Sprott on UraniumSprott's bullish on uranium as cheap, reliable energy source
By: Dorothy Kosich
Posted: '20-SEP-05 05:00' GMT © Mineweb 1997-2004
RENO--(Mineweb.com) Sprott Asset Management Research Analyst Kevin Bambrough is bullish on uranium--not just because of soaring demand for nuclear energy--but also because the world may be forced to wean itself from its expensive addiction to oil.
In a presentation to a recent uranium conference in St. John's, Newfoundland, Canada, Bambrough noted that the consequences of oil supply problems for mining are shortages of diesel and rail capacity, higher transportation costs, and the requirement for more onsite power plants and electric mining equipment in operations. He also predicted increased hedging risks and costs and increased volatility of input costs and commodity prices.
Bambrough suggested that "small mines will often be hurt the hardest, increased capital costs will require long life reserves associated with larger (mining) operations."
Well before Hurricane Katrina blew out U.S. Gulfcoast oil production and refining this month, Sprott's Energy Fund analysts were arguing that an energy crisis is looming. As Bambrough explained, "All major energy commodities are characterized by tight supply/demand fundamentals with few alternatives."
Using the thesis of Hubbert's Peak and other theories, Sprott asserts that the best oil fields have been found and discoveries are going into a downturn. Even if the world is not running out of oil, as Sprott and other members of the peak oil crowd suggest, Bambrough declared that the world is "running out of cheap oil."
Meanwhile, as China, India and other Asian nations' energy appetites become more voracious, the Energy Information Agency forecasts that the demand for oil may grow 60% by 2020. If oil supplies have peaked, the world could be facing a demand/supply imbalance of 65 million barrels a day for a 50% shortfall by the end of the next decade. Even if the planet is simply running out of cheap energy, Bambrough asserted that it "will have dramatic rippling effects on all aspects of human life."
The good news may be, however, that--since no commercially viable alternatives are in place to make up for the shortfall, and serious conservation measures are lacking--uranium and nuclear energy may have to fill in the energy gap.
In his presentation, Bambrough detailed his belief and the assertions of renowned oil experts that oil supplies are dwindling with serious consequences for mining, agriculture, and all other industries dependent on gasoline, diesel and other petroleum-based products. He noted that oil now represents 39% of all consumed energy and accounts for 90% of transportation fuel.
Bambrough stated that 98% percent of global crude oil comes from 45 nations, of whom more than half may have peaked in oil production. It is believed that seven of the 11 OPEC nations may have also peaked in their production.
Oil field discoveries have also declined since their heyday in the 1950s, according to Bambrough, while U.S. oil production is believed to have peaked in 1970. Meanwhile, the excess capacity held by OPEC nations has dwindled from an average of 30% excess capacity to about 1% of global demand. For instance, existing oil fields in Iran are estimated to be declining at the rate of 8-13% annually, he added.
The recently retired head of oil exploration and production for Saudi Aramco, Dr. Sadad al-Husseini recently told the New York Times that if current demand and depletion patterns continue, the world will need to open enough fields or wells to pump an additional 6 to 8 million barrels a day, produce at least 2 million new barrels a day to meet rising demand and at least 4 million to compensate for the declining production of existing fields. "That's like a whole new Saudi Arabia every couple of years," he said. "It's not sustainable."
Assuming that ultimate world production will be 2.2 trillion barrels of oil, Hubbert's Peak forecasts international oil production peaking in the year 2010.
Husseini, nonetheless, recently attempted to debunk the peak oil crowd by clarifying his remarks to the Times. "Given the current outlook in terms of global exploration and development, the rate of investments in the oil value chain, energy prices, and the prevailing legal and political investment climate, I believe oil production will level off at around the 90 - 95 mmbd by 2015. This plateau can be sustained beyond 2020 at continuously higher oil prices and with rapid improvements in overall energy efficiencies throughout the world," Husseini wrote in a September 6th e-mail to the Association for the Study of Peak Oil and Gas-USA.
Andrew Gould, Chairman and CEO of Schlumberger, a major oil services provider, however, asserts that 70% of today's production comes from oilfields that are more than 30 years old. "As these reservoirs age, falling pressures, water encroachment and mechanical events take their toll," he said. Not only are modern oil-field discoveries smaller, but they also decline at a faster rate.
In an interview with the Financial Sense Newshour, Matt Simmons, CEO of Simmons and Company International, a specialized energy investment banker, declared "We've basically used up the vast majority of the world's high flow rate, high quality sweet oil ...now we're left with lots of oil. But it's heavy, gunky, dirty, sour, contaminated-with-various-things oil. It doesn't come out of the ground very fast, is very energy intensive to get out of the ground. And we're going to pay a fortune for it."
Bambrough suggested that it will require 18% in oil production growth just to maintain gasoline and Mid Dist. output. Meanwhile, non-OPEC light sweet crude has already dropped from 3.26 million barrels a day from 2000 to 2004.
Potential geopolitical disruptions in oil supplies could occur in Iraq, Iran, Russian, Nigeria, and Venezuela, according to Bambrough. Meanwhile, infrastructure woes--such as limited pipeline capacity, aged systems, over-loaded oil and refinery infrastructure--could also hurt production.
In an interview Monday with Mineweb, Bambrough suggested : "we have sucked up all the easy stuff," which now requires using more energy to produce energy. With a 12% drop in the production of light sweet crude over the past four years, he believes OPEC will be hard-pressed to maintain even present oil production.
URANIUM MANIA
While Bambrough and Sprott Energy Fund are bullish on coal and uranium to meet energy needs, Bambrough admits he is partial to uranium and nuclear energy as a more near-term solution. Sprott believes the world will embrace nuclear energy until commercially viable alternatives become available.
In his presentation, Bambrough noted that nuclear power generation represents 7% of global energy demand and 8% of U.S. energy demand. Uranium-derived electricity accounts for 16% of the worldwide power grid and 20% in the U.S.
Bambrough believes "we have just started a long term uranium bull market that will end in a "uranium mania" as utilities and countries drive uranium prices to unbelievable highs as they compete to secure supplies." Many nations and utility companies are already competing for low supplies of above ground-inventories and newly-mined uranium. In an article published a year ago, Sprott asserted that "the fundamentals for uranium going forward are superlative both on the demand and supply sides of the equation. ...It has become apparent to us that we are in the nascent stage of a nuclear renaissance."
As prices at the gas pump soar higher and higher, it is helping convince the North American consumer that "we have a problem" when it comes to sources of cheap, reliable energy, Bambrough told Mineweb. With the passage of the U.S. Energy Act and other developments, the United States and Western European nations are seriously considering nuclear power.
Bambrough claims a number of utility companies have proposals and plans for nuclear power plants ready to go to development and construction within a few years. China already plans to add 32 new reactors to its nuclear generating capacity. India also plans to build one nuclear reactor per year until 2020.
In the long term, some scientists are already considering the prospects of producing hydrogen to fuel the world's vehicles by 2050.
The dearth of uranium exploration and of new discoveries has left only a handful of deposits internationally "that show real promise at current prices," according to Sprott analysts. The good news is that uranium is more abundant on this planet than hydrocarbons. "The world is very unlikely ever to run out of uranium, as it will oil, natural gas, and even coal," declared Sprott, adding that some predict the looming uranium shortage may be so severe that the price of uranium could reach $110 within the next five years.
Nevertheless, Bambrough still insisted that "as investors and owners of commodity companies, it is our duty to protect the world's remaining finite resources."
"We should be responsible when engaging in the production and sale of our asserts and ensure that the market attributes proper value to them, thereby helping to reduce misallocation and encourage conservation," he concluded.