Daniel Lacalle - The Energy World is Flat: Opportunities from the End of Peak Oil

This edition first published 2015

2015 Daniel Lacalle and Diego Parrilla

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Library of Congress Cataloging-in-Publication Data

Lacalle, Daniel.

The energy world is flat : opportunities from the end of peak oil / Daniel Lacalle, Diego Parrilla.

pages cm

Includes index.

ISBN 978-1-118-86800-3 (cloth)

1. Energy security. 2. Energy consumption. 3. Petroleum reserves. 4. Petroleum industry and trade. 5. Energy industries. I. Parrilla, Diego, 1973 II. Title.

HD9502.A2L3325 2015

333.79dc23

2014044969

Cover image: shutterstock.com/Madlen

Cover design: Wiley

From Daniel Lacalle

To all my colleagues in the energy sector and decades of hard work looking for a better world, and in particular to those who passed away during geopolitical conflicts and terror attacks. We will never forget you.

To Patricia, Jaime, Pablo and Daniel, my parents, my brother, and his family. To all my uncles, aunts, and cousins who give and share so much joy. To all of them, my never ending source of energy.

From Diego Parrilla

To my wife, Gema, and my children, Yago, Lucas, and Carmen. My life and purpose in life.

To my father, Paco, and my mother, Nieves, my role models.

To my brother Paco, the best brother I could have wished for. My inspiration.

To my sisters Nieves and Marta, the geniuses of the family.

And, of course, to our sister Belen, our Guardian Angel.

The opinions expressed in this book by Daniel Lacalle and Diego Parrilla are strictly personal and do not in any way reflect the opinion, strategy or philosophy of the firms they work or have worked for, nor should be taken as buy or sell recommendations

Heraclitus

At 2.46 pm on the 11 March 2011, the largest earthquake in the history of Japan triggered a giant tsunami wave that would change the energy world forever.

I was on a conference call in my office when the prices of the Japanese yen started to swing wildly. Something had happened. Shortly after, the news was hitting the wires: Massive 9.0 Earthquake Hits East Coast of Japan. Tsunami Warning Issued. While Japan had a long history of earthquakes, such as the Unzen earthquake and tsunami in 1792 that left a death toll of over 15,000, a tremor of 9.0 on the Richter scale was at a whole new level, and would make this earthquake the largest in the history of Japan and the fifth largest globally since records began in 1900.

Within minutes, a series of giant tsunami waves reached Fukushima Daiichi power plant. More than twice as high as the protective seawalls, the waves flooded the power station and damaged the back-up generation and cooling systems. The situation was out of control, and radiation was eventually released, making Fukushima the worst nuclear accident since Chernobyl in 1986, both rated level 7 on the International Nuclear Event Scale.

I immediately recognized Fukushima as yet another black swan, an event that has a very large impact that no one had anticipated before the fact, but that everyone viewed as obvious after the fact. The scale of the earthquake and the unfortunate series of events were unique to Fukushima, but lessons would be learnt and new processes and security measures would be put in place, as has always been the case when accidents and natural disasters have occurred.

But within days, and despite decades of safe nuclear power, countries around the world were closing down nuclear plants and rethinking their plans of extending the life of existing plants and building new ones. Politicians had taken over and were reshaping the future of nuclear power.

But not all countries reacted the same way. Fukushima did not change the position of France, which produces over 75% of its own energy needs from nuclear power. And it did not change the position of China either, which maintained its plans to build up to 70 new nuclear plants by 2020.

The nuclear world was polarized, but I was optimistic that common sense would prevail and that short-term knee-jerk reactions would give way to long-term constructive solutions and even safer power generation across the world.

There is, however, no doubt in my mind that Fukushima was a critical milestone towards the end of OPEC's dominance. Let me tell you why.

The close down of all nuclear capacity in Japan left a large gap in power generation that had to be filled by coal, natural gas, and crude oil.

The seaborne coal market was able to absorb the increase in Japanese demand with relative ease, but the much smaller market of seaborne liquefied natural gas (LNG) suffered a severe shock that sent prices skyrocketing.

Prices of natural gas in Asia more than doubled reaching over $20/MMBtu, equivalent to over US$110 per barrel of oil equivalent (USD/boe).

Fukushima impacted other large Asian consumers, such as Korea, Taiwan, and China, who also rely on natural gas for their current and future power generation mix, reinforcing the perception that Asia would buy unlimited amounts of gas, at unlimited prices.

The imbalances could not be resolved easily, and the price of LNG for delivery to Japan stayed at an extremely high level for several years in order to direct any available LNG towards North East Asia.