Thorium: The Energy "Silver-Bullet" to Replace Uranium?

Last May we covered a Financial Sense Newshour interview with Kirk Sorensen, founder of Flibe Energy - he made the case for little-known element thorium as the potential “silver bullet” to our energy problems.

Today, Casey Research energy expert Marin Katusa dives into the thorium topic once again, to see if it has realistic hopes of becoming a potential alternative to uranium...

Why Not Thorium?

By Marin Katusa, Chief Energy Investment Strategist, Casey Research

The Fukushima disaster reminded us all of the dangers inherent in uranium-fueled nuclear reactors. Fresh news last week about Tepco's continued struggle to contain and cool the fuel rods highlights just how energetic uranium fission reactions are and how challenging to control. Of course, that level of energy is exactly why we use nuclear energy – it is incredibly efficient as a source of power, and it creates very few emissions and carries a laudable safety record to boot.

This conversation – "nuclear good but uranium dangerous" – regularly leads to a very good question: what about thorium? Thorium sits two spots left of uranium on the periodic table, in the same row or series. Elements in the same series share characteristics. With uranium and thorium, the key similarity is that both can absorb neutrons and transmute into fissile elements.

That means thorium could be used to fuel nuclear reactors, just like uranium. And as proponents of the underdog fuel will happily tell you, thorium is more abundant in nature than uranium, is not fissile on its own (which means reactions can be stopped when necessary), produces waste products that are less radioactive, and generates more energy per ton.

So why on earth are we using uranium? As you may recall, research into the mechanization of nuclear reactions was initially driven not by the desire to make energy, but by the desire to make bombs. The $2-billion Manhattan Project that produced the atomic bomb sparked a worldwide surge in nuclear research, most of it funded by governments embroiled in the Cold War. And here we come to it: Thorium reactors do not produce plutonium, which is what you need to make a nuke.

How ironic. The fact that thorium reactors could not produce fuel for nuclear weapons meant the better reactor fuel got short shrift, yet today we would love to be able to clearly differentiate a country's nuclear reactors from its weapons program.

In the post-Cold War world, is there any hope for thorium? Perhaps, but don't run to your broker just yet.

The Uranium Reactor

The typical nuclear-fuel cycle starts with refined uranium ore, which is mostly U238 but contains 3% to 5% U235. Most naturally occurring uranium is U238, but this common isotope does not undergo fission – which is the process whereby the nucleus splits and releases tremendous amounts of energy. By contrast, the less-prevalent U235 is fissile. As such, to make reactor fuel we have to expend considerable energy enriching yellowcake, to boost its proportion of U235.

Once in the reactor, U235 starts splitting and releasing high-energy neutrons. The U238 does not just sit idly by, however; it transmutes into other fissile elements. When an atom of U238 absorbs a neutron, it transmutes into short-lived U239, which rapidly decays into neptunium-239 and then into plutonium-239, that lovely, weaponizable byproduct.

When the U235 content burns down to 0.3%, the fuel is spent, but it contains some very radioactive isotopes of americium, technetium, and iodine, as well as plutonium. This waste fuel is highly radioactive and the culprits – these high-mass isotopes – have half-lives of many thousands of years. As such, the waste has to be housed for up to 10,000 years, cloistered from the environment and from anyone who might want to get at the plutonium for nefarious reasons.

The Thing about Thorium

Thorium's advantages start from the moment it is mined and purified, in that all but a trace of naturally occurring thorium is Th232, the isotope useful in nuclear reactors. That's a heck of a lot better than the 3 to 5% of uranium that comes in the form we need.

Then there's the safety side of thorium reactions. Unlike U235, thorium is not fissile. That means no matter how many thorium nuclei you pack together, they will not on their own start splitting apart and exploding. If you want to make thorium nuclei split apart, though, it's easy: you simply start throwing neutrons at them. Then, when you need the reaction to stop, simply turn off the source of neutrons and the whole process shuts down, simple as pie.

Here's how it works. When Th232 absorbs a neutron it becomes Th233, which is unstable and decays into protactinium-233 and then into U233. That's the same uranium isotope we use in reactors now as a nuclear fuel, the one that is fissile all on its own. Thankfully, it is also relatively long lived, which means at this point in the cycle the irradiated fuel can be unloaded from the reactor and the U233 separated from the remaining thorium. The uranium is then fed into another reactor all on its own, to generate energy.

The U233 does its thing, splitting apart and releasing high-energy neutrons. But there isn't a pile of U238 sitting by. Remember, with uranium reactors it's the U238, turned into U239 by absorbing some of those high-flying neutrons, that produces all the highly radioactive waste products. With thorium, the U233 is isolated and the result is far fewer highly radioactive, long-lived byproducts. Thorium nuclear waste only stays radioactive for 500 years, instead of 10,000, and there is 1,000 to 10,000 times less of it to start with.

The Thorium Leaders

Researchers have studied thorium-based fuel cycles for 50 years, but India leads the pack when it comes to commercialization. As home to a quarter of the world's known thorium reserves and notably lacking in uranium resources, it's no surprise that India envisions meeting 30% of its electricity demand through thorium-based reactors by 2050.

In 2002, India's nuclear regulatory agency issued approval to start construction of a 500-megawatts electric prototype fast breeder reactor, which should be completed this year. In the next decade, construction will begin on six more of these fast breeder reactors, which "breed" U233 and plutonium from thorium and uranium.

Design work is also largely complete for India's first Advanced Heavy Water Reactor (AHWR), which will involve a reactor fueled primarily by thorium that has gone through a series of tests in full-scale replica. The biggest holdup at present is finding a suitable location for the plant, which will generate 300 MW of electricity. Indian officials say they are aiming to have the plant operational by the end of the decade.

China is the other nation with a firm commitment to develop thorium power. In early 2011, China's Academy of Sciences launched a major research and development program on Liquid Fluoride Thorium Reactor (LFTR) technology, which utilizes U233 that has been bred in a liquid thorium salt blanket. This molten salt blanket becomes less dense as temperatures rise, slowing the reaction down in a sort of built-in safety catch. This kind of thorium reactor gets the most attention in the thorium world; China's research program is in a race with similar though smaller programs in Japan, Russia, France, and the US.

There are at least seven types of reactors that can use thorium as a nuclear fuel, five of which have entered into operation at some point. Several were abandoned not for technical reasons but because of a lack of interest or research funding (blame the Cold War again). So proven designs for thorium-based reactors exist and need but for some support.

Well, maybe quite a bit of support. One of the biggest challenges in developing a thorium reactor is finding a way to fabricate the fuel economically. Making thorium dioxide is expensive, in part because its melting point is the highest of all oxides, at 3,300° C. The options for generating the barrage of neutrons needed to kick-start the reaction regularly come down to uranium or plutonium, bringing at least part of the problem full circle.

And while India is certainly working on thorium, not all of its eggs are in that basket. India has 20 uranium-based nuclear reactors producing 4,385 MW of electricity already in operation and has another six under construction, 17 planned, and 40 proposed. The country gets props for its interest in thorium as a homegrown energy solution, but the majority of its nuclear money is still going toward traditional uranium. China is in exactly the same situation – while it promotes its efforts in the LFTR race, its big bucks are behind uranium reactors. China has only 15 reactors in operation but has 26 under construction, 51 planned, and 120 proposed.

The Bottom Line

Thorium is three times more abundant in nature than uranium. All but a trace of the world's thorium exists as the useful isotope, which means it does not require enrichment. Thorium-based reactors are safer because the reaction can easily be stopped and because the operation does not have to take place under extreme pressures. Compared to uranium reactors, thorium reactors produce far less waste and the waste that is generated is much less radioactive and much shorter-lived.

To top it all off, thorium would also be the ideal solution for allowing countries like Iran or North Korea to have nuclear power without worrying whether their nuclear programs are a cover for developing weapons… a worry with which we are all too familiar at present.

So, should we run out and invest in thorium? Unfortunately, no. For one, there are very few investment vehicles. Most thorium research and development is conducted by national research groups. There is one publicly traded company working to develop thorium-based fuels, called Lightbridge Corp. (Nasdaq: LTBR). Lightbridge has the advantage of being a first mover in the area, but on the flip side the scarcity of competitors is a good sign that it's simply too early.

Had it not been for mankind's seemingly insatiable desire to fight, thorium would have been the world's nuclear fuel of choice. Unfortunately, the Cold War pushed nuclear research toward uranium; and the momentum gained in those years has kept uranium far ahead of its lighter, more controllable, more abundant brother to date. History is replete with examples of an inferior technology beating out a superior competitor for market share, whether because of marketing or geopolitics, and once that stage is set it is near impossible for the runner-up to make a comeback. Remember Beta VCRs, anyone? On a technical front they beat VHS hands down, but VHS's marketing machine won the race and Beta slid into oblivion. Thorium reactors aren't quite the Beta VCRs of the nuclear world, but the challenge they face is pretty similar: it's damn hard to unseat the reigning champ.

[Marin has an enviable track record in the uranium sector, with one current pick up nearly 1,600% since he first recommended it to his subscribers 39 months ago. Now he's targeting a little-known company that possesses oil-recovery technology that could reward investors with similar gains.]

March 2011 Oil Price Outlook: Why Libya Could Trigger $200 Oil

The Libyan Crisis: Where Are Oil Prices Going?

By Marin Katusa, Casey’s Energy Report

The oil picture is always complex, but right now things are about as complicated as they can get.

The unrest in Egypt has settled for the moment, but the future there is not yet clear as the military takes control on promises of free elections.

Tensions are rising in Algeria, where the unofficial unemployment rate is along the lines of 40% and protesters are demanding change.

Yemen and Bahrain are unsettled, to say the least.

And now Libya is embroiled in the most violent protests to rock the Middle East during the current wave of uprisings, with 40-year ruler Colonel Muammar Gaddafi sending snipers and helicopters to shoot down protestors in the capital city Tripoli.

Unrest in Egypt mattered because of the Suez Canal and the Suez-Mediterranean Pipeline, which together transport almost 2 million barrels of oil per day. Protests in Libya and Algeria – with Libya inching closer and closer to full revolution status – matter because both are important oil producers and key suppliers to Europe. Algeria produces some 1.4 million barrels of crude each day, while Libya spits out 1.7 million barrels a day. Libya is Africa’s third largest oil producer after Nigeria and Angola and has the largest crude oil reserves on the continent, concentrated in the massive Sirte Basin.

The Egyptian revolution has not yet disrupted oil supply. In Libya, however, things are very different. Global oil companies are pulling employees out of the country, leaving exploration projects and producing wells sitting idle.

Al Jazeera reported that oil has stopped flowing at the Nafoora oilfield, which is part of the Sirte Basin. The largest and most established foreign energy producer in Libya, Eni of Italy, is repatriating its nonessential personnel. German firm Wintershall is winding down its wells, which produce 100,000 barrels daily, and flying 130 foreign staff members out of the country. Norwegian Statoil is closing its Tripoli offices and pulling foreign workers out. OMV of Austria, which produces 34,000 barrels of oil a day in Libya, is evacuating most of its workers. And BP is flying its staff home as well, leaving its exploration operations unattended.

With foreign journalists banned from the country, phone lines cut and Internet access mostly severed, it is almost impossible to know just how much of Libya’s oil supply has been disrupted (one report pegged it at 6%). But Libya’s second largest city, Benghazi, has fallen to protestors, and it is in the country’s east, where the oil fields lie.

With politicians defecting and government buildings literally burning in Tripoli, it is clear that, whether Gaddafi stays or goes, disruptions will continue and uncertainty is the new normal in Libya. If Gaddafi does go, it is not at all clear who can lead the country’s next phase, as Libya is a country bereft of institutions, with a non-cohesive army and old tribal structures that are both divisive and weakened.

The price of oil responded to Libya’s instability immediately. Europe-traded Brent oil prices hit above US$108 per barrel on Feb. 21, a high not seen since just before the recession, in September 2008. The West Texas Intermediate (WTI) oil price, which reflects the American market, also gained notably, adding US$3 to reach almost US$92 per barrel.

The head of oil research at Barclays Capital, Paul Horsnell, described the current situation as potentially worse for oil than the Iran crisis of 1979. “That was a revolution in one country, but here there are so many countries at once. The world has only 4.5 million barrels per day of spare capacity, which is not comfortable.”

There are several comments to make about all of this.

First, oil prices might run out of control again. High oil prices reduce the amount of money people have to spend on other things, shrinking demand in the wider economy. Eventually a tipping point is reached where confidence collapses. Given the recent global recession, you might expect OPEC to act quickly to prevent that cycle, but the wave of protests across the Middle East and North Africa has OPEC leaders just a tad bit distracted.

Many are now wondering aloud if Saudi Arabia will be the next nation to see protests. In that context, what happens to the world economy is not exactly a priority for OPEC leaders right now – they are focused on survival. This is not an environment conducive to the kind of quick decision-making necessary to control oil prices.

Second, remember that benchmark prices for oil do not have a strong relationship to supply and demand. That is why prices could shoot up – speculation and manipulation by hedge funds and hoarders have as much impact as an actual change in supply. And a final benchmark price stems from a complex summation of interlinked spot, physical forwards, futures, options, and derivatives markets, which means the paper market is almost as important as the physical one.

The current spread between the two main benchmarks – Brent and WTI – is one example of how the benchmark pricing system fails to properly represent the oil market and all its complexity. WTI has historically been slightly cheaper than Brent, but over the last year the discount has spread to a record of as much as US$19 per barrel. The difference reflects ample supply in the U.S. Midwest (WTI is an American benchmark) compared to a squeeze on supplies from Europe’s North Sea.

While that part makes sense, why is the Brent price used to determine three-quarters of the world’s oil contracts, including those in Asia? A market with very low production volumes is used to price markets with very high production elsewhere in the world.

The system has led to many other nonsensical situations, like the fact that many U.S. oil refiners and consumers pay prices that track Brent, not WTI, so right now American gas station prices reflect greater-than-US$100-a-barrel oil even though the North American benchmark hasn’t yet passed US$92. When you add in the fact that no one really knows what’s going on in the world’s fastest-growing oil market, China, you have all of the ingredients for serious mispricing.

Third, transportation infrastructure plays a key role in oil pricing. North African oil and gas are especially important to Europe because the only other place with pipelines running into Europe is Russia, and no one likes relying on Russia for energy. Russia already exports 7 million barrels of oil each day, which constitutes roughly 10% of global production.

To get around reliance on Russia for both oil and gas, European countries have been working to build more pipelines from North Africa, including a new, US$1.4 billion Algeria-Spain gas pipeline set to open in March. The desire to avoid increased reliance on Russia is another factor driving the Brent benchmark upwards; European prices for natural gas and liquefied natural gas are also on the rise, for the same reason.

Right now in the all-important oil world of the Middle East and North Africa, short-term supply, future prices, ownership and preferred trading partners are all up in the air. Libya’s potential revolution poses a real threat to oil supplies – as mentioned, we only have 4.5 million barrels a day to spare, and Libya produces 1.2 million. On top of that, the fact is that oil prices are not decided in the most rational ways, and speculation plays a major role.

Can we profit from all of this? If you believe oil is on the rise, there are ways to get direct exposure to the price of oil, as well as many oil companies worth considering.

[Of course, with skyrocketing oil prices, alternative energies, becoming more attractive, will also see their day in the sun. In the upcoming issue of Casey’s Energy Report, Marin and his team introduce a new standard to – for the first time ever – compare apples and oranges, i.e., the energy output of oil/gas and geothermal energy. The result would amaze you. Learn more about the future of geothermal and how to profit in this free report.]

Ed. note: I am a Casey Energy Report subscriber and affiliate.

Coal Outlook 2011: What Australia's Floods Mean for Coal Supply and Prices

Australia's nasty flooding is drastically hampering their ability to crank out coal.  How serious and long lasting will the effects of these floods be on coal supply, and prices?  Our energy guru Marin Katusa explores...


Australian Floods Cause Drought in the Coal Market

By Marin Katusa, Casey’s Energy Report

The most important metallurgical coal basin in the world is underwater. Open pits have become lakes, stockpiles are soaked, and rail lines are submerged and in places destroyed. Damage is estimated at $5 to $6 billion.

Australia accounts for almost two-thirds of global coking coal production. Much of it comes from Queensland, where an area the size of France and Germany combined is underwater. That includes the Bowen Basin coal region, which produces almost a third of the world’s coking coal. The Bowen Basin was hit with 350 mm of rain in December, against an average of 102 mm.

Floods are now receding from the Bowen, giving some miners an opportunity to ship from existing stockpiles. Other mines are still inaccessible, and several rail lines are still submerged or damaged. And since open pits are still flooded and will take weeks to drain, shipping from stockpiles only postpones the inevitable: a reduction in met coal supply. Analysts think a recovery to pre-flood coal production levels will take at least three months.

At least six major global coal miners have declared force majeure, which means they can miss contractual shipments because of circumstances out of their control. The list includes Anglo American, Aquila Resources, BHP Billiton, Macarthur Coal, Rio Tinto, Vale, and Xstrata. Mines responsible for between 100 and 140 million tons of annual coking coal production are now under force majeure, representing as much as 40% of global supply.

And it’s probably not over yet. Australia’s Bureau of Meteorology predicts both eastern New South Wales and southeastern Queensland have a 60% to 70% chance of receiving higher-than-average rainfalls between January and March 2011.

What does it mean for coal prices and coal equities?

First, coal is not traded daily, like copper or gold. Coking coal prices are set in quarterly negotiations between steelmakers and coal miners; contracts for the first quarter of 2011 were mostly settled before the floods, at an average of $225 per ton (already the second highest level ever). So prices have not changed yet, but there is lots of talk about where they will go next. Analyst predictions for the second quarter range from $250 to $350 per ton.

Coking coal producers not affected by the floods are already reflecting the increase, and that will likely continue. Teck Resources, for example, climbed from below $59 to almost $63 in the last days of December, before slipping with the markets. Western Coal and Grande Cache Coal also made gains. The longer-term impact will of course depend on how long it takes for Australia’s mines to return to normal operations, but in general the situation supports Casey’s bullish stance on coking coal: there is not a lot of supply, and demand is constant, if not rising, so prices can only trend up.

Casey’s support for coking coal has already generated big returns on at least one recommendation. Some ten months ago, I was on Business News Network (BNN) talking about met coal and recommended Cline Mining at just over $1. Those who traded on that advice are now looking at a 300%+ gain, as Cline is currently trading at more than $4, in less than four months. And Casey’s Energy Report recently added a new metallurgical near-term coal producer to its portfolio.

As for thermal coal, prices seem poised to edge up slightly because of the floods but, unlike metallurgical coal, there is plenty of thermal coal to go around. The situation has disrupted just 8% of global thermal supply. So while the floods may be causing a pop in thermal coal equities, the increase is unsustainable. There are thermal coal deposits all over the world, and many countries produce enough to meet most of their energy needs. China’s thermal coal stockpiles remain very healthy, for example, and it is the second-largest importer of thermal coal in the world. The top importer is Japan, but even it only imports some 113 million tonnes annually and relies on coal for less than 30% of its electricity needs.

As such, the pop in thermal coal equities is not going to last. Hence, investors should use the lift as an opportunity to reduce their positions.

The floods are also a reminder of the extremes of Australian weather – a prolonged drought in Queensland ended just two weeks before the torrential rains began. And while the rains pound Queensland and New South Wales, which cover the eastern third of the country, searing temperatures have residents of neighboring South Australia and Victoria on alert for bushfires. That is simply a reminder that Australia’s weather can often impact the country’s all-important met coal mines.

[No one is more knowledgeable in the volatile energy market than Marin Katusa and his team. That’s how subscribers could rake in an exceptional 818% gain on Uranium Energy (UEC) in only 24 months. Subscribe today and get Casey’s Energy Report for 30% off the regular price – plus one year of Casey’s Extraordinary Technology FREE. Find out more here.]

Ed. note: I am a Casey Energy Report subscriber and affiliate.

Why the Gulf Disaster is Wildly Bullish for Canada's Oil Sands

Congrats to our friend and energy guru Marin Katusa on his excellent interview recently with John Mauldin!  I subscribe to Mauldin's premium service - thought the conversation was fantasic (which included resource expert Rick Rule as well).

Marin is always on the hunt for energy investments that also have economic advantages over competitors.  He wants stuff that's profitable at the lowest energy prices possible.  And while the Canadian oil sands don't immediately come to mind when you think of low cost oil, things start to click when you reason out which areas will benefit from the coming smackdown on offshore drilling...

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A Run for the Canadian Border

By Marin Katusa, Chief Energy Strategist, Casey Research

The Gulf of Mexico disaster has changed U.S. priorities, costs, and energy supply sources for years to come. But the fact that the U.S. needs energy isn’t changing anytime soon, and as mass sources of green energy are still a while away, the most likely alternative might be the most surprising one.

With US$15 billion invested annually in offshore drilling in the United States, the disaster in the Gulf of Mexico means that this money is getting ready to migrate elsewhere. And it is the Athabasca oil sands of Alberta, Canada, that are number one on the list.

Given the amount of bad press the oil sands get, this could come as a shocker. But technological advances and improvements in recovery methods, as well as reduction of water usage and greenhouse gas emissions, have made oil sands a viable and popular option for the future of U.S. energy.

The numbers, too, are looking in their favor. Out of the 1.34 trillion barrels that is the world’s total proved oil reserves (2009), only about 20% (270 billion barrels) of this number is actually available to free-flowing capital investment – the vast majority is in the tight grip of various national oil companies.

And a good chunk of these “free-market” barrels, about 178 billion, is sitting underneath the feet of Canadians, or as some call them, the Crazy Canucks. For a country that runs on oil, the United States couldn’t have been presented with a better lifesaver. Compared to alternatives such as Chavez’s Venezuela or the oil fields of the Middle East, reliable oil from politically stable and friendly Canada is by far the easier pill to swallow.

As it is, roughly one in every six barrels of oil consumed by a U.S. citizen today comes from the Canadian oil sands. The fact that infrastructure is already in place for oil sands development and oil already flows through pipelines between the two countries only sweetens the deal.

So, we wouldn’t be taking a huge step in assuming that any future capital spending that will be diverted away from the Gulf of Mexico will find it hard to bypass Canada. In addition, as global oil supply is affected by the drilling restrictions, in the long term we’ll be seeing higher oil prices. While this news might not make the drivers amongst us happy, it couldn’t get better for Alberta and the energy companies operating in the oil sands. With oil prices hovering over US$70 a barrel, the stream of investment dollars into the oil sands is guaranteed.

Obama’s first-ever Oval Office address has confirmed our expectations of no more growth in the American offshore drilling industry anytime soon. But the Gulf accounted for a large chunk of U.S. oil production (25-30%) and consumption (9% – the entire consumption of France), and that shortfall must be met.

While renewable energy is where the future of U.S. energy lies, according to Obama, it is still some time before green energy producers will be able to meet the full demands of the nation. In the meantime, authorities have also realized the importance of Canada for U.S. energy and are enticing companies with new pipelines. Plans on expanding the Keystone Pipeline, linking up Texas and Oklahoma to 500,000 Canadian barrels a day, have already been drawn up and put into motion.

The turmoil in the U.S. energy market has created a number of opportunities, both in the short and long term. For now, investment into the Canadian oil sands is about to increase dramatically, and things are moving rapidly. We’ve uncovered the lowest-cost producer with significant upside production, and they’re the one on the list as a takeout target by Big Oil.

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[Discover the oil sands company Marin thinks so highly of… and get ready to profit when shares shoot up. But oil sands are not the only energy investment to benefit from the Gulf Coast disaster – read more here or sign up right now for a $39/yr. subscription with 3-month money-back guarantee.]

Why the Gulf Oil Spill is an Utter Catastrophe for Obama's Energy Plan

What has the BP oil spill done to Obama's energy policy?  According to our energy expert Marin Katusa, it's pretty much turned it on it's head.  According to Marin, Obama's down to only two options - both of which are perceived as pretty undesirable from a tree hugger's point of view!

But for us red blooded capitalists, Marin does have a couple of ideas about how we can profit from these trends that now appear to be baked in the cake.  Read on to learn more...

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Has the Gulf Spill Opened Pandora’s Box for Obama?

By Marin Katusa, Chief Energy Strategist, Casey’s Energy Report

The White House might be gaping in shock that the U.S. federal court overturned the six-month drilling moratorium, but it really isn’t all that surprising. Amid the finger pointing and political posturing, the Obama administration seems to have missed a vital detail – the U.S. oil industry is in a spot of bother.

It’s not just America’s oil supply and energy security that’s in danger after the BP oil spill and the subsequent drilling ban. The Gulf economy is hanging by a thread, and it won’t take much to send it over the edge.

Thousands upon thousands of rig workers were effectively laid off when the 33 rigs operating in the Gulf stopped drilling. The full economic impact of the ban is still unrealized, with the layoffs just starting, but estimates put the figure for lost wages as high as US$330 million per month.

Given the potential economic losses, BP’s US$100 million compensation fund for rig workers starts to look rather paltry. It doesn’t end there either. There’s a domino effect in play as well – each rig job supports up to four additional jobs for cooks, supply-ship operators, and those servicing the industry.

And should the drilling ban become permanent, the consequences could be dire. Just like the towns that died in the Upper Midwest after the demise of the auto plants and steel mills, the entire Gulf Coast – where deepwater drilling is crucial to the economy – could fade away.

All in all, not the best news for a country whose economy can be best described as fragile at the moment.

There’s also the question of America’s energy security. The Gulf accounts for up to 30% of all the oil produced in the country. Should the Gulf be put off limits, that shortfall has to be made up from somewhere. Obama’s renewable energy might be the future, but it’s not up to the challenge of meeting the needs of the present.

And attractive, viable options are far and few in between. Russia may be a friend now, but its tap-twisting history with gas in Europe does not strike up a positive note. The Middle East is hardly America’s best friend, not to mention its royalty structures, which leave much to be desired. And in Venezuela, Hugo Chavez just recently nationalized 11 oil rigs belonging to a U.S. company.

In the end, only two real options are left in the hands of the U.S. – the oil sands of Canada or rethinking the drilling ban.

A revised drilling ban would still see higher taxes on each barrel produced and tighter regulations for companies coming to the Gulf. Any lease application would come under intense scrutiny and face higher insurance rates. For smaller companies interested in the Gulf, the rising production costs mean that the death knell has been sounded.

Option two is the friendly neighbor to the north, Canada. The country already plays a big role in U.S energy. One in every six barrels of oil consumed daily in the U.S. comes from the oil sands in Alberta, Canada. The oil sands are pretty controversial stuff, however, associated with derelict, broken landscapes and carbon emissions.

But this is an image that’s going to change very soon. The future of oil sands is here: they are cost effective and their face is green. Steam Assisted Gravity Drainage (SAGD) pumps steam into the ground to liquefy the bitumen and stiff crude oil, making it thin enough to be pulled out of the ground. No giant holes or toxic tail-ponds – just two horizontal pipes, one above the other, puffing away efficiently.

That the Gulf spill is a game-changer for the U.S. oil industry is yesterday’s news. For now, it’s about making ends meet. And while we expect the U.S. to shift towards renewable energy, and maybe even rethink its energy use, for now there’s an unmet demand that’s not going anywhere.

As far as an investment portfolio goes, both options bring with them opportunities. If the U.S. federal court allows a somewhat watered-down version of the drilling ban, the long delay means that there’s potential to pick up some great stocks at a cheap price. On the Canadian side of things, there are some well-run companies perfectly combining cash-flow and SAGD technology. The Gulf spill might be Obama’s Waterloo, but for the careful investor, the winds of change could just blow in a fortune.

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Marin Katusa is the editor of Casey’s Energy Report, your single best source for ongoing coverage and profitable recommendations in the energy sector. Learn more here.

Ed. Note: I am a Casey Research Affiliate and Subscriber.

Energy Investing Outlook for 2010 and Beyond: Geothermal, Natural Gas, Peak Oil, and More!

With oil back up in the $70 range, what's the current energy outlook for the global economy?  And more importantly - how should we invest?  For some insights, we're going to turn it over to our pal David Galland, who's rounded up two of Casey Research's energy experts for an insightful interview...

The Doctor and the Dealman: An Energy Update

By David Galland, Managing Director, Casey’s Energy Report

At first glance, no two individuals could seem more different.

The Doctor, middle-aged and balding, could be the very archetype of the college professor. The Dealman is young with a full head of well-styled hair: more than a few people have compared his looks to Elvis in his prime.

The Doctor is quiet and soft-spoken. The Dealman is outspoken and, under the right circumstances, even outrageous.

On further examination, however, you begin to uncover the similarities that make them one of the energy sector’s most potent teams, starting with the fact that they each possess an intimidating intelligence.

Case in point, while only 23 years old, the Dealman taught advanced mathematics at the university level.

The Doctor, an elected fellow of the Royal Society of Canada, is a PhD professor of petroleum and coal geology at the University of British Columbia and the winner of the coveted Thiessen Award, the highest award presented by the International Committee for Coal and Organic Petrology.

They also both share a passion for the energy sector, though as is typical with this atypical team, they approach the sector from two different perspectives.

The Doctor, one of North America’s leading experts in “unconventional” oil and gas, loves to analyze every aspect of modern-day hydrocarbon exploration and production.

While fully conversant in the technological and geological facets of the global hunt for energy, in his work as the chief investment officer for Casey Research’s Energy division, the Dealman lives to find the next big money-making energy play. Even if it requires working almost around the clock, he is passionate to uncover companies with the magical combination of the right management, the right commodity in the right place and with the right geology. And, most important, the right financial structure at the right price that allows investors to lock in serious upside potential but with very little downside risk.

Individually, the Doctor, Dr. Marc Bustin, and the Dealman, Marin Katusa, are powerful resources when it comes to separating facts from fiction about today’s energy scene and where the real opportunities for investors are to be found. But working as a team, they become a force of nature.

With oil gushing into the Gulf, the global economy under pressure as well as the prices of energy and energy stocks, and with the new American Power Act lurking in the background, John Mauldin called to ask if we could provide an update for readers on the always-important energy sector.

And so, with that goal in mind, I arranged to sit the Doctor and the Dealman down for a chat. The highlights of that chat follow.

Q: Let's start by asking your opinion, Dr. Bustin, on the sinking of the Deepwater Horizon rig off the coast of Louisiana and the impact that could have on oil exploration in the U.S.

Bustin: It’s an environmental ecological disaster, and everything else pales besides that fact. That said, I think what we're looking at is a major shutdown in offshore exploration off North America.

In addition to the Obama administration, the Canadian government has also come out and said that there will be no further offshore exploration until we understand what went wrong and there is something in place to better control a similar incident should it happen.

The impact of the disaster is already being felt in that Obama had only recently announced an expansion of offshore drilling, but that's now dead. Likewise, probably for the rest of my life, offshore Western Canada won't go ahead, so it's a huge impact, and of course this is going to affect the mid-term oil price.

Katusa: It is really important to understand that, for companies with existing drilling permits, the costs are going to be significantly higher… in terms of construction and maintenance costs, labor, permits, battling lawsuits filed by environmental groups and others with an interest in the water – the fishing industry, for example. Then there is a big increase in insurance costs, more taxes, and special clean-up funds.

As a result, when you start looking at the bottom line impact on companies you might want to invest in, when it comes to offshore projects, the netbacks are going to decrease significantly, so your profits are going to decrease significantly. Then there’s the overhang of the potential for another actual disaster and the clean-up costs.

Q: So this is clearly going to be a setback to offshore drilling. What are the implications from a supply perspective? Are you guys believers in the whole Peak Oil thing?

Bustin: Fundamentally, I'm a believer in the concept of Peak Oil. Yet, with the new accessibility to reservoirs made possible by technologies that allow us to drill horizontally and release petrocarbons unconventionally through fracking, I am not sure we have actually seen Peak Oil. Ultimately, however, we are burning through an awful lot of what is undeniably a finite resource.

Katusa: David, the problem with the Peak Oil theory is, it doesn’t take into account the increase of production and supply and the economic value of the reserve using unconventional technologies, which are always improving. Moving forward, we are long-term bulls on the oil price, but we've been consistent in telling our subscribers to stick to the fundamentals – that the companies they should be investing in are those that are able to produce at the lowest costs. Viewed from another angle, if a company in your portfolio needs $150 oil to make a profit, you should be a seller.

Q: What cutoff price do you think investors should be looking at for a company they want to own?

Katusa: In our in-house calculations, we use US$45 per barrel. If a company cannot produce economically and with a solid netback at $45 oil, they are not a low-cost producer and should be avoided.

Q: For the readers who are not familiar with the term, can you define "netback"?

Katusa: Netback is basically the difference between your production costs and what you sell your oil for at the well head. Let's say the spot oil price you are receiving is $75 and your all-in costs are $40, your netback would be $75 minus $40, for a netback of $35.

Q: On the topic of unconventional production, there's clearly a trend towards viewing the oil sands from an environmental standpoint as being a bad thing. Do you anticipate there being additional taxes levied or even a complete ban on the sale of oil from oil sands?

Katusa: The oil sands have too big of a production profile for them to be banned as a source. Already, one out of every six barrels of oil consumed by a U.S. citizen comes from the Canadian oil sands. We’ll almost certainly see increased taxes, however, that assure that oil sands are not going to be our cheap source of oil, though it will continue to be a sure source of oil.

Q: Won't that ratchet overall prices higher?

Bustin: The overarching problem is that the oil sands projects are so capital intensive – we're talking about 60-80 billion dollars already invested, with potentially another 300 billion dollars yet to be invested to maximize the resource. You can't put together projects with a capex of that magnitude unless you have a predictable price of oil.

Katusa: It’s worth noting here that the existing production is profitable at a cost of around $40-$45 per barrel. But of course, that doesn’t take into account any new taxes.
For the time being, taking into account the netbacks being earned by both conventional and unconventional producers – with even the oil sands operators currently operating at margins of close to 100% -- we see the potential for some downward pressure in the price of oil in the short term. Remember, for years and years, the big oil companies were running at 10-15% margins.

Q: Do you think we’ll see a carbon tax – cap-and-trade and all that?

Bustin: Absolutely.

Katusa: Whether you like it or not, it’s coming. While we all know it’s complete nonsense, if there is one certainty in today’s world, it is that the governments are going to tax whatever they can, and most of the people who support the current government in the U.S. believe that a carbon tax is good because they’re taxing the bad polluting companies that have billions of dollars in their banks. So it's coming.

Right now the voluntary market for CO2 is trading around $8-10 per ton, but in Europe, which has a mandatory market, the cost is double that. That's a big cost.

Q: Let's talk a bit about natural gas. From the geological perspective and also as an energy investor. Dr. Bustin, what’s your outlook for natural gas?

Bustin: In North America, we see natural gas lingering around the $5-or $6 range probably for the rest of the year. There really is a lot of natural gas available. Also keeping a lid on prices is that there are a lot of projects on line that aren’t quite economic at current prices. However, as soon as prices start moving up a little, a large amount of gas will become economic and therefore hit the market.

Prices in Europe are starting to decline significantly from a year ago as well, thanks also to increased supplies, so we're pretty soft on natural gas. That doesn’t mean you can't make money in natural gas or by investing in natural gas-producing companies – you can, but you have to be very selective and focus on low-cost producers.

Katusa: Moving forward, there are two things that will be very important to the sector. The first is that, thanks to unconventional technology becoming increasingly streamlined and effective, there are thousands of wells that have been drilled, fracked, but not completed. Those wells can come on stream with between 2-10 BCFs per day and are just sitting there. Think of it as a shadow supply of natural gas in the U.S.

The second thing to keep in mind is that the success that companies have had in exploiting the shales has resulted in massive new deposits.

Finally, it’s important to understand some of what’s going on with the oil-to-gas-equivalent ratio, which has traditionally been around 6:1. Consequently, at current spot prices, many analysts and promoters are saying, "Well, natural gas is cheap relative to the price of oil." Be careful when you hear that.

For instance, a lot of oil companies are purchasing gas companies because lower gas prices have made the companies cheap. The oil companies then look to boost the reserves on their balance sheets by reflecting the gas they acquire as BOEs, or barrels of oil equivalence. They will then actually book it as a barrel of oil to analysts at a ratio that is something like 22:1 today.

Q: What are the implications to us as investors?

Katusa: It all comes down to what a company is actually worth, which will guide you in what you pay for it. If a company says it has a billion barrels of oil equivalent in the ground, it will command a much higher price than if it showed its actual oil reserves and that it also had, say, three TCFs (trillion cubic feet) of gas. A surprising number of companies are doing this, including mid-tiers and majors. Imagine the implication to shareholders if this con is exposed for what it is?

Q: Can these companies actually convert their gas into usable oil?

Katusa: No.

Q: With the oil/gas ratio skewed in favor of gas, what about the market for substituting oil with gas?

Katusa: You have to ask, can we create a market for the natural gas that actually substitutes for oil? Of course, the big one would be having more compressed natural gas stations to encourage car manufacturers to make the switch, and there are a number of companies in North America looking to do just that. The big movers in that initiative are Canadians, but the idea has a lot of potential given the general theme of trying to reduce reliance on oil from foreign sources.

Q: Isn’t an increasing amount of base power generation switchable from oil to gas?

Bustin: With a lot of effort. Of course, the big one is the switch from coal to natural gas. Natural gas is much cleaner burning. In Canada, just a couple of weeks ago, legislation was passed calling for no new coal-fired plants. I think after a period of 15 years, they won't allow the existing coal-fired plants to be refurbished and continue to burn coal. So there's going to be a huge shift towards natural gas-fired electrical generation in North America, because of the carbon issues.

Q: I know you guys like coal, which is kind of counterintuitive, seeing how most people view it as dirty and dangerous. What's driving your outlook on coal – again from a fundamental standpoint and also in terms of finding investment opportunities?

Katusa: Start with the big picture. As much as 75% of China’s electricity generation currently comes from burning coal. That’s not going to change anytime soon. In fact, 2009 was the first year ever that China actually imported coal. Not so long ago, it had been a big exporter. But already half of the coal in the world that is produced is used by China.

On top of that, and this is pretty ironic given the popular view of coal, is that the U.S. is the second largest consumer of coal in the world, after China – with India being a distant third. Everyone is saying coal is dirty, coal is ugly, coal is smelly. It's done. We're going green. Even Obama said so. Yet if you’re careful, it’s where the profit is to be made. In fact, coal has been the biggest winner of all the energy subsectors over the last 12 months.

Q: How do we invest?

Katusa: In terms of investments, we like those related to met coal, versus thermal. As a reference point, there have been contracts signed in China at $105 per ton of thermal coal, but and as high as $500 per ton of met coal.

That’s because on the order of 90% of all steel production is dependent on met coal because of the temperature it produces. In North America, there are serious difficulties bringing on a thermal coal project, starting with environmentalists and government regulators, but also because transportation of the coal is the largest cost of a coal project – and therefore the deciding factor in the economics. Simply, at today’s prices, if you don’t already have a train running almost right up to your new thermal coal mine, it’s almost certainly not going to get off the ground.

So we have decided to stick with met coal for North America. On our North American met coal plays, we have recently recommended two in our alert service. They are doing well, and we expect them to go a lot higher.

Q: You like companies with significant upside as opposed to run-of-the-mill returns. That typically means small-cap companies. Are there smaller coal companies investors can get into, or are these all large companies?

Katusa: The coal companies have huge amounts of cash right now, because they’re kind of like the base metal of the energy sector. They’re boring, but they make a lot of money.

There are ETFs you can use to play the coal sector, but the reason why I like the juniors is the share price can go up ten times, as was the case recently with Western Canadian Coal. Of course, there are big companies with good coal exposure, like Peabody or Nobel or Teck Cominco. They have great assets, but the bang for your buck is not going to be as high as with a small-cap play.

Q: Let’s talk nuclear. There has been a lot of talk about pebble-bed reactors dotting the Chinese landscape, yet here they are scrambling for coal. Whatever happened to the dozens of new nuclear plants that were supposed to be headed for China?

Katusa: Despite popular conceptions, the pebble-bed reactors are actually an old technology, initially developed by the Nazis. The Chinese bought the technology off the Germans.

Pebble-bed reactors were supposed to be the Henry Ford Model T of nuclear reactors. They would actually be built in an assembly line. Imagine it like a LEGO set. As a town grows, you add a module. As the city grows and the energy requirements grow, so does the number of nuclear reactors.

However, the technology is still not ready for prime time. In fact, it's years away. That said, in the not-too-distant future, the demand for power and the need for governments to launch make-work projects will almost certainly kick off a rush to get a piece of the action. Especially in China.

Q: How would you play it as an investor?

Katusa: The best way is through a small-cap uranium company with a substantial economic resource, because these reactors are going to need a lot of feed. The time will come when the spot price of uranium is going to return north of $100 per pound. The last time that happened, a lot of the early investors in the better uranium juniors – most of which are Canadian – made a lot of money.

Q: What's your time line for uranium to push back over $100 per pound?

Katusa: I'd say 3-5 years.

Q: What are the fundamental reasons for this?

Katusa: The HEU Agreement, which involved nuclear warheads being dismantled and the uranium blended down to nuclear fuel has now come to an end and it will be three years before it is renegotiated. The last time it was negotiated, Boris Yeltsin was in power and Russia was on its knees. That's not the situation today. Russia is very powerful and Putin is still running the country behind the scenes. This time around, they’re going to negotiate a much different agreement. And don’t forget that today, unlike back when the last treaty was negotiated, the China factor is huge.

We would expect the Russians to go to the Chinese first before they renegotiate with the Americans. So the Americans are a victim of their own success by depending on the cheap Russian nuclear fuel. That time is coming to an end in three years, and within five to six years you'll see spot prices very high.

With the world increasingly looking to ramp up nuclear energy production – as it very much is – any of the companies with large reserves and the potential for low-cost production are going to be trading at a nice premium to where they are today.

Q: As an investor, where in the energy sector is your biggest focus right now? Where are the big opportunities in the relative near term?

Katusa: Before you can talk about specific opportunities, it’s important to be sure you have the right strategy to bringing those opportunities into your portfolio. These are very fragile markets, and so our strategy has been very conservative for some time now.

For instance, we spend a lot of time identifying great management teams that are personally heavily invested in their own companies – and then wait for them to raise cash through private placements that allow investors to pick up both a share and a warrant on favorable terms. Once the holding period is over, which can be as little as a few months, selling the shares and riding the warrants can be a good move as it gives you most of the upside with none of the downside if the markets tumble.

Likewise, we don’t chase stocks but instead decide what we’re willing to pay for a stock – which in these volatile times might be 20% below where it currently trades – and then wait patiently for it to come to us. That approach doesn’t always work, as sometimes we don’t get filled, but we’re okay with having a greater-than-normal allocation to cash at this point.

Another technique we use is what we call the Casey Cash Box – which involves running regular screens of a universe of small to mid-sized energy companies, looking for prospective companies selling at discounts to cash and other liquid assets. You might say we look to buy dollars for quarters.

Finally, when we get the desired result from our analysis – i.e., we buy good companies cheap and watch them move higher, we don’t hesitate to cash out our initial investments and take a free ride on the balance.

These are dangerous markets, and being cautious while building a diversified portfolio of energy plays makes a lot of sense. At least to us.

Okay, with that foundation, where would I invest today?

For starters, I might try to get ahead of the large sovereign wealth funds. And they are being pressured to invest in green energy. That’s one reason we’re more bullish than ever on green energy plays with the real potential to be economic.

Q: So which of the green energies are potentially economic?

Katusa: Geothermal and run-of-river are two we particularly like just now.

Q: Geothermal is not a new technology. It’s been used in energy production for something like 100 years, right?

Katusa: That’s correct.

Q: So why isn't it in wider use? What percentage of the base load in electricity in the U.S. comes from geothermal?

Katusa: Less than 1%.

Bustin: Economic geothermal projects are found in areas where you have very high heat flow or fluids near the surface. Of all the deep dry rock geothermal projects, where the real energy potential exists, none are actually economic. Currently they’re still in the experimental stage. At some of the more prospective sites in Australia, they ran into some significant problems, so it's still in the science box.

As a consequence, most of the geothermal projects you see are not where the real future is, which is in the deep dry rock geothermal projects, and those are going to take more time and a lot of money to get right.

Q: Aren’t government subsidies that can help the geothermal companies try to reach economic sustainability a big part of the attraction just now? Isn’t that also the case with run-of-river?

Katusa: No question, depending on the jurisdiction a company operates in, the subsidies for green energy projects can be very substantial. So much so that it makes it almost impossible for a company to lose money. Which, of course, all but eliminates the risk to shareholders as the company tries to build something that can last.

As for run-of-river, which involves diverting flow from a strongly running river, using it to turn a turbine, then returning it to the main river, there are actually quite a few opportunities. In fact, our latest look at the sector found over 45 small-cap companies. We recommended two, and one of them gave us a double that allowed us to cash out all of our initial investment, giving subscribers a free ride on the rest.

Overall, the prices on these companies have reached the point where we are holding off on any new recommendations in the sector, but we expect the prices will come back to an attractive level in the not-too-distant future. We’ll be ready when they do.

Q: Dr. Bustin, we’ve heard from the Dealman. Now, speaking from the technical perspective, are there any particular energy sectors now attracting your attention?

Bustin: Well, I'm really concerned about the coal sector. We're so dependent globally on coal. If we start slapping some major carbon taxes on coal, it's going to be catastrophic. I'm not quite sure how it's going to work out, because there is no way China and India and a lot of the developing nations, particularly in Southern Africa, which are so dependent on coal, are going to be able to manage. If they have to face these carbon taxes, I'm not sure where the world economy is going to head, because there's no way we can free ourselves from coal.

Q: I've heard the idea to use taxes to level the playing field between the dirty and the clean sources of base power. So coal would be weighed down, if you will, by added taxes to the point where there is no cost advantage to using it over natural gas. Have you heard the same thing?

Katusa: The beauty of coal is, it's base load. It's cheap and it's easy. The problem with solar is nighttime, and the problem with wind is no wind. And even run-of-river, which we like, fluctuates according to the climate, which is why geothermal is our favorite green energy because of its base load potential.

Taken together, these alternative energy sources are okay as secondary sources to meet excess demand, but they’re not your go-to sources. What most people don’t realize is that much of the power used isn't from people charging their Blackberry or running their computers, or any of that. It’s used by big commercial industries, such as manufacturing and mining, for example.

Q: In the past, Dr. Bustin, you’ve said that is the question is not so much about which energy sources to use, but rather that, in order for the world to maintain even the status quo, the answer will be “All of the above.” In order to avoid the economic devastation of runaway energy costs, we're going to need every single source we can get over the next ten years. Fair statement?

Bustin: Yes, it is. Unfortunately, when we look at our gross national product per capita, it's directly proportional to our energy consumption. And, of course, if you look at multiple billions of people who have very low standards of living and if you want to give them a gross national product per capita comparable to that we enjoy in the developed world, you have to expect global energy consumption is going to continue to skyrocket.

As I’ve tried to indicate, the only way to even come close to meeting that energy demand is with coal. There is just no alternative for the foreseeable future, until we get into bigger reactors or some other interesting usage of nuclear power. Bottom line, we're stuck with fossil fuels, and the fossil fuel that is readily available and most economic is coal.

Q: Are you looking from an investment standpoint at any offshore opportunities to tap into some of that demand for coal coming out of China?

Katusa: We've got one on our radar screen now, but it’s premature to mention it here. I've actually visited the site twice and like the story. It's a great project, the management is heavily invested in it themselves, but we haven’t recommended it yet because we are waiting for a couple of financings to come free trading, which will result in more stock available – and that will create downward pressure. By being patient, investors should be able to get it at a cheaper price. That theme, of being patient, can’t be stressed enough. Especially in markets as volatile as these.

Q. Good advice, and a good place to leave off. Thanks for your time.

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David Galland is a partner in Casey Research, LLC., an international firm providing research and investment recommendations to individuals in over 150 countries. Prior to joining Casey Research, he was a founding partner and director of a successful mutual fund group (Blanchard Group of Mutual Funds), and well as a founding partner and executive vice-president for EverBank, one of the biggest recent successes in online financial services.

If you’re interested in the staying closely in touch with the ever changing investment opportunities in the energy sector, you’ll find no better team than Marin Katusa and Dr. Marc Bustin as your guides. Just recently they tapped into one of the best-kept secrets in European energy policy – a sure-fire winner. Read more here.

Ed. Note: I am a Casey Research affiliate and subscriber.  I also head up their Sacramento Phyle.

Geothermal vs Wind Energy: Pros and Cons

Search engine giant Google has made a very large investment in wind energy.  Smart play - or should Google stick to Search and Web Apps?

According to our energy guru Marin Katusa, Google may have been better served if they'd considered Geothermal Energy instead.  That's the energy play that Marin loves for investors - read on to see his comparison of wind energy vs. geothermal...


Why Google Should Subscribe to Casey Research

By Marin Katusa, Chief Investment Strategist, Casey Research Energy Division

What do search engines and wind energy have in common? That’s the question a lot of investors were asking earlier this month, when Google made an almost US$40 million investment into NextEra Energy Resources, a North Dakota wind energy firm. The simple answer: more than you think.

It’s not surprising that the Internet search-engine superstar needs energy. Companies like Google own massive computer frameworks, known as server farms, to store all that digital data floating around in cyberspace. While Google is quite hush-hush about how many computers it owns, estimates put it at about 1,000,000 servers (almost 2% of the world total), and an enormous amount of power is needed to keep them running constantly. And as cyber-information grows – almost 24 hours of video footage is uploaded onto YouTube every minute – more and more computers are required to store and distribute it.

But where does their power come from? Most server farms are located near coal-fired generating plants. Good for efficiency, but that adds up to a pretty big carbon footprint. Naturally, this has environmental groups fuming and lobbying the corporations for clean energy alternatives. Given Google’s avowed sensitivity on this issue, investing in wind turbines in North Dakota makes good public relations sense.

However, it is usually the company’s philanthropic arm, Google.org, that handles such good-citizen initiatives. Thus the unprecedented move to make a first-time direct investment into NextEra Energy suggests that Google is expecting something further.

It seems logical to assume that the company’s motivation also involves saving money by slashing its dependence on coal-fired generators. After all, when your electric bills approach that of a small country, it’s hard not to jump on a company that could potentially produce enough power to light up 55,000 homes.

But if this is, in part, an exercise in cost-cutting, Google made a big mistake: it chose the wrong renewable energy.

Wind Farms vs. Geothermal Power

The main problem with wind farms: they don’t work when it’s not windy.

But that’s not all. Wind energy is plagued by high capital costs, a weak power transmission system, and low output, making its success heavily dependent on government subsidies. Load factors for wind energy – that is, the difference between how much power a generator can produce and how much it actually produces, which determines how much money a utility will make – are also quite low. The large physical footprint – the amount of land required to build wind farms – is another downside, as is the threat they pose to birds and the noise pollution they generate.

Add this all up and you’ve got the biggest loser when it comes to going green. In reality, the best renewable energy bet Google could make, especially in the United States, is on geothermal. Leaving everything else aside, geothermal beats wind energy on the most important factor: it is not dependent on weather. That means there is no need for backup power generation facilities, something wind farms must have for the days when the turbines won’t turn. Nor are government subsidies absolutely necessary for geothermal energy; they’re more of an added bonus. And geothermal power plants require the least amount of land: they can hum away contentedly even in the middle of farmland or a park.

Geothermal also wins on the numbers, with the highest load factor of all renewable energies and the biggest profit margin. Take a look at the cost breakdown of renewable generating technologies in the U.S. – it’s clear that geothermal is miles ahead:

Generating Technology*	Load Factors	Revenues per plant (US$0.10/kWh electricity)	Costs of Operations** (US$)	Profit From Operations (US$)	Capital Costs 2009  (US$ per KWH)
Geothermal	90%	$39,420,000.00	$8,416,500	$31,003,500	$1,749.00
Hydroelectricity	45%	$19,710,000.00	$696,500	$19,013,500	$2,900.00
Wind - Onshore	25%	$10,950,000.00	$1,549,000	$9,401,000	$1,966.00
Wind - Offshore	40%	$17,520,000.00	$4,346,000	$13,174,000	$3,937.00
Biomass	90%	$39,420,000.00	$30,336,620	$9,083,380	$3,849.00
Photovoltaic	25%	$10,950,000.00	$597,000	$10,353,000	$6,171.00
Solar - Thermal	15%	$6,570,000.00	$2,902,500	$3,667,500	$5,132.00

* Numbers are on a comparable per-plant basis   ** Costs are exclusive of subsidies.

Once Bitten, Twice Shy

Perhaps the reason Google decided to go with wind energy this time is because it gave geothermal a chance in the past. Two years ago, through Google.org, the company became the biggest investor in enhanced geothermal research, beating even the United States government. Unfortunately, that time around, Google picked the wrong company.

Google invested US$6.25 million into AltaRock Energy in August 2008, to help the company make a success of its promising Geysers project in northern California. AltaRock was using the latest technology – Enhanced Geothermal Systems (EGS) – in an attempt to harness some of the energy locked far beneath the earth’s surface. As Google discovered, though, making a sound investment is not as simple as picking a company just because it has a great project location and the finest in tech. A host of pitfalls faces any geothermal developer – including inexperienced crews, insufficient financial backing, and the lack of a good power purchasing agreement.

But most formidable of all are the challenges of very deep drilling. While EGS represents a breakthrough, it’s still new, and it’s tricky to use. To properly exploit its potential, companies need to learn how to drill that deep, and to do so despite the hot corrosive fluids and unfriendly intervening layers of rock that can ruin a well in short order. And as if that weren’t enough, users have to work extra cautiously. Geothermal activity is generally found around seismic fault lines, and fracturing deep rocks using hydraulic pressure has linked EGS to earthquakes.

As AltaRock Energy (and its investors) found out, it’s going to take more than just fat corporate and government checks and tweaks to conventional techniques for EGS projects to work. The Geysers project came to an abrupt halt just over a year after drilling began. Barely a third of the well’s planned 12,000 ft depth had been reached before drillers encountered a layer of fibrous rock that caused the holes to collapse.

Getting on the (Right) Green Bandwagon

Renewable energy is essentially still in its infancy, with plenty of barriers to surmount. At the same time, there’s no mistaking politicians’ growing desire to climb onto the bandwagon. Which means more and more companies are jumping at the chance to join in. But this is still relatively unexplored territory, and the market has some hard lessons yet to teach. Not every company... or idea... is cut out for this.

It would be wrong to say wind energy doesn’t have a future, because it does – a very distant and windy one. One that won’t be materializing anytime soon, at least not until the capital costs of wind development drop and transmission techniques improve.

Geothermal isn’t easy. The Geysers failure demonstrates that. But it’s proven, it’s cost effective, and it runs 24/7... so for now, it’s our favorite renewable energy.

Our research is focused on finding the best geothermal companies out there and, because Google is our favourite search engine, we’ll be happy to share that research with CEO Eric Schmidt and his band of merry men. So come on Google, feel lucky and click here – we’ll give you a free three-month trial with our Energy newsletter, including our #1 geothermal recommendation.

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Not just for Google, you too can get access to Casey’s Energy Report today and start profiting from the green energy movement, as well as from oil, gas, and other energy trends.  Start your 3 month risk free trial today.