Archive for January, 2013

Qui a coupe le fromage?

Natural gas is colorless and odorless, which is why back in the day colliers had to carry little canaries with them into the coal mines. If the canary died, get out of the mine. Fast. Nowadays, a compound called mercaptan is added to natural gas as a safety precaution so you can instantly smell a gas leak by the foul aroma coming from a malfunctioning stove or heater. And that’s just a little bit of mercaptan.

Last week (Monday, January 21), France and England smelled a lot of mercaptan. There was a large leak of chemicals at a Lubrizol plant in Rouen, France, about 100 miles northwest of Paris. The chemicals combined and reacted to form a huge, invisible cloud of mercaptan. The cloud traveled down the Seine to Paris (watch out for those river cruise boats), where it supposedly caused panic and hysteria. (How this was distinguished from normal conditions in Paris was not explained.) After that, it continued on across the Channel, where it wafted over the Cliffs of Dover (no rhyme intended) and invaded the UK, which not even Bonaparte succeeded in doing. Hundreds of people on both sides of the Channel were reporting dangerous gas leaks to local authorities. This was definitely a hazard as people might not be able to detect a real gas leak. Even worse, some in France might have thought that the cheese had gone bad. No one, however, was injured, except in an olfactory sense.

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This past Thursday Tom Albanese got booted from the CEO slot at Rio Tinto, the world’s second largest mining company (2011 earnings $15.5 Bn), but things might have worked out differently if he’d read The Sparkspread’s August 2012 post: Energy’s All About Infrastructure. It doesn’t matter if you’ve got tremendous energy resources in your neck of the woods if the infrastructure is not in place to move it from source to sink.

For example, India has tremendous coal reserves, but it has neither the capacity to extract all it needs nor the railroad network to reliably transport it. The railroads in India, with mostly the same tracks that were there when the Brits left in 1947, are notoriously decrepit and dangerous. Not to mention overcrowded:

Boarding Train in India

(Yes, there really is a train somewhere under all those people trying to get on board. One can only wonder how the conductors collect fares.) Despite being the third largest coal producer in the world in 2011 (585MM metric tons), India still has to import more than 100MM metric tons from Indonesia, South Africa and Australia.

Why does all that crude oil in Cushing, Oklahoma trade at a discount (about $15 – 20/bbl) to the Brent? Not enough pipelines and port facilities (i.e., infrastructure) to get it to the world market.

Nor is it that important that North Dakota has the greatest wind energy potential in the continental United States because its transmission grid is so thin. Renewable or not, electricity has to get from source to sink, and that requires infrastructure.

Back to Rio Tinto. In 2011, Albanese and Doug Ritchie, Rio Tinto’s energy guy, spent $4.2 Bn ($3.7 Bn for the company and another $516MM for a 65% stake in the Benga thermal and coking mine) for Riversdale Mining Ltd., a coal miner in Mozambique. With mineral extraction potential in developed countries on the decline, miners have been wandering into more and more remote areas to grow their reserves. Mozambique definitely qualifies as remote. Admittedly, Rio Tinto was more interested in the Benga’s higher margin coking coal than its thermal, but as far as infrastructure is concerned the principle is the same.

Rio Tinto planned to ship the coal down the Zambezi River, but that strategy ran aground when they found they couldn’t dredge the Zambezi. Worse, Rio Tinto failed to get the government approvals it needed for the shipments. As far as Riversdale Mining was concerned, the Zambezi was the infrastructure, and the failure to confirm its usability and availability was a major blunder. Another mining major, Anglo American, didn’t bid on Riversdale because of “serious transportation issues.” It’s as if Albanese asked for directions in Mozambique and was told: “You can’t get there from here.” Then last Thursday his board of directors told him where he could go.

Energy Rule Number One: It’s all about infrastructure.

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