After Oil: Money, Food and Polymers – New Business Activities for the Middle East

I wrote this article for the Al Jarida newspaper and it was published on Saturday 7 February 2015.

This article took a full page as I was developing an argument for Kuwait and other oil rich countries after demand for crude oil declines. It is published here: Al Jarida Article 7 Feb 2015 (Go to page 12)

Al Jarida Page 12, 7 Feb 2015

After Oil: Money, Food and Polymers – New Business Activities for the Middle East

Fourteen years ago the former Minister of Oil for Saudi Arabia, Sheikh Ahmed Zaki Yamani said that by 2030 oil would remain in the ground because people would not want it. One oil rich country, Iran, is discussing their future budgets without oil. I have written previously about how dramatic falls in energy creation from solar radiation is now a direct competitor to burning fossil fuel. So what can economies that are heavily reliant on oil revenues such as Kuwait do in a post oil world? This is what I will discuss in today’s article.

Based on experience, for a change to take place in any market there must be three major forces that come together at the same time. These three forces are: Economic, Social and Technical. If a market or industry sector has these forces in play, then it will change. Let us look at the oil market and see if these forces are present.

Economically? Yes. Falling prices have made many oil reserves uneconomic. Falling prices of other energy sources drives consumers towards them.

Socially? Yes. Climate change issues are affecting the entire world and reducing carbon dioxide production is now a topic of common discussion. The United Nations Framework Convention on Climate Change (UNFCCC) and the Intergovernmental Panel on Climate Change (IPCC) are both very vocal in the need to curb carbon dioxide emissions immediately. Not next year, but now. Today. Yesterday if they could do it.

Technically? Also yes. Energy can be produced as efficiently from the sun and the wind as it can from fossil fuels (coal, oil and gas).

So it seems the forces are aligned. Hence the market will move. Then the question remains, what does this mean for countries that are heavily reliant upon fossil fuels, especially crude oil, for their state revenues? Something needs to change. Business will have to divest and reinvest in order to create new revenue streams.

There is a catch however, a complex economic catch. In countries where oil revenues provide a lot of state revenues, oil production is also very cheap. For example in Russia, oil production cost is around $15 per barrel. It’s about $10 per barrel in Iran and less than $5 per barrel in Saudi Arabia, Iraq and Kuwait. New revenue streams however will come with higher operating costs, high retooling costs (more capital investment) and high human capital retraining costs. Margins will be less. Hence there must be significant increases in revenue by these lower margin activities to cover the revenues lost by a fall in oil demand. It will be difficult.

So with that groundwork laid, I boldly predict that for oil rich states such as Kuwait that once oil demand declines there are three areas that can replace oil revenues. These are:

1. Finance, equity and debt investments, investment yields 2. High value polymer production, taking it beyond low value petrochemicals 3. Aquaculture for high efficiency protein production

These income streams can either occur through private ownership, in which case taxation regimes would be required to provide state revenues. Or the ventures would be state owned and continue to operate much like the oil and gas sector operates now. The later would be a tall order. The economic efficiencies necessary in these new industries will not allow traditional work ethics common with the high margin, easy to produce revenues from crude oil. Therefore state governments will get smaller. The private sector will grow, if it can. Private sector needs three factors in it’s favour to thrive: 1) great infrastructure – transport, communications, access to liquidity; 2) excellent legal systems; 3) low taxes. This is something Dubai has been developing and they appear to be doing well.

Let’s go through each one of these three new revenue options in turn, using Kuwait as an example and the benchmark of $50b – Kuwait’s gross income with crude oil price at $45 per barrel.

1) Finance, Equity and Debt Investments, Investment Yields

Sovereign wealth funds of the Middle East are in an ideal position to expand their operations to replace falling oil revenues. Since 1953, the Kuwait sovereign investment fund has accumulated an estimated $550b in assets. Therefore, quite simply, a 10% yield on investment would replace all present revenues from crude oil.

But can you get such a high yield on so much capital? You can. You can even get more.

Berkshire Hathaway, the very well known investment group established by Warren Buffet in the 1960’s, holds net assets of $484b. Their net revenues have averaged 20% per year for the past 50 years.

This demonstrates that high yields are achievable.

Employing 330,000 people, Berkshire Hathaway presents a viable model for Kuwait moving forward after oil. Raising the level of investment knowledge therefore is an important skill to develop amongst Kuwaitis. The management of such investment could be achieved by creating 100 investment groups each allocated $5b. Each group would be set the target to achieve 20% or more net annual revenues. It would be survival of the fittest. Consolidation, knowledge transfer and then further expansion would increase the performance of the funds and the skills of the investment management teams.

From first hand experience, investment yields greater than 50% are possible when carefully selected and expertly executed.

So the management of money is a viable solution to entirely replace revenues from falling oil demand.

2) High Value Polymer Production, Taking It Beyond Low Value Petrochemicals

Here is a perspective of the use of crude oil in today’s world:

Oil Consumption Breakdown

From Renewable Energy World

The chart shows that 44% of crude oil is consumed as gasoline, 21% as diesel, and 9% as jet fuel. That means that 74% of crude oil is burnt every day, never to return, non-renewable.

Notice that only 2.7% of all production is consumed in the polymer industry – petrochemicals. This is an industry that takes a product with a market value of $0.30 per kg (crude oil), and then, with complex chemical and mechanical processes, produces products that sell for $1, 5, even $17 per kg. This industry is is the petrochemical industry, producing plastics and polymers.

Value adding to crude oil is a straightforward way to increase revenues once you have installed the necessary equipment and have the required numbers of trained personnel.

I have put together the table below to show different polymers with their prices, their world market share and how much of Kuwait’s revenue this would represent.

For example polycarbonate, a transparent, highly impact resistance plastic common in the automotive industry, sells for about $5 per kg.

PTFE, a high tech fluorocarbon polymer sells for about $17.5 per kg.

But the demand for both of these polymers is low compared to crude oil volumes. Even if Kuwait was producing all of the worlds requirements for these two high value polymers, it would not provide any where near the replacement revenue for the State.

Polymer

World Production (million tonnes per year)

Bulk Market Price

($ per kg)

World Market Value

($ billion per year)

% of World Crude Market Value

Profit at 20% Margin

% of Kuwait Income ($45b)

Polyethylene

80

1.7

136

10%

27

60%

Polypropylene

60

1.5

90

7%

18

40%

PVC

43

2.5

108

8%

22

48%

Polyester (PET)

28

2.2

62

5%

12

27%

Polyurethanes

12

2.5

30

2%

6

13%

Acrylonitrile-Butadiene-Styrene (ABS)

7.3

2.5

18

1%

4

8%

Polycarbonate

3.7

5

19

1%

4

8%

PTFE (Teflon)

0.2

17.5

3.5

0.3%

1

2%

Crude Oil (Kuwait)

150

0.30

45

3%

Crude Oil (World)

4,025

0.33

1,328

100%

Prices and quantities are from various years eg 2012, 2013, and 2014 and are indicative only for the purposes of general trends and forecasting for this article. Further details analysis would be necessary to undertake investment level decisions.

When considering what products the petrochemical industry should focus on, the table highlights that advanced polymers are high value but are not high volume. It also highlights the large scale of investment needed to produce a viable revenue source from advanced polymers. Also there is no one single polymer that would replace crude revenues. Instead a mix would be required, determined by market demand, capital expenditure, and feedstock availability.

Let’s consider two countries in the region, Saudi Arabia and Iraq. Saudi Arabia presently produces 75% of all Petrochemicals in the Middle East (and 10% worldwide). In 2013 Saudi petrochemical production was 86.4 million tonnes and the total value was $66.9b. Note that this equates to only $0.77 per kg, so it’s not in high value polymers, but in mid value intermediate polymer feedstock. In Iraq, Shell has just signed a $11b deal with the Iraqi government to build the Basra Nibras complex (operating by 2021). This is a petrochemical facility with a modest 1.8 million tonne per year capacity. Also, it is not making high value polymers, only intermediary polymer feedstock. Further capital investment is required to do higher value adding.

For an exercise, let’s assumed that the profit margin for a basket of high value polymers is 20% and that that basket sells for $2.5 per kg. This includes all capital investment, operations, maintenance and replacement allowance for the equipment (depreciation). Therefore the net profit will be $0.50 per kg. Thus, with 1,000,000 barrels per day of oil (123 million tonnes per year) converted into a high value polymer would yield $26b in net profits per year, or about half of Kuwait state requirements.

So this is possible, though with considerable capital investment and the time to establish it.

3) Aquaculture for High Efficiency Protein Production

What else can these countries do when oil is no longer wanted for burning? Well, it will still remain a low cost source of energy, and that means that other industries can be supported with it. One such industry is aquaculture, the most efficient form of protein conversion of any animal husbandry practice, as the table below highlights:

Feed Conversion Ratios

Animal

Kilograms of Animal Feed to Produce 1 Kg of Animal Meat

Beef

20

Sheep

4

Chicken

2

Fish

1.4

Shrimp

1.1

This is food for thought for oil rich nations with abundance of sunshine, water, and hence cheap energy. Growing fish and shrimp for hungry expanding world markets is a possible viable investment path, especially as the forecasts of collapsing wild fish and shrimp stocks come more frequently into the news.

One of the fastest growing food industries due to it’s high feed conversion ratio is shrimp farming. Iran has increased shrimp production to 8,000 tonnes per year in only about 15 years, and Saudi Arabia is producing about 25,000 tonnes of shrimp per year over a similar time frame.

There are plans for a 9,000 tonne per annum shrimp farm in Iran which will double production from that country and put it on level with Saudi Arabia.

Aquaculture

WorldFishCentre.org

However, growing shrimp is not a replacement for crude oil sales. It’s a supplement.

Here’s why.

The market price for shrimp is around $5 per kg and they cost about $2 per kg to produce. Hence the net margin is $3 per kg.

To produce $1b net profit per year requires 300,000 tonnes of shrimp.

Note that world shrimp production is about 4 million tonnes per year.

About 40,000 Ha is required to produce this much shrimp (if growing white tail vannamei).

The Kuwait land area is 1.782m Ha, so 2.2% of Kuwait’s total area would have to be converted to shrimp ponds.

Incidentally this much land would also produce about 100 GW of electricity if photovoltaic cells where installed. This is the same amount that both China and India are committing to install by the early 2020’s.

So the volume of resources required is large whilst the net return is comparatively low, despite the fact that it is healthy and expanding.

So, there you have it. A stool with three legs provides the greatest stability:

1. Finance 2. Polymers 3. Food

Perhaps fishing and textiles will again be the mainstay for the region in years to come as it was before oil.

Author Deck Mr. Jeremiah Josey is an Australian who has been living in the Middle East for 7 years. Knowledgeable in the energy markets, he is the Chairman and Director of Oil & Gas of Swiss based Meci Group, a business and investment consultancy operating across the Middle East, Central Asia and Russia.

The End of Oil? Oil Pricing for 2015 and the Rise of Solar Energy

I wrote this article for the Al Jarida newspaper and it was published on Saturday 24 January 2015.

It’s a further development of my previous blog on how technology is changing the way the energy market operates and how the oil price may never rise again.

It is published here:

Al Jarida Article 24 Jan 2015 (Go to Page 16)

Al Jarida

The End of Oil? Oil Pricing for 2015 and the Rise of Solar Energy

For oil prices, it’s a possible flat line in my opinion. Sideways. In fact with recent dramatic changes in the cost of energy we may be witnessing the end of oil. If oil stays low for long enough it may never rise again.

Said in June 2000, by Sheikh Zaki Yamani, former Oil Minister of Saudi Arabia (1962–86), “Thirty years from now there will be a huge amount of oil – and no buyers. Oil will be left in the ground. The Stone Age came to an end, not because we had a lack of stones, and the Oil Age will come to an end not because we have a lack of oil.”

How so? I hear you ask. How have we reached the end of our modern “Stone Age”?

I say yes. Let’s have a look at why.

Economically, world energy has hit and passed a price equilibrium point between two competing mediums: fossil fuels, and solar energy. This means that how we do busy will change. And it will change rapidly now. For instance, mobile phones took out the land line market in a matter of years once mobile phones became cheap and available enough to do so. They were the better option technically and economically.

Energy from fossil fuels has historically been cheap and this enabled the great economic boom of the past 100 years: a population explosion from 1.7 billion people in 1900 to over 7 billion now, and GDP from $2.7 trillion (adjusted) to over $75 Trillion in roughly the same time period (per capita moving from $1,600 adj. to $10,000). The Green revolution (food production). The Technology revolution (computer development). The Connectivity Revolution (mobile phone & internet) and now the Knowledge revolution (P2P and social networking). All fuelled by cheap energy. And now this low cost energy has engineered it’s own replacement: Solar energy.

Looking closely at Illustration 1 below we see these low fossil energy prices. We also see the rise in crude oil prices to between $10 and $20 per mmbtu that caused the oil shocks of the 1970s. Renewable energy, particularly wind and solar, attempted to rise in this time, but their high technology cost was so great that when oil prices dropped again in the mid 1980’s so did interest in alternative means of keeping us warm, cooking our food and illuminating our homes. Just keep burning fossil fuels was the acceptable, economic solution. That is until now. Solar technology costs have plummeted, especially in the last 6 years, coming from an astronomical $220/mmbtu to now being at the same level as Brent crude and LNG at around $15 per mmbtu. And it’s still falling.

Solar Price Falling

As far as economics go, fossil fuel prices are going the wrong way (up) and solar pricing is going the right way (down).

So what is really happening with the tumbling price of oil? Is Saudi Arabia attempting to displace US supply by shutting down high priced tight oil investments? Are there moves afoot to destabilise the Middle Eastern power base by cutting revenues of Iran for their support of the Syrian regime and other related matters? Are there plans to destroy the asset side of the Russian balance sheet and topple their eastern European hegemony?

Yes, it may be all, or some of these things. For now.

But these are still small compared to the impending impact of economics and the immutable power of the sun. I don’t think that solar prices are having any direct effect on oil demand right now, but I believe that very soon they will. We may find that the price of oil does not rise again, or if it does, not for very long before demand falls for the final time. Remember that more than 40% of crude oil consumption is by passenger vehicles and that’s an important fact when considering the low cost of generating power from the sun.

Led by their wallets, consumers will migrate towards solutions that are supported by lower cost energy and they will seek them out as manufactures support their demands. So it’s just a matter of availability of options. And what is the option for reducing energy costs: locally generated electricity for domestic consumption and electric vehicles or EVs for transport. EVs are 90 percent cheaper to fuel and maintain than gasoline cars (Rocky Mountain Institute).

Those options appear to ready now. Today, EVs can be purchased from many of the major vehicle manufactures from around the world. For instance BMW, Chevrolet, Citroen, Fiat, Ford, General Motors, Honda, Kia, Mahindra, Mercedes Benz, Mitsubishi, Nissan, Renault and Tesla to name a few. In fact BMW are expected to phase out internal combustion engines within 10 years (Baron Funds, September 14, 2014). So that means within the very close and near future, almost half of the demand for crude oil will evaporate. The Sheik’s prediction will come true. And about the image of electric cars, in 2013 the fully electric Tesla Model S won the Car of the Year (Motor Trend) for all car types, not just EVs, and was quoted as being the best car ever tested. Ever!

What continues to drive down the cost of solar energy is mega solar projects and continued large scale PV installations. For example the Indian government has made its intentions clear to have 100 GW of installed generating capacity by 2022 and China are planning 100 GW by 2020. That’s the equivalent of 200 nuclear power stations. And pricing will be around $0.06 per kWh – on a par when levelled with present energy costs (nuclear, coal & LNG).

Is the fall in oil price here to stay. Perhaps not just yet. It depends the uptake of EVs, and that is a matter of their availability. But soon low oil prices will be here to stay.

Our choice in this energy shift is to be leaders or let others lead.

Author Deck

Mr. Jeremiah Josey is an Australian who has been living in the Middle East for 7 years. Knowledgeable in the technology and energy markets, he is the Chairman of Swiss based Meci Group, a business and investment consultancy that operates across the Middle East, Central Asia and Russia.

See www.JeremiahJosey.com and www.Meci-Group.com for more.

Brilliant, and Ancient Technology

This is the famous 12 sided stone in Hatum Rumiyoc Street, Cusco, Peru.  It is 1,000’s of years old, carved with a technology long forgotten by man, and is in fact lost to modern science.  We do not know how it was done, and we do not know who did it.  It wasn’t the Incas. There is simply nothing in their technology capable of achieving it.

The stone is carved from diorite which is a very hard, very rare, igneous rock.  These days we cut it with diamond.

Why are there 12 sides? It’s elementary my dear Watson: the most efficient and most conservative means to cut a stone is to remove as little material as possible, just make some flat surfaces so you can get a good seal with other rocks (there is not filler or mortar used in this wall).  This is only possible if the means by which you cut the rock is so easy, is so simple, that you do not mind putting in 1, 2, 3, 12 sides to get fit you want.  Cutting rock almost as hard as diamond like a hot knife cuts butter – what reality is needed to achieve that?

That is another discussion, and includes the Pyramids, and Florida’s Coral Castle – a very, very recent application of a similar and related technology.

 

Hatum Rumiyoc Street, Cusco, Peru

12 Sided Stone, Hatum Rumiyoc Street, Cusco, Peru

Jeremiah Josey

The End of Humanity? It’s All in the Numbers

For the human population to remain steady, each woman needs to have at least two children – one to replace herself and one to replace her mate. The actual number works out to be about 2.1 – to allow for accidents and the like.

In this very good presentation by Hans Rosling, he very clearly demonstrates how much of the western world is way below 2 births per woman, in fact many countries hover around 1, and he shows how as countries “modernize” their birth rates drop rapidly.

That means the end of the human race!

With a little bit more thinking (see here), we’re talking about the year 2300 for the population to be less than 1 billion people. And then afterwards where does it end??!!!

Hans Rosling’s web site is here: www.gapminder.org.

Hans Rosling

Jeremiah Josey

How to get a 1 hour suntan in 5 minutes

I was sitting by the pool today (as I often do), thinking about stuff (as I often do)…

I was thinking about a movie called Sunshine released in 2007. An excellent Si-Fi movie set 50 years into the future when the sun is dying. (Worth a watch by the way. It’s a straight forward and complex concept.)

I was thinking about the “sun room” on the space ship. The crew often go there, and after requesting the computer to open the screen only 2% or 3% they watch the sun from close up. They learn a lot about themselves by doing this – watch it, you’ll understand what I mean.

That got me thinking, how close would the earth be to get a suntan in 5 minutes that now takes 1 hour? Crazy thought, but I was lying in the sun pondering it?

So I decided to do a mind exercise to work it out:

Let’s assume that the atmosphere remains as it is. It just makes it easier.

Now for some straight physics and geometry: The surface of a sphere is calculated by 4 time Pi times Radius squared – 4 x pi x r^2.

I.e. Surface Area of a sphere is proportional to the square of its radius.

When the sun emits energy in any given second (all across the frequency range: gamma rays, ultraviolet, light, infrared, and a heap of photons all charged up and going somewhere fast), that particular unit of energy spreads out around an ever-growing sphere as it moves away from the sun, i.e. it decreases directly in proportion to the square of the distance away from the sun.  I.e. Energy is proportional to Radius^0.5

To get a 1 hour sun tan in 5 minutes we need to cram in 12 times as much energy in 5 minutes as we would have done in 60 minutes.

What is the square root of 12? It’s only 3.46, about 4.

That means we need to move the Earth only a 107 million miles closer to the sun and you’ll only need 5 minutes to get a tan!  And 10 minutes to burn, and 1 hour, hmmm… probably a cinder?? !!

There you go.  Stuff you really need to know.

Some interesting facts on the sun and the Earth’s relationship to it.

  • It’s ‘only’ 150 million kilometers from the Earth to the sun (That’s the distance it takes to go around the earth 3,750 times) (So to tan in 5 minutes we need to move the earth to an orbit of 43 million kilometers, inside the orbit of Mercury).
  • It takes the light from the sun about 8 minutes to reach us.
  • The estimated temperature in the center of the sun is 15,000,000 °C.
  • Diameter of the sun is 1.39 million kilometers (That’s 34 times the earth’s circumference)
  • Surface temperature of the sun is 6,000 degrees celsius.

Puts our home into perspective a little doesn’t it.

Jeremiah Josey

The Mediocrity of Australian Politics

Recent public movements in Australian politics reveal the truth behind the talking: National interest, getting things done, change for the good of everyone? These are not on the agenda.  Personal interest, personal gain and tepid caution: these are what drives the upcoming Australian election.

As pointed out by Leigh Ewbank in his recent blog, the major parties are playing very low key campaigns. Both parties have identified the marginal electorates where they need to win to win the election, and they are focusing their campaigns accordingly, minimizing any disruptive or controversial discussions that may upset the status quo of their stable – already won – electorates.

In her post, Fiona Armstrong cites that scientist believe we have 10 years to correct climate change.  In my blog post from last year on the melting of Greenland’s ice cap,  I demonstrate that the data already published shows that it is already too late:  my recommendation is that adapting to change is the best solution – it is simply too late to do anything else.

However, is it the morally best solution?  I think not.

100% carbon free energy production by 2020 for all of Australia? The plan already exists.  The plan is robust, it is solid and it is achievable.  Only those who work in the energy industry understand this. They know this.  For everyone else it is debate, conjecture and point scoring, and certainly leaves them exposed to influence from special interest groups, namely the coal industry.

I worked with giants of the coal business for years in Australia – individuals that shaped Australia’s policy  not by writing papers and debating bills, but by promoting and selling coal  – billions of dollars of it.  These people are not interested in doing anything that will disrupt this business.

Until these individuals shift, until the coal industry shifts, the Government  – along with the Australian people – may as well piss into the wind.

We are not long term animals. We don’t think long term. We don’t act long term.  Never have been, most likely never will be.  This is just yet another disappointing example.  It is the main failure of the great democratic experiment of the 20th century.

Hopefully 10 years is not so long term that we WILL act responsibly.

Links

My post on Greenland’s melting ice:
https://jeremiahjosey.wordpress.com/2009/08/14/an-inconvenient-truth-3-years-on/

The plan for Green Australia by 2020:
http://media.beyondzeroemissions.org/preview-exec-sum14.pdf

Fiona Armstrong’s post
http://cpd.org.au/2010/07/are-you-fair-dinkum-julia/

Leigh Ewbank’s blog
http://therealewbank.com/2010/07/30/dealing-with-the-electoral-unimportance-of-climate-change/

Recent Summit on Australia by 2020
http://www.australia2020.gov.au/docs/2020_Summit_initial_report.pdf

Jeremiah Josey

Food, Inc. A review of the documentary – recommended

What a great documentary. Not just because of the story (eat food in the USA? Yuck), but also because of the great positive, do something message at the end.

Let’s start with that message:

“You can vote to change the system… three times a day

Buy from companies that treat… workers… animals … and the environment .. with respect

When you go to the supermarket
* Choose foods that are in season
* Buy foods that are organic
* Know what’s in your food
* READ LABELS

The average meal travels 1,500 miles from the farm to the supermarket.
* Buy foods that are grown locally
* Shop at farmers markets
* Plant a garden (even a small one)

Cook a meal with your family … and eat together

Everyone has a right to healthy food.

Make sure your farmers market takes food stamps

Ask your school board to provide healthy school lunches

You can change the world with every bite…”

More on the background of the film:

The US food system has effectively become a inorganic, inhumane, industrialized machine for delivering as much salt, fat and sugar to consumers as possible, while keeping it all soooo secret: it puts people in jail for speaking out against it…(I couldn’t write these words if I were in 13 states of the USA, like Florida, Colorado and Texas!! http://www.sourcewatch.org/index.php?title=SLAPP).

Amazingly complex and technical, the industrial food system does things like wash meat with highly toxic substances to kill the people killing bugs that got there because the cows are fed government subsidized corn… ??? and grow super fat chickens that can hardly walk because they are too fat for their legs (I’m happy for my small Kuwaiti chickens now!!)

Did you know that:
*There are a few hundred deaths each year from eating hamburgers in the USA… Bet you didn’t think that eating a hamburger could kill you that quick!! http://www.cdc.gov/ncidod/EID/vol5no5/mead.htm
*A third of Americans born after 2000 will suffer from early onset diabetes, brought on by high sugar and refined food intake…
*Monsanto “owns” the soyabean in the US, and farmers trying to collect seeds to replant are sued
* The average American consumes 200 pounds – 90 kg – of meat every year

We are what we eat.

http://www.foodincmovie.com/

http://www.youtube.com/watch?v=QqQVll-MP3I

http://en.wikipedia.org/wiki/Food,_Inc.

Jeremiah Josey