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Posted February 23, 2021

Byron King

By Byron King

Life, Liberty and Electricity

The Texas disaster continues with electrical problems, water problems, massive property damage, logistical nightmares and widespread human suffering.

Houston propane line

Cold, wet and waiting in line in Houston for propane. Boston Globe.1

Texas is a mess on many levels. Even worse, this mess has become a political football with numerous competing narratives.

 

The past 12 or so days have been a massive shock to Texas in many ways. Texas attitude, culture, politics, industry, and regulation now all up for reconsideration.

 

Texas offers national implications, as well.

 

Nobody should feel secure about U.S. energy. Many regions of the country are one seismic, weather or manmade event away from something similar.

 

Say a prayer of thanks every time you flip the light switch and something good happens.

 

What we see in Texas might even be enough to prompt some positive change. Closer to home, though, on your end you may be able to invest in the upside. Ill address that in a moment.

 

Lets dig into this

 

As we saw over the past two weeks, the rest of life goes to pot in a huge hurry when you lose electricity.

 

Sure, you may be alive. And you might even think you have some semblance of liberty. Its America and all

 

But absent electricity, youre in a world of hurt. You can do almost nothing, because much of the big picture is out of your hands.

 

It reminds me of that great line by boxer Mike Tyson. Everybody has a plan, he said. But nobodys plan ever survives getting punched in the face.

 

Well, the Texas energy failure was (and remains) a serious whack to the head. Wham!

 

Details are rolling in while everybody is still arguing over what happened. Heres what we know: Windmills iced up. Gas lines froze. Coal couldnt meet the load. There was even trouble with a nuclear power plant.

 

Texas was a cascade of failures. One thing led to another, which fed something else. Its hard to say which domino knocked over which other domino.

 

But some people already have all the answers. For example, New York Congresswoman Alexandria Ocasio-Cortez (AOC) offered this insightful tweet:

AOC tweet

This is a Whiskey bar and all. But really Cmon, man. Thats total barstool analysis.

 

Word of advice: when you want to understand complex energy issues, you should beware seeking solutions from a former bartender.

 

Frankly, and contrary to AOC, if any state went hog wild for so-called green energy it was Texas. All those West Texas windmills speak for themselves. I discussed it here.

 

And arguably, those windmills werent so much energy projects as political showboats, just tax-subsidized, feel-good projects. That is, they were supported up and down the line with generous tax credits. The input-output and profit-loss of windmills is truly a case of voodoo economics.

 

Along these lines (and speaking of political favors), Texas regulators didnt mandate something as basic as heating systems for the windmills. A shame, because its very doable technology that works just fine in northern climates like oh Minnesota, if not Sweden.

 

And its not as if Texas weather doesnt get miserably bad, with Arctic-like blasts every decade or so. The ice of last week was not unanticipated.

 

Another thing Texas regulators failed to do was to mandate backup power for the windmills, such as redundant fossil fuel systems if not outright utility-scale battery storage. All because those backups would undermine the upfront economic case.

 

Meanwhile, lets not mince words about the fossil fuel side. More than a few Texas gas transmission systems failed. One reason has to do with how pumps and compressors stopped working up and down the pipeline network.

 

In the olden days, like 10 years ago, most compressor stations ran on gas pulled from pipeline flow. Suck a small fraction of gas out of the line, burn it, spin the turbines and keep the product moving. The gas in the line powers the line at each stage.

 

But in recent years, companies everywhere have been under pressure to show how green they are. Thus, many companies replaced gas power on the pipelines for wait for it electric pumps and compressors.

 

Hey, great! Every pumping or compressor station just lowered its CO2 footprint. But the system grew more and more reliant on third party electricity to keep the rotating machinery spinning.

 

With that Texas weather event last week, the overall grid experienced a rapid loss of generation in the face of spiking demand. Windmills tripped off. Electric power supply plummeted. Gas stopped flowing in many pipelines. And then more generation failed. It was a cascade.

 

Ironically, many Texans thought they had prepared for tough times by installing a generator. But many of those generators were hooked to public utility natural gas lines. So when the gas went down well, you know what happened.

 

Its enough to prompt you to buy an old Franklin stove and lay in a large supply of firewood or coal. (Hint, hint.)

 

We could spend all day discussing what happened. But lets focus more on whats going to happen as the ramifications and recriminations play out.

 

The good news is that Texas will upgrade its grid. The politics are inescapable. Its just a question of what technologies will benefit and who will pay for it.

 

Other good news is that the Texas disaster is a wakeup call for power systems across the U.S., Canada, Mexico and indeed the world. Again, there but for the accident of geography is pretty much everyone in our electrical age.

 

Here in the U.S., theres not much debate over the need for building and rebuilding new, long-distance transmission lines. Obviously, Texas requires far better integration to the national grid. Enough of that Texas Macho attitude. Join the world, people.

 

And meanwhile, many other parts of the national grid need significant repair. California comes to mind. The Brownout State, right?

 

But as the U.S. and North American grid realigns, what else will come with it?

 

Its a wide open question. More green plays? Kill off more and more fossil fuel systems? While building out more favored green plays like wind and solar?

 

Time will tell

 

Along those lines, consider what one energy expert has to say, PatrickPouyann, CEO of French energy giant Total, which is a player in both fossil fuels and the green space.

 

Begin just with the economics of the investment landscape. Pouyann argues that renewable energy assets are in a bubble. He recently said that markets across the globe have experienced a string of deals with crazy valuations, up to 25 and more times potential earnings.2

 

In essence, per Pouyann, theres a short supply of assets of a significant scale. Companies are scrambling in a land rush to acquire green acreage, and they are too scarce.

 

Along with this, Pouyann points out the failure of politicians and environmentalists to admit how much going green will cost energy consumers.

 

We have to face the reality that there is something wrong in the political debate, said Pouyann. People think its renewable so it should be free.

 

And nothing is free, right? Not sunshine or wind, especially not when you must build complex technology to harness it.

 

And this brings us back to the Texas problem, with a decade or more of windmill christenings. Impressive numbers, yes. But all that wind power was constructed on the cheap, without winterization or power backup for when the blades dont spin.

 

Meanwhile, money to build green things must come from somewhere. So who pays?

 

Theres an old saying both in Washington and in state capitols about political negotiations: If you are not at the table, you are on the menu.

 

Heres my prediction. The green lobby is powerful and has friends like AOC in Congress, along with most of the media and Academe behind the fundamental ideas.

 

At the same time, building big, complex systems is actually hard. You must be smart and understand details like math, physics and engineering.

 

So look for the current fossil fuel players to transform into green power plays as well. Because any clean (ha!) energy business will still need the financial firepower currently held by fossil fuel producers.

 

One fossil fuel player thats going green is the above noted Total. Other oil companies are entering the green game as well, like BP and Shell.

 

There are many other green plays, many of them old line fossil fuel companies.

 

Beyond energy plays, I like metal. For example, I recently discussed how the internal combustion engine (ICE) will be phased out over the next 15 years or so. Its a setup for copper plays, in particular.

 

Ive also discussed the need for exotic elements, like what go into batteries, electric vehicle (EVs) and the complex electronics of power distribution systems.

 

In an array of articles over the past year, I discussed more than a few specific investment ideas.

 

Along the way I pointed out that Whiskeyis not a portfolio newsletter, and we do not make formal recommendations about what to buy or sell.

 

But in my travels and experience, there are small companies in the exploration and development biz that offer a junior level of risk but high upside. You must be careful, but if I mention a name, its because I like what Ive seen.

 

Several times, Ive mentionedRiverside Resources, which trades over the counter (OTC) in the U.S. It is under contract with mining giant BHP to explore for copper and related metals in Mexico.

 

Ive mentioned Group Ten Metals, also OTC. It works in Montana, adjacent to the massive Sibanye-Stillwater Complex. Its an early-stage explorer, but when I visited the site a year and a half ago (pre-Covid), the first thing I saw coming out of the drill core was fresh, high-grade nickel sulfide mineralization.

 

Group Ten offers domestic, exploration-level exposure to nickel, as well as copper and cobalt mineralization, not to mention significant amounts of gold, platinum, palladium and rhodium.

 

On the rare earths side, Ive mentionedMedallion ResourcesandDefense Metalsin the past. Both trade OTC. Both companies have enjoyed strong runs in the share price in the past two months. The market is catching on.

 

Finally, a couple of last points

 

Doubtless, youve heard that old saying that water is life.

 

Now, though, add some critical context to it. Because electricity is quality of life.

 

Without electricity, you cant move volumes of water. And for this and many other reasons, life as you know it is over.

 

Last week in Texas, the electricity went out and the pumps couldnt move water. Pipes froze and burst. Now Texas suffers from all manner of property and public health issues that will require tens of billions of dollars to fix, and many years.

 

Can Texas build it back? Can the U.S. do it? Of course, but only if a lot of things happen that require political power, money and industry to play nicely together.

 

On your end, is it investable? Yes, see above.

 

And whether you live in Texas or not, take what happened there very personally. Take it to heart. The gods are telling you to reassess and change your lifestyle and invest accordingly.

 

On that note, I rest my case.

 

Thats all for now Thank you for subscribing and reading.

 

Best wishes,

 

Byron King

 

Byron King

Managing Editor, Whiskey & Gunpowder

WhiskeyAndGunpowderFeedback@StPaulResearch.com

 

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1 Texas Was Warned a Decade Ago Its Grid Was Unready for Cold, Boston Globe

2 Why the CEO of One of the World's Biggest Energy Companies Believes Renewables Are in Bubble Territory, Financial Post

 

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