The red queen syndrome

“The release of energy from splitting a uranium atom turns out to be 2 million times greater than breaking the carbon-hydrogen bond in coal, oil or wood. Compared to all the forms of energy ever employed by humanity, nuclear power is off the scale. Wind has less than 1/10th the energy density of wood, wood half the density of coal, and coal half the density of octane. Altogether they differ by a factor of about 50. Nuclear has 2 million times the energy density of gasoline.” William Tucker, Understanding E=MC2

Ahead of the Herd recently interviewed Richard (Rick) Mills about the dark cloud of negative sentiment hanging over the nuclear power industry…..

Ahead of the Herd (AOTH): Japan’s reactors are offline, Chinese demand has slowed considerably as well. German demand has evaporated and many miners are being forced to sell into the spot and mid-term market. This selling has dropped the much watched spot price of uranium to US$40.00 lb.

RM: Japan’s inventories are thought to be an overhang in the spot market as are German inventory sales. There’s been very limited Chinese demand lately because of the country’s revised nuclear new build schedule.

Buyers are sitting on the sidelines waiting for prices to come to them.

AOTH: The Chinese authorities took a timeout in regards to new nuclear builds to implement stringent safety standards in the wake of the Fukushima disaster.

RM: Yes they did. But China has recently released its new energy plan and it effectively ends the pause on new nuclear construction. Any reactors currently under construction will be allowed to continue but new reactors will be required to use third-generation technology, the EPR or AP1000.

This is a major industry catalyst as it paves the way to commence building a lot of reactors very soon. Currently China has 12.57 GW in operation with 26 GW under construction. The Chinese government had previously stated that its goal was establish 40GW of nuclear power capacity by 2015 and to reach 80 GW by 2020.

AOTH: It’s not hard to raise money in China for nuclear power.

RM: China Guangdong Nuclear raised 1.5 billion yuan or US$240 million through a *dim sum bond offering. The offering was oversubscribed by a factor of four, that equates to a lot of interest.

* A bond denominated in Chinese yuan and issued in Hong Kong. Dim sum bonds are attractive to foreign investors who desire exposure to yuan-denominated assets, but are restricted by China’s capital controls from investing in domestic Chinese debt – INVESTOPEDIA.

AOTH: And where is Japan?

RM: The current Democratic Party of Japan (DPJ) government tabled a new nuclear energy policy in September 2012 that would see all reactors phased out in the 2030s. The Cabinet refused to ratify it and Japanese utilities are spending money upgrading their reactors and JOGMEC, the Japanese governments exploration arm, has entered into a joint venture with the government of Uzbekistan to explore for uranium for export to Japan, you would not do these things if you weren’t going to restart.

AOTH: Japan has a new regulatory agency.

RM: Yes, the Nuclear Regulatory Authority (NRA) replaces the old NISA. The key takeaway here is that the power utilities, in addition to the NRA green-lighting their restart, will only need the consent of the host municipality and the prefectural governor, no higher levels of government are involved.

An initial regulatory framework will be drafted by Mar-2013 and, after a public comment period, written into law by Jul-2013. Inspections, to see if plants are up to the new code, will be allowed prior to the July legislation so I expect the next restarts in the third quarter of 2013.

AOTH: Germany is walking away from nuclear power and selling its fuel inventory.

RM: Germany is greenwashing the world. They need to import more and more nuclear produced electricity from Holland, the Czech Republic and France to cover their self-inflicted power shortfall. Germany touts itself as the poster child for green energy yet they are sucking up nuclear generated power at a prodigious pace, just not from reactors on their soil.

And that’s not all there is to this story. France relies on electric heaters for heating many of its homes, the country’s energy needs rises over 2000 MW, the equivalent of two nuclear plants, for every one degree drop in temperature. Germany helped cover their own, and the French energy shortage, by using its existing coal-fired plants. There are twenty three new coal fired power plants under construction in Germany. Why so many? Because Germany is worried about the increasing cost of electricity.

Here’s a staggering reality, Germany opened a $3.4 billion 2200 MW coal fired power plant in August 2012. It vomits 13 million tonnes of CO2 instead of the 15 the old ones do by being 10 percent more efficient and burning only the ‘cleanest’ of coal, lignite. In one year, in just one year that one coal burner will generate one million times more CO2 than Germanys entire nuclear fleet would have over 20 years!

The top five coal fired power producers are; China, the U.S., India, Germany  and Japan.

AOTH: Mainstream media, many internet bloggers and newsletter writers are ‘reporting’ the U.S. has 100 years of NG supply. There’s a widely held perception that there are so many shale natural gas discoveries being made in the U.S. that nuclear energy is dead.

RM: Nothing could be further from the truth. The key to the U.S. natural gas boom is the use of new technology. Hydraulic fracturing, fracking, and horizontal drilling have tapped huge resources previously thought unrecoverable.

However the decline rate of shale gas wells is very steep. A year after coming on-stream production can drop to 20-40 percent of the original level. If the best prospects were developed first, and they were, subsequent drilling will take place on increasingly less favourable prospects. Can you imagine how much drilling would have to take place just to keep even with the existing production rate? Not, imo, going to happen.

Here’s James Howard Kunstler, author of “The Long Emergency” and his take on the situation;

“In order to keep production up, the number of wells will have to continue increasing at a faster rate than previously. This is referred to as “the Red Queen syndrome” which alludes to the character in Alice in Wonderland who famously declared that she had to run faster and faster just to stay where she is.”

Here’s something else, it’s a piece from an interview with energy expert Bill Powers;

“My thesis is that the importance of shale gas has been grossly overstated; the U.S. has nowhere close to a 100-year supply. This myth has been perpetuated by self-interested industry, media and politicians. Their mantra is that exploiting shale gas resources will promote untold economic growth, new jobs and lead us toward energy independence.

In the book, I take a very hard look at the facts. And I conclude that the U.S. has between a five- to seven-year supply of shale gas, and not 100 years. That is far lower than the rosy estimates put out by the U.S. Energy Information Administration and others. In the real world, many companies are taking write-downs of their reserves.” Bill Powers, author ‘Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth’ in a Energy Report interview.

AOTH: What’s the state of the U.S. uranium market?

RM: The U.S. has 104 nuclear reactors operating requiring 55 million pounds of uranium. This is the largest fleet of nuclear reactors and the US is the world’s largest uranium market. There are also two reactors currently under construction in the U.S.

U.S. uranium mines produced only 4.1 million pounds U3O8 in 2011, three percent less than in 2010.

AOTH: In its just released outlook, the IEA said global energy demand would grow by more than a third over the period to 2035, with China, India and the Middle East accounting for 60 per cent of the increase.

RM: We need to de-carbonize energy. The earth’s population is projected to climb from its current seven billion people to upwards of ten billion by 2050, most of this population growth will come from developing countries. All the people without power and all the new people will want power, they want TV’s, air conditioners, washers and dryers, phones, clean drinking water etc, they will want electricity. They all want the very same amenities we in the West take for granted, this will take enormous amounts of energy.

The quote below is from an article by James P. Hogan, Nuclear Power, It’s No Contest

“A year’s operation of a 1,000-MW coal plant produces 1.5 million tons of ash – 30,000 truck loads, or enough to cover one and a half square miles to a depth of 40 feet – that contains large amounts of carcinogens and toxins, and which can be highly acidic or alkaline depending on the sulfur content of the coal. Also, ironically, more unused energy is thrown away in the form of trace uranium in the ash than was obtained from burning the coal. Getting rid of it is a stupendous task, and it ends up being dumped in shallow landfills that are easily leached out by groundwater, or simply piled up in mountains on any convenient site. And that’s only the solid waste. In addition there is the waste that’s disposed of up the smokestack, which includes 600 pounds of carbon dioxide and ten pounds of sulfur dioxide every second, and the same quantity of nitrogen oxides as 200,000 automobiles.

An equivalent-size nuke, by contrast, produces nothing in addition to its cubic yard of high-level waste, because there isn’t any chemical combustion. No ash, no gases, no smokestack, and no need for elaborate engineering to generate and control enormous air flows. Because of its compactness, nuclear power is the first major industrial technology for which it is actually possible to talk about containing all the wastes and isolating them from the biosphere.”

Natural gas systems were the largest anthropogenic (refers to greenhouse gas emissions that are a direct result of human activities or are the result of natural processes that have been affected by human activities) source of methane emissions in the United States in 2009. Methane is more than 20 times as effective as CO2 at trapping heat in the atmosphere.

AOTH: Life-cycle emissions definitely favor nuclear power.

RM: Nuclear power’s life-cycle emissions range from 2 to 59 gram-equivalents of carbon dioxide per kilowatt-hour. Only hydropower’s range ranked lower at 2 to 48 grams of carbon dioxide-equivalents per kilowatt-hour. Wind came in at 7 to 124 grams and solar photovoltaic at 13 to 731 grams. Emissions from natural gas fired plants ranged from 389 to 511 grams. Coal produces 790 to 1,182 grams of carbon dioxide equivalents per kilowatt hour.

Nuclear energy is the only proven technology that can deliver base-load electricity on a large scale, 24 hours a day, 7 days a week, regardless-of-the-weather, without producing carbon dioxide emissions. Nuclear power plants emit no carbon pollution – no carbon monoxide, no sulfur oxides and no nitrogen oxides to the atmosphere – nor do they need costly electricity storage options.

The bottom line? One ton of uranium produces more energy than several million tons of coal and oil. Fuel transportation costs are less and there is less impact on our environment from mining or fracking shale gas.

AOTH: Nuclear power plants aren’t cheap to build.

RM: Neither are $3.5 billion coal fired plants. Here’s a bit more from the same article I quoted from earlier…

“A 1,000-MW solar conversion plant, for example – the same size as I’ve been using for the comparisons of coal and nuclear – would cover 50 to 100 square miles with 35,000 tons of aluminum, two million tons of concrete, 7,500 tons of copper, 600,000 tons of steel, 75,000 tons of glass, and 1,500 tons of other metals such as chromium and titanium – a thousand times the material needed to construct a nuclear plant of the same capacity. These materials are not cheap, and real estate doesn’t come for nothing. Moreover, these materials are all products of heavy, energy-hungry industries in their own right that produce large amounts of waste, much of it toxic. So much for “free” and “clean” solar power.”

When it comes to cost, upfront money isn’t everything.

Compare the costs of nuclear/gas, nuclear/coal or nuclear/hydro. The operational cost of nuclear power was 1.87 ¢/kWh in 2008 which is 68% of the electricity cost from coal and a quarter of that from gas, and who wants to dam a bunch more rivers?

One pound of yellowcake (U3O8 – the final product of the uranium milling process) has the energy equivalence of 35 barrels of oil. One seven gram uranium fuel pellet has an energy to electricity equivalent of 17,000 cubic feet of natural gas, 564 liters of oil or 1,780 pounds of coal, that’s energy density.

Natural gas accounts for 80 percent of the cost to produce power from an NG power plant while uranium accounts for 5–10 percent of the price of nuclear energy. The future price of uranium matters little, yet if Mr. Powers is right what is going to happen in regards to NG produced electricity pricing in a few short years? Never mind the environmental cost.

AOTH: Without a much higher incentive price to make most new production economical we’re heading towards a serious shortage of mined uranium. Many existing uranium mining operations will not be able to withstand a protracted period of prices in the low-US$40s, particularly publically-owned entities with high cost mines and high exposure to spot.

RM: There’s not a lot of people that get that, yet it seems fairly straight forward that without sufficient price incentive, pipeline mine supply will continue to erode thus exacerbating the future shortfall. There are several significant deposits which were progressing down the development path but have been put on hold due to the fall in the uranium price.

The supply side of the equation needs at least US$70/lb., some analysts are saying as high as $85lb, to encourage new projects and it takes up to ten years to develop, permit and build a uranium mine. We’re talking about facts, real supply side issues that will keep the market tight over the next several years. Expected and new projects/production are at risk at current prices.

AOTH: There are recent developments backing up what you say.

RM: The Olympic Dam, Kintrye, Millennium and Langer Heinrich Stage 4 expansion deferrals have removed a potential 22 million pounds of U3O8, or 1.5x the supply provided by Cigar Lake, from the market.

Areva placed its 9 Mlbs/yr Trekkopje development project on care and maintenance citing a projected US$75/lb break-even price.

Energy Fuels (EFR-TSX) stated on Oct-17-12 that it will cease operations at two of its mines due to current market conditions.

Cameco has cut its long term uranium production forecast trimming guidance by six MM lbs to 36 MM lbs U3O8 in 2018.

AOTH: China is uranium deposit hunting and security of supply is going to be a huge issue moving forward, especially for the US which was short 51 million pounds of uranium in 2011.

RM: Here’s four good examples of what’s happening to future supply.

China’s Guangdong Nuclear Power Corp.’s subsidiary Taurus Minerals did a A$2.2 billion acquisition of Australian listed Extract Resources. Extract owned the Husab uranium project in Namibia which is said by Extract to be the fourth largest uranium-only deposit in the world having measured resources of 84 million pounds uranium and indicated resources of 274 million pounds (Swakop Uranium is the local wholly-owned subsidiary of Taurus and is developing Husab).

Canadian PM Stephen Harper met with India’s Prime Minister Manmohan Singh to fast-track the 2010 India-Canada nuclear deal so a lot of Canadian uranium will be going to India.

Australia-India talks that were recently concluded resulted in an agreement to see Australian uranium exported to India for its huge pending nuclear power program. Again this is a deal tying up a lot of uranium.

Turkey imports more than 70 percent of its energy, primarily fossil fuels, and electricity demand has been growing an average of eight percent per year over the past decade. Current Turkish leaders plan to turn the country into the nuclear energy poster child. Russia is going to build, and own, the Turkish plants, running them presumably using fuel from the motherland. This is now the adopted Russian business model for selling its nuclear technology to nuclear newcomers. If successful, and there’s no reason to believe they won’t be highly competitive, this will take a lot of Russian supply off market.

Of course all of these long term deals locking up future supply means less uranium for the rest of the world going forward.

AOTH: There are more reactors under construction and planned now than there were before Fukushima.

RM: Without higher prices, we won’t see the necessary uranium mines coming on stream to keep up with the ever increasing uranium demand from the nuclear power industry.

AOTH: Do you see uranium prices recovering anytime soon?

RM: According to a recent report from the International Atomic Energy Agency (IAEA) and the Organization for Economic Cooperation and Development (OECD), by the year 2035:

“World nuclear electricity generating capacity is projected to grow from 375 GWe net (at the end of 2010) to between 540 GWe net in the low demand case and 746 GWe net in the high demand case, increases of 44% and 99% respectively.

There are several catalysts that should spur utilities to pick up their buying activity short term.

The restart of Japanese reactors and the Chinese resumption of construction for their reactors should at the very least firm up spot prices. The new Chinese energy plan reiterates a nuclear capacity goal of 60-70 GW by 2020 which is in line with previous expectations.

Under the terms of the 1993 government-to-government nuclear non-proliferation agreement (Megatons to Megawatts program), the United States and Russia agreed to commercially implement a 20 year program to convert 500 metric tons of HEU (uranium 235 enriched to 90 percent) taken from Soviet era warheads, into LEU, low enriched uranium (less than 5 percent uranium 235). The HEU agreement ends late in 2013 and removes 24 million pounds of uranium supply from the U.S. market.

AOTH: The U.S., if naysayers like Bill Powers are proven correct, has no energy security. They don’t in uranium, your feed for 24/7 base load power and don’t in natural gas. Supplying a meaningful percentage of the U.S. population with renewable power, solar/wind, is pie in the sky dreaming.

Does anybody else out there, besides the Indians and Chinese, understand the absolute importance of energy security – security of supply?

RM: Oh absolutely, EDF of France has dropped US$200 million in cash a full seven years in advance of delivery from one producer for 13 MM lbs, and has contracted 78 MM lbs from another.

Three billion dollars worth of sales contracts from the United Arab Emirates appears to cover a full seven years of uranium supply for its first four reactors.

I would not be surprised if Saudi Arabia follows these examples and buys long term supply for their planned 16 reactors, if all this doesn’t sound like worry about security of supply, then nothing does.

AOTH: Thank you Rick.

Conclusion

Set up in 2008 the Committee on Climate Change (CCC) was to advise the UK government on climate change issues. Their very first report stated; “It would be possible to decarbonise electricity generation with very significant nuclear deployment.”

Concerns about climate change, carbon footprints, energy security and the rising cost of fossil fuels spurred a revival of interest in nuclear power generation. In early 2010 we saw the start of a of a global nuclear renaissance. It was derailed when the unfortunate Fukushima-Daiichi nuclear power plant accident paused the renaissance.

Whether you believe in a nuclear renaissance or not, the security of supply issue for today’s global reactor fleet of 436, coupled with future demand for the 60 nuclear reactors under construction and the approximately 150 reactors planned, is an issue of paramount importance and should be on every investors radar screen. Is energy security on yours?

If not, maybe it should be.