Yesterday, I wrote a quick post that linked a recently issued UBS report’s negative views about the economic viability of merchant nuclear power plants in the US to UBS’s large portfolio of troubled loans to companies involved in various aspects of the natural gas extraction technique known as “fracing” (alternatively spelled as fracking in many publications, including this one.)
Low oil and gas prices have hammered revenues at the companies that borrowed the money, threatening their ability to remain current on the loans. Because of the high risk of default, UBS is having a hard time selling the loans. The pool of uninformed buyers has shrunk as more and more people realize the deeply troubled nature of the portfolio.
Recent sales of fracing-related loans have netted just 65 cents or less on the dollar.
This morning I read another article, this one from Power Engineering, titled UBS Warns More Nuclear Retirements on the Way covering the UBS report that the Boston Globe article discussed yesterday. It included another clue about the extent of the at-risk loans UBS made in recent years on the basis of high oil prices.
The article mentioned the expected drop in average Northeast regional natural gas prices that should come when the “Constitution Pipeline” project is completed. A drop in prices, which benefits consumers, is not really the goal of companies that build and own pipelines. Their interest is in the revenue they receive from selling capacity on the pipeline. In this case, however, the pipeline owners have additional financial interests.
The Constitution Pipeline is a 121 mile connector between gas-producing regions in the Marcellus shale region of Pennsylvania and natural gas consuming areas in the Northeast. Its capacity is well booked in advance because of the current transportation constraints that limit the total amount of gas that can flow between the regions, often resulting in market price spikes when there are periods of high demand.
The project, announced in April 2012, is owned by a partnership between Williams Partners L.P. (75%) and Cabot Oil and Gas Corporation (25%). Just a month before announcing the Constitution Pipeline project, Williams Partners L.P. announced the $2.5 billion purchase of Caiman Eastern Midstream LLC, a relatively small oil and gas gathering and processing company with significant capacity to extract oil and gas from the Marcellus, but little or no capability to move that gas to market.
In 2012, there was a rather large price differential between wellhead prices in the Marcellus shale region and consumer prices in the Northeast. Williams Partners L.P., which has a large pipeline business, saw the opportunity to profit from both the extraction and delivery of gas. There is a rosy description of the project’s attractiveness and expected returns for investors on the Williams Partners investor web site titled Williams Partners Announces $2.5 Billion Acquisition to Establish Major Footprint in Liquids-Rich Area of Marcellus Shale; Plans Joint Venture to Pursue Utica Shale Opportunities.
UBS Investment Bank and Jefferies provided financial advice to Williams Partners for the Caiman acquisition. UBS Investment Bank also provided a $1.78 billion interim liquidity facility to help fund the cash portion of the transaction. The expected profitability of the acquisition and the subsequent Constitution Pipeline construction project is closely tied to having an increasing demand for natural gas in the Northeast.
The executives and managers at UBS Investment Bank and its client companies have a fiduciary responsibility to maximize shareholder value, an outcome that is driven by a number of variables. Executives often simplify the action prioritization process for employees by focusing them on maximizing relatively short term profits. It is beyond my current capabilities for forensic accounting to determine the current extent of loans from UBS to Williams Partners, but there is a decent probability that the strong relationship between the bank and the company still exists.
Permanently getting rid of a few large nuclear power stations, which each produce between five and eight billion kilowatt hours of electricity each year, would help increase the demand for natural gas and most likely increase the average realized sales price. That would help improve the value of a troubled loan portfolio.
Issuing a strongly negative report about the future financial performance of competitive plants is a pretty inexpensive way to call in the usual suspects in the antinuclear movement to serve as unpaid and perhaps unsuspecting tools. Many lifelong antinukes eagerly participate in an energy supply constraining action to kill off productive nuclear power plants while not realizing who will reap the almost inevitable rewards. The tactic, like grabbing the shirt of a receiver streaking down the sidelines, works well as long as none of the referees throw a flag.
My goal is calling attention to actions and motives that might otherwise go unobserved. It’s probably not illegal, but it sure isn’t in the best interests of the common defense, security, environmental cleanliness and prosperity of the United States to replace reliable, emission free nuclear power plants with fracked natural gas.
It’s also not in the best long term interests of companies that own well-run nuclear plants to listen to financially motivated analysts that want them to destroy long-term value because of short term commodity prices in historically dynamic market.
Aside: When I searched for related posts to add depth to this story, I was a little surprised to find an Atomic Insights post about B&W’s decision to dramatically reduce its investments in the mPower reactor development project in the search results. That story included a mention of the fact that UBS analysts were encouraged by the decision; they upgraded their recommendation on B&W’s stock. Hmm End Aside.
Rod Adams is Managing Partner of Nucleation Capital, a venture fund that invests in advanced nuclear, which provides affordable access to this clean energy sector to pronuclear and impact investors. Rod, a former submarine Engineer Officer and founder of Adams Atomic Engines, Inc., which was one of the earliest advanced nuclear ventures, is an atomic energy expert with small nuclear plant operating and design experience. He has engaged in technical, strategic, political, historic and financial analysis of the nuclear industry, its technology, regulation, and policies for several decades through Atomic Insights, both as its primary blogger and as host of The Atomic Show Podcast. Please click here to subscribe to the Atomic Show RSS feed. To join Rod's pronuclear network and receive his occasional newsletter, click here.
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I feel that Demand Response has much more of an effect than the “smoking gun” you are looking for.
Try this link – http://powersource.post-gazette.com/powersource/policy-powersource/2014/11/25/FirstEnergy-says-demand-response-putting-powerplants-out-of-business/stories/201411250013
Don’t understand the whole problem, but seems this is causing even more plants to shut down and be replaced with cheap (NOW) gas.
In areas with more solar there is going to be an even bigger perturbation to the market. For, example, in California, the installed solar panels greatly affects the peak demand, but is not reliable! You expect and predict a certain demand on a certain day, data shows that solar will (on average ) reduce that demand by 25% – thus you no longer need an ancient coal plant that needs extensive upgrading to meet Obama’s new regulations. So what happens when the sun does not shine for that day, week? You build more GAS plants, and end up with demand rates like those in NE in the winter and gas prices 10 – 100 times higher.
@Rod
fracing-related –> fracking-related
I note that at least three northeast nuclear plants (Ginna, Fitzpatrick, Pilgrim) are in financial trouble because of low
regional electricity prices. Do you have any insights as to whether the operators of these plants believe they can “hold-out” for about two years while waiting for Dominion’s Cove Point LNG export facility to be completed? Or whether UBS’s analysis even considers this possibility. Is two years too long a time horizon for such economic considerations? I’m assuming that the Pennsylvania’s Marcellus gas will eventually find its way to Maryland.
In New England and elsewhere there has been a steady reduction of coal fired electricity production with a demonstrable increase in electrical output fueled from natural gas fired units. Not to harp on the need for fuel diversity, but when you have the likes of the head of ISO New England continue to display charts early on, in briefings after briefings, showing the dramatic shifts in generation by fuel sources over the last 15 years, along with natural gas impacts and electricity wholesale pricing, one should get the picture (see http://www.iso-ne.com/static-assets/documents/2015/07/ieee_pes_general_meeting_van_welie_slides_07282015_final.pdf).
Any loss of another nuclear generating station in that region will have dramatic effects on fuel diversity and reliability. New England can’t simply make up the difference with wishful thinking or renewables. There are serious concerns over natural gas availability, transmission and pricing in the region going forward, especially during cold weather months, where earlier this year generators actually had to resort to filling the gaps by shifting to oil fueled sources. A sad reflection of old times, where during the 1970’s, New England relied upon oil to produce 70% of the region’s electricity prompting the move to planning more nuclear plants to help offset the reliance on foreign oil and imports of other fuels into the region.
I wonder if this is related?
http://www.marketplace.org/topics/economy/push-lift-ban-crude-oil-exports-gains-steam
Out of curiosity, roughly how much gas would be required to generate enough electricity to replace five large nuclear reactors for a day? How does this amount compare to the total amount of gas produced in the US per day? Is it material? My guess is that this ratio is so small that shutting the plants down would have no effect on the price of gas.
That said, there is probably no other CO2 emission reduction strategy that comes even close to being as cost effective as just subsidizing these plants to keep them in operation. Shutting them down would be a major setback to the goal of reducing carbon emissions.
@Jeffrey;
Back of the envelope calculations imply it would be small (I think less than 1%), but it becomes a problem of availability; if the NG pipelines in the area are already at max capacity and new demand comes online, then price negotiating starts. Even if there is plenty of gas in the country at large, it still has to get to the customer, which means pre-existing buyers get priced out by the new demand, or new pipelines are built, but I think we both know how expensive and time consuming it can be to get a cross-country system built in the United States.
Unfortunately, it is a fact of American business today that policy is often dictated to corporate boards by hedge-fund managers & other “activist investors” who do not have the good of the company or the public at heart, nor any long-term stake, but simply wish to make a quick buck — off the collapse of the company, if that’s the easiest thing to engineer.
Consider the case of “California Resources Corporation”. Under heavy pressure, the management of Occidental Petroleum spun off their underperforming California operations. The new company was required to borrow several billion dollars to pay a “Special Dividend” to OXY shareholders, & the bonds were cleverly packaged for sale as apparently good-quality securities. As you might guess, CRC has been repeatedly downgraded by the credit agencies, & there’s little question that everyone who bought their debt is going to take a bath, while the middlemen who handled the transaction make out very nicely.
@publius
Unfortunately, it is a fact of American business today that policy is often dictated to corporate boards by hedge-fund managers & other “activist investors”
It may be true today, but that does not make it unimpeachably true forever. Little understood fact is that “hedge-funds” are often playing with “our” money from mutual funds or pension investments. We can resist and overthrow their misuse of our money in damaging ways.
It’s not intuitive, but one of the most important steps forward is to gradually, but steadily, return interest rates to their historical position of giving some income to savers while charging borrowers for the privilege of using someone else’s money. We shouldn’t have to go through vultures in order to appear to be getting some return on saved capital.
I had a similar idea, so I did this:
1000 MWe * 24 * 365 * 0.90 * 1000 ~ 8 billion kW-hr per year for a 1000 MW nuclear plant
A modern gas-fired unit runs at a heat rate of ~ 7500 Btu/kW-hr, so
8E9 kW-hr/yr * 7500 Btu/kW-hr = 60 million MMBtu/yr gas requirement to replace the 1000 MW plant
I don’t have any idea what the total gas production or projected flow thru the Constitution Pipeline would be.
Thanks Benjamin – that’s a good point.
@gmax137
Excellent start. The units that the US Energy Information Agency uses to track natural gas production and consumption on a commercial scale are normally variations on cubic feet. They can be confusing.
Mcf – 1000 cubic feet with the meaning of M coming from its meaning in Roman numerals. An Mcf contains approximately 1,000,000 BTU (MMBTU) In that case the meaning of the Ms is also derived from Roman numerals.
Bcf – Billion cubic feet. One million Mcf.
Tcf – Trillion cubic feet. One thousand Bcf.
Another archaic unit that often seems designed to confuse people who are not in the business is the “therm.” It is defined as 100,000 BTU, so 10 therms is roughly equal to an Mcf and exactly equal to 1 MMBTU. The gas industry uses deca (or deka), a metric system prefix, to multiply a base unit by 10, so you occasionally come across decatherm (dt). That’s the case for the announcement I found about the Constitution Pipeline capacity, which reports it as approximately 650,000 decatherms (dt) per day.
650,000 dt x 1 MMBTU/dt x 365 days/year =~ 240 million MMBTU/year.
Feeding the natural gas power required to replace a single 1000 MWe nuclear plant would require almost exactly 25% of the total capacity of the new pipeline.
Also need to add in the cost of transportation (pumping) of that NG and the fact that with no NPP the demand is going to be very high on very cold/hot days with the addition of more NG power plants. Price will un-necessarily skyrocket during these periods of high demand, increasing BOTH the cost of electricity and Heating gas.