Lawrence Roulston: Challenges and Enormous Opportunities in Alternative Energy
Source: The Energy Report (7/2/09)
The Energy Report caught up with newsletter writer and analyst Lawrence Roulston, who recently launched the GreenTech Opportunities newsletter. In this exclusive interview with The Energy Report, Roulston gives us his thoughts on developments that are happening in the alternative energy field, and ideas for profiting in a changing world.
The Energy Report: Lawrence, you have just returned from trips to Dubai, Hong Kong and Europe. What does the rest of the world think of the health of the U.S. and European economies?
Lawrence Roulston: It is striking how different the outlooks are in different parts of the world. In North America, most people are totally focused on the U.S. economy, which is not looking that promising in the near term. Therefore, investors are quite gloomy. Europe is also not very upbeat. But, in Europe, they are more pragmatic and they tend to look a little further into the future. As a result, many European investors see this down period as a buying opportunity. Parts of Asia were hit hard by the slowdown, but there is still a lot of growth in China and India. China reacted quickly with an effective stimulus plan that is focused on building infrastructure. Growth there is forecast at 8% for this year. With enhancements to rail, roads, ports and the like, China will become an even greater economic force.
TER: What is the Asian perspective on the importance of emerging markets to global economic turnaround?
LR: There is a myth that Asian growth depends mainly on exports to the West. Much of the economic activity in Asia is related to trade within the region. After the credit crisis, there was a severe shortage of export financing, which meant that exports plummeted. Now that financing is available again, activity is recovering throughout the region. Asians are far less concerned about the global situation than they are with what is happening in the region. With China, which is the third-biggest economy in the world, growing at 8%, it doesn’t really matter what happens in other regions. Once upon a time, Asian growth depended on exports to the West. Now, the West will benefit from growth in Asia.
TER: What do investors in other regions think about the U.S. dollar?
LR: Investors are very nervous about the outlook for the dollar, but it remains the global currency. People can see the long-term downtrend in the dollar. As a result, the dollar is seen more as a medium of exchange. It’s held for the short term, by most investors. Of course, the Chinese government holds most of its $2 trillion dollars worth of foreign currency reserves in dollars. There is growing nervousness about that huge exposure and moves away. In part, the government is buying commodities.
TER: It's been said that the Chinese government is buying commodities and stockpiling these commodities as a way to get out of the U.S. dollar. If this is true, should we expect commodity prices to fall when China has built up a significant stockpile and, if so, in what timeframe?
LR: The Chinese government is taking advantage of low metal prices to build strategic stockpiles. They are smart enough that they are not going to push the price up with their buying. Recovery in the West should dovetail with the Chinese buying so that the prices will not drop. The amount of actual commodities being bought for the stockpiles is small in relation to the total value of their reserves.
Much of the Chinese buying of commodities that we read about in the popular press is about Chinese companies in the private sector acquiring interests in metal deposits with the intent of developing mines. The Chinese mining industry is becoming quite large and it is only natural that they acquire resources.
TER: What will be the impact on the U.S. dollar if/when commodity prices fall?
LR: I don’t believe commodity prices will fall. What we are seeing now are commodity prices that reflect weak demand as a result of the recession in the West. As the Western world gets back on track, commodity prices will continue higher.
TER: To give our readers some perspective for your comments regarding energy, can you summarize the focus of your GreenTech Opportunities newsletter and why you chose that focus over a general energy or an emerging technology newsletter?
LR: There has to be a shift in the way the world generates energy. At present, burning carbon fuels provides 88% of all the energy in the world. The next biggest energy source is nuclear. The biggest carbon fuel is oil. There is a limit to the amount of oil that can be produced. The alarmists will tell you that we will run out of oil soon. The reality is that oil production has been increasing steadily for decades.
In the not very distant future—estimates range from next year to as much as 12 years from now—the total oil production will no longer increase. With demand continuing to increase, flat oil production will cause considerable disruption. Furthermore, a growing portion of oil production is coming from politically unstable or unfriendly jurisdictions, causing a lot of concern about energy security. It is vital that we begin now to get away from carbon-based energy.
There are numerous alternative energy forms in operation. They all offer enormous promise. But, most of the alternative energy forms are not economically viable at current prices and with current technology. There is enormous scope to improve technologies and to develop new technologies. The focus of GreenTech Opportunities is to raise awareness of the challenges, but more to the point, to make investors aware of the enormous opportunities available.
We have been enormously successful at Resource Opportunities at identifying emerging companies. We are bringing that skill at recognizing successful management and the other elements involved in building winning innovative companies.
We believe that the most important element in the transition to a cleaner energy environment will be the technological enhancements that will allow broader application of alternative energy forms. As in all fields, a great deal of the innovation happens in the small companies.
TER: The first issue of GreenTech Opportunities focused on two key factors for a pending demand for changes in our fuel consumption: 1) peak oil/gas—we will shortly reach the point where consumption is greater than production and 2) environment impacts of using fossil fuels is greater than the benefits of the currently cheaper fossil fuel energy options.
Awareness of global warming (the environment impact of using fossil fuels) initiated the desire for changes in our energy consumption. Without global warming as an issue, is there enough momentum from other drivers to sustain the desire for change?
LR: Global warming helped to mobilize public sentiment and government policy. It’s hard to know, but at this time the momentum has shifted so firmly in favor of alternatives that it really doesn’t matter. I firmly believe that the cost of the alternative energy forms will drop quickly enough that they will become economically viable, and in many cases provide cost advantages over traditional energy forms. Alternative energy will get cheaper as more implementations lead to reduced costs through economies of scale. In addition, there are many technological improvements in the development stage that will have a big impact on cost. In addition, the huge effort being mobilized in that direction will continue to reduce costs.
TER: Peak oil/peak natural gas is fueling the demand for investment in alternatives fuels due to the assumption that as we reach the peak, the prices for these fuels will increase, making energy unaffordable. If the peak for oil/gas is not a reality for another 50 years, will there be enough return for investments in alternatives?
LR: Peak oil is here in the very near future. Many of the big oil producing regions have already passed peaks. Don’t forget, the United States was the world’s largest oil producer for a period, but production has fallen way down. Experts who follow this industry are very clear that the peak is not too far away—at most a dozen years, but more likely much sooner. The pace of new discoveries has fallen way off over recent years. It takes an enormous amount of new drilling to simply replace depletion. Production from existing wells declines steadily. Production won’t drop off suddenly, but it will certainly stop rising. Demand is continuing to rise and we are so complacent about oil production continuing to rise.
TER: What alternative / technology opportunities will emerge first as successful companies/sectors?
LR: Nuclear will be a big part of the move away from carbon fuels, whether people like it or not. Wind and solar are gaining importance, but at present on the basis of “feed-in tariffs,” in effect subsidies. Geothermal is also looking very favorable. At present, geothermal only works in a few places. New technologies are expanding the applicability of geothermal. Solar is an area where there is huge potential for new technologies to impact on costs.
TER: You mentioned earlier that wind and solar are not currently economically viable sources and rely on subsidies. What is the likelihood that Federal subsidies run out before the technologies are developed to make these sources economically viable? How should individual investors look at these segments?
LR: If you are looking at a producing company, then you have to look carefully at the specifics of the company and its revenue projections, taking into account whatever subsidies may be in place. We all know that the subsidies won’t be around forever. That is exactly why we are focused on companies that are developing and enhancing technologies. The new technologies are vital. The flip side of this is that producing companies could lock in subsidies based on today’s cost structure and then bring in new technologies in the future that bring costs way down.
TER: Two years ago there was a rapid increase in uranium fueled by the projected number of nuclear facilities being built around the world and speculation of a shortage of uranium supplies. Subsequently, uranium prices have fallen and many nuclear facilities have been stalled due to the economic recession. Given this, in what timeframe do you see nuclear beginning to increase as a percentage of energy output? What is the investment strategy for this sector?
LR: There is still a looming shortage of uranium. The 400 or so reactors in the world now in operation get about 40% of their fuel from Soviet-era nuclear warheads being converted to fuel grade. The agreement under which Russia is converting uranium and supplying material to the West runs out in 2013. Russia does not intend to extend that agreement, as they will need more material internally. Another hundred reactors are planned over the next decade or so. Uranium mines can’t be developed fast enough to bridge that gap. Nuclear energy will continue to increase, but it is unlikely to increase as a percentage of energy output. It will do little more than keep pace with the overall increase in energy output.
TER: Since coal is in abundance in the U.S. it seems natural that there would be some technological advances in this area. Have you heard of any?
LR: Coal is abundant all over the world. Unfortunately, it is the dirtiest of the carbon fuels. In addition to carbon dioxide, coal-fired power plants also emit sulphur dioxide and ash. That ash contains all sorts of nasty ingredients. The research is aimed at cleaning up the emissions. There are scrubbers that remove a portion of the emissions and work is ongoing to further improve efficiencies. There is also work underway to capture the carbon dioxide. Most of the work is aimed at simply stuffing the CO2 back into the ground. That may work in some areas, but is far from a universal solution.
TER: Can you give us some specifics?
LR: In the last issue of GreenTech we introduced a company called Natcore Technology (TSX.V:NXT) that is working toward a very significant development in solar technology. Two very accomplished scientists with different approaches realized that there was huge synergy in combining their technologies. They set up a company and just took it public to finance their development work. The value of the company is now almost nothing. If successful, the new technology would have a huge impact on the solar industry, and of course on the value of the company.
We are looking now at some emerging geothermal companies that we will introduce in the next issue. There have been some big advances in technology in this area that make it far more broadly applicable than it was even a short time ago.
Lawrence Roulston may from time to time have a position in the securities of the companies mentioned herein, and may change his positions without notice.
Lawrence Roulston, a geologist, with engineering and business training, and more than 20 years of hands-on experience in the resource industry, launched GreenTech Opportunities (sample issue) in February. He founded Resource Opportunities—which provides objective commentary on the resource industry and emerging resource companies—in 1998. Roulston has established an impressive track record, with a particular knack for picking emerging companies that delivered ten-fold or better returns.
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