By John Lee CFA on August 22, 2017 11:20 am
In this article, I will share my insights on oil, lithium, and vanadium
World crude oil production has increased 50% since 1985,
Technology has cut the breakeven price for key US shale oil plays by more than half since 2013.According to a Forbes article dated February 2017 by Jude Clemente titled “Texas’ Permian Basin: An Oil and Natural Gas Machine”, The decrease in the breakeven price is a factor in the significant crude oil production and exploration in the Permian Basin of Texas and New Mexico.
“Today, at around 2 million b/d, the Permian accounts for over 20% of the country’s (USA) crude production and is the second largest oil field in the world, after Saudi Arabia’s legendary Ghawar field.
A barrel of oil currently sells for $53-54, which is well above the break-even oil price of $35 or so in the Permian.
This year, expect an average of 345 oil-directed rigs in the Permian in 2017, or a 93% increase over the 2016 average, followed by a 25% increase in 2018 y/y”.
Shale oil production propelled the USA to be third largest oil producer in the world.
We are only at the beginning of major shale oil boom on a global scale as the Chinese oil shale resource may exceed that of the US. According to Wikipedia article titled “Oil Shale in China” dated 17 Aug 2017
“Oil shale in China is an important source of unconventional oil. A total Chinese oil shale resource amounts of 720 billion tonnes, located in 80 deposits of 47 oil shale basins. This is equal to 48 billion tonnes of shale oil. At the same time there are speculations that the actual resource may even exceed the oil shale resource of the United States.”
Technology is also bringing down the production cost of oil from Canadian oil sands. According to an Oil Sands Magazine article dated 9 Feb 2017 titled “Oil Sands Breakeven Prices Are How Much?”,
“…the Canadian Energy Research Institute (CERI) pegs breakeven costs at $43.31/bbl for SAGD projects (steam-assisted gravity drainage) and $70.08/bbl for a stand-alone mine. The figures exclude blending and transportation costs but include capital expenditures.”
With ever increasing conventional oil supply from Russia, Iran and other OPEC countries, there is no shortage of cheap oil.
European and North American oil consumption peaked around 2005 and has declined 10% since 2006 mainly due to improving vehicle fuel economy and slowing GDP growth.
Consumption chart of oil Products by country
Most of the consumption growth in the last 10 years came from China, which registered consumption growth of just 1% in 2015.
With a maturing Chinese economy, improving vehicle fuel economy, alternative rail transportation, and aging demographics, peak oil consumption may have already arrived.
Maybe Saudi Arabia knows this. John Kemp of Reuters noted the following in July 2017.
“Saudi Arabia is curtailing oil shipments to the United States with the likely intention to drain visible inventories and support prices. The United States imported an average of 524,000 barrels per day (bpd) of crude from Saudi Arabia in the week ending July 14, the lowest volume for more than seven years.
You have to wonder why Aramco, the state oil producer of Saudi Arabia, with 12 million barrels per day of production capacity at operating cost of merely $10/barrel, is going IPO to raise over 100 billion dollars.
One can’t analyze oil demand without studying electric vehicles, which I believe could dent global oil demand in the same dramatic fashion as how shale oil has increased oil supply.
Electric Vehicles (“EV”)
The following highlights from a Wall Street Journal article dated May 2017 by Cook and Cherney titled “Get Ready for Peak Oil Demand”, 26 May 2017 caught my eye
“Transport fuel accounts for about 50% of the demand for crude oil, with cars accounting for half of that; that means 25% of total oil demand hinges on autos. BP, meanwhile, expects the number of electric cars to skyrocket to 100 million by 2035 from one million today—but thinks even that rise will likely shave only one million to 1.5 million barrels a day off oil demand.
Wood Mackenzie expects roughly 2% of global oil demand—or two million barrels a day—to be lost to electric vehicles by 2035.”
I believe those experts have greatly under-estimated EV’s impact on oil demand possibly by a factor of 10. Let me explain-
Global electric car stock has increased by roughly 170% every year on average according to the following Bloomberg chart.
Why 2040? About 80 million vehicles are manufactured globally annually, I wonder if 35% of those production capacities can be retro-fitted to produce electric vehicles with in next 5 to 10 years?
A basic EV like Chevy Volt costs about US$35,000, which looks exactly like a regular car, and prices are coming down every year. Will it really take till 2022 (as the subtitle of chart “The Rise of Electric Cars” above suggests) for electric vehicles and gasoline vehicles to arrive at comparable price points?
So long as there is positive sales margin (i.e. revenue minus cost), there are practical constraints to EV sales growth with giant battery factories been erected across USA and Asia. We could very well see 1 in 3 vehicles powered by batteries within 10 years, way before 2040.
How much oil consumption will be displaced by EV?
50% of petroleum consumption was in the transportation sector according to the Cook and Cherney article above; that ratio is more than 75% in the US according to Energy Information Agency webpage “Oil: Crude and Petroleum Products Explained” dated 28 Nov 2016. If 35% of the transportation petroleum consumption is displaced by batteries, we would see not 2 million, but rather 15 million barrels per day of oil demand disappear. (80 million barrels per day x 50% transportation sector consumption x 35% displaced by EV)
You might argue there is a big difference between 35% of new cars sales as EV, and 35% of all cars on the road as EV, and you are right. However, consider the following-
According to an CNN article dated July 2017 by Petroff titled “These Countries Want to Ditch Gas and Diesel Cars”, India, France, Britain and Norway all want to completely ditch gas and diesel cars in favor of cleaner vehicles. At least 10 other countries have set sales targets for electric cars.
And according to a Reuters article titled “China Targets 35 Million Vehicle Sales by 2025, NEVs to Make Up One-Fifth” dated 24 Apr 2017, China set a goal for new energy vehicles (“NEVs”) to make up one-fifth of the total vehicles manufactured by 2025.
Once EV mass adoption sets in, the government can phase out gasoline cars based on vehicle age and impose additional tariffs on the sales and production of new gasoline cars. In addition to EV dedicated parking spaces in California, anticipate an EV lane, and an imminent monthly (or even weekly) EV day where only EVs are allowed on the road.
Shale production today floods consumers with 15 million barrels of oil per day; most of that production didn’t exist 10 years ago. EVs will have a similar impact by displacing 15 million barrels a day of oil demand with batteries over the next 10 years.
I don’t know if oil will go back to $20/barrel, given the price of oil is affected by geopolitics and the strength of the US dollar. However, I am selectively selling oil on strengths when it gets over $50/barrel.
I am a big oil bear.
I am not a big lithium fan.
Even though lithium ion batteries have the best energy density in today’s battery space, their inherit flaws remain: short life span of 2 to 3 years, up to about 1,000 charge cycles, and potential safety hazards.
Just like Ni-Cad batteries which were largely replaced by lithium ion batteries, lithium ion batteries can be replaced by new technologies such as hydrogen fuel cells that have up to 4 times higher energy density by volume and up to 20 times by weight.
According to a CNBC article by Ferris titled “Elon Musk Hates Hydrogen, But Automakers are Still Investing in It-and for Good Reason” dated 26 May 2017, Toyota, Mercedes and others are investing heavily in fuel cells with some technologies near commercial stage.
I suspect lithium-ion technology replacement will come sooner than we think.
Vanadium vs Lithium
An Inc. article by Kevin Ryan titled “What Elon Musk’s New Power Plant Means for the Future of Batteries” on January 31, 2017 reported the following
“On Monday, Tesla officially brought a new energy storage facility online at a plant 40 miles east of Los Angeles. With 396 refrigerator-sized stacks of lithium-ion batteries, the plant uses energy collected from the sun and the electric grid to power 15,000 homes for about four hours in the evening”.
While Tesla’s cause was noble with its utility-scale lithium-ion battery deployment, this battery project will eventually prove to be costly and a failure.
Lithium-ion batteries are not ideally suited for grid-level energy storage because they have a short-duration and discharge run-time cycle, and begin to degrade after a few hundred discharge cycles (i.e. 1,000 cycles at most), whereas vanadium redox flow batteries (VRBs) can operate for 10,000 cycles over 20 years. Vanadium batteries can scale up with decreasing unit storage costs, whereas the unit cost of lithium batteries increase when sizing up.
Adoption of VRB is still in its infancy with less than 500MW (0.5 GW) of installed capacity globally while solar and wind energy combined capacity is at 550GW in 2016, up from 100GW in 2007 according to a report titled RENEWABLE CAPACITY STATISTICS 2017 by International Renewable Energy Agency (IRENA)
There is a lot of pent up demand for VRB, not even counting any future growth of wind and solar capacity. GTM Research and the Energy Storage Association estimated the utility-scale energy storage market to grow to 2.6 GW by 2022, the potential to the upside could be much larger.
The price of vanadium pentoxide (the key ingredient for VRBs) has gone up 500% from its 2016 low of $2.50/lb and the price has doubled since I begin covering the metal in December 2016.
There is no commodity exchange or ETF for the vanadium metal. One can gain vanadium exposure through owning shares of vanadium mining companies.
The three largest vanadium producing countries are China, Russia and South Africa which account for over 80% of global vanadium production. I wouldn’t however recommend mining investment in those countries. There are currently no operating primary vanadium mines in North America.
Gibellini vanadium deposit, 250 miles east of Tesla’s gigafactory in Nevada and potentially become the first primary vanadium mine in the United States.
Gibellini is the only North American primary vanadium project with a feasibility study that I am aware of. The project is open pittable and since Gibellini material is low in deleterious metals and non-metals (typically less than 1% Fe, 0.5% Ca, 0.3% Mg, 0.2% Ti), it is thus conducive to low cost heap leach processing.
Since the process already yields vanadium in sulfuric acid in an intermediary step to producing vanadium pentoxide, it is expected that this intermediary product can be pulled from the process stream and used directly as an electrolyte for grid-scale energy storage batteries.
While there is a possibility of lithium ion battery replacement, vanadium batteries are here to stay.
As full disclosure, I am the Chairman and largest shareholder of Prophecy Development Corp. (TSX: PCY OTCPK: PRPCF) which engages in vanadium exploration. The opinions, estimates and projections presented herein are my own and not of Prophecy. This article is not intended to be an offer to sell or a solicitation for an offer to buy securities. Though the sources of information are considered reliable, no representation or warranty, expressed or implied, is made as to the accuracy or completeness of the information contained herein. Neither myself or Prophecy accepts any liability whatsoever for any loss arising from any use of this article or its contents.