A world energy tour with Google Maps

February 6, 2013

Let’s take a lighthearted tour around the world of energy, helped by Google Maps.

1) Cushing, Oklahoma , the delivery point for WTI crude oil.  This tidy town in Oklahoma, USA has accidentally become a centre of world energy.  It’s advantageous for energy companies to store crude oil here – indeed it’s easier to get oil here than take it out again.  Look how big the tanks are compared with the occasional vehicle around.

2) Straits of Melacca, off Singapore.  Most of the oil tankers from the Middle East heading to Asia have to go through this choke point.  And Singapore itself has a number of important refineries.  As a result, there are often dozens of supertankers moored off Singapore.

3) LNG trains, Qatar.  You can get gas from source to market via pipelines, or compressing it into liquefied natural gas.  The compression stage is called a LNG train.  As the largest exporter of LNG in the world, Qatar, a tiny desert nation off Saudi Arabia, very close to Iran, is key in world gas markets, and this is where much of that gas gets turned into LNG for export.

4) Sabine Pass LNG Terminal, Louisiana, USA.    Buy or sell?  This place tells a story.  The US expected to be importing LNG, and built this LNG import terminal.  Now, due to the huge surge in its own gas production, this terminal is expected to be converted to export gas, with exports due to start in 2016.

5) Dragon import LNG terminal, UK.  The UK has gone the other way, from an exporter of gas to a large importer, as its own fields in the North Sea decline.  This google maps picture shows a number of LNG carriers offloading simultaneously.  It takes around 14 hours for an LNG tanker to discharge.  The Dragon facility is half-owned by UK-based BG Group (formed out of the earlier ‘British Gas plc’) and half-owned by the Malaysian national oil exporter Petronas.  Petronas and other gas producers like to own import terminals as it gives them a guaranteed market for their gas.

6) Itaipu Dam, Brazil.  What are the world biggest power stations?  Nuclear?  Coal?  No, hydro – the world’s four largest power stations, by energy produced, are all hydro, with the second biggest being this dam in Brazil (the 3 Gorges Dam in China in the biggest).  It is a large factor in Brazil being able to boast that an amazing 77% of all its electricity is produced from green hydro-electricity.

7) Didcot Power station, UK.  The 6 huge cooling towers from this power station are visible from miles around.  The lower 3 are from a coal power station (Didcot A), and the upper three from a more recently constructed gas power station (Didcot B).  Didcot tells us a valuable environmental story, being repeated throughout Europe.  The coal power station has recently been closed, because it has met its maximum number of hours to burn coal under the EU ‘Large Combustion Plants Directive’, producing more emissions and CO2 than cleaner gas.

Shale gas and US coal

November 25, 2012

There’s an interesting article here about the rapid switch happening in the US’s power generation from coal to gas.  Apparently gas overtook coal in April 2012 and continues to grow rapidly. The savings to consumers are huge – they quote the example of Ohio where combined costs for gas and electricity fell 20% in 2011 vs the 2007-2009 average, which is no doubt helping the US economy.

Coal remains competitive though. An exec of AEP, a giant energy utility in the US, says they begin to turn coal back on when gas prices exceed the $3 to $3.25 range.  As you can see from the futures curve here it’s already above that price at almost $4 and predicted to rise only gradually, reaching $5 around 2018.

With natural gas so cheap and gasoline so expensive in the US, I’ve often wondered why US consumers and car companies aren’t switching to natural gas (via LPG) for their cars. In Malaysia, most taxis run on LPG. But that cuts power by 10% or 20%, reduces range (LPG is less energy dense than gasoline) and half of the boot (trunk) is taken up by a huge gas cylinder. And of course you need the refueling infrastructure. Even in Malaysia the petrol stations that do stock LPG often have long queues of taxis.

Perhaps the switch from gasoline to natural gas in cars will come instead through all-electric and plug in hybrid cars. Personally I think electric cars are a non-starter because of the range limitations. Everybody likes the occasional road trip. But plug in hybrids solve that, and you get to buy most of your fuel at electricity costs. Thus the automotive industry moves to natural gas via electricity.  If this happens, plenty more gas power stations will be needed unless everybody can be persuaded, via dynamic pricing, to only charge their cars overnight.  This is, to me, the real reason for the push to smart metering. 

The switch to natural gas from coal at the generation end is rapid and happening now. But the automotive switch from oil to natural gas will take much longer. Will that demand reduction in oil, mostly in cheap gas USA and not in expensive gas Asia, be enough to balance the huge oil demand increase forecast in Asia? World oil production seems to have almost platueaud. Eventually I guess shale gas technology will spread, although the US appears to have better geological conditions for it than elsewhere.

Black-76 Model Implied Volatility Calculator in Excel

July 28, 2012

I recently needed a calculator for implied volatility in the Black-76 model (options on futures).

This simple Excel Spreadsheet does the calculation.  Simply enter the other parameters and press the button to calculate the implied volatility.  You could use it repeatedly to build a commodity volatility smile.  Note that it assumes European options whereas many commodity options are American.

The Black-76 model is essentially the same as the normal Black-Scholes model, but takes into account that you only pay to take delivery of a future on expiry, hence you don’t incur funding costs prior to that date.


Copper Futures Curve and Inventory, 2003-2012

July 28, 2012

I produced a video for the world copper conference in Chile a few months back.  It shows the futures curve of copper and its price, as well as inventory.  You can clearly see the effect of inventory on the futures curve and price.  The 2008 onwards recession has caused a significant inventory build.


Send me your questions!

July 18, 2012

Send me your questions on commodities (related to financial modelling) and I’ll do my best to answer or suggest further reading.  Post them at www.commoditymodelling.com .

1 day Commodity Conference (free), London, 20 January 2012

January 6, 2012

My PhD supervisor Helyette Geman is organising a commodity conference in London on 20 January 2012.  Speakers include Alexander Eydeland, author of several commodity-related books and head of commodities at Morgan Stanley and Robert Doubble, head of Quant Analytics at BP.

To register for a place, a programme of events, location infomation etc., see www.bbk.ac.uk/cfc/

Commodities on UK TV

June 7, 2011

There’s a number of TV programmes related to commodities which are regularly shown on UK TV. As usual, they can be downloaded on BBC iPlayer for a few weeks after each TV broadcast (if you are in the UK).  I find they tend to rotate, so if you’ve missed an episode, it will probably be re-broadcast within 6 months.

Windfarm Wars

A series about developers wishing to build a windfarm in a scenic part of Britain, who encounter a lot of local hostility. There’s some information about the science of windfarms, but it’s mainly following the legal planning progress, details about noise data, wind speed data etc.  Interesting because it shows the huge perceived social costs of wind farms, and the long delays in implementing them.  A 4 part series, fairly slow moving.

The Secret Life of the National Grid

A 3-part series about the construction and social effects of the electricity grid and electricity in general.  Mostly I find it’s about the social revolution caused by having on-demand electricity.


Richard Hammond’s Engineering Connections

I haven’t watched this yet, but one episode describes the technology in the ships that carry LNG.


And another episode describes the technology behind an offshore natural gas platform.