The next energy powerhouse

Into energy

Which group do you think would be the next dominant energy conglomerate in the medium to long term?

When it comes to power generation, the groups that readily come into minds are the Aboitiz and Lopez groups which have been entrenched in the power industry for generations. With the slew of reforms which was jumpstarted by the Electric Power Reform Act during the Ramos years and continuing to the present, the country has seen new formidable entrants to the power sector which bodes well for the industry and the country.

Which of these groups would come to dominate, or at least become a significant player in the energy sector, has been the topic of speculation by energy watchers.

Ramon Ang of San Miguel Corporation is being keenly watched as he is credited of transforming a stodgy food conglomerate into an energy player. He started by taking over Petron Corporation, and using this as a vehicle, expanded into Malaysia. Next, a huge chunk of Meralco, then some moves into power generation. Now Ang is talking big about upstream oil production.

The other large conglomerates are also suspects. The Ty group through a unit of GT Capital Holdings has been busy acquiring or putting up power assets mostly in the Visayas. The Consunjis have been testing the waters through a power unit of Semirara Mining Corporation. Even the group of Andrew Gotianun through Filinvest Development Corporation is putting up a 600 MW coal plant in Misamis Oriental.

What about--Ayala Corporation?

As of now, that might raise eyebrows as the group is better known for its iconic master planned property developments and banking (through Bank of the Philippine Islands). But since then, it has successfully branched into telecoms which gives the dominant carrier a run for its money, and water service.

Judging from its recent  pronouncements and actions, the group seems determined to stamp its mark in the energy industry.

At the recent stockholders' meeting, Eric Francia, the president of AC Energy Holdings of the Ayala group, revealed that the company has already committed US$325 m for four power projects already acquired or in advanced stage of development. The amount is part of the $700 m earmarked for upcoming power projects in the next few years.

Ayala debuted into energy a few years back by acquiring a 50% stake of 33 MW Bangui wind project from the original developers. At present, the group's equity interests in projects include a 20% of GNPower which is developing a 600 MW coal plant in Bataan; two 135-MW coal plants in Batangas in partnership with Trans-Asia Oil and Energy Development; and a mini-hydro project somewhere in Luzon.

These could represent just a start.

“Our strategy of record for AC Energy is to have a combination of conventional (or fossil-fuel) and renewable energy resources,"  Francia explained, which summed up a strategy combining reality to have conventional power sources together with renewables and hard-nosed business acumen which Ayala is renowned for.

That's why, according to Francia, the group leans towards competitively-priced conventional sources, but over time it sees a balanced portfolio of conventional and renewable sources. But that should take time. That makes sense.

Given its track record on other businesses by taking a long term view, the Ayala group cannot be ruled out as a dominant energy player, even if it has no previous record. When it acquired a small telecommunication outfit named Globe-Mackay, it had no telecom experience, but nevertheless transformed it to second-largest telecommunications firm GlobeTelecom. It acquired a much maligned government water service unit and developed it to a reliable--and profitable--service provider Manila Water Corporation despite having no prior exposure to the water distribution business.

Most importantly, it has the necessary capital firepower to undertake costly projects like power generating plants.

The oldest conglomerate may yet turn out to be the youngest dominant power player.

The Fitch ratings upgrade is welcome, but...

Bangui wind turbines. From Flickr

Before this Administration drum-beaters capitalize on the recent upgrade of the Philippines by Fitch ratings agency to investment grade by blowing its own horn to prop up its candidates this coming elections, it is better for it to go on a Lenten retreat and reflect it's (upgrade) ramifications.

Specifically, Fitch gave credit to Arroyo's--not the present--administration for laying the economic foundations into what we have now.
That's a sobering thought.

Perhaps, the most  prescient reaction to the upgrade is that of William Pesek in his piece he wrote yesterday for Bloomberg. In it he said that the "sick man of Asia" has the unique ability to disappoint even the most hardened optimists. And for good reasons. While he lauded Aquino's administration for its drive for more transparency in governance by punishing his predecessor and ousting a former chief justice, putting a cap on runaway overpopulation and addressing chronic tax evasion, he wondered aloud,"where does Aquino go from here?"

Specifically, he is worried if Aquino's successor would have a divergent view on reforms that could unravel what has been achieved so far. But it won't require a new president with different ideas to nullify the ratings upgrade.

It only requires that we fail to manage and improve our the basic infrastructures  that are hounding economic progress.

Just yesterday, my flight to Manila was delayed due what was euphemistically called "air traffic congestion" which actually demonstrates the inadequacy of our transportation systems.  The creation of modern international airports and improvement of existing ones have been have been priority projects at the start of this Administration, but none seemed to have taken off. Even what looked like a simple project such as the expansion of the Mactan international airport has been bogged down by changes in the bidding procedures and likely political posturing.

Major road  and transportation projects which are the pillars of the much-touted public-private partnership (PPP) program have not even broken ground. What happened to the Daang-Hari interconnection, the extension of our light rail transport system and the planned ports?

The other pillar that needs to be strengthened is the power sector. Here, the Administration deserves a grade of at most a "C", for going into the motion of trying to.

Consider for example, the feed-in tariff (FIT) system which ought to jump-start the use of renewable energy sources such as wind and solar by guaranteeing a reasonable price of power generated by renewable energy companies.  The renewable energy law was passed in 2008 but the feed-in tariff mechanism was only released July of last year or four years later, and only solar projects of between one and 3 MW would hopefully stand to benefit starting next year, according to Mario Marasigan, the energy department's renewable energy bureau chief revealed in an interview with reporters a few days ago.

Forget about those for geothermal and wind; that would be three to five years away, he added. The government has not even approved any of the hundred or so projects that have been submitted for consideration under the renewable energy act.

Marasigan's lame excuse for the snail-paced roll-out is that the government was introducing a completely new energy financing scheme and this took time to get right.

Don't be kidding.

The feed-in tariff scheme has been around for so long and this has been credited for the ballooning of renewable energy projects in major countries such as the United States and Germany since the 1990s. We have been articulating for a speedy resolution of the scheme a long time ago in several posts such as this one.

In the meantime, halfway through the term of the present administration, no significant capacity has been added to the power grid.

Let's come back to what Pesek warns: "Every five years or so, markets get all excited about change in the Philippines only to regret it. That makes it a fool's errand to predict turning points in this most erratic of Asian economies."

He might be proved correct.

And the early Easter gift by Fitch might turn up to be an egg.

Mindanao's power calvary

When President Benigno Aquino III declared yesterday that the people of Mindanao, which has been suffering from rotating brownouts for years now, will have to pay more for their power consumption, he is merely stating the inevitable and obvious. It is also and admission of failure of this Administration to address the lingering power problem in Mindanao as well as in the Visayas.

We have already said almost verbatim the same thing years back in a post. Reading my post again gives me goose pimples when I realized much of what I said then have come to pass.

“The power rates will go up in Mindanao because the choice is a higher power rate or no power. And many of those we’ve spoken to understood the necessity for higher rates, and they’re amenable to this, instead of no power at all,” he said during an ambush interview at a Pasay City bus terminal on Tuesday. What a message to Filipinos leaving to the provinces to observe the solemnity of the Lenten season.

No, I disagree that those whom he talked to are amenable to this. Are you?

Like good Christians we are more like submitting ourselves to bad governance and inadequate planning. We are carrying this cross of bad governance to our Calvary.

Pnoy was saying this in the context of DOE's plans to buy "modular" diesel-powered plants as a stop-gap measure until 2015 when the coal-fired plants start coming in. This was the plan presented by politician-turned-DOE secretary to Pnoy.

The idea is, the plants can be set up in as little as six months to at most one year. He also claimed, or rather being advised, that "[b]y 2015, we expect the problem to largely go away—by that time, we’ll have good surplus. That’s the time the (coal)  power plants go on line". Considering the procurement and setting up process alone, six months is a pipe dream. What about the permits and other bureaucratic requirements?

It seems that the president is ill-advised. The "solution" forwarded by Petilla is uncannily similar to what then DOE Secretary Rene Almendras proposed early 2012: sale of diesel-fueled power barges owned by the government. If that was a success, we won't be in dire situation today. Now how different is the current DOE secretary's proposal?

The numbers don't even add up. We even put a conservative 3% annual energy growth then (if we are to maintain the  economic growth at about 5.5 - 6, the energy demand would be nearer to 5 than 3%), and the power plants under advanced construction wouldn't put a dent on the demand.

The news report also quoted that at present, Mindanao has a power shortfall of 294 megawatts. The demand is at 1,157 MW while the actual supply is only 863 MW. But how much of this in dependable supply? The 300 MW to come online in 2015 quoted by the President is only enough to cover this shortfall at present. (For more of the coal plants coming on line, see this.)

How would we power the power-hungry new mines? New mines and sprouting subdivisions and malls if we are to believe in a peace dividend upon the cessation of political hostilities in Mindanao. We are not even factoring in the continuing siltation at Agus  or the aging diesel plants that are still in operation.

For a healthy economy to keep chugging along, the rule of thumb is, there should be a reserve supply of at least 30% more. Advanced and some developing countries have reserves of 40% or  more.

Just this afternoon, we have gained the coveted investment grade rating from Fitch. What it means is that the Philippines is safe enough to invest in. Imagine if a portion of the expected foreign  investment is poured into Mindanao.

At the very least, Aquino should refrain from recycling politicians into his Cabinet, especially like the sensitive and critical Department of Energy. How many DOE secretaries did we have in the last 5 years? Every time a new face sits at the DOE throne, all the pending and ongoing projects are delayed, scratched or "reviewed". We have not had any technocrat at the helm of DOE since the late Geronimo Velasco of Marcos' time, except probably Mr. Vince Perez.

In the meantime we can only shed tears and watch the people of Mindanao carrying the power shortage cross to Calvary. I don't want to see them nailed there.
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Note added on April 8: Napocor has warned that Mindanao power situation will get worse next month (May) due to decreasing water levels at Lake Lanao. The deficit is now 121 MW.

Methane hydrate deposits in the country?

State-owned Japan Oil, Gas & Metals National Corp. revealed March 12 that it produced gas in the world’s first offshore test to extract the fuel known as methane hydrate which is trapped in ice below the seabed off the  east coast  of Japan. It will be joined by  Natural Gas Corp. (ONGC), India’s biggest energy explorer, to try to produce the fuel, according to two officials at the regulator Directorate General of Hydrocarbons.

Methane hydrate?

For the average person, this potential source of unlimited fuel is virtually unknown and most energy planners may not have heard of it or it is not on their radar screens. But that situation would not last long.

 Methane hydrate, known in chemistry as methane clathrate, is an ice-like solid composed of  a methane molecule surrounded by several molecules of water.  Methane hydrates form under the low temperatures and high pressures of the ocean floor, usually at depths greater than about 575 meters, at the underlying sediments to about 225 m and  beneath Arctic permafrost.

It was first discovered off the coast of Guatemala during a deep drilling project in 1982 and remained a scientific curiosity for years until  the late 1990s when sufficient number of similar deposits have been detected or discovered and its possibility as a source of energy has been raised.

The catch is, there is no technology that could commercially extract the resource. The joint effort of the two companies attempts to prove that it could be done.

In the laboratory and pilot scale, extraction procedures have been tested and some of these look promising. The obvious method is depressurization to release methane from the lattice. But the biggest stumbling block is how to control the process since the hydrate exists under high pressure, and rapid depressurization could lead to catastrophic blow outs. An alternative suggestion is to displace the methane from the ice lattice using another gas such as waste carbon dioxide.

The possibility that the resource can be harnessed may have been unwittingly discovered by the Russians as early as 1970. In the  Messoyakha gas field of western Siberia,  Russian engineers were pumping natural gas from beneath the permafrost and piping it  across the wasteland to a large metal smelter. By the end of the decade, they ought to have exhausted the gas supply based on standard scientific estimates. But, lo and behold! The gas keeps on flowing, even up to the present. They thought that they have tapped a hidden reservoir beneath the identified field. However, exhaustive experiments revealed that the gas was seeping from the permafrost above. Now it is inferred that the field is in fact tapping a methane hydrate reservoir.

The current estimates of the volume of deposits discovered or inferred boggles the mind. Suffice is it to say that the quoted amount far more exceeds the total hydrocarbon deposits in the world. If only a fraction of it could be harnessed, the world would become self-sufficient in fuel energy. That's why the New Scientist online magazine dubbed it the next fossil fuel.

For this country, what is intriguing that in the updated map shown below (courtesy of the U.S. Geological Survey) of known or inferred methane hydrate deposits, the Philippines has been identified to have at least one. Based on the pressure and temperature regions of stability of this material, the country would have enormous potential.

It doesn't hurt if our researchers and energy planners look ahead into the future and examine the possibilities from methane hydrate.

Japan is showing the way.

Think big oil

Think big.

If you want to get ahead in life and be wildly successful in business, this is the counsel of the inimitable Donald J Trump in his book of the same title.

San Miguel Corp  (PSE: SMC) president Ramon Ang must have taken heed of this counsel when he recently declared that his diversifying conglomerate is looking for a big oil or natural gas field as its next target for acquisition.

“If we are able to buy one of those, it would be like printing money forever,” Ang said as a matter- of- factly.

Well, not exactly. That could happen if you execute your plan flawlessly. While big oil is big business, it has its share of gargantuan risks. One thing, nation owners could suddenly gain epiphany that the resources that lie within their borders belong to their people (clap! clap! for the grandstanding) and seize your oil assets. Look at what happened to Venezuela when Hugo Chavez—bless his soul—seized control of the country. Or to neighboring Argentina when its president Cristina Fernandez forcibly took control of ownership of Spain-owned YPF Repsol.

Or you could have a blow-out as in the Gulf of Mexico resulting to oil spill that cost the oil rig owner billions of dollars in damages, or you tanker runs aground somewhere in Alaska and oil spills out causing catastrophic environmental damage.

There are also risks caused deliberately.  Militants may attack your facilities as in Algeria, or the Arab spring erupts in your area of operations as in Libya and Syria.

All of these are surely at the back of Ang’s mind when he uttered those words. But, if your business has to grow, take heed of Trump’s next piece of advice: Take chances. Be a doer, not only a dreamer.

“We have a full force of people pursuing these deals,” Ang reveals.

Surely, he must be kind enough to help develop our struggling miniscule oil field prospects off the coast of Palawan? Oh, no, “those are toys”. Kind of small for his taste.

Credit and salutation should go to Ang just for thinking along those lines if one were to think about the future of this country. We are one of the few countries in Asia which do not have an oil champion seeking oil production outside the borders. Even our small neighbours are doing that. Malaysia has Petronas combing for opportunities and Thailand’s PTT following a similar plan.

It seems Ang is dead serious about his plan, no matter what the costs. Even if he has to let go of major assets like its brewery business or its power generation projects under SMC Global Power Holdings which are only taking off as we write.

“In business there is no such thing as sentimental value”, Ang mused.

Let’s sit and watch Ang’s designs unfolding.

Coal's call

Lately, coal has been in the news owing to the recent accident at the coal mine belonging to Semirara Mining Corporation (PSE:SCC) in Antique where 5 workers were confirmed dead. The tragedy highlights risks in mining, and anti-mining groups pounced on the incident to bolster their position against the industry. At the capital markets, SCC and its parent DMCI Holdings (PSE:DMC), being listed companies, have suffered sell-down immediately after the accident.

But the incident is not wholly a mining concern.  It is more about energy—our precarious energy situation in particular.

At about the same time as the accident, the Department of Energy (DOE) awarded service contracts to explore and develop 11 prospective coal blocks to eight companies. These coal blocks were auctioned off by the government in 2011 under the Philippine Energy Contracting Round.

The “winning proponents”  include Altura Mining for Area 3 (Catanduanes); Semirara Mining Corp. for Areas 9 (Oriental Mindoro) and 25B (Sarangani); Empire Asia for Area 18B (Surigao del Sur); SKI Mining for Area 19A (Agusan del Sur and Surigao del Sur); PNOC Exploration Corp for Areas 19B (Agusan del Sur and Surigao del Sur), 29 (Zamboanga Sibugay) and 30A (Zamboanga Sibugay); South Davao Developement Co. for Area 8 (Occidental Mindoro); Blackstone Mineral Resources for Area 27 (Zamboanga Sibugay) and Mega Phils. Inc. for Area 23 (South Cotabato, Sultan Kudarat and Sarangani).

As an aside, very recently Coal Asia Holdings (PSE: COAL) which is a pure play on coal, launched its initial public offering (IPO) at the Philippine Stock Exchange.

Why the upsurge in coal exploration and development despite coal world prices scraping near historical lows?

The Aquino government has trumpeted as its major achievement the 6.6% economic growth in 2012, and it this growth were to be sustained in the coming years, the country needs additional power—lots of it.

And if we need reliable power at the shortest time possible, the source would be coal-fired plants by default. Developing a coal-fired power plant does not require stringent requirements for a location, fuel is plentiful and the banks are more than happy to finance such low risk project. About the only most critical path to the project is getting the Environmental Clearance Certificate (ECC) and how to appease environmental protesters who would unfailingly raise ruckus against any power project.

Power generation from coal is undeniably not clean energy but economic considerations could trump pure environmentalism. That is why the major power plants that are coming on stream in the next few years would be coal-fired. Aboitiz Power Corp. (PSE:AP) alone is planning a total of 1,300 MW coal fired facilities to add to the Luzon and Mindanao grids in four years’ time. These are the 400 MW expansion of the existing Pagbilao plant, a 300 MW Davao plant and a 600 MW plant to be put up at Subic.  The Alcantara group which is based in Mindanao, through publicly-listed Alsons Consolidated Resources Inc. (PSE:ACR) has, in its pipeline, a 105 MW plant in Zamboanga and a 210 MW plant in Sarangani.  GT Capital Holdings (PSE: GTCAP) which is a major power player in the Visayas through its power subsidiaries, is planning two coal-based power projects. Even new-comer in the power industry AC Energy Holdings of the Ayala Group (PSE: AC) is planning to put up a 135 MW coal plant in Iloilo together with A Brown Inc. (PSE:BRN), and a 135 MW plant in Batangas (with Trans-Asia Oil and Energy Development (PSE: TA)); and it has a 17.1% stake in a 600 MW facility in Bataan owned by GNPower Mariveles Coal Plant Ltd. which is slated to come into operations by May of this year.

Clearly, it’s coal’s call this time.

Criticize coal plants to high heavens, but they may well be our salvation against debilitating brownouts that could derail our climb from  impoverishment to prosperity.

Resurrection

In the past couple of years, followers have repeatedly asked why this blog has virtually stopped. Well, the main reason is that I have been engaged exclusively to work for a major energy company and in order to avoid any possible conflict of interest, the blog has to be set aside in the meantime.  

But then, nagging energy issues both national and international, have piled up and by default, I have been remiss in my duty to at least contribute to the discussions on these issues as a citizen and as an energy professional. 

Hence, this revival.

Locally, some of the issues/topics that need to be elaborated and debated upon include:

1. The looming power crisis (if we are not there yet) especially in Mindanao;

2. Development--or lack of it—of renewable energy projects like wind, solar and geothermal despite the passage long ago of the renewable energy act;

3. The energy policies/ideas of the incoming Energy Secretary;

4. The perennial high cost of power;

And so on.

The larger picture at the international level will not be left out. 

And of course, the exciting developments in the laboratories and research centers that would greatly impact the future use and development of energy sources. 

There will also be physical changes in the  presentation.

As they say in advertising, “Watch out this space”.

EDC subsidiary acquires the Palinpinon and Tongonan geothermal plants

No surprise there.
Green Core Geothermal Inc. of the Lopez- group, is set to take over the 192.5 MW Palinpinon  and the 112.5 MW Tongonan geothermal power plants as it posted yesterday a higher bid of $220 million over that of its lone rival, according to the Power Sector Assets and Liabilities Management Corp. (PSALM), the government agency tasked to privatize the power assets of the government.
The other bidder was Therma Power Visayas, Inc., a unit of the Abotiz group of companies which is one of the dominant local players in the power industry, which put in a bid of $200 m. According to PSALM representative Conrad Tolentino, the winning bid topped the government’s reserve price for the assets.
Green Core is completely owned by First Luzon Geothermal Energy Corp., which is in turn a full subsidiary of listed geothermal developer Energy Development Corp. (PSE: EDC). EDC, meanwhile, is majority-owned by First Gen Corp. (PSE: FGEN), the power generation arm of the Lopez group.
From the very beginning and from the nature of the assets, bidding is heavily tilted towards EDC.
The Palinpinon geothermal complex consists of the 112.5- MW Palinpinon 1 and the Palinpinon 2 which counts four 20-MW modular generating units.  All the units have been supplied with steam from the production field owned by EDC based on a steam sales agreement between the field operator and the power plant management (formerly, the National Power Corp., or NPC).
The original supply contract calls for a 75% “take-or-pay” in which the steam supplier is guaranteed payment of this amount whether or not the plant operator could operate the plant at rated capacity. Prior to the sale, the steam sales agreement was modified to become similar to that of the contract between the field and plant operators at Tiwi-Makban.
Many potential investors consider the provisions of the contract “onerous” and a major disincentive to acquisition. EDC, upon acquisition of the plants, will be immune to the effects of the provisions since it is the steam supplier in the first place, and has heavily influenced the final outcome of the contract since it is a party to it.
Moreover, being both the steam supplier and power plant operator, EDC will realize synergistic cost benefits which would be absent for any other acquirer.
As an added bonus, EDC can now operate the plants at its maximum capacity. At present, EDC just supplies steam to the plants at about the contractual obligation of 75% capacity. Owing to some provision of the existing contract--in particular, to the proviso that the power plant operator could use steam at no cost the steam gas ejectors (a necessary component to operate the plant)--it would not make perfect economic sense to supply more than the contractual amount. That constraint is now removed.
The Palinpinon plant has been on the auction block for some time. The sale could not proceed however, since an attached steam sales contract (a necessary sweetener to potential investors) still has to be approved by the Joint Congressional Power Commission, and PSALM had no choice but to move back the auction to 2009. With the steam supplier getting the power plant, that issue has become moot and academic.
For the case of the 112.5-MW Tongonan 1 power plant, it sits in the middle of the EDC-owned steam fields, surrounded by other power plants which are now owned by EDC, but which used to be owned by build-operate-transfer (BOT) foreign contractors. The steam sales contract is similar to that with Palinpinon.
Theoretically, the Tongonan-1 plant steam supply would be dictated by EDC, and could be given less priority in distributing steam, when supply becomes tight. At best, it could be supplied with the minimum contractual steam requirement under trying conditions.
Good if steam is plentiful, but this might not be the case.  According to a recent quarterly report filed by EDC to the Philippine Stock Exchange (PSE), its net income has been severely impacted by capital expenditures associated with augmenting the steam supply at the Greater Tongonan geothermal field.
In the end, all these costs and risks are factored in when an outside investor examines the asset for possible acquisition. The bottom line is, the outside investor will have to place a bid which is low enough if one is to reap returns to its shareholders down the road.  This is likely the reason why EDC lost in the Tiwi-Makban bidding, where the field is operated by another party, Chevron.
No such constraint faces the field operator. It can comfortably bid higher than potential rivals knowing that it could reap cost benefits due to synergy. More importantly, it has the built-in advantage of knowing the nature and the cost of production of the fuel—that of steam.
Foreign investors have probably done their due diligence and didn’t like what they see.
So it seems the Palinpinon and Tongonan 1 geothermal plants have been handed to EDC on a silver platter by PSALM.

Is wind energy poised to take off in the Philippines?

Recent pronouncements by various investor groups seem to indicate that wind energy use for power generation in the country is about to blow hard.

Three groups have recently submitted proposals to the Department of Energy (DOE) to undertake wind power projects in various parts of the country. These are: Energy Development Corporation (PSE: EDC) with proposed projects in Burgos, Ilocos Norte; Northern Luzon UPC Asia Corp. in Pagudpud, Ilocos Norte; while PetroEnergy Resources Corp. (PSE: PERC) has identified sites in Sual, Pangasinan, and Nabas, Aklan.

The proposals of these companies have pre-qualified according to the requirements of the DOE, according to Energy Assistant Secretary Mario Marasigan. The DOE is ready to give them the green light to go ahead with the projects.

Waiting in the wings include the local unit of Korea Electric Power Corp. (KEPCO) which plans to undertake renewable energy projects like wind and hydropower with the government-owned Philippine National Oil Co.-Renewable Corp. (PNOC-RC); and Trans-Asia Oil and Energy Corporation (PSE: TA) of the PHINMA group which is reported to have conducted preliminary studies.

The three committed wind projects could generate up to 200-MW of power, according to Marasigan, but this amount is but a fraction of the often-quoted 76,600 MW of wind potential the country could offer.

The growing interest in wind energy could be partly attributed to the passage of the Renewable Energy Act of 2008 which offers fiscal incentives such as income tax-holidays, tax-free importation of capital equipment, and tax-free carbon credits to RE projects. But what could accelerate the growth of such projects are the non-fiscal incentives such as the renewable portfolio standards (RPS) which require electricity distributors to source a percentage of their requirement from RE sources, and feed-in tariff scheme which tries to level the playing field in the power sector for the RE producers against traditional (fossil-fuel) generators.

These two last incentives have been credited with the explosive growth of wind energy particularly in the Unites States, Germany and Spain. However, our own similar policies have not really been given due clarification from responsible agencies of the government. Until, and only when, the implementing rules and regulations for these incentives are sufficiently clear will these companies fast-track their projects.

Northwind Development Corp., the developer and operator of the 33-MW wind farm at Bangui Bay, Ilocos Norte, has shown that given favorable circumstances, a wind project can be viable under local conditions. Aside from supplying 40% of the power needs of Ilocos Norte Electric Cooperative, the wind farm has boosted local tourism with its majestic turbines appearing in postcard pictures posted in Flickr and other websites.

But these wind energy projects can only really take-off given a push of a tail wind in the form of a clear renewable portfolio standards and an attractive feed-in tariff scheme.

PSALM to dispose Limay power plant by end of the month

And then there were...none?

At the rate investor interest is waning on privatization sale of the 620-MW Limay power plant complex in Bataan, the Power Sector Assets and Liabilities Management (PSALM) Corp. would be hard-pressed to successfully conclude the sale to private investors by the end of this month.

Already, this target has moved from last month’ schedule.

This time, “we are hoping to complete the privatization of Limay by the end of this month,” PSALM president Jose Ibazeta said. From the tone of his statement, he might as well cross his fingers and wait for a new investor to come out of the blue to snatch the asset.

In 2008, PSALM counted as many as seven groups showing some interest (read: we’d like to have a peek). But during the actual two past bidding in April and September of 2008, only one bidder submitted the required documents which automatically made the sale failures.

This time should be better since PSALM counted three groups still interested.

One of them, the San Miguel group which has been all over the energy landscape lately picking power assets like apples, has already turned bland on Limay because converting it to use other types of fuel was expensive, according to San Miguel’s consultant Alan Ortiz.

PSALM believes the Aboitiz group is still interested, but the latter has its hands full on other projects like the newly-acquired Tiwi-Makban geothermal complex and hydro projects in Mindanao.

The third group remains unidentified.

What makes Limay a difficult sale?

The power complex is composed of two 310-MW identical modules, each comprising of 3 70-MW gas turbines and a 100-MW steam engine. So, 420-MW of its capacity runs on expensive fuel. To make it competitive, the power generators have to be converted to run on cheaper fuel—coal, for instance. This is probably the conversion cost Ortiz is talking about.

Worse, the plants do not have any power purchase agreement attached to the sale. That is, the new owners would have to sell the generation to the wholesale electricity spot market (WESM) where the cheapest power is likely to be dispatched first.

One could very well create a captive market by developing the surrounding area as an industrial zone. This has been in the blueprint for some time. But unless you are an Andrew Tan or a Henry Sy (or at least you could talk to any of them to cast a few billion pesos) you’d better stake your luck somewhere else. At this point when the image of a recovery in the horizon could only be a mirage on the desert of the worldwide recession, creating an artificial oasis is just nuts.

So what value is left?

You might be wondering why after a building is razed to the ground, an army of scavengers starts circling the devastation. Yes, people could see value amid the destruction—in the form of scrap metal that could be salvaged and recycled.

Selling it as such is not really a bad idea. Many of PSALM’s decommissioned plants ended up on the scrap yard. But Limay was only constructed in 1993; surely there must be value left of it. For some decommissioned plants, the underlying land could be a valuable piece of real estate.

The right to own and operate a power plant in itself is a valuable asset. Try to go through the hassles of getting an ECC (Environmental Compliance Certificate) for a greenfield project. You would probably wait 3-5 years before the cornerstone can be laid down.

The odds of a successful sale of Limay are stacked against PSALM. With luck, it could very well dispose the asset.

But definitely not at the price and terms of its liking.

_______

Note added, August 28, 2009: The other day, reports say that the energy unit of San Miguel offered $13.5 M for the asset. At that ridiculous price, the new owners seemed to have bought scrap metal. PSALM apparently agreed to it. I am reminded of a slogan in a pizza parlor: We have no problem if others sell at a low price; they know what their products are worth.

Added, Sep 6, 2009: An SMC spokesperson said they planned to spend $350 million to convert the plant into gas-fired type. Ah, OK.

Arroyo forgets the fourth “E” in her SONA

Well, almost.

In her supposedly last State of the Nation (SONA) address yesterday before Congress, President Gloria Macapagal-Arroyo talked mainly in glowing terms, about her administration’s achievements since she first came into office in 2001.

Yes, the GDP grew from $86 billion in 2001 to $187 billion as of last year, and we have had 33 quarters of uninterrupted growth. The figures are cast in stone, so it is almost impossible to dispute these. What is not mentioned though is that the GDP number for instance is puny compared to our neighbors’ and it does not tell anything about the distribution of wealth. Our growth rates are tepid at best compared to the sizzle at some of our neighboring countries.

The achievement, she says, were accomplished due to her administration’s focus on three E’s—economy, education and environment—which are considered pillars of the economic progress. What was given a casual mention was the fourth E—energy—which I would consider to be one of the basic infrastructures to be given priority if the country were to progress beyond mediocrity. The other two are transportation and telecommunications.

She touted the passing of the EPIRA—the Electric Power Industry Reform Act of 2001—as a cornerstone on the path of reform, but forgot to point out that after nine years, the promised benefits of the energy liberalization has not taken hold: the target level of 70% of the power asset privatization has not been achieved, while the assigning of Independent Power Producers (IPP) administration has not really budged from first base.

These two requirements have stymied the real opening of a competitive power sector.

She also mentioned the passage of two landmark pieces of legislation on energy—the Biofuels Act of 2006 and the Renewable Energy Act of 2008—as part of her crowning glory, but the situation on the ground is not that impressive.

True, the mandated biodiesel content of 2% and an ethanol mix of 10% have been implemented, but there’s not much push to higher biodiesel or ethanol mix. No, the motorists should not be compelled to use them; but they should be educated on the advantages and limitations of these fuels mix.

The RE Act on the other hand, was passed on the philosophy that if you build it, they will come. No such torrent of new investments in renewable energy sources could be felt. Intentions are there, but laying down upfront cash is altogether different.

Part of the reason is that the implementing rules and regulations (IRR) of the Act has only come out very recently—almost a year since the bill was enacted into law. Even then, the detailed IRR of two of the most important provisions, those of the feed-in tariff and the renewable portfolio standards (RPS), are sorely lacking. Without these, investments in renewable energy resources, in particular, solar and wind could not be expected to take off.

Arroyo claimed that with these twin Acts, the populace should expect lower electricity bills soon. It is not clear however, how this would come about. On the contrary, without an attractive feed-in tariff and a well-defined RPS, investments in renewable energy would in fact jack up the prices of electricity.

Perhaps the lack of firm commitment or a report card on energy is a tacit acknowledgment that much is still needed to be done on this sector, if the country is to leapfrog forward and not just nonchalantly chug along.

Perhaps omission of the fourth “E” in the SONA was deliberate.

India squirms at “legally binding” limits of carbon emissions—shall we?

During the U.S.  Secretary of State Hillary Clinton’, visit to India last Sunday, where she heaped praises to that country’s efforts to curb carbon emissions, the local Environmental Minister Jairam Ramesh loudly thought otherwise. He said his country won’t agree to “legally binding” limits on greenhouse gases (GHG).

That remark couldn’t have come to an importune time as the minister escorted the ever graceful Clinton during the tour at ITC Green Center outside the Indian capital. She called the center “a monument to the future”, a testimony to India’s efforts towards cleaner energy sources.  Ramesh, however, pointed out that India is among the major countries which pledged recently to join the efforts to limit global warming by curbing carbon emissions.

But behind that facade of diplomatese lies a brewing conflict between the developed countries represented by the United States on one hand and the industrializing economies typified by India, over GHG emission limits.

Clinton’s smiles can easily disarm a gentleman like Ramesh, but she did not come to India to relish the splendour of Taj Majal. She was there to arm-twist India to accept her boss U.S. President Barack Obama’s cap-and trade plan as a means of weaning his country from fossil-based “dirty” energy sources like coal and oil.

Briefly, the cap-and-trade plan, which is becoming a contentious issue at par with Afghanistan at Capitol Hill, is a series of proposed legislation that makes power generation from fossil fuels more expensive by capping the amount of GHG emissions allowed from these sources. The polluting sources are only given certain emissions credits which they can trade if they have excess credits—hence the “trade” portion.

The current Obama proposal calls for an eventual 83% reduction from 2005 levels by 2050, and a do-able 14% reduction by 2020. And, yes, his bookies say that the government stands to gain $646 billion between 2012 and 2019 from the auction of carbon credits.

Obama cruised to the presidency partly riding on the promise to the American people of a cleaner future—and he is just doing that with the plan. For the American government, the plan is actually a tightrope policy of appeasing both the green movement and the coal industry which supplies roughly half of the power needs of the country. Outright banning of coal, or even a significant reduction of its use, would severely cripple the mightiest economy on earth.

American legislators know that such plan carries enormous costs, and protagonists from both sides of the divide are cranking out arguments and associated costs to support their contention. Nobody knows what the final costs would be, but one thing is sure: the American people would be facing increased electricity costs, despite the claims that money raised from the exercise could be plowed back into the economy.

To give you an idea on what electricity rates increases Americans could expect from the floated  cap and trade plan, utility operators estimate that price increases could range from a low of 40% to as high as 120% for coal-dependent states such as Oregon.

But what’s India—and the developing countries, including the Philippines—got to do with America’s internal energy policy?

Plenty.  U.S. policymakers and think tanks have already figured out, that with the increase in energy costs, the economy would come to a crawl, and the country’s competitiveness on the global arena would be acutely debased.

Which is why for the plan to be viable, the U.S. must enlist the cooperation of the fastest developing economies like India and China, by urging them to do likewise. Or using strong- arm tactics.

But India, which is growing at an average of 8% a year, cannot afford that its march to progress would be derailed by caps imposed from outside.

No, India is not running away from its commitment to cleaner future; “we are simply not in a position to take on legally binding emission targets,” Ramesh insists.

It may not be readily obvious, but people in the third world, who are consuming a fraction of energy per capita compared to their counterparts in developed economies, couldn’t simply have their angst for more power curtailed. The alternative is further slide into abject poverty.

If it were not for the associated cost, it would be pleasant to dream of fresh air every day throughout one’s life, brought about by clean sources of energy. Yes, Americans may grumble about increased electricity bills. They may have to learn to switch off their plasma TVs when not in use. Some may just bear and grin it, but somehow, other expenses will have to be pruned down. Such scenario could put more strain to people who have borne the brunt of the current recession which is considered the worst since the 1930s.

But for the millions of people in Asia and Africa, curtailing power use could mean complete darkness after dusk, or scaling down production at the micro-enterprises which could barely provide subsistence in the first place. That is, if they already have rudimentary electrical power in the first place.

Yes, mercury is still being emitted by coal plants, but will all of it finds its way to the human ecosystem?  Yes, pound for pound, a coal plant emits far more carbon dioxide than any of the alternative, albeit more costly, sources. The mightiest power on earth knows this, but it is powerless to scale down drastically its own coal usage. And for one reason: cost.

Yes, any sane person would love to dismantle all the fossil-fuel plants for the sake of a healthy future, but then, at this point in time, a major problem facing the country is still lingering poverty.

Would we buckle down and dream on, or be pragmatic like India?

Would I trade an unknown, possibly bright future, with a more horrible present?

And I thought about my country.

I just cringed. 

DMCI Holdings bags Calaca coal-fired plant for $361.7 M

In a terse, one-sentence announcement, publicly-listed DMCI Holdings (PSE:DMC) said today it has acquired the 600-MW coal-fired power plant from the Power Sector Assets and Liabilities Management Corporation (PSALM), the government agency tasked with the privatization of power assets, for $ 361.7 million which is the highest among the participating bids.

DMCI Holdings, controlled by the Consunji family, has interests in construction, tollway operation, water services, coal mining and real estate among others. Its subsidiary, Semirara Mining Corporation (PSE:SCC), is the largest coal producer in the country and supplies coal to local power plants including Calaca.

At the Philippine stock exchange, share prices of DMCI Holdings ballooned to P7.10 per share, up P0.50 or 7.58% while that of SCC climbed P3 to P38, up 8.57%. Apparently, investors have cheered the move since there is expected to be a synergy gained from the Calaca acquisition with SCC a major fuel supplier.

It can be recalled that the present winning bid is much less compared to the earlier winning bid of Suez Energy at $787 million for the same asset. Since then, Suez Energy backtracked on the project, losing a $14 million bid bond in the process.

The current bid is also not much higher than the highest bid at $280 million during the first auction of the asset, which was however rejected by PSALM because the price did not meet its base price. It is also at par with the last privatization, which is that of Tiwi-Makban geothermal complex when the Aboitiz group paid $0.6 million per MW. On a per MW basis, the price paid by DMCI amount exactly to the same amount.


The per-MW price is also reasonable compared to the construction of the similar 232-MW STEAG coal-fired plant in Mindanao at $305 million, or $1.31 million/MW.

It would appear then that our contention that Suez Energy merely cut its potential losses when it returned the assets to PSALM was justified. Including the forfeited bid bond, Suez Energy aborted a potential loss of $420 million if its bid is compared to that of the present winning bid.

At least, some sense of sanity has returned in valuing the power assets for sale by the government.

Minority Galoc partners bail out

If you and your friends discover a treasure trove that could provide you long term income, what would you do?

Sell out to your friends.

At least that was what two of the Filipino minority partners—Alcorn Gold Resources (PSE:APM) and Petroenergy Resources (PSE:PERC)-- in the Galoc oil production field did. On June 24, the consortium operating the Galoc field off Palawan declared the “commerciality” of the resource. Two days later, the aforementioned minority partners sold their interests (at 1.53 and 1.03% interests, respectively) to unnamed consortium members at $800,000 per percentage point.

The other participants in the project with their corresponding interests are as follows: Galoc Production Co. W.L.L. (58.29%); Nido Petroleum Phils Pty Ltd (22.28%); Philodrill Corp. (7.02%); Philodrill Corp. (7.02%; PSE:OV); Oriental Petroleum and Minerals (7.58%; PSE:OPM); and Forum Energy (2.27).

The identical reason cited by the minority partners is that their respective interests are too small to obtain a significant revenue stream considering the risks involved. Which could also be interpreted that the resource is not as good as it is touted to be.

The total amount of oil lifted from the field since October of last year has already exceeded 1.3 million bbls of oil, which is really a decent amount. The Department of Energy has been trumpeting that the field should produce from 17,000 to 20,000 bopd (barrels of oil per day) which corresponds to 6% of the country’s daily demand, but the operators are more circumspect, saying that the average production should be around 12,000 to 14,000 bopd. Nido Petroleum, one of the consortium members, and its parent firm listed at the Australian Stock Exchange (ASX:NDO), has a broader range of production target at 10,000 to 15,000 bopd, for planning purposes.

Unlike our energy planners, investors have not really been giving standing ovation at the seemingly sweet smell of money wafting from the oil patch. From a high of A$ 0.46 near the start of production, NDO’s share prices plummeted down to A$ 0.06 before recovering to current prices of about A$0.13 – 0.14. Share prices of the Filipino partner firms, all of which are listed at the local bourse, have not really been influenced to a significant degree from Galoc announcements.

The bailout of the minority partners tells more about the prospect than the official news.

First, the amount involved.

According to a presentation made by Nido, the revenues to be expected depends on the price of oil as well as the amount of production sown on the plot below at production levels between 10,000 and 15,000 bopd.

At a projected average oil price of between $65 to $70/bbl for the year 2009 (The price has since dropped to about $62, from about a high of $73, but that is another story), Nido’s share of the revenues amounts to around $50 million (a conservative amount), which translates to about $220 million for the whole consortium. That means about $2.2 million per percentage point participation.

This is the amount of revenue expected by, say, PetroEnergy which has a 1.03% interest, for the whole of 2009. Compare this with its revenue of $1.8 million for the first quarter 2009 from its small interest in an oil field in Gabon, Africa, which could be annualized to $7.2 million assuming steady oil prices and production.

Now, according to the existing production sharing agreement, for every $100 oil revenue, $70 goes to cost recovery, $7.50 goes to so-called “Filipino participation incentive allowance"and $11.22 as production allowance to the operator. The rest is booked as profit, with $6.77 of it to the government and $4.51 to the investor participant.

Now, figure out the amount due to the minority participants.

Moneywise, there is a compelling reason to take the money today, and run, “considering the risks involved”, as the backtracking participants put it.

Second, the risks are real. Production has not been consistent, with the wells shut from December to February 25 this year due to technical problems. And lately, there has been an interruption “after the mooring and riser system was detached from its floating production storage and offloading facility”. In layman’s term, a technical problem.

Production wont be accelerated soon. At the moment the consortium is actively looking for a strategic partner to help foot the bill required for further development of the field.

We have also pointed out earlier that a potential field problem that could arise is sea water intrusion owing to the fractured geology of the area, as shown by the adjacent West Linapacan field which only produced a short time.

Bailing out early may prove to be a smart move for the minority participants.

Mindanao’s power woes

The Mindanao power situation is becoming a choice between the devil and the deep blue sea.

The devil of course, is the perceived polluting coal-fired power plants that are mulled to be erected in Mindanao to address the looming power shortage on the island. To be sure, Mindanao is not stuck up solely on coal plants. There are lesser “devils” around like the planned 50 MW Mindanao 3 geothermal plant project of Energy Development Corporation (PSE:EDC), which doesn’t sit well with environmentalists due to its proximity to the Mt. Apo National Park, and a 42-MW hydro project in Davao which has also attracted some opposition from locals.

The deep blue sea is more like pitch darkness due to expected brownouts if none of these projects could take off on time due to local opposition. The year of reckoning is pegged in 2015 by the Department of Energy when power demand completely outstrips supply assuming a conservative power growth of 3 % per annum, and the committed power projects are on track.

The reign of darkness could come earlier by 2012 if one or two of the bigger power projects are derailed. Or if big power-hungry projects like Hanjin’s shipbuilding facilities in Misamis Oriental and big malls come on stream to GenSan and other booming cities in southern Mindanao.

At the same time, the DOE considers this year as critical for the Mindanao power grid with peak demand reaching 1,525 MW.

One of these power projects to help alleviate Mindanao’s power shortage is the recently unveiled 200-MW coal-fired power plant to be built in Sarangani province by the Alcantara-led Conal Holdings Corp. at a cost of $450 million. The proponent claims that the plant is “on track” to operate in three years despite that fact that it is still in the development stage.

Conal Holdings is backed by the Electricity Generating Corporation (EGCO), one of the largest generating companies in Thailand and Southeast Asia.

The plants would be built in two stages: Stage 1 comprises a 100-MW unit and the whole facilities for the power station complex, while Stage 2 would be the second 100-MW unit which would be constructed within 24 months after the commencement of operations of the first unit. The second unit is targeted to be completed in 2014.

If coal plants are considered dirty, then why are these preferred by investor- developers?

Compared to other types of generating plants like hydro or geothermal, coal plants have the shortest time of completion, and theoretically, one could erect them just about everywhere. The fuel is not a problem since one could just get it from the open market.

Mindanao is no stranger to coal plants. The speed in which coal plants can be constructed if so desired is best exemplified by the record completion of the 232-MW STEAG coal-fired power plant in Misamis Oriental, a significant control of which has now been acquired by the Aboitiz group.

The apparent choice of coal is of course dictated in the end by economics. But with not much choice considering the looming crisis, Mindanao may not have much choice but must make a pact with the devil.

Or the people there may have to consider coal plants not the devil himself, but a fallen angel with some hope for redemption. The choice is easily made if one looks at the other side and sees nothing but an abyss of darkness.

Iran’s oil and the street battles

Strangely, world crude oil prices have been dropping since the contested elections in Iran.

Not even graphic pictures of bloodied demonstrators—who have been questioning the avowed re-election of Iran president Ahmadenijad—which have been streaming out of the Islamic Republic despite a clampdown on foreign reporting, could stem the decline.

While democratic proponents and civil liberties workers throughout the world have been watching the political and social developments lately, economists and business leaders have been scouring the market horizons for any signs of an oil price spike.

There ain’t any. It is unlikely that there will be, as a result of the tumultuous events on the streets of Tehran.

The concern is real since Iran is a major crude oil supplier to the world. Logic tells us that should the unrest spreads around the country, it could lead to shutting off the Iranian oil taps from its ports.

But the scenario is unlikely.

Revenues from its oil exports lubricate Iran’s economy, and its entrenched leaders would be ill-advised if the country leverages its oil production for concessions from the outside world. More so now that nagging questions about the veracity of election results, which have been violently expressed on the streets, could lead to more dollar shortage to the Iranian regime.

Whether by force or design, any stoppage of oil deliveries from Iranian ports would at best only cause a blip on world oil prices. Other OPEC countries which have been reining in its own oil production in hopes of improving prices, would gladly take the slack of Iranian oil.

Iran needs oil exports badly that it is finding ways to develop other sources of energy in lieu of oil.

Iran has been insisting that its nuclear program is basically for power production and for other peaceful purposes; and there are reasons for believing that it is so. As a scientist, I have visited the Iran’s atomic energy agency in the late ‘90s, and their world class scientists were more inclined to study non-weapons applications like isotopes production for agricultural and hydrological studies and nuclear power engineering.

They would rather have a large electrical generating plant powered by nuclear fuel than a plutonium enrichment plant. And the oil revenues saved could go a long way towards lining up the state coffers.

And why would the Iranians insist on developing its limited geothermal resources, like the one at Sabalan mountains northeast of Tehran, when it is far easier and cheaper to drill for oil on its vast untapped oil resources to obtain an equivalent amount of electrical power?

With the ugly turn of events on Tehran streets, one would have expected that the president of Iran’s nemesis, the United States, which regards itself as a bastion of democracy, would jump at the opportunity of bashing the Islamic republic. But no; U.S. President Barack Obama’s response to the unfolding events has been muted.

As if returning the complement, Iranian authorities have singled out the U.K.—not the “great Satan” the U.S.—as the prime “meddler” of the country’s internal affairs.

No, the turmoil in Iran wouldn’t cause a spike, or even a slow rise, of oil prices.

Oil prices, as well as stock markets around the globe, have been steadily rising since October of last year mainly due to hopes of recovery for the global economy. Now that signs of economic recovery are more like a mirage on the desert sun, the steady rise in oil prices is beginning to stall and major bourses have begun to take severe pounding lately.

San Miguel takes another pot shot at Indonesian coal

True to its avowed aim at diversification outside its core foods and beverages business, San Miguel Corporation (PSE: SMC) has reportedly trained its sights on acquiring a stake worth about $500 million in PT Adaro Energy (JSE: ADRO), Indonesia’s second=largest coal producer, according to news wires.

San Miguel president Ramon S Ang confirmed that his company is in talks with Goldman Sachs, its financial advisor on its diversification forays, on the planned acquisition but declined to say how much stake it is aiming for.

Bisnis Indonesia has reported that investors Goldman Sachs itself, hedge fund Farallon, Citigroup Global Special Situations Group and Atticus Investments Pte. Ltd. are looking at buyers for their combined 17% stake in the coal firm. Analysts say that these investors, who participated in the coal miner’s $1.3 billion initial public offering (IPO) last year, are looking to sell out at IDR 1,200 per share, given the uncertainty of coal prices amid global economic downturn.

Two members of the same consortium who has a combined 26% at the end of the IPO, the Government of Singapore Investment Corporation and Kerry Coal, are reportedly not keen on selling out at this time.

The other largest holders of the company are PT Saratoga Investama Sedaya which is owned by Indonesian entrepreneur Edwin Soeryadjaya and Teddy Rachmat, one of Indonesia’s richest businessmen, who own 32% each.

That asking price is just slightly above the IPO price of IDR 1,100 a share and the current prices which has hovered at the same level. The selling investors would still reap windfall profits since they have been long-time investors in the coal firm.

The planned sale was already expected given that the lockup period ended in March for these financial sponsors.

Would this foray into an unrelated business from its core food competence be good for San Miguel and its shareholders?

Hard to say at this time.

During the last two years, SMC has weaned itself from the food business by taking a 27% in electricity distributor Manila Electric Company (Meralco, PSE: MER) and planning a majority stake in oil refiner petron Corporation (PSE: PCOR). It has also a joint venture in telecommunications with a foreign partner and is looking at entering the water distribution business locally.

Its intentions in Adaro is its second attempt at getting a foothold at Indonesian coal after its planned acquisition of a significant chunk of PT Bumi Resources (JSE: BUMI), Indonesia’s largest coal producer, fizzled out.

For sure, SMC won’t be calling the shots at Adaro since its planned 17% couldn’t exert significant management influence and control. It would be entering a business firm whose sole product coal is a commodity whose prices are subject to world economic movements.

When oil prices were rising, so did the coal prices. But when commodity prices collapsed, so did the latter.

At this time when the global economic downturn appears to be stretching longer than expected despite pronouncements of an imminent economic recovery, commodity prices including that of coal, may be struck in the doldrums for a long time.

That could mean that, should this deal push through, SMC investors would have to wait patiently before the firm’s Adaro stake could bear fruit.