-cTs/s1600/Chart001.JPG"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 768px; DISPLAY: block; HEIGHT: 540px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5596282695366283666" border="0" alt="" src="http://3.bp.blogspot.com/-LqkbeDEZllM/Tan9dgf5EZI/AAAAAAAAAD8/8MsAg29-cTs/s400/Chart001.JPG" /></a> <a href="http://4.bp.blogspot.com/--QGMvjNd6-I/Tan9dTM3jTI/AAAAAAAAAD0/2R2ZS1Fzcao/s1600/Chart002.JPG"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 768px; DISPLAY: block; HEIGHT: 540px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5596282691796831538" border="0" alt="" src="http://4.bp.blogspot.com/--QGMvjNd6-I/Tan9dTM3jTI/AAAAAAAAAD0/2R2ZS1Fzcao/s400/Chart002.JPG" /></a> It's really surprising. Warren Buffet is known to be the world's most successful value based investor, with all the good characters of investment success: patient, determined, diligent. He had the track record of consistently gaining about 40% each year, in his investment career spanning over 4 decades. But in the last 10 years, his fortune barely gained anything even in terms of the depreciation US dollars.</div><br /><div align="left"></div><br /><div align="left">In terms of gold ounces, or real purchasing power term, Warren Buffet lost more than HALF of his fortune in the last ten years. He lost that much fortune despite of all his personal DD efforts working 12 hours a day, and a team of hundreds of the world's best financial geniuses working with him. All these time and energy spent trying to make the best investment decisions for the world's most respected investment firm Berkshire Hathaway, and <strong>they still lose money</strong>?</div><br /><div align="left"></div><br /><div align="left">Warren Buffet is famously know for his despise of gold, which he doesn't understand: </div><br /><blockquote>Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head. </blockquote><br /><div align="left">That famous gold quotation sounds reasonable with me and I actually agree with him. An ounce of gold is forever just an ounce of gold. It doesn't grow. Gold is only worth what it costs to extract an ounce of gold from the ground. That certainly is worth a lot of money but it is not growing. Gold is merely a storage of value, not a growth of value. So gold is really not an investment.</div><br /><div align="left"></div><br /><div align="left">But Warren Buffet could well have digged a hole 10 years ago and buried all his fortune in gold bars. His stake would not have grown had he done that, but his fortune at least would not have shrunken like it happened. In the last ten years Warren Buffet diligently managed his investment firm, trying to find valuable companies to buy, selling any asset that seems to cost him money, his giant investment kindom accumulates huge amount of profits and dividends, allowing him to buy up more assets. But despite of all these, his net fortune is barely flatline in US dollar terms, and shrunk to barely 1/4 where he once was, in terms of gold ounces.</div><br /><div align="left"></div><br /><div align="left">Why top billionaires must necessarily once day become top losers? It's not because these rich people have grown too old to think rationally, but simply because they have become too big to grow. Young Warren Buffet could buy a six-pack soda for 25 cents and then sold each can separately, and make an instant 20% gain in an afternoon. Senior Warren Buffet, with his net fortune worth $47B, would now have to buy 18 billion of six-pack sodas for $2.50 each, and find a giant beach with 108 billion thirsty people to vendor individual cans of soda to them for 50 cents each, to grow his fortune 20%.</div><br /><div align="left"></div><br /><div align="left">The world does not have a beach that big. The world is a small place. The universe has a finite size. Persistent growth is not possible in a finite world. When you hit a certain size, you simply can not grow any more. Rapid growth is only possible when you are small. Warren Buffet once purchased a lot of silver bullions, about 1/3 of what the whole world had to offer. It costed only 2% of his fortune. But he could not keep even just 2% of his fortune in physical silver. He was forced to sell his silver.</div><br /><div align="left"></div><br /><div align="left">To the average Joe investors, it's pleasant to know that you can beat the billionaires easily. You can easily make more money than billionaires do, in making the kind of investment decisions that billionaires could not make: Warren Buffet could not buy silver, but an average Joe can walk into a coin store and purchase a couple hundred ounces any time. Had you bought physical silver a mere two and a half years ago, your fortune has more than quadrupled from your initial investment, an investment gain that few of the world's billionaires could achieved.</div><br /><div align="left"></div><br /><div align="left">I <a href="http://seekingalpha.com/article/55959-the-tellurium-supernova">pitched</a> physical <strong>tellurium</strong> investment a few years ago when <strong>tellurium</strong> was <strong>$40 a pound</strong>, today it's nearly <strong>$500</strong> per kilogram, with the price <a href="http://www.asianmetal.cn/news/getProductsNews.am?productThreeID=50">surged</a> 50% in just the last two months, marching with certainty towards gold price as I <a href="http://seekingalpha.com/article/71942-the-tellurium-supernova-has-erupted">predicted</a>. Had I pitched <strong>tellurium</strong> investment to <strong>Mr. Warren Buffet</strong>, he would have brushed me away as if I told him to vendor soda packs on the beaches. Folks like him are too big to be concerned in such narrow markets, but an average Joe Six-Pack could have bought six buckets of tellurium for less than 10 grands, and make himself a millionaire in a few short years.</div><br /><div align="left"></div><br /><div align="left">It's great to be a small investor since you have many great opportunities to easily grow much bigger. Those opportunities are <strong>not</strong> available to billionaires. I notice that <strong>Mr. Jim Rogers</strong>, my most respected commodity investment guru, pitched <strong>silver</strong> and my favorite <strong><a href="http://seekingalpha.com/article/240878-new-palladium-paradigm-shift-coming">palladium</a></strong> to his audiences since early 2009. The annual global production of silver is only 600M ounces. After industry demand is meet, there is no more than 100M available to investors, or $1B in early 2009 silver price. Palladium's annual global production is slightly over 6M ounces. There is no palladium left for investors after industry demand is meet. But even if there are some palladium ounces available, there are probably no more than 500K ounces per year available to investors. At early 2009 prices, the market liquidity of silver and palladium was $1.1B and $0.1B respectively. If you bought either metal at the lows, your money would have quadrupled by now. But I don't think Jim Roger's fortune had quadrupled during the same time. <strong>Mr. Jim Rogers</strong> himself is probably too rich for those two narrow precious metal market. Both silver and palladium and excellent investment opportunities for the average Joes, and un-available to billionaires. Jim Rogers could not buy the metals himself that he urged people to buy.</div><br /><div align="left"></div><br /><div align="left">So, do NOT listen to the world's top billionaires. You should be inspired by the stories how they accumulated their fortune, and their general philosophy of the society and of life in the world. But do <strong>NOT</strong> listen to top billionaires as far as investment decision goes. They have now become irrelevant losers while you are the winners. You need to listen to the small guys like me and other <strong>Seeking Alpha</strong> authors, and then <strong>do your own thinking</strong>. Warren Buffet would not tell you to buy gold, silver, palladium and he probably doesn't know what is tellurium. I will tell you to buy tellurium, buy palladium, and other investment opportunities meant for the small guys. At the end of days the billionaires are proven wrong, and small people like me are proven right. </div><br /><div align="left"></div><br /><div align="left"><strong>Full Disclosure:</strong> I am heavily invested in physical <strong>palladium</strong> and <strong>silver</strong>, and related mining companies, but otherwise have no specific positions related to the discussion of this article. </div>JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com5tag:blogger.com,1999:blog-915569627637323801.post-1805304210674680742011-01-10T11:25:00.000-08:002011-01-10T12:14:53.399-08:00Global PGM Supply - Lights Going Out in South Africa Agagin?Many platinum and palladium investors remembers the spectacular rally of platinum and palladium price in the first few months of 2008, when electricity crisis in South Africa forced the PGM mining industry in the country to shut down for 5 days, causing a market panic that sent platinum price to $2300 per ounce and palladium to near $600 in short order.<br /><br />While the world's attention is focused on the Australian flood which disrupts the country's coal supply, causing a big rally in international coal price, few notice that it <a href="http://www.timeslive.co.za/sundaytimes/article838909.ece/SA-dreads-the-lights-going-out-yet-again">rains on South Africa's coal mines</a> just as well, just as it did 3 years ago!<br /><br />Are we setting up for a re-run of the early 2008 PGM panic rally? How is South Africa's electricity grid coping today, comparing with early 2008?<br /><br />I pointed out that South Africa has <a href="http://seekingalpha.com/instablog/121744-mark-anthony/123690-looming-peak-coal-in-south-africa-and-the-world">reached Peak Coal</a>. So the coal and electricity supply situation in South Africa will get worse, not better, in the coming years.<br /><br />I pointed out that <strong><a href="http://www.eskom.co.za/live/index.php">ESKOM</a></strong>, the semi-governmental national electricity company of South Africa, could not solve the electricity problem because <strong>it does not have the money</strong>. Even after several boosts of electricity tariff, South Africans are still paying the lowest electricity tariff in the world: about 0.29 rands per kwh, or <strong>US$0.04 per kwh</strong>, while <a href="http://www.globalcoal.com/">international coal price</a> is running at <strong>$129 per ton</strong> and going higher. It costs <strong>0.55kg</strong> of coal to generate one kwh of electricity. So if fuel cost is half of the cost of generating electricity, a fair electricity price should be US$0.14 per kwh. According to the latest ESKOM annual report, they paid roughly <strong>$25 per ton</strong> for coal acquisition. So imagine what kind of low quality discard coal they have been burning over the years if that's the kind of coal price they have been paying!<br /><br />In response to concerns of ESKOM's coal supply, amid the disruption due to heavy raining, and due to increased export demand, here is <a href="http://www.timeslive.co.za/sundaytimes/article838909.ece/SA-dreads-the-lights-going-out-yet-again">what ESKOM said</a>: "<strong>Eskom</strong> is <strong>buying high-quality coal</strong> for affected stations and taking steps to improve operating procedures in the coal stockyards. We are upgrading operating processes and procedures for the power station coal stockyard to improve coal handling in wet weather".<br /><br />I am pretty sure ESKOM is paying <strong>$25 per ton</strong> and getting the kind of <strong>high quality</strong> discard coal, wet and mixed with free dirty mud, while the Chinese and Indians, turned away from Australian coal export harbors, are paying $125 per ton and they are getting the low quality coal with no freebie dirts. I will believe that ESKOM is getting guaranteed supply of high quality coal, when I see that they are paying a price that tops the offers of the Indians and the Chinese.<br /><br />I think we are probably set up for a re-run of the 2008 PGM supply panic soon. To leverage this investment opportunity, investors should acquire physical physical platinum and palladium metal bullions and coins, as well as stocks of the only primary PGM mining companies outside South Africa, namely <strong><a href="http://seekingalpha.com/symbol/swc">SWC</a></strong> and <strong><a href="http://seekingalpha.com/symbol/pal">PAL</a></strong>.<br /><br />P.S. The author is heavily invested in palladium mining companies <strong><a href="http://seekingalpha.com/symbol/swc">SWC</a></strong> and <strong><a href="http://seekingalpha.com/symbol/pal">PAL</a></strong>, and has big long positions in coal mining companies <a href="http://seekingalpha.com/symbol/pcx">PCX</a>, <a href="http://seekingalpha.com/symbol/aci">ACI</a>, <a href="http://seekingalpha.com/symbol/ico">ICO</a>, etc.JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com13tag:blogger.com,1999:blog-915569627637323801.post-62591259708694677142010-12-27T16:57:00.000-08:002010-12-27T16:58:40.668-08:00Looming Peak Coal in South Africa and the World<strong>South Africa</strong> <a href="http://peakoil.com/geology/south-africa-is-nearing-peak-coal/">is about to reach</a> <strong>Peak Coal</strong>, or has already passed it. Mean while the world will reach <strong>Peak Coal</strong> <a href="http://earthsky.org/energy/the-end-of-cheap-coal">soon</a>, <a href="http://earthsky.org/energy/world-coal-reserves-overestimated-says-scientist">said</a> Cal Tech scientist <strong>David Rutledge</strong>. Mr. Rutledge <a href="http://seekingalpha.com/article/111613-expert-coal-reserve-estimates-way-too-high">surveyed</a> coal production history of major producing counries all the way back to 1880, and applied the <a href="http://en.wikipedia.org/wiki/Hubbert_curve">math model</a> pioneered by <a href="http://en.wikipedia.org/wiki/M._King_Hubbert">King Hubbert</a>, who accurately predicted the 1971 Peak Oil production in the USA, using his math model. Rutledge <a href="http://seekingalpha.com/article/111613-expert-coal-reserve-estimates-way-too-high">concluded</a> that previous estimates of global coal reserves were outdated and too optimistic. He believes that there were roughly 662 billion tons of ultimate recoverable coal reserve on earth, among which 59%, or 400 billion tons, still remain underground. To put the numbers in prospect, the world produces and consumes about 7 billion tons of coal a year. China is responsible for about half of that number, or about 3.5 billion tons.<br /><br />South Africa produces <strong>242 million tons</strong> of coal last year. David Rutledge <a href="http://peakoil.com/geology/south-africa-is-nearing-peak-coal/">predicts</a> that South Africa's production will peak in 2011 at <strong>253 million tons</strong> a year. <strong>Peak Coal</strong> in South Africa has huge implication to the global economy and to the supply/demand of a critical natural resource that the world can not be without, especially as we move towards alternative energy solutions. South Africa is responsible for 85% of the world's platinum production and 40% of palladium, two noble metals used extensively as catalysts to cut air pollution from automobile emissions, and as catalysts to produce synthetic fuels and used in fuel cells, among other things.<br /><br /><strong>Peak Coal</strong> in South Africa also means <strong>Peak PGM</strong> for the world, just as the world has an increasing demand of <strong>PGM</strong> metals for the environmental and alternative energy needs.<br /><br />I <a href="http://seekingalpha.com/instablog/121744-mark-anthony/104860-peak-oil-alternative-energy-and-platinum-group-metals">discussed previously</a> that mining of Platinum Group Metals (PGM), platinum, palladium and rhodium etc., is extremely energy intensive. Based on reports available from South African PGM mining companies like Anglo Platinum (AGPPY.PK), it costs roughly <strong>1x10^10 joules</strong> of energy to produce just one troy ounce of PGM metals. That is the direct energy cost. If you include the indirect energy cost, the energy required to build and replace the mining equipments, build and maintain the mine and provide for the mining workers etc, the total energy cost to mine one ounce of platinum or palladium could be five times higher, or roughly <strong>5x10^10 joules</strong>.<br /><br />The <strong>5x10^10 joules</strong> total energy cost to produce one ounce of platinum or palladium is equivalent to 13,890 kwh of electricity, or 7.64 metric tons of coal, or 30 barrels of crude oil, or 160,000 cubic feet of natural gas, or 0.556 <a href="http://en.wikipedia.org/wiki/Mass%E2%80%93energy_equivalence">miligrams of mass</a>. At their recent prices in the US market, these energy commodities would be worth $472 in electricity, or $955 in coal, $655 in natural gas, or $2730 in crude oil. (Calculated using $0.034 per kwh electricity, $125 per ton of coal, $4.09 per thousand cubic feet of natural gas, and $91 per barrel oil.)<br /><br />Remember in early 2008, electricity shortage almost knocked out the electricity grid in South Africa. The <strong>PGM</strong> and other mining industry was forced to <a href="http://www.miningmx.com/opinion/columnists/brendan-ryan/Eskom-one-year-later.htm">shut down</a> for 5 days, causing a market panic that sent platinum price to $2300/oz and palladium to near $600/oz.<br /><br />Has <strong>ESKOM</strong>, the nation's semi-governmental electricity company, fixed the electricity supply problem in that country? Not by a long stretch! So far <strong>ESKOM</strong> has not even touched ground to start building any new power plant, even though there has been lots of talks. They promised in 2008 to quickly return three mothballed coal fired power plants back to service in a few months, but the first of the three mothballed power plant did not return to service <a href="http://www.mg.co.za/article/2010-12-07-not-just-lunch-eskom-says-of-r12million-event">until October, 2010</a>.<br /><br />The problem is that ESKOM is financially crippled due to the low electricity tariff in South Africa. Based on their latest annual report, ESKOM burned 122.7 million tons of coal and generated 215940 GWH of electricity, or roughly 0.57 kilograms of coal to generate each kwh of electricity.<br />Cost of electricity generation was 0.282 rands per kwh, half of which is fuel, mostly coal cost. So ESKOM paid roughly 250 rands per ton for coal, or <strong>US$25</strong> per ton, using last year's exchange rate. Current <a href="http://www.globalcoal.com/">international coal price</a> runs as high as <strong>US$125</strong> per ton. Imagine <a href="http://www.miningmx.com/news/energy/720032.htm">what kind of craps</a> (<a href="http://www.eskom.co.za/enviroreport01/sust.htm">discard coal</a>) ESKOM burns to generate electricity as they could only pay a fraction of the going market price of coal!<br /><br />ESKOM is vulnerable to lose its domestic coal supply to international buyers who have insatiable demands and who can pay much higher prices. Look at <a href="http://seekingalpha.com/article/227845-huge-indian-demand-to-drive-global-coal-export-boom">India</a> with an economy growing at 8% and who faces <a href="http://seekingalpha.com/article/227845-huge-indian-demand-to-drive-global-coal-export-boom">peak hour electricity shortage of 14%</a>, and who will boost coal import from 80 to 100 million tons next year. The increased will mostly come from South Africa. China <a href="http://seekingalpha.com/article/227673-peak-coal-theory-profit-from-the-peaks">is also approaching peak coal</a>. China <a href="http://www.bloomberg.com/news/2010-08-19/asia-tops-europe-first-time-on-south-africa-coal-imports-energy-markets.html">begins coal import</a> from South Africa just as Asia <a href="http://www.bloomberg.com/news/2010-08-19/asia-tops-europe-first-time-on-south-africa-coal-imports-energy-markets.html">tops</a> Europe to become South African coal's biggest buyer. China experiences such acute coal shortage in major cities recently that they inadvertently cut power supply to critical oil refineries, resulting in a diesel shortage that crippled the truck transportation, leading to skyrocketing vegetable prices while some produces are left rotting in the fields unharvested.<br /><br />Let's look at <a href="http://peakoil.com/geology/south-africa-is-nearing-peak-coal/">South Africa's coal</a> again. Last year's <strong>242M</strong> tons of coal production <a href="http://peakoil.com/geology/south-africa-is-nearing-peak-coal/">was mostly used</a> by ESKOM (123-million tonnes), Sasol (40-million tonnes) and export (66-million tonnes). ESKOM's expansion program can use an extra 50M tons while Sasol's new project requires an extra 20M tons annually. And we are also talking about insatiable international demands from India, China and Europe. There is <strong>no way</strong> South Africa can meet all these coal demands.<br /><br />Some one has to yield! Who is least capable of affording high coal price, namely, <strong>ESKOM</strong>, must yield! <strong>ESKOM</strong> must drastically cut electricity supply and aggressively boost electricity price to stay in business and keep the country's electric grid up and running.<br /><br />We are not talking about events a few years down the road. These events are rapidly unfolding in front of our eyes now. I have been <a href="http://www.globalcoal.com/">monitoring coal price</a> and see how it <a href="http://www.indexmundi.com/commodities/?commodity=coal-australian&months=60">rallied</a> from <strong>$90/ton</strong> in August, 2010 to now <strong>$125/ton</strong>, a 40% surge in just 4 months.<br /><br />What's the implication if <strong>ESKOM</strong> has to take those drastic measures? The country's energy intensive <strong>PGM</strong> mining industry will crumble! Simply put, <strong>platinum</strong> and <strong>palladium</strong> will have to be produced at much higher cost. The production volume has to be cut dramatically. The <strong>PGM</strong> mining companies will demand much higher metal prices to compensate for the increased cost to stay in business.<br /><br />That, of course is bad news for the world, but music to the ears of wise investors who put their money in physical precious metals, <strong>palladium</strong> and <strong>platinum</strong>. These two metals, particularly palladium, are <strong>the ultimate alternative energy investments</strong> <a href="http://seekingalpha.com/instablog/121744-mark-anthony/104860-peak-oil-alternative-energy-and-platinum-group-metals">as I discussed</a>.<br /><br /><strong>Full disclosure</strong>: The author is heavily invested in <strong>palladium</strong> and owns large long positions in North America's only palladium mining company, Stillwater Mining (<strong><a href="http://seekingalpha.com/symbol/swc">SWC</a></strong>) and North American Palladium (<strong><a href="http://seekingalpha.com/symbol/pal">PAL</a></strong>). The author is also heavily invested in coal mining company <strong><a href="http://seekingalpha.com/symbol/pcx">PCX</a></strong> and is looking to buy other coal mining stocks.JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com5tag:blogger.com,1999:blog-915569627637323801.post-55009481225830450142010-12-08T20:30:00.001-08:002010-12-08T23:56:41.323-08:00Norilsk Nickel's Strategic Moves and Palladium Super BullRussia's <strong><a href="http://nornik.ru/en">Norilsk Nickel</a></strong>, the world's single largest nickel producer who is also responsible for 45% of the world's palladium mine production, made <strong>two big strategic moves</strong>, one of which escaped everyone's attention except for mine, and another one caused every one's attention but still caught me by a big surprise.<br /><br />The surprise move is that <strong>Norilsk Nickel</strong> actually meant it when they said early in the year that they were going to sell their stake in <strong><a href="http://stillwatermining.com/">Stillwater Mining</a></strong> (<strong><a href="http://seekingalpha.com/symbol/swc">SWC</a></strong>), the only US based <strong>palladium</strong> and <strong>platinum</strong> mine, an extremely important strategic asset that <strong>Norilsk Nickel</strong> <a href="http://motherjones.com/environment/2004/05/russians-are-coming">acquired in 2004</a>, after going through the trouble of <a href="http://motherjones.com/environment/2004/05/russians-are-coming">getting two superpower presidents involved</a> in the negotiation, among other things. I could not believe <strong><a href="http://seekingalpha.com/symbol/nilsy.pk">Norilsk Nickel</a></strong> will sell their <strong><a href="http://seekingalpha.com/symbol/swc">SWC</a></strong> stake, because <strong>Norilsk Nickel</strong> and <strong><a href="http://seekingalpha.com/symbol/swc">SWC</a></strong> combined gives them the <a href="http://motherjones.com/environment/2004/05/russians-are-coming">monopoly power</a> of controling more than half of the world's <strong>palladium</strong> supply. But they did just sell their <strong>SWC</strong> stake. They acquired their <strong>SWC</strong> stake for <strong>US$100M</strong> cash and <strong>877K ounces of palladium</strong>, valued at today's market value, their investment did not bring them much profit after all.<br /><br />What made the Russians change their strategic mind regarding <strong>palladium</strong>, at a time when <strong>palladium</strong> price looks <a href="http://www.kitco.com/charts/livepalladium.html">spiralling higher by the day</a>? They no longer consider themselves a key <strong>palladium</strong> supplier to the world in the future?<br /><br />The Russian riddle is solved when I noticed another less noticed, but much more significant strategic move made by <strong>Norilsk Nickel</strong>. The story goes back to 2007 when <strong><a href="http://www.nornik.ru/en/">Norilsk Nickel</a></strong> outbid <strong><a href="http://www.xstrata.com/">Xstrata</a></strong> to <a href="http://www.nornik.ru/en/press/news/2172/">acquire <strong>LionOre</strong></a> in an all cash offer worth more than <strong>US$6.5B</strong>. At the time analysts could not understand why <strong>Norilsk Nickel</strong> paid such high price for a mining company of limited mineral reserves. The answer became clear only recently, long after the <strong>LionOre</strong> acquisition, in a <strong>Bloomberg</strong> news story:<br /><br /><strong><a href="http://www.bloomberg.com/news/2010-10-18/norilsk-nickel-plans-20-billion-program-to-boost-arctic-output.html">Norilsk Nickel Plans $20 Billion Program to Boost Arctic Output</a></strong><br /><br /><br /><blockquote><a href="http://www.bloomberg.com/news/2010-10-18/norilsk-nickel-plans-20-billion-program-to-boost-arctic-output.html">New Technology</a><br /><br />“We’re considering switching from pyro-metallurgy to hydro-metallurgy based on <strong>Activox</strong> technology,” Muravyov said. Within a year, the company will test whether the technology, which Norilsk bought in 2007 as part of its $6.5 billion <strong>LionOre</strong> acquisition, will be suitable for Arctic ores. <strong>Activox</strong> uses <strong>chemicals</strong> to dissolve nickel from concentrate and then produce the pure metal.<br /><br />“The cost of applying <strong>Activox</strong> in Norilsk still needs to be evaluated,” Muravyov said. Installing the technology at all of Norilsk Nickel’s facilities, at a cost of as much as $10 billion, would allow the company to “<strong>remove all ecological problems</strong> and cut electricity and gas consumption,” he said. </blockquote><br />I suddenly had an eureka moment: The <strong><a href="http://www.westernminerals.com.%20au/activox.html">Activox Process</a></strong>, originally owned by LionOre, was the real reason for <strong>Norilsk</strong> acquisition. <a href="http://www.time.com/time/specials/2007/article/0,28804,1661031_1661028_1661022,00.html"><strong>Norilsk Nickel</strong> mine</a>, being <a href="http://www.time.com/time/specials/2007/article/0,28804,1661031_1661028_1661022,00.html">one of</a> the <a href="http://www.time.com/time/specials/2007/0,28757,1661031,00.html">top ten most polluted places</a> on earth due to sulphur dioxide and heavy metal emission from the smelters, and facing <a href="http://seekingalpha.com/article/185739-palladium-the-bullish-case-now-looks-even-stronger">deteriorating nickel ore grade</a> in coming years, desperately needs this new chemicals based metal producing technology that cuts pollution and production cost drastically.<br /><br />Except for one catch. <strong>Platinum</strong> and <strong>palladium</strong> are very stable and extremely chemical inert metals. Therefore unlike nickel and copper which are easily dis-solved, these two precious metals are virtually impossible to be leached from the mineral ores, using any chemical solution. A demonstration chart of the <strong><a href="http://www.westernminerals.com.%20au/activox.html">Activox Process</a></strong> confirms my intuition. The lower left corner of the <a href="http://www.westernminerals.com.%20au/activox.html">flow chart</a> indicates that the leach residue, containing the precious metals, are either simply disposed, or be send to alternative precious metal recovery process.<br /><br />After base metals are extracted, the leach residue would contain virtually all of the original material from the mineral ores: rocks, sands, dirts grinded into fine powder, and wet with all the nasty chemicals mixed in during leaching. It probably contains no more than a few part per million precious metal content. Once again those precious metals: <strong>palladium</strong> and <strong>platinum</strong>, are chemically inert and can not be extracted efficiently using any chemical solution. The only way to process them is to use high temperature smelters, which bring back all the air pollution problem and high energy cost, problems that <strong>Norilsk</strong> wanted to solve in the first place, moving away from smelter based pyrometallurgy towards <strong>Activox Process</strong> based hydrometallurgy.<br /><br />The unescapable conclusion is that <strong>Norilsk Nickel</strong> will become just a low cost nickel and copper producer, and will <strong>cease</strong> to produce <strong>palladium</strong> and <strong>platinum</strong> as byproducts, once they adopt the <strong>Activox Process</strong>!!! This is true unless palladium and platinum prices are driven to such high levels that it makes economical sense to try to recover the trace amount of precious metals contained in the leach residue despite of the high processing cost!<br /><br />A technical paper discussing the <strong>Activox Process</strong> running at the <strong>Norilsk Nickel</strong> owned <strong>Tati plant</strong> in Botzwana, written by experts of that plant, confirms my conclusion. The 16 pages technical paper contains not a single word mentioning of either palladium or platinum:<br /><br /><strong><a href="http://www.saimm.co.za/Conferences/Hydro2009/257-272_Robles.pdf">Solvent extraction design consideration for the Tati Activox® plant</a></strong><br /><br />This shocking development is very bullish for <strong>palladium</strong> and is a very good news to fellow <strong>palladium</strong> investors. We are talking about <strong>45%</strong> of the world's supply of <strong>palladium</strong> removed when <strong>Norilsk</strong> ceases to produce byproduct PGM metals. Of course, I do <strong>not</strong> expect this paradigm shift to occur overnight. But shouldn't it be time that precious metal investors leverage the opportunity to hoard the palladium metal and ride the palladium super bull up to the moon, and mean while industry users like <strong>GM</strong> (<strong><a href="http://seekingalpha.com/symbol/gm">GM</a></strong>), <strong>FORD</strong> (<strong><a href="http://seekingalpha.com/symbol/f">F</a></strong>) and <strong>TOYOTA</strong> (<strong><a href="http://seekingalpha.com/symbol/tm">TM</a></strong>) need to start panic now and build their strategic palladium inventories before it is too late. If 4% of shortage was enough to drive rhodium price from $300-ish to $11000 per ounce, I don't know how high palladium price can go to if we have more than 50% shortage in the global supply!!!<br /><br />Maybe, just maybe, the recent remarkable <a href="http://www.kitco.com/charts/livepalladium.html"><strong>surge</strong></a> of <strong>palladium</strong> price indicates that some investors out there have already figured out what the <strong>Activox Process</strong> means to <strong>Norilsk Nickel</strong> and to global <strong>palladium</strong> supply, and are already quietly loading up while keeping their lips sealed.<br /><br /><strong>Full disclosure:</strong> The author has studied global <strong>palladium</strong> market for a few years and is heavily invested in physical <strong>palladium</strong> metal, as well as in stocks of the world's only primary palladium mining companies: <strong><a href="http://seekingalpha.com/symbol/swc">SWC</a></strong> and <strong><a href="http://seekingalpha.com/symbol/pal">PAL</a></strong>. The author has no position in <strong>Norilsk Nickel</strong> (<strong><a href="http://seekingalpha.com/symbol/nilsy.pk">NILSY.PK</a></strong>).JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com7tag:blogger.com,1999:blog-915569627637323801.post-17740826090637862652010-11-10T14:08:00.000-08:002010-11-10T16:13:15.146-08:00Grave Warnings to Precious Metal Investors - Buyer Beware!I am a palladium bug, not a silver bug or gold bug. Although I do like silver and gold and I like all precious metal investments. My favorite remains palladium. But regardless what precious metal you like best, I urge all precious metal investors to own ONLY <strong>physical metals</strong> and stocks of their favorite precious metal mining companies.<br /><br />I <a href="http://seekingalpha.com/article/225249-the-problem-with-almost-every-etf-investment">strongly discourage</a> owning any Exchange Traded Funds, ETFs that invest only on future contracts or other paper instruments. I <a href="http://seekingalpha.com/article/225249-the-problem-with-almost-every-etf-investment">cited</a> <strong><a href="http://seekingalpha.com/symbol/ung">UNG</a></strong> and <strong><a href="http://seekingalpha.com/symbol/uso">USO</a></strong> as perfect bad examples. At a point of time <strong><a href="http://seekingalpha.com/symbol/ung">UNG</a></strong> was once the second largest long position in my portfolio, right after <strong><a href="http://seekingalpha.com/symbol/swc">SWC</a></strong>. I still can not help but pad myself on my back for <a href="http://seekingalpha.com/instablog/121744-mark-anthony/33532-hot-money-hot-commodities-and-the-us-dollar-carry-trade-part-2">promptly realizing</a> the fundamental problem with a paper based "commodity" ETF such as <strong><a href="http://seekingalpha.com/symbol/ung">UNG</a></strong>, and sold without hesitation. Had I held <strong><a href="http://seekingalpha.com/symbol/ung">UNG</a></strong> till this day I would have been much poorer. Unfortunately such ETF funds continue to make many unsuspect investors poorer by the day. So I urge every investor to carefully read <a href="http://seekingalpha.com/article/225249-the-problem-with-almost-every-etf-investment">why paper based ETFs do not work</a>.<br /><br />I do expect that 99% of the people will attack my view point that paper ETFs will not work. I don't mind as I know 99% of the people simply could not grasp the concept until they have lost all their money. I will be very happy if 1% of people feel that I have helped them to avoid costly mistakes and to make smart investment decisions.<br /><br />Like advocators <a href="http://jsmineset.com/">Jim Sinclair</a> and <a href="http://www.investmentrarities.com/tbarchives.shtml">Ted Butler</a>, I always encourage people to directly own physical precious metals. I do not trust the physical gold ETF, <strong><a href="http://seekingalpha.com/symbol/gld">GLD</a></strong>, and the physical silver ETF, <strong><a href="http://seekingalpha.com/symbol/slv">SLV</a></strong>. Like some other folks I <a href="http://seekingalpha.com/instablog/121744-mark-anthony/13311-warnings-to-precious-metal-etf-investors-buyer-beware">expressed skeptism</a> whether these funds actually hold the physical precious metals as they claimed. These ETF funds were hosted by entities known to be hostile to precious metal investors and known to have large short positions in silver so why should people trust them? At one point I <a href="http://seekingalpha.com/instablog/121744-mark-anthony/13311-warnings-to-precious-metal-etf-investors-buyer-beware">went so far</a> as scrutinizing the almost 10,000 pages long <a href="https://ebts.jpmorgan.com/ebtsWebMod/ebts_downloads/BONYBARLIST.PDF">silver bars list</a> posted by <a href="http://us.ishares.com/product_info/fund/overview/SLV.htm?qt=SLV">iShares Silver Trust</a> (<strong><a href="http://seekingalpha.com/symbol/slv">SLV</a></strong>), and <a href="http://seekingalpha.com/instablog/121744-mark-anthony/13311-warnings-to-precious-metal-etf-investors-buyer-beware">discovered plenty of red flags</a>.<br /><br />But what I just discovered may shock the raw core out of every <strong><a href="http://seekingalpha.com/symbol/slv">SLV</a></strong> investors' shells. If you read the following and you still feel comfortable investing in <strong><a href="http://seekingalpha.com/symbol/slv">SLV</a></strong>, and do not feel a need to scrutinize the fund a little bit more yourself, then maybe you are too numb to even invest money in the dangerous marketplace of today, and it is probably a good thing you lose money, if indeed this is exposed to be one of the biggest scam of our time.<br /><br />This is a nuclear bomb I am dropping, so before I continue let me make a few things clear for my own legal protection. I am a US Citizen with constitutional right to free speech, and conscious forces me to speak out. I do not have a short position in <strong><a href="http://seekingalpha.com/symbol/slv">SLV</a></strong> and stands for no monetary gain out of this disclosure. I am a supporter of precious metal investments and want to see higher silver price. I have no vested interest against any entity involved, other than that I insist seeing honesty and integrity of all involved parties.<br /><br />That said, I have noticed that iShare recently hired an <a href="http://www.inspectorate.com/">independent auditor</a> to inspect the silver bars in their vault, and issue <a href="http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/slv_vault_inspection.pdf">audit certificates</a> such as <a href="http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/slv_vault_inspection.pdf">this most recent one</a>. I urge you to follow the link to immediately <a href="http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/slv_vault_inspection.pdf">download a copy of the inspection certificate</a> and save it on your computer, lest it disappear soon! The auditor, <a href="http://www.inspectorate.com/uk/index.asp">Inspectorate International Limited</a>, is a very reputable commodity inspector for 150 years in the business. Very good! I welcome iShare's move to hire a reputable auditor to look at their silver bars and disclose it to the public. If you trust Inspectorate, and they visited iShare vaults and come back to tell us they see all the silver bars stored in the vaults, then it should put all skeptism at rest and people should feel safe to invest in <strong><a href="http://seekingalpha.com/symbol/slv">SLV</a></strong> shares, right?<br /><br />Not so fast! Not so dandy fast and easy, I say folks! Look at this <a href="http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/slv_vault_inspection.pdf">Audit Certificate</a> once again. It's only two pages. Print it out, friend. But Inspectorate is a big company and it just so happens that the same <strong>Mr. Paul Alston</strong>, a nice and respectable English gentlemen, was also <a href="http://goldmoney.com/news/goldmoney-introduces-quarterly-vault-audits.html">hired to do audit</a> for <a href="http://goldmoney.com/news/goldmoney-introduces-quarterly-vault-audits.html">GoldMoney.com</a>, and issued <a href="http://goldmoney.com/certificates-and-reports.html">audit reports</a> like <a href="http://goldmoney.com/images/bar-count-images/Inspectorate-2009-08-31.pdf">this</a>, <a href="http://goldmoney.com/images/bar-count-images/Inspectorate-2009-11-30.pdf">this</a>, <a href="http://goldmoney.com/images/bar-count-images/Inspectorate-2010-02-28.pdf">this</a>, <a href="http://goldmoney.com/images/bar-count-images/Inspectorate-2010-05-28.pdf">this</a> and most recently <a href="http://goldmoney.com/images/bar-count-images/Inspectorate-2010-09-02.pdf">this</a>.<br /><br />Do you see anything unusual, folks, when you compare the two pages SLV audit report and the 14+ pages GoldMoney audit reports, alleged done by the same <strong>Mr. Paul Alston</strong>?<br /><br />1. <strong>SLV</strong> has a two page lousy <a href="http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/slv_vault_inspection.pdf">report</a> that says almost nothing, while <strong><a href="http://goldmoney.com/news/goldmoney-introduces-quarterly-vault-audits.html">GoldMoney</a></strong> has much more elaborate reports detailing every aspect of the inspection process, including such seemingly unimportant information like the brand of the sale used for weighing, even though <strong><a href="http://seekingalpha.com/symbol/slv">SLV</a></strong> has way much more silver to be inspected.<br /><br />2.Inspectorate issued a paper audit certificate to <strong>GoldMoney</strong> and they have to use an awkward optical scanner to scan the image of the paper certificate and post on the web. More awkwardly, the brits use a paper size narrower than standard American letter size, thus the scanning exposes the ugly paper edge, telling the size of the margin to the edge of the paper. Wouldn't it be nice to do like what iShare did, create <a href="http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/slv_vault_inspection.pdf">a nice and clean electronic PDF document</a>, leaving no trace of the paper, and just digitally embed the Inspectorate logo, and an image of <strong>Mr. Paul Alston</strong>'s signature? Except that <strong>anybody with a computer can do it</strong>. It's not hard to find a sample image of <strong>Mr. Paul Alston</strong>'s signature off the web, right? (Don't try it at home, kids!)<br /><br />3.Unfortunately Bank of New York Mellon is in America and speaks a different kind of English than the one spoken by Mr. Paul Alston, a nice British gentleman. And the vaults are supposed to be in England. They forgot such unimportant details and let a lousy American created <a href="http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/slv_vault_inspection.pdf">that Inspectorate Report</a>. Congradulations on getting the paper size to be the correct A4 size, but they need to work on <strong>small details</strong>, for example Inspectorate would not begin the sentence with "The Bank of New York" as the sentence subject and would not use the ® mark when referring to third party names, and the British would refer a date as <strong>7<sup>th</sup> of July, 2010</strong>, not in the lousy American style <strong>July 7, 2010</strong>. I encourage them to really spend some time studying how Inspectorate issue their audit certificates. They should have done that before they post it.<br /><br />I will stop here and let people draw their own conclusions. But I do <strong>NOT</strong> for a single bit believe that <strong>Mr. Paul Alston</strong> himself personally counted and inspected <strong>308,542</strong> pieces of silver bars, and sampled and measured each one bar out of each pallet of 30 bars all by himself and his gangs, and issued that SLV <a href="http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/slv_vault_inspection.pdf">audit certificate</a> and signed his name on it. <strong><span style="color:#ff0000;">Not a bit at all.</span></strong><br /><br />Full Disclosure: The author is fully invested in mining stock <strong><a href="http://seekingalpha.com/symbol/swc">SWC</a></strong>, <strong><a href="http://seekingalpha.com/symbol/pal">PAL</a></strong> and precious metal <strong>palladium</strong>. The author also holds physical <strong>silver</strong> and silver mining stocks like <strong><a href="http://seekingalpha.com/symbol/ssri">SSRI</a></strong>, <strong><a href="http://seekingalpha.com/symbol/cde">CDE</a></strong> and <strong><a href="http://seekingalpha.com/symbol/hl">HL</a></strong>, but has no position in ETF funds <strong><a href="http://seekingalpha.com/symbol/gld">GLD</a></strong>, <strong><a href="http://seekingalpha.com/symbol/slv">SLV</a></strong>, <strong><a href="http://seekingalpha.com/symbol/ung">UNG</a></strong> and <strong><a href="http://seekingalpha.com/symbol/uso">USO</a></strong>.JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com13tag:blogger.com,1999:blog-915569627637323801.post-16991544308958914062010-10-24T14:49:00.000-07:002010-10-26T14:31:56.303-07:00Peak Oil, Alternative Energy and Platinum Group MetalsThe world's attention is increasingly turning towards <strong>alternative energy</strong> as the reality of Peak Oil is sinking in, even though the public discussion of <strong>Peak Oil</strong> is still only just wispering, with majority of investors unware of the looming global crisis.<br /><br />Fossil fuels are cheap and convenient: they are easily produced, and the fuels themselves serve two purposes at the same time: They are both <strong>energy source</strong>, and <strong>energy storage</strong>. When you fill up your car with 15 gallons of gasoline, you acquires both the energy needed to drive your car a few hundred miles, as well as ways to store the energy: the energy is stored in the gasoline until it is burned in the internal combustion engine.<br /><br />Any alternative energy development must address these two issues as well: <strong>energy source</strong>, and <strong>energy storage</strong>. Alternative energy sources we talk about, like solar, wind, ocean wave, nuclear, addresses only the problem of energy source, but not the <strong>energy storage</strong>.<br /><br />While scientists are making some progress in developing high energy density batteries, the basic physics is that energy density in any battery could never come even close to the chemical energy density in either hydrogen, or carbohydrate fuels. The best energy storage solution we can find is to <strong>synthesize</strong> carbohydrate fuels using energy derived from solar, wind, nuclear or coal fired power plants. Such synthesized carbohydrate fuel can then be transported using the existing infrastructure before they can be utilized. Finally, <strong>fuel cell</strong> batteries can extract energy from the carbohydrates and turn it into electricity energy, at an efficiency much higher than simply burning them in a combustion engine.<br /><br />So this is the alternative energy recipe scientists have given us:<br /><ol><li>First electricity is generated from alternative energy sources like solar, wind, ocean wave, nuclear, hydropower, etc.</li><br /><li>Second electricity is used to synthesize carbohydrate fuels, allowing the stored energy to be easily transported and utilized.</li><br /><li>Third fuel cells are used to generate electricity from carbohydrate fuels to provide end energy usage, like driving a vehicle or other electricity driven machines.</li></ol><br /><p><br />Do you realize that for steps 2 and 3 to be possible, a category of rare and expensive precious metals are need. You need the so called PGMs (<a href="http://en.wikipedia.org/wiki/Platinum_group_metals">Platinum Group Metals</a>), namely <strong>platinum</strong> and <strong>palladium</strong>. These two metals serve as <strong>catalysts</strong> in synthesizing cabohydrate fuels. They also serve as <strong>catalysts</strong> in fuel cell batteries.</p><br /><p>Among the two PGM metals, palladium is probably even more important. Palladium is very unique in its extreme <a href="http://en.wikipedia.org/wiki/Palladium_hydride">affinity to hydrogen</a>: one volume of palladium is capable of absorbing <a href="http://en.wikipedia.org/wiki/Palladium_hydride">900 times</a> the volume of hydrogen. Such extreme affinity to hydrogen makes palladium an ideal catalyst in any chemical process that involves hydrogen, including, of course, the chemical process to synthesize carbohydrate fuels, or the chemical process to turn carbohydrate fuel into water, carbon dioxide and electricity, as it happens in fuel cells. There is no shortage of efforts by scientists to look for alternatives to the expensive platinum and palladium, in the last one hundred years. Unfortunately no practical substitute could be found so far.</p><br /><p>No wonder when President <strong>Bush</strong> <a href="http://www.villagevoice.com/2003-12-30/news/hydrogen-s-dirty-details/1/">advocated</a> hydrogen economy in a State of the Union address <a href="http://www.villagevoice.com/2003-12-30/news/hydrogen-s-dirty-details/1/">in 2003</a>, some one reminded us that <a href="http://motherjones.com/environment/2004/05/russians-are-coming">you can NOT have a hydrogen economy without palladium</a>, and that the USA is lucky to have one of the world's only two primary palladium mines: the <a href="http://stillwatermining.com/">Stillwater Mine</a> (<strong><a href="http://seekingalpha.com/symbol/swc">SWC</a></strong>) in Montana. The other palladium mine is <a href="http://www.napalladium.com/">North American Palladium</a> (<strong><a href="http://seekingalpha.com/symbol/pal">PAL</a></strong>). Read "<strong><a href="http://motherjones.com/environment/2004/05/russians-are-coming">The Russians Are Coming</a></strong>" by Mother Jones.</p><br /><p>Recently there is an <strong>investor mania</strong> in the sector of <strong>rare earth metals</strong>, just like the one in solar energy a few years ago, due to recent news that China is limiting production and export of rare earth metals. The rare earth metals <strong>mania</strong> is not without a good reason. The alternative energy development is a huge investment theme due to Peak Oil. In the alternative energy development, you need efficient electric motors to turn mechanical energy (like wind power or hydropower) into electricity and turn electricity into mechanical power (like in a hybrid car), and you need high energy density batteries to store the electricity energy. The high density batteries need rare earth metals. To make the strong magnets needed to build electric motors, you need rare earth metals. Not to mention the advanced electronics technology need rare earth metal as well. No wonder the whole world panicked when China begin to cut back rare earth metals expert quotas, and there is an investor mania to rush into potential rare earth mining plays like <strong><a href="http://seekingalpha.com/symbol/mcp">MCP</a>, </strong><strong><a href="http://seekingalpha.com/symbol/ree">REE</a>, <a href="http://seekingalpha.com/symbol/avarf.pk">AVARF.PK</a></strong> and <strong><a href="http://seekingalpha.com/symbol/uuraf.pk">UURAF.PK</a></strong> these days.</p><br /><p>But let me be clear: rare earth metals are not rare at all. China could <strong>not</strong> cut the world off on rare earth metals even if she wants to. There are plenty of rare earth resources else where in the world that can be developed. They just won't be cheap.</p><br /><p>But here are these two other metals that are <strong>truely rare</strong>, and that all alternative energy technology more critically depend on, and which China has <strong>zero</strong> domestic sources. China runs the danger of being cut off by the world on these two critical metals if there is a resource war.</p><br /><p>Those two metals, as I just mentioned, are <strong>palladium</strong> and <strong>platinum</strong>. Supply of these two metals concentrate in just a few spots in the world: Russia's <strong><a href="http://nornik.ru/en">Norilsk Nickel</a></strong> (<strong><a href="http://seekingalpha.com/symbol/nilsy.pk">NILSY.PK</a></strong>) mine, South Africa PGM mines, and these two palladium mines in North America: <strong><a href="http://seekingalpha.com/symbol/swc">SWC</a></strong> and <strong><a href="http://seekingalpha.com/symbol/pal">PAL</a></strong>. Price of platinum but even more so that of palladium, have been <a href="http://www.kitco.com/market">surging up</a> relentlessly due to strong supply/demand fundamentals. China, Japan and other nations without their domestic sources of these two metals, better begin to think about accumulate their strategic reserved of these two critical strategic <a href="http://seekingalpha.com/article/93590-of-wars-and-strategic-metals">industry and <strong>war time</strong> metals</a>.</p><br /><p>Likewise, investors would do much better hoarding physical palladium metal bullions, than hoarding a basket of 2 dozen different rare earth metals and not knowing which one will do best in the near future.</p><br /><p>In the next two articles I will talking about how effects of resource peaking in two countries will impact global supply of platinum and palladium catastrophically, causing market panick in the near future, sending prices of these two metals surging to unimaginable high levels:</p><br /><p>Peak Coal in South African and the Global PGM Supply</p><br /><p>-How South Africa is running out of coal. How booming India coal demand will deplete South Africa's coal supply. And how these will impact South Africa's electricity supply and therefore constraint that country's platinum and palladium supply. </p><br /><p>Peak Nickel in Russia and the Russian Checkmate on Palladium</p><br />-The Russian checkmate on global palladium supply are in two aspects: First <a href="http://blogs.forbes.com/halahtouryalai/2010/10/21/a-russian-state-secret-may-push-palladiums-price-to-1000/">the end</a> of Russia strategic palladium stockpile sale, due to the stockpile depletion. Second, palladium production of Russia's <strong><a href="http://seekingalpha.com/symbol/nilsy.pk">Norilk Nickel</a></strong> (<strong><a href="http://seekingalpha.com/symbol/nilsy.pk">NILSY.PK</a></strong>) mine declines dramatically, as ore grade deteriorates. Third, More shockingly, Norilsk Nickel is now <a href="http://www.bloomberg.com/news/2010-10-18/norilsk-nickel-plans-20-billion-program-to-boost-arctic-output.html">considering</a> the more cost effective <strong>Activox Process</strong> technology, which it acquired by spending US$6.5B to acquire <strong>LionOres</strong> a few years ago. The <strong>Activox Process</strong> will dramatically cut sulphur dioxide pollution. But the new technology will only extract base metals nickel and copper, leaving platinum and palladium in the residue un-extracted, unless the price is high enough to provide the economic incentives to extract the precious metals using alternative approaches. This change would be a <strong>catastrophic loss</strong> of global palladium supply and will be sure to cause market panic.<br /><br /><strong>Full Disclosure:</strong> The author has large long positions in palladium mining stocks <strong><a href="http://seekingalpha.com/symbol/swc">SWC</a></strong> and <strong><a href="http://seekingalpha.com/symbol/pal">PAL</a></strong>, in addition to silver mining stocks like <strong><a href="http://seekingalpha.com/symbol/ssri">SSRI</a></strong>, <strong><a href="http://seekingalpha.com/symbol/cde">CDE</a></strong>, <strong><a href="http://seekingalpha.com/symbol/hl">HL</a></strong>, and coal mining stocks <strong><a href="http://seekingalpha.com/symbol/pcx">PCX</a></strong> and <strong><a href="http://seekingalpha.com/symbol/aci">ACI</a></strong>. The author has no position in rare earth metal plays <strong><a href="http://seekingalpha.com/symbol/ree">REE</a></strong> and <strong><a href="http://seekingalpha.com/symbol/mcp">MCP</a></strong>.JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com6tag:blogger.com,1999:blog-915569627637323801.post-11934141450593231292010-10-05T10:38:00.000-07:002010-10-05T14:39:22.068-07:00The Ultimate Energy InvestmentsYou read that title right, I am talking about The <strong>Ultimate</strong> Energy Investments, not the "<strong>Alternative</strong> Energy" investments. <em><a href="http://en.wikipedia.org/wiki/Alternative_energy">Alternative energy</a></em> is a very sexy word to the ears of investors, in recent years. I am all for <em>alternative energy</em> developments. But I am not a big fan of most of the alternative energy developments. They are too costly in terms of energy and money invested, in terms of energy return, and none of them can be ramped up quickly to meet even a fraction of energy demands in today's global economy. I believe <strong><a href="http://lenr-canr.org/News.htm">LENR</a></strong>, or <strong><a href="http://www.coldfusionnow.org/">Cold Fusion</a></strong>, which involves precious metal <strong>palladium</strong>, is humanity's only solution to Peak Oil energy crisis.<br /><br />We face the <strong><a href="http://en.wikipedia.org/wiki/Peak_Oil">Peak Oil</a></strong> reality, a reality that the total energy supply of the world will begin to <strong>decline</strong>, instead of continue to increase. The world must cope with and live within the reality of <strong>ever declining</strong> energy supply, until <a href="http://www.coldfusionnow.org/">a new abundant energy source</a> can be developed to replace the depleting <a href="http://en.wikipedia.org/wiki/Fossil_fuel">fossil fuels</a> of the earth.<br /><br />It makes sense to hoard something when supply is in shortage. Wouldn't it be nice to physically hoard <strong>energy</strong> itself, as a commodity investment? This is why I gave the title of this article as "The <strong>Ultimate</strong> Energy Investments". Yes I am talking about <strong>HOARDING ENERGY</strong> itself.<br /><br />How do you <strong>hoard energy</strong>? Energy is invisible, has no shape or form. Energy price is still cheap but it won't stay cheap. One kilowatt hour of electricity is worth about 5 US cents at whole sale. You can hoard energy by storing it in a battery, but it is an ineffective investment: One set of Toyota Prius hybrid car batteries, costing a few thousand dollars, stores about 500 watt hour of energy fully charged, or less than 3 cents worth of energy. Is it so impossible to hoard energy?<br /><br />It is not possible to hoard energy directly, but it is possible to hoard energy <strong>indirectly</strong>. It can be a very good investment. Energy drives all activities of the society. All goods or services we produce or consume ultimately depends on energy in one way or another, directly and indirectly. When you take a hair cut in a barber's shop it costs lots of energy: Electricity is used to drive the hair clipper. The hair clipper itself is made of plastic and metal parts. You need energy to produce the plastic and produce the metal from minerals. You need energy to turn raw plastic and metal into parts and then assembly into a hair clipper. The barber needs to eat food. You need energy to produce the fertilizer needed to grow grocery foods that the barbers and every one of us consume daily. Everything costs energy.<br /><br />The <strong>ultimate energy investments</strong> are investments in commodities that cost a huge amount of energy to produce in the first place. Such commodities may be extremely rare, and can be very expensive, reflecting the huge amount of energy it costs to produce these commodities.<br /><br />Precious metals, particularly <strong><a href="http://en.wikipedia.org/wiki/Platinum_group_metals">PGM</a></strong> metals, <strong>platinum</strong> and <strong>palladium</strong>, are such <strong>ultimate energy hoarding</strong> investments, because these metals cost huge amount of energy to produce. According to <a href="http://angloplatinum.investoreports.com/angloplatinum_arpdf_2009/downloads/angloplatinum_sdr_2009.pdf">the annual report</a> of <a href="http://www.angloplatinum.com/">Anglo Platinum</a> (<strong><a href="http://seekingalpha.com/symbol/agppy.pk">AGPPY.PK</a></strong>), the direct electrical energy cost of producing just one ounce of PGM metal, is almost <strong>7GJ</strong> in 2008, or <strong>7x10^9 Joules</strong>. In terms of electricity that's roughly <strong>2000</strong> kilowatt hours of electricity to produce just one ounce of PGM metal. At retail electricity rate of US$0.15 per KWH, it costs US$300 just in direct energy cost to produce one ounce of PGM metals. Indirect energy cost, e.g. the energy cost to produce the mining equipments, explore and develop the mine, as well as costs to pay salary to feed the mining workers and their families, is probably several times higher.<br /><br />I guestimate that all direct and indirect energy cost combined, it costs about <strong>10,000</strong> KWH of electricity worth of energy to produce one ounce of platinum or palladium, or the equivalence to the energy contained in <strong>six tons</strong> of coal.<br /><br /><strong>ONE OUNCE of PGM metal equals SIX TONS of coal</strong>. Remember that and think about it!<br /><br />The <strong>platinum</strong> engagement ring you bought for your wife contains about 1/6 of an ounce of platinum. It costed <strong>one ton of coal</strong> to produce the metal. Your wife is wearing one metric ton of coal right on her ring finger. Just tell her that there is one ton of coal sitting on her finger!!!<br /><br />When you buy a one ounce <strong>platinum</strong> or <strong>palladium</strong> coin, you have hoarded 6 tons of coal under your pillow, without taking up any space in your backyard. When South Africa exports one ounce of PGM, they consume six tons of their coal. By the time South Africa depletes its coal reserves, they won't be able to produce a single more ounce of PGM metal, even if there is still be plenty of metal lying underground.<br /><br />As energy becomes more expensive, it costs more to produce the precious metals. The value of a physical asset is generally decided by the replacement production cost, the ounces of precious metal you hoard will grow more valuable over time, as Peak Oil starts to take its toll in societies.<br /><br />Isn't it great that you can <strong>hoard energy itself</strong>, by simply hoarding bullions of precious metals, without costing space in your backyard to store a small mountain of coal! Just remember this: <strong>one ounce of platinum or palladium equals to six metric tons of coal</strong>.<br /><br />The concept can be applied to other precious metals and base metals. Gold production is also extremely energy intensive, having to sort through tons of rocks to extract just a fraction of an ounce of gold. One base metal that is tightly correlated to energy cost, is <strong>aluminum</strong>. There is no scarcity in the raw material to produce aluminum. Aluminum <a href="http://en.wikipedia.org/wiki/Aluminum_processing">production</a> is merely a matter of applying electricity energy to separate the aluminum metal by electrolysis. When you buy an aluminum bar, you bought a certain amount of electricity, stored in the metal, in the form of energy consumed to produce the metal.<br /><br />If you want to hoard <strong>electricity</strong>, you can hoard <strong>aluminum</strong> bars instead. I do not know how many kilwatt hour of electricity it costs to produce one kilogram of aluminum. Probably you can check the annual reports of producers like <strong>Alcoa Inc.</strong> (<strong><a href="http://seekingalpha.com/symbol/aa">AA</a></strong>) or <strong>Aluminum Corp. of China</strong> (<strong><a href="http://seekingalpha.com/symbol/ach">ACH</a></strong>) to find out. One thing is sure, as electricity price goes up, so will the cost of aluminum production, and so will the market price of the metal.<br /><br />Recently, another energy source, <strong>natural gas</strong>, has become a hot topic of discussion in the investor community. I agree with the general sentiments that current natural gas price is unreasonably too low in comparison with other energy sources. Current natural gas price does not fairly reflect the production cost, particularly the shale gas production cost. The low price is unsustainable. It must go up soon.<br /><br />What can you buy to invest in <strong>natural gas</strong>, besides producers like <strong><a href="http://seekingalpha.com/symbol/chk">CHK</a></strong>, <strong><a href="http://seekingalpha.com/symbol/cog">COG</a></strong>, <strong><a href="http://seekingalpha.com/symbol/apc">APC</a></strong>, <strong><a href="http://seekingalpha.com/symbol/petd">PETD</a></strong>? Many people talk about <a href="http://seekingalpha.com/article/201466-four-natural-gas-etfs-to-ponder">natural gas ETF funds</a> like <strong><a href="http://seekingalpha.com/symbol/ung">UNG</a></strong>, <strong><a href="http://seekingalpha.com/symbol/fcg">FCG</a></strong>, <strong><a href="http://seekingalpha.com/symbol/unl">UNL</a></strong>, <strong><a href="http://seekingalpha.com/symbol/wcat">WCAT</a></strong>. I must point out that people should <strong>NOT</strong> touch any of these <strong>ETF</strong>s that are based on <strong>nothing but paper</strong>. Ask managers of these ETF funds: Do you hoard even one cubic feet of natural gas? Do you have any facility they can show you that contains natural gas? If they don't have the physical goods, then they only have <strong>worthless papers</strong> created out of thin air by counter-parties. I have <a href="http://seekingalpha.com/instablog/121744-mark-anthony/33532-hot-money-hot-commodities-and-the-us-dollar-carry-trade-part-2">learned my lesson</a> in <strong><a href="http://seekingalpha.com/symbol/ung">UNG</a></strong>, fortunately without suffering any loss. I <a href="http://seekingalpha.com/article/225249-the-problem-with-almost-every-etf-investment">argued</a> why people should NOT invest in <strong><a href="http://seekingalpha.com/symbol/ung">UNG</a></strong>, <strong><a href="http://seekingalpha.com/symbol/uso">USO</a></strong>, or any other paper based <strong>ETF</strong>s. It is extremely important that <a href="http://seekingalpha.com/article/225249-the-problem-with-almost-every-etf-investment">you read it</a> and try to understand <a href="http://seekingalpha.com/article/225249-the-problem-with-almost-every-etf-investment">the difference</a> between <strong>paper</strong> and <strong>physical goods</strong>.<br /><br />Is there no way to <strong>hoard</strong> physical <strong>natural gas</strong> for an investment? Well, there <strong>IS</strong> a good way of hoarding natural gas, without giant steel storage tanks. Natural gas is used to produce a very important agriculture commodity whose other raw material for production is free: the air! It's called <strong><a href="http://en.wikipedia.org/wiki/Urea">urea</a></strong>, a nitrogen fertilizer. The nitrogen comes from the air. The hytrogen, as well as the energy needed to produce <strong>urea</strong>, comes from <strong>natural gas</strong>. No other raw material is involves. <strong>Urea</strong> is stable, safe and cost effective to store. By hoarding <strong>urea</strong>, you are hoarding natural gas in solid form. Current <strong>urea</strong> price is at multi-year low, reflecting the current low natural gas price and therefore the low production cost of urea. The urea price must go up when natural gas price goes up, and when global food demand goes up, driving more urea demand in agriculture.<br /><br />Go ahead to hoard <strong>urea</strong> at current low price if you want to invest in physical <strong>natural gas</strong>.<br /><br />As for me, I have been a long term <a href="http://seekingalpha.com/author/mark-anthony/articles">advocater</a> of <strong>palladium</strong> investment. There is now even more reason to invest in palladium, besides the bullish factors I have <a href="http://seekingalpha.com/author/mark-anthony/articles">talked about</a> repeatedly. At <a href="http://www.kitco.com/charts/livepalladium.html">current price</a> of only <strong>$578/oz</strong>, it is nice to know that one ounce of <strong>palladium</strong> represents at least <strong>six metric tons of coal</strong>, right at your finger tip. Since the <a href="http://stockology.blogspot.com/2008/11/how-to-save-us-economy-part-two.html">December, 2008 lows</a> of precious metals, the performance of <strong><a href="http://www.kitco.com/charts/livepalladium.html">palladium</a></strong> has beaten other precious metals: <a href="http://www.kitco.com/charts/livegold.html">gold</a>, <a href="http://www.kitco.com/charts/livesilver.html">silver</a> and <a href="http://www.kitco.com/charts/liveplatinum.html">platinum</a>. <strong>Palladium</strong> will continue to <a href="http://seekingalpha.com/article/225803-palladium-in-play-demand-up-supply-down">outperform</a> the other precious metals, until at least it reaches a <a href="http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Mzk5Nzd8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1">price parity</a> with <strong>platinum</strong>.<br /><br />Not to mention that there are hundreds of gold or silver mining stocks to pick from, notably like <strong><a href="http://seekingalpha.com/symbol/abx">ABX</a></strong>, <strong><a href="http://seekingalpha.com/symbol/gg">GG</a></strong>, <strong><a href="http://seekingalpha.com/symbol/au">AU</a></strong>, <strong><a href="http://seekingalpha.com/symbol/nem">NEM</a></strong>, <strong><a href="http://seekingalpha.com/symbol/paas">PAAS</a></strong>, <strong><a href="http://seekingalpha.com/symbol/ssri">SSRI</a></strong>, <strong><a href="http://seekingalpha.com/symbol/cde">CDE</a></strong>, <strong><a href="http://seekingalpha.com/symbol/hl">HL</a></strong>, just to name a few.<br /><br />When it comes to platinum, there are much fewer choices: <strong><a href="http://seekingalpha.com/symbol/agppy.pk">AGPPY.PK</a></strong>, <strong><a href="http://seekingalpha.com/symbol/impuy.pk">IMPUY.PK</a></strong>, <strong><a href="http://seekingalpha.com/symbol/lnmiy.pk">LNMIY.PK</a></strong>, <strong><a href="http://seekingalpha.com/symbol/agpbf.pk">AGPBF.PK</a> </strong>and <strong><a href="http://seekingalpha.com/symbol/nmpnf.pk">NMPNF.PK</a></strong>.<br /><br />When it comes to <strong>palladium</strong>, the only primary mining plays available is <a href="http://stillwatermining.com/">Stillwater Mining</a> (<strong><a href="http://seekingalpha.com/symbol/swc">SWC</a></strong>), and <a href="http://www.napalladium.com/">North American Palladium</a> (<strong><a href="http://seekingalpha.com/symbol/pal">PAL</a></strong>).<br /><br />Full Disclosure: The author holds shares in <strong><a href="http://seekingalpha.com/symbol/swc">SWC</a></strong> as the largest long position. The author also holds shares in <strong><a href="http://seekingalpha.com/symbol/pal">PAL</a></strong>, <strong><a href="http://seekingalpha.com/symbol/ssri">SSRI</a></strong>, <strong><a href="http://seekingalpha.com/symbol/cde">CDE</a></strong>, <strong><a href="http://seekingalpha.com/symbol/paas">PAAS</a></strong>, <a href="http://seekingalpha.com/symbol/hl"><strong>HL</strong></a>, <a href="http://seekingalpha.com/symbol/pcx"><strong>PCX</strong></a>. The author hoards physical <strong>palladium</strong> metal but currently has no plan to hoard physical <strong>urea</strong> due to lack of suitable market access. The author has no long or short position in any of the <strong>ETF</strong> funds mentioned.JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com4tag:blogger.com,1999:blog-915569627637323801.post-85774172209409599342010-09-14T10:40:00.000-07:002010-09-14T13:19:28.380-07:00The Pitfalls of Almost Every ETF InvestmentsI am telling you something <strong>every investor should know</strong>, but no one has told you! Even the most successful investors like <strong>Warren Buffet</strong> or <strong>Jim Rogers</strong> has failed to tell you this important investment rule that you are about to hear from me. I believe <strong>Jim Rogers</strong> does not intend to withholding his investment knowhow from you, but he truely does <strong>NOT</strong> actually <strong>get it</strong> himself. It took me a while to get it as well.<br /><br />When <strong>Jim Rogers</strong> pitched agriculture commodities and urged people to buy <strong><span style="color:#ff0000;">future contracts</span></strong> of those commodities, he did NOT know what he was talking about! I hope that some one close to <strong>Mr. Jim Rogers</strong> can bring my words to him and explain why he was wrong. I have high respect to <strong>Mr. Jim Rogers</strong> and I hope he gets what I am about to tell below. This is an investment mistake 99% of people make, including <strong>Jim Rogers</strong> himself.<br /><br /><strong><span style="font-size:130%;">If you believe something is bullish and want to invest in it, then you MUST <span style="color:#ff0000;">own it outright</span>.</span></strong><br /><br />Allowing some one else to own your investments for you, simply won't cut it. Owning something "<strong>indirectly</strong>", for example, by purchasing futures contracts, won't cut it, either. If you don't hold something outright, physically, under your own control, then you really don't own it. If you don't own something outright, then all you have is merely a piece of promise, written on a piece of paper. You are owning merely paper assets, not the physical assets. You should <strong>reject</strong> all assets that rely on a promise printed on a piece of paper, because a promise can be created out of thin air, and can just as easily vanish into thin air, with little or no repercussion to the one who breaks the promises, but tremendous loss to you who wrongly trusted that promise. Let me explain.<br /><br />But first let me clarify that owning <strong>equities</strong>, i.e., owning shares of stocks of publicly traded companies, is NOT owning paper asset. The company, like the <strong><a href="http://stillwatermining.com/">Stillwater Mining Company</a></strong> whose stock I own, is a real physical business entity, if I push a computer button to buy shares of <strong><a href="http://seekingalpha.com/symbol/swc">SWC</a></strong> through TD AmeriTrade, I do own a small piece of that company. My ownership is recognized as legitimate. If I have any doubt I can request physical stock certificate. If there is still any doubt regarding the ownership, then the stock should not be bought. So let's make it clear, equities, as long as the ownership is not in question, are physical assets, not paper assets.<br /><br />But all indirect ownership of physical assets, or ownership of <strong>derivatives</strong> of physical assets, are paper assets because they rely on a <strong>promise</strong> made by some body, written on a piece of paper. Take for example the physical gold <strong>ETF</strong>, the <strong><a href="http://seekingalpha.com/symbol/gld">GLD</a></strong>, and physical silver <strong>ETF</strong>, the <strong><a href="http://seekingalpha.com/symbol/slv">SLV</a></strong>. The respective investment prospectus claims these funds are backed by physical gold and silver, and hence owning shares of these two <strong>ETF</strong>s are equivalent to owning actual physical precious metal.<br /><br />Maybe these <strong>ETF</strong>s are really backed by physical metals, maybe not. We don't know. All I know is by owning shares of either <strong><a href="http://seekingalpha.com/symbol/gld">GLD</a></strong> and <strong><a href="http://seekingalpha.com/symbol/slv">SLV</a></strong>, you are NOT owning physical gold or silver. Not at all. You are owning something which is based on a mere promise, a promise that some how some where in a secret location in the world there are a pile of gold or silver bars and those bars really do belong to you, but you have no way of knowing and you have no access to it. Those physical precious metal bars might as well be put on the moon and you can point to the moon and tell your grandsons that you really do own something on the moon, and that some one promised it to you, you just don't have control or access to it.<br /><br />Make no mistake about it: You are owning a piece of <strong>promise</strong>, not a piece of metal, by owning <strong><a href="http://seekingalpha.com/symbol/gld">GLD</a></strong> or <strong><a href="http://seekingalpha.com/symbol/slv">SLV</a></strong>. It's up to you to decide how much you can trust that promise and how much you value it. But to me, I don't even trust my best friend to hold a few palladion coins for me, why should I trust some guys that I don't even know personally to hold my precious metal in a fund called <strong><a href="http://seekingalpha.com/symbol/gld">GLD</a></strong> and <strong><a href="http://seekingalpha.com/symbol/slv">SLV</a></strong>? In the past <a href="http://seekingalpha.com/instablog/121744-mark-anthony/13311-warnings-to-precious-metal-etf-investors-buyer-beware">I scrutinized the metal bars list of SLV</a> and raised plenty of red flags. I determined that regardless whether those red flags have legitimate explanations, it is not worth risking my own investments to count on some Santa Clause keep a good promise.<br /><br />Another categories of <strong>ETF</strong> funds are <a href="http://seekingalpha.com/instablog/121744-mark-anthony/33532-hot-money-hot-commodities-and-the-us-dollar-carry-trade-part-2">even worse</a>. The <strong><a href="http://seekingalpha.com/symbol/gld">GLD</a></strong> and <strong><a href="http://seekingalpha.com/symbol/slv">SLV</a></strong> fund at least claims to be backed up by physical assets. But there are ETF funds which are backed up by <strong>nothing but paper</strong>. Most notably are the <strong><a href="http://seekingalpha.com/symbol/uso">USO</a></strong> fund for crude oil, and <strong><a href="http://seekingalpha.com/symbol/ung">UNG</a></strong> fund for natural gas. The <strong><a href="http://seekingalpha.com/symbol/uso">USO</a></strong> fund does not own a single drop of oil and the <strong><a href="http://seekingalpha.com/symbol/ung">UNG</a></strong> fund does not own a single cubic of natural gas. They own future contracts, i.e., <strong>promises</strong> made by some one, not physical commodities digged out of ground. Why do people buy these two funds and then expect to make profits when prices of the underlining comodity goes up, if there is not an ounce of the actual stuff involved? They don't. I <a href="http://seekingalpha.com/instablog/121744-mark-anthony/33532-hot-money-hot-commodities-and-the-us-dollar-carry-trade-part-2">recognized that fundamental fact on Oct. 29, 2009</a>. I advise you to <a href="http://seekingalpha.com/instablog/121744-mark-anthony/33532-hot-money-hot-commodities-and-the-us-dollar-carry-trade-part-2">read that article again</a>. It was a very important lesson I learned.<br /><br />Lucky for me, once I recognize <a href="http://seekingalpha.com/instablog/121744-mark-anthony/33532-hot-money-hot-commodities-and-the-us-dollar-carry-trade-part-2">why the investment based on paper will not work</a>, I quickly unwinded my entire investment in <strong><a href="http://seekingalpha.com/symbol/ung">UNG</a></strong>, which was once the second largest position I held, without suffering any loss, and I never touched it again. In hind sight I have chills in my spine thinking what could happen had I not timely realized what's wrong with <strong><a href="http://seekingalpha.com/symbol/ung">UNG</a></strong>, and other similar paper based <strong>ETF</strong> funds. Unlucky for many investors who still buy such paper ETFs thinking they are investing on the right thesis of bullish commodities, or bearish US dollar. These investors suffered great losses and will continue to suffer losses in the future, until they realize the problem with owning paper, or untill they lose all their money, whichever comes first.<br /><br />Notice what the prices of crude oil and natural gas were doing, since the low of March, 2009, and what were the share prices of <strong><a href="http://seekingalpha.com/symbol/uso">USO</a></strong> and <strong><a href="http://seekingalpha.com/symbol/ung">UNG</a></strong> doing, during the same period? Do I need to bring your attention to what <strong><a href="http://seekingalpha.com/symbol/faz">FAZ</a></strong> and <strong><a href="http://seekingalpha.com/symbol/fas">FAS</a></strong> has been doing over the long term? They are supposed to be a pair of opposite financial ETFs and they are supposed to run in the opposite directions, but over the long term, both <strong>run down</strong>. Same story with <strong><a href="http://seekingalpha.com/symbol/uup">UUP</a></strong> and <strong><a href="http://seekingalpha.com/symbol/udn">UDN</a></strong>, the dollar up and dollar down funds. In short term they indeed run opposite to each other, but in longer term, both runs in the same dorection: <strong>downward</strong>. All those are paper instruments based on nothing but mere promises made by counter parties. So why should any one expect to make money out these papers? Why do you think those counterparties are nice Santa Clauses ready to deliver profits to you happily? They don't. These paper instruments are gamblings, not investments.<br /><br />There have been recent criticisms <a href="http://seekingalpha.com/article/225063-the-sad-path-of-ung">on UNG</a>, <a href="http://seekingalpha.com/article/222781-the-seven-sins-of-gld">on GLD</a> and on <strong><a href="http://seekingalpha.com/symbol/slv">SLV</a></strong>, and even <a href="http://seekingalpha.com/article/224974-why-contango-is-a-bull-killer-for-oil">on USO</a>. I share some of the criticisms on these ETF funds. But no one on Seeking Alpha has really touched the more fundamental reasons why paper-based, or promise-based ETFs, are fundamentally wrong as investment vehicles, regardless of the bullish fundamentals of the underlining commodities.<br /><br />When it comes to investments, <strong>if you don't hold it, you don't own it</strong>. Please pause and think about it. Hopefully you learn something. Hopefully next time Mr. <strong>Jim Rogers</strong> tells you to buy agriculture commodity <strong>future's contracts</strong>, you can help me to explain to him why he was wrong; why people should not buy this index or that index, or this or that ETF, or buy future contracts or other derivatives. Hoarding the physical stuff is the only correct way to invest in a commodity.<br /><br />I still remember when I <a href="http://seekingalpha.com/article/55959-the-tellurium-supernova">first pitched</a> physical <strong><a href="http://seekingalpha.com/article/55959-the-tellurium-supernova">tellurium</a></strong> investment, many analysts, some well known, immediately asked me where they can buy <strong>tellurium</strong> futures contracts. I should have told them that I am quite happy to write up and sell them some tellurium futures contracts, at good prices, but they are not going to make money out of me. If you want to make money from <strong>tellurium</strong>, you have to purchase and hoard physical tellurium, just like I did. It is true for all commodities. It is true for all investments. <strong>If you don't hold it, you don't own it</strong>.<br /><br />Therefore I reject virtually <strong>all</strong> <strong>ETF</strong> investments as legitimate long term investment vehicles. If you want to invest in precious metals, you have to own the real metals, or own stocks of the related mining companies. I am happy to see that I am now <strong><a href="http://billingsgazette.com/business/3295cc30-be1e-11df-b370-001cc4c002e0.html">vindicated</a></strong> and will continue to <a href="http://www.kitco.com/charts/livepalladium.html">do well</a> in my insistence that <strong>palladium</strong> will be the best precious metal to invest in, and my insistence on the only known primary <strong>palladium</strong> producers, <strong><a href="http://seekingalpha.com/symbol/swc">SWC</a></strong> and <strong><a href="http://seekingalpha.com/symbol/pal">PAL</a></strong>. It was not a love affair. It was a firm conclusion from my own objective investment analysis. I just wish that if investors are bullish on <strong>palladium</strong>, they should go out of their ways and purchase any ounce of <strong>physical palladium</strong> they can find, instead of counting on buying palladium future contracts.<br /><br /><strong>Full Disclosures:</strong> The author owns <strong><a href="http://seekingalpha.com/symbol/swc">SWC</a></strong> as the largest position on his investment portfolio, and is invested in physical palladium metal. The author does not have position in <strong><a href="http://seekingalpha.com/symbol/uso">USO</a></strong>, <strong><a href="http://seekingalpha.com/symbol/ung">UNG</a></strong>, <strong><a href="http://seekingalpha.com/symbol/gld">GLD</a></strong>, <strong><a href="http://seekingalpha.com/symbol/slv">SLV</a></strong>, <strong><a href="http://seekingalpha.com/symbol/fas">FAS</a></strong>, <strong><a href="http://seekingalpha.com/symbol/faz">FAZ</a></strong>, <strong><a href="http://seekingalpha.com/symbol/tbt">TBT</a></strong>, <strong><a href="http://seekingalpha.com/symbol/uup">UUP</a></strong>, <strong><a href="http://seekingalpha.com/symbol/udn">UDN</a></strong>, and does not intend to enter any position either. Although the author hoards physical <strong>tellurium</strong> and is skeptical of <strong><a href="http://seekingalpha.com/symbol/fslr">FSLR</a></strong>, he holds no position in <strong><a href="http://seekingalpha.com/symbol/fslr">FSLR</a></strong>.JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com6tag:blogger.com,1999:blog-915569627637323801.post-25269506299978554392010-07-18T18:01:00.000-07:002010-07-19T11:05:48.956-07:00BP Well Pressure Test Proves a Leak Exists Under Seabed!BP scientists <a href="http://news.yahoo.com/s/ap/20100717/ap_on_bi_ge/us_gulf_oil_spill_20100616040947">puzzled on</a> why closing the new sealing cap of the Macondo well did not raise the well pressure to the expected <strong>8000 to 9000 PSI</strong> pressure, but reached only <strong>6700 PSI</strong> after the first 24 hours and <strong>6745 PSI</strong> after 48 hours. If the well did not leak underground, with oil from the underground reservoir could only gush into the well but not leak out of it, the pressure should promptly reach equilibrium with the reservoir pressure. The reading at the sealing cap should then reach between 8000 to 9000 PSI, calculated based on reservoir pressure which is estimated based on conditions when the well blew out on April 20, 2010.<br /><br />BP scientists offer only two possible explanations:<br />1. There is a significant underground leak from the well.<br />2. The oil reservoir pressure has dropped due to depletion from 80 days of spill.<br /><br />I believe the pressure deficiency clearly indicates there is a big leak underground. Almost every one fail to notice to another data which is more important, and more disturbing: Why it is so <strong>slow</strong> for the pressure to approach its final equilibrium level. It's been more than two days and the pressure still hasn't fully stabilized yet! If the well has no leak, since the volume of oil in the well is small, and the liquid oil is hardly compressible, the well pressure should <strong>promptly</strong> raise to equilibrium level and stabilize within a few minutes after the sealing cap is shut off.<br /><br /><p>Let me explain the basic physics <strong>how fast</strong> the pressure in the well should raise, after the valves at the new sealing cap is shut off. If the well is not leaking, then all the oil already in the well has no where to go. Mean while at the bottom, the oil from reservoir continue to gush into the well. As the oil from reservoir squeezes in it builds up the pressure. This continues until the pressure reaches equiulibrium with the reservoir, and then there is no more oil getting in or out of the well any more and the pressure is stabilized.</p><p>How fast the pressure builds up to equilibrium level depends on three things:</p><p>1. How fast the reservoir oil can gush in under the pressure difference. The faster the oil gushes, the faster the pressure builds up.</p><p>2. How big a volume the oil in the well is confined to. The more room there is, the longer it takes to squeeze in extra oil to build up the pressure.</p><p>3. How compressible is the oil. The less compressible the oil is, the harder it is squeeze extra oil into the volume and therefore the faster the pressure reaches equilibrium.</p><p>Based on the estimate that reservoir oil was gushing into the well at a flow rate of 50,000 barrels per day, the total confined volume of oil the well is no more than 6500 barrels. And the compressibility of that amount of oil (liquid is not very compressible!) gives no more than 50 barrels extra space under full pressure. It takes roughly 3 * 50/50,000 of one day, or roughly <strong>5 minutes</strong>, for the pressure in the well to build up to equilibrium level.</p><p>But now it's taking <strong>much longer</strong> than 5 minutes, and the pressure is far from stabilized yet. At the start the pressure was at 5000 feet deep water pressure level, or <strong>2250 PSI</strong>. After the first 24 hours it reached <strong>6700 PSI</strong>. After 48 hours it was <strong>6745 PSI</strong>. After 72 hours it was <strong>6775 PSI</strong>. Now after 4 days it's nearly <strong>6800 PSI</strong>. The fact it is raising so slowing, and the pressure fails to stabilize, is a very troubling sign.</p><p>The data tells us that the oil is confined in a volume way much bigger than just the well itself. As the oil gushes into the well, it simutaneously leaks out of the well, through a pierced opening, into a way much bigger pocket of storage within the seabed rocks. This is why the pressure builds up extremely slowly. Lots of oil is being squeezed out through the leak point into the giant pocket in the seabed, to build up the pressure there slowly over time.</p><p>There is no question that <strong>the well casing is compromised and there is a huge leak</strong> some where in the well casing.</p><p>So why can't BP spot any seepage of oil out of the sea floor, if the oil is leaking out of the well into the seabed? That's because the well itself is 3 miles deep under the sea floor. If the oil seeps through the seabed and leak out from sea floor, it does not necessarily come out of the vicinity of the well site. It can come out at ANY spot within a roughly 3 miles radius from the well site. That is a pretty wide area to look for leaks. It is also pitch dark at the sea floor, the ROV video camera must use artificial lighting and can not see more than a living room's area of sea floor at at time.</p><p>if there is one single leak out of the sea floor within a 3 mile radius, it will take forever for BP to discover it using those under-sea ROVs. If BP find one leak, that means there must be hundreds of un-discovered leaks out of the sea floor!</p>What should BP do? BP should publicly publish detailed profile of pressure change over time, since the beginning of the pressure test. Let the experts look at the data and build physics model to discover what teh data tells us, and debate the scientific question whether there is a leak and how big the leak is, and/or whether the leak has penetrated all the way to the sea floor.<br /><br />As for the relief wells, if the well casing has been dameged, then there is no point to proceed with the relief wells any more. Once the relief well is pierced through to the wild well, BP will continue to lose mud throught the leak in the wild well. Once all the mud is lost, BP will have a blowout at the relief wells, causing a much bigger disaster than the existing one.<br /><br />It's time for BP to be honest with itself, publish all information and invite experts around the world to deal with the problem together. This is a disaster that BP can not handle on its own.<br /><br />Full Disclose: The author currently owns a small short position of BP. But my main stock portfolio are on long positions on my favorite palladium mining stocks, SWC and PAL, as well as silver mining stocks such as SSRI, CDE, PAAS. The author does intend to increase BP shorts over time, if there is significant recovery of the BP stock price.JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com8tag:blogger.com,1999:blog-915569627637323801.post-13464556016083134002010-07-08T12:43:00.000-07:002010-07-08T14:49:55.557-07:00Warning to BP: Stop the Relief Wells Or Expect a Much Bigger Catastrophe!I issue a serious warning to <strong><a href="http://seekingalpha.com/symbol/bp">BP</a></strong>: Stop it right now, do NOT drill the last few feet of the relief wells. Do NOT punch that hole through. Think everything through very carefully! If BP proceeds to puncture the hole through to the original blowout well, it opens up a Pandora's Box which may lead to a much bigger catastrophe than any one has ever bargained for!<br /><br />BP must halt now and invite all experts for a good debate on exactly what could happen. Build a computer model and test all scenaries. Build a physical model and run tests on it. BP is foolhardy to just proceed and pray/gamble for a success. Because what could happen is not just another failure, but rather a much bigger catastrophe!<br /><br />BP <a href="http://www.bp.com/genericarticle.do?categoryId=9033657&contentId=7061734">explains</a> how a relief well works. You drill another well nearby which intercepts and punches a hole through the casing of the original well, at 18000 feet below sea level, or 135,000 feet below the sea floor. Then heavy mud is injected through the relief well into the original blowout well, filing it up from near the bottom. Since the density of the mud is heavy, the gravity of the mud column generates a pressure enough to counters the pressure of the oil and gas from the reservoir, hence the oil/gas flowis stopped. Once the oil/gas flow is stopped the well can then be sealed off using cement.<br /><br />It sounds simple. But due the the extreme depth of the well and the extreme pressure from the reservoir, some technical details makes the plan virtually impossible to work. Let me explain.<br /><br />For the plan to work. BP needs to ensure several things:<br />1. The mud must have a density heavy enough to counter the pressure of the oil from the reservoir and to stop the flow of oil from the reservoir.<br /><br />2. The mud must be pumped into the junction point fast enough to prevent it from being diluted by oil and gas coming from the reservoir. See condition 1.<br /><br />3. The mud must not be too heavy that it seeps down into the fracture of rocks, damaging the rock formation, fracturing the sea floor which releases oil and gas in an uncontrolable way.<br /><br />4. BP must have enough mud at hand. If it ever runs out of mud it's game over for BP. But not so much mud that it all go down into the rock fractures and causes the sea floor to rupture. See condition 3 again.<br /><br />I don't see how BP can pull it off.<br /><br />For the discussion below, let's keep one thing in mind, when liquid flows thorugh a path, pressure drops the further you go alone the path. Part of the pressure is lost to overcome the resistance to the flow. The higher the viscosity (sticker) is, the narrower the flow path is, the more pressure drops along the path. On the other hand, if the liquid is not flowing, then there is no pressure drop due to liquid flowing.<br /><br />In the first phase of operation, mud is injected from the relief well through the junction point into the blowout well, expelling the oil and gas originally in the blowout well out of the exit point, while stopping the flow of oil and gas from the reservoir below.<br /><br />When the oil from reservoir is to seep through the rock fractures and then gush out of the blow out well, the pressure at the junction point is way much lower than the reservoir pressure, because it is much harder for the oil to seep through the rock fractures then to flow through the blowout well. Hence more pressure is lost at the rock fractures, than the pressure loss needed to push the oil up through the well. What it means is once the oil below the junction point stops, the pressure at the junction point quickly raises to a much higher level. And BP needs to be able to counter this much higher junction pressure and still be able to push the mud in.<br /><br />Now consider the path of the mud. It is pushed down the relief well and then it pushes the oil and gas up the blowout well. Note the exit point is free flowing. The pressure of the mud must be high enough that while the mud is flowing at very high rate, it still generate high enough pressure at the junction point to fight the static pressure from the oil in the reservoir. That goal is extremely hard to achieve, because most of the mud pressure is lost in pushing the mud through the resistance of the relief well.<br /><br />Likewise, the original oil and gas must be pushed to gush out of the blowout well even faster than the free flowing rate, to generate enough back pressure to push back the oil coming from the reservoir. Failing that, the oil will continue to flow from below to mix with the mud, hence diluting the mud entering the blowout well. This, again, is virtually impossible for BP to achieve. We are talking about pushing the mud in at <strong>more than twice the rate</strong> how free flowing oil and gas gushes out of the blowout well.<br /><br />To put things into formulas, let's call the pressure at the junction point Pj:<br /><br />Formula One, Junction Pressure from the Relief Well:<br />(1) Pj = P(Pump) + P(Mud Column) - Q2(Mud Flow) * Rm(Mud Resistance in Relief Well)<br /><br />Formula TWO, Junction Pressure from the Blowout Well:<br />(2) Pj = P(Sea Floor) + P(Oil Column) + Q2(Oil Flow) * Ro(Oil Resistance in Blowout Well)<br /><br />Formula THREE, Junction Pressure from the oil from the Reservoir:<br />(3) Pj = P(Reservoir) - P(Oil Below) - Zero (Oil below not flowing)<br /><br />Let's define net pressures, which is the pressures the three source of liquid would generate at the junction point if we put a flow stopper there, as such:<br /><br />P(Net Relief Well) = P(Pump) + P(Mud Column)<br />P(Net Reservoir) = P(Reservoir) - P(Oil Below)<br />P(Net Blowout Well) = P(Sea Floor) + P(Oil Column)<br /><br />The relationships can be re-written as such:<br /><br />(4) (P(Net Relief) - P(Net Reservoir))/(P(Net Blowout) - P(Net Reservoir))<br />= Rm(Mud Resistance in Relief Well)/Ro(Oil Resistance in Blowout Well)<br /><br />Let me explain it in layman's English. Let's imagine the reservoir is directly connected to the junction point with no resistance to the flow movement in either direction. The net force that pushes the mud down into the oil reservoir must be pushing the mud down at the <strong>same rate</strong> that the oil from the reservoir is able to push oil up to gush out of the blowout well, in terms of barrels per day.<br /><br />I don't see how BP can have mud heavy enough to achieve this goal. The fact that viscosity of mud is significant higher than the viscosity of oil, hense mud flow experiences much higher resistance than the oil flow, makes it even harder.<br /><br />Now that is just one condition, being able to inject mud and completely fill the blowout well with it, without being diluted by the gushing oil. It requires mud heavy enough. This condition directly contradict another condition, which is that the mud must not be so heavy that it is able to seep into the rock fractures, which requires mud that is not so heavy.<br /><br />The second condition, preventing mud from seeping into the rock formation, can simply be written as:<br /><br />(5) (P(Net Relief) - P(Net Reservoir)) <= 0 This second conditon, formula (5), can not be achieved at the same time that first condition, formula (4) is achieved. I predict that BP's relief wells are <strong>not</strong> going to be successful.<br /><br />A MORE SERIOUS warning to BP: If the relief wells fail as I predicted, do <strong>NOT</strong> resort to the desperate act of using nuclear options. If you use nuclear option, there is a good possibility it will trigger chain reaction of <a href="http://www.infowars.com/detonating-nuclear-bomb-at-bp-oil-spill-site-could-end-all-life-on-planet/">methane eruption on a global scale</a>, turning the local catastrophe into a <a href="http://www.infowars.com/detonating-nuclear-bomb-at-bp-oil-spill-site-could-end-all-life-on-planet/">global catastrophe</a>!!!<br /><br />Full Disclosure:<br />The author does not currently have any short or long position in BP, but plan to short BP if irrational exuberance pushes BP share price higher leading to the near finish of the relief wells giving people false hope it's going to be successful.JJ2000426http://www.blogger.com/profile/07973237146288465819noreply@blogger.com7