Arroyo’s Gasmar investment offers a glimpse into the future of energy
By leungchopan
Arroyo Investors last week disclosed an investment in Gasmar S.A., a terminal and storage facility for liquefied petroleum gas (propane) in northern Chile. The case for that investment is cemented in a particular view of the industrialized world’s energy future.
Houston-based Arroyo Investors, an independent investment manager that focuses on power and energy infrastructure investments in North and South America, has more than $2.5 billion in assets under management.
Rudolf Araneda, partner in Arroyo’s office in Santiago, Chile, said in a statement: “As Chile continues its push to lower the carbon intensity of its energy consumption. LPG is a critical energy source to displace higher carbon intensity fuels such as diesel and biomass. Gasmar’s receiving and storage assets are critical to advancing the growing need for LPG services in Chile.”
The supply of propane
Gasmar has a facility at Chile’s Quintero Bay, one of the largest LPG terminals on the Pacific coast of South America. It is also currently expanding its operations, constructing a new terminal in Mejillones Bay. Operations at the new terminal are expected to begin in 2022.
An investment in Gasmar, then, is an opportunity for Arroyo to sponsor energy infrastructure strategically positioned to supply the market demand for a key commodity in fueling homes and businesses in Chile.
David Field, a founding partner of Arroyo, in a recent interview with Alternatives Watch, gave a detailed overview of the propane landscape. “Chile has a very limited supply of indigenous fossil fuels,” he said. “By and large it imports. Other geographies in Latin America do have significant resources. But there is very little connectivity among the regions of Latin America, so most of Chile’s come into the country by sea.”
Specifically, Argentina, Brazil. Ecuador, Trinidad and Tobago, and Mexico all produce oil and gas. Argentina, which shares a 3,300-mile-long border with Chile along the Andes, produces more than 500,000 barrels per day.
But South America is, as Field observed, not a unified market, and Chile takes its fossil fuels in at its ports.
The demand for propane
From a market demand point of view, Arroyo’s investment in Chilean energy infrastructure, is a bet on the growth of the Chilean economy, a growth that in turn will determine an increase in demand for propane. This is despite the fact that Chile’s economy (like that of so many nations around the world) has been battered by the two-year-old pandemic.
Asked whether continued recovery and strong market demand is a reliable expectation, Field spoke of the value of the products that Chile exports, and how the rest of the world’s demand for those products underlies its expected growth.
“Chile is resource rich in copper, lithium, and other minerals that are in demand across the world,” he commented. “LPG consumption is correlated with GDP growth, and Chile seems poised to come back from the economic consequences of the pandemic better than most countries.”
Commodity experts predict strong demand for Chilean exports of copper in the months and years to come. Long-delayed construction projects are at last getting underway around the globe: and they will all need wiring. Especially, an agenda of sustainable energy generation requires a lot of new wiring (consider the needs of recharging stations for new generations of electric vehicles).
Relatedly, the rise in battery costs is keeping the supply of lithium tight. There will be a booming demand for Chile’s contribution to that international market.
It is reasonable, then, to expect that Chile has export-driven economic growth ahead of it, and this shall enable an increase in the domestic demand for propane, stoking the value of Gasmar’s assets.
Could the assets be stranded?
But at this point one has to take a step back to look at the future of energy.
For Arroyo, making an infrastructure investment is necessarily an investment with a long-time horizon. Transition to “net-zero” emissions is an ongoing fact, and if it makes an impact in Chile over, let us suppose, the next five years that fact will have negative consequences for money committed to the import of propane.
Is there a risk, then, that Arroyo is invested in soon-to-be-stranded assets?
Field pointed to a five-year horizon. “Gas and oil may soon completely replace coal. But oil and gas will remain part of the energy picture for years yet,” he said. “And beyond that, Gasmar is in a good position to be part of the post-transition world; first, LPG is displacing firewood, and we expect the terminal can be converted to store hydrogen and ammonia in particular.”
There was a day when displacing firewood use with LPG might itself have seemed like a regressive idea to some. After all, firewood is renewable, and it doesn’t involve drilling holes deep into the ground or pose a threat of wildlife destroying oceanic spills. But, with climate change at the top of the environmentalist agenda, firewood use has come to seem quite regressive. Even aside from the carbon the burning produces, just chopping down the wood reduces the forests that are the “lungs of the earth,” absorbing tons of CO2 every year. Replacing firewood with propane as a way of, for example, warming a home is progress toward sustainable economies, because it allows those lungs to go unmolested.
With regard to the post-transition fuels: ammonia and hydrogen are receiving a lot of attention in this regard as they are “blue fuels.” They can be produced as a consequence of the use of carbon capture storage (CCS) capacity.
One of the great issues for CCS tech, after all, is “how can it be made profitable?”. There are only so many carbon bricks anyone will buy. But CCS converts hydrocarbons into hydrogen and the one hand and carbon on the other. As hydrogen becomes a valuable fuel, there will be plenty of profit-seekers revving up the CCS sector.
What is true of hydrogen is true as well of ammonia, which is simply a compound of hydrogen and nitrogen.
Furthermore, ammonia created as a side effect of CCS is not just on the drawing board. A little more than a year ago Saudi Aramco shipped forty tons of “blue ammonia” to Japan for use in the generation of power with zero carbon emissions.
If that is the energy future, Arroyo then can see the transition to that future will not threaten Arroyo’s stakes in Gasmar.
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Duke Energy resists Singer restructuring plan
Paul Singer by World Economic Forum via Flickr
Paul Singer’s Elliott Management released a letter it sent to Duke Energy proposing a plan to divide Duke into its constituent parts. Elliott would have Duke separate into three regionally based entities; one in the Carolinas, one in Florida, one in the Midwest.
The company is resisting, and after seeing its stock hit new highs for the year earlier this week, the company is playing what one may call the ‘climate card’ in the process.
In unrelated Ellington news, Eric Cole’s Warlander will reportedly combine with Ellington as the firms seek to expand their corporate credit capabilities, according to an investor letter reported on by Bloomberg. Warlander’s CEO and CIO Cole and his team are slated to join Ellington to continue to manage the main fund that will be renamed Ellington Warlander Partners. Ellington will become its investment manager while an affiliate serves as general partner.
Back to Charlotte, North Carolina-based Duke, which is a multistate American utilities holding company with a long history. It began in 1900 as the Catawba Power Company, with the construction of a hydroelectric power station at India Hook in South Carolina. The course of events since then has been both colorful and controversial.
Elliott says that it is one of Duke’s ten largest investors, although it does not say in the letter precisely how much of Duke’s equity it owns. It does say that it believes Duke has “one of the highest-quality and most under-appreciated collections of utility franchises in the country.” Its value ought to be higher than it is (the reasoning proceeds), and the discount from underlying value must be due to the “sprawling, non-contiguous” nature of Duke’s portfolio.
Economists refer to this as an argument about the “diseconomies of scale.” Duke replied to it almost immediately, saying that Elliott’s proposals run counter to “the strategic direction of the entire industry at a time when scale is needed to efficiently finance the companies’ unprecedented capital investment and growth opportunities.”
Further: Duke’s understanding of the strategic direction of the entire industry involves climate strategy. It has a clean energy plan that aims to cut carbon emissions by at least 50% by 2030, and to get to net zero emissions by 2050. This plan “will deliver significant customer benefits and create jobs in its communities” while “modernizing and strengthening the energy grid, generating cleaner energy, and expanding [our] smart energy infrastructure.”
A classic response offered by company managements faced with hedge fund activists is, “The hedge funders only think in terms of meeting the numbers, quarter by quarter — your incumbent board is looking at the longer run.” Duke is working a refinement of this, “The incumbent board is looking at the planetary long run, making our power production sustainable. For this we need scale. Yet the hedge fund here would deprive us of that scale in order to boost short-term numbers.”
The future is the only judge of whether the stockholders will honor the ‘climate card’.
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The big metal bet on recovery, green tech
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By microgen
The post-pandemic recovery is doing great things for platinum prices, and they may well go higher still on the strength of climate concerns, since platinum, as we are reminded in the latest quarterly report from the World Platinum Investment Council (WPIC), plays a big part in green technologies.
During the first quarter of 2021, with widespread stimulus measures impacting the economy, demand for platinum increased by 26% year-on-year, to 1,969 koz (thousand ounces).
The CTA community has a big bet on the ongoing post-COVID economic recovery, especially in the period since good news from COVID vaccine researchers started making headlines late last year. As Max Layton, managing director for commodities research at Citigroup, told Bloomberg earlier this month, the humans involved didn’t necessarily know why they were doing it, their algorithms were making the calls, but they happened to make the right ones.
Looking specifically at platinum, the metal hit a historic high, above $2,000 oz, in March 2008.
The global financial crisis drove it down to less than half of that by the end of that year, a loss it (mostly) regained by early 2011. But there followed a slower bear run, caused in large part by changing practices among automobile manufacturers.
Platinum is one of the metals used to neutralize automobile emissions in catalytic converters, along with palladium and rhodium. The percentage of platinum use for this purpose gradually declined throughout the period 2010-2020, and platinum value fell in parallel, though it has spent most of the time since January 2016 within the range from $800 to $1,000.
In 2021, platinum has busted out of that range on the upside. It passed $1,000 on December 1, 2020 stalled around $1,100 until early February, and then moved to a better neighborhood. It is now trading between $1,200 and $1,250.
“We now see growing momentum and economies shifting through the gears,” of the global economy, according to Paul Wilson, CEO of the WPIC. Platinum is critical to the green hydrogen agenda, which is seeing increased stationary fuel cell development and the early production of green hydrogen from renewable electricity.
Holdings of platinum by exchange traded funds grew for the fourth consecutive quarter in Q1 2021, even though some speculators (especially in Japan) capitalizing on recent price strength, sold back to the bar and coin sector of the market, producing a fall in demand there.
Japanese interest in that trade was piqued when platinum exceeded the 4,000 Yen per gram level.
Much is expected of the jewelry sector. Platinum jewelry is expected to grow 9% from 2020, to 1,978 koz, which will place it close to the 2019 level. Strength in this sector is coming especially from the North American, European, and Indian markets.
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