By: The Mining Report
Source: Peter Byrne of The Mining Report (12/2/14)
Thomas Drolet has decades of experience in capitalizing on the movement of international energy markets. The chief of Drolet & Associates Energy Services is not sanguine about the long-term potential of fracking, but in this interview with The Mining Report, he tells us why now is a great time to reinvest in the uranium space.
The Mining Report: It's been a rough couple of years for uranium prices. Realistically, could news of possible restarts of nuclear plants in Japan positively impact the price of uranium, even if it's only psychologically?
Thomas Drolet: The psychology of Japan restarts has been driving the spot price; perhaps it will start to move the all-important long-term price, too. The long-term price is the signal that the utilities are buying. It is paramount to core value investing.
Let's talk about Japan. My observation, after having been there several times post-Fukushima Daiichi, is that there is a giant tug-o-war going on. Pulling on one end of the rope is Japanese industry, which is paying a high price for fossil fuels replacement electricity, and the current government, which is definitely for bringing the nuclear plants back on-line. Tugging on the other end of the rope is a profoundly fearful public. Hanging onto the middle of the rope is Japan's new nuclear regulatory agency. It will take time for this stronger regulator to finish a series of mandated safety checks before it can authorize bringing back some of the mothballed reactors.
TMR: Will the Japanese be building new reactors, as well as bringing back the ones that were mothballed?
TD: The Japanese have announced the intent to start building a couple of new reactors, but I do not see any real progress yet on the early-stage design efforts. What I do see is that the major reactor suppliers from Japan are actually doing the opposite; they are concentrating overseas. They are doing deals in the United States, in Europe, in Southeast Asia.
Two years ago in the U.S., there were 104 working reactors. Six of them were stilled for valid local or contractual reasons: i.e., the argument with a supplier of new heat exchangers for San Onofre took two units out. And there was significant displeasure in the Northeast with a couple of reactors, and one in Wisconsin. Anyway, we are down to 98 reactors in the U.S. now.
In the U.S., four new AP1000 reactors, each one delivering 1,200 megawatts, are being built. Until these four reactors are operating successfully, roughly on schedule and roughly on budget, the U.S. is not going to be a high-growth area for nuclear power.
TMR: Given this environment, how do spot prices relate to long-term contracts in the uranium market?
TD: Spot is simply uranium put up by suppliers for short-term cash needs. The price is almost certain to be taken up further by a smart utility, or by the enrichers, the firms that enrich the uranium that goes into the fuel fabrication process and eventually burns in the reactors. Current activity in the spot market is a signal that a corner is turning. Uranium fell to ~$30/pound ($30/lb) on the spot market in the early fall. That is below the average cost of worldwide production by a good US$10. The price obviously cannot stay there because people have to make money to stay in business.
Although an important corner has turned, I am not saying that there is massive upside for all uranium companies as a result of what is happening on the spot side. There will be a slow and steady climb driven by major utilities coming in on buying cycles that meet their internal needs.
TMR: Will Russia have to go into the global market for uranium?
TD: Russia will supply the uranium, enrich it and fabricate it within the boundaries of Russia. Also using the Kazakhstani reserves, Russia will supply yellowcake for the reactors that it builds, be they in Pakistan, Iran, Turkey, Indonesia or Bangladesh. Russia is the most aggressive nuclear reactor exporting nation on the face of the earth at the moment.
TMR: Leaving uranium, what are the driving forces affecting the price of oil and gas today?
TD: There are several forces driving these prices. Nation states such as Venezuela, Saudi Arabia and Iran are taking over the place of the international integrateds. Nation states with large oil reserves are attending to their own needs and gradually blowing off the integrateds.
Second, the revolutionary advance of fracking and horizontal drilling has taken away a lot of the uncertainty about future supply. There is indeed a large supply of tight oils and shale gas, with the new technology to extract it. However, the price is not going to stay down forever. There is a new and important phenomenon emerging.
We will soon start to run out of shallow, easy-to-access, reasonably permeable, low decline rate tight oil and shale gas zones. President Obama has said that fracking and horizontal drilling will provide a transitional fuel source for the next 50 years. I personally doubt that that super supply will last that long, simply because the decline rates are huge and have a long, low tail. Frackers have been able to get their money back in one to two years, but as production drops, I worry about the high, never ending, poke-a-new-hole drilling cost syndrome.
TMR: How does the strong dollar affect junior miners in Canada?
TD: The cost of operating a drill rig is paid in Canadian dollars, which is substantially below the U.S. dollar. That means that the capital and operating costs for oil and gas companies is denominated in a currency that is 15% less than the currency tied to the sale of the product!
TMR: Are oil and gas juniors doomed?
TD: Most of the juniors will survive. Eventually, the good ones will be bought up because that is the way of the world. The little ones get bought up by the big guys.
TMR: Is now a good time to invest in major electrical utilities?
TD: Yes. A lot of them have been beaten down, because we are still emerging from a difficult period in the U.S. But as the U.S. economy picks up steam, the big, well-managed utilities are good places to invest for the long term.
TMR: Thanks for your insights, Thomas.
TD: You are welcome, Peter.
Thomas Drolet is the principal of Drolet & Associates Energy Services Inc. He has had a four-decade career in many phases of energy—nuclear, coal, natural gas, geothermal and distributed generation, with expertise in commercial aspects, research and development, engineering, operations and consulting. He earned a bachelor's degree in chemical engineering from Royal Military College of Canada, a master's of science degree in nuclear technology/chemical engineering and a DIC from Imperial College, University of London, England. He spent 26 years with North America's largest nuclear utility, Ontario Hydro, in various nuclear engineering, research and operations functions.
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