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The New Politics of Uranium Supply

After two weeks of modest increases, this week the uranium price jumped by $3.00 to $53.00. These few weeks of increase follow a downward trend and are in part due to recent political events that can impact future supply.

The biggest impact is due to events in Kazakhstan. It is now a few weeks since Kazakhstan announced that it is investigating past sales of the country’s uranium assets to foreign companies. The former Soviet republic, which is home to a fifth of global uranium reserves, has accused a former head of state-owned uranium producer Kazatomprom, Mukhtar Dzhakishev, of illegally selling deposits to foreign companies. Dzhakishev and other executives have been removed from the company and been replaced by new government appointees.

In Africa, the President of Niger dissolved parliament in an attempt to secure a change to allow him to run for another term in office. As Kazakhstan is poised to become the world’s largest supplier of uranium in 2009, and that together Kazakhstan and Niger produced about a quarter of the world’s uranium in 2008, this is very troubling news for the industry.

Uranium Production by Country

 

2007 TU

2008 TU

Australia

8,611

8,430

Canada

9,476

8,980

Kazakhstan

6,637

8,521

Namibia

2,879

4,366

Niger

3,153

3,032

Other

10,523

10,601

Total

41,279

 43,930

Source: WNA

While there were modest increases in price over the last two weeks since these events started to unfold, it is interesting that this week’s increase was the largest in some time.  This is after Kazatomprom assured their customers late last week that production will be unchanged and that it would honour all existing agreements; and following the Uranium One announcement that the Russian ARMZ will take a 17% stake in the company for half a uranium mine in Kazakhstan. 

And there are also issues for potential future production.  The acquisition of Western Prospector by CNNC in Mongolia is at risk as the government of Mongolia has temporarily suspended Western Prospector’s mining licenses.  This is of interest as it represents a recent investment in potential future production by China.

So what does this all mean for the nuclear industry?  Clearly, one of the strengths of the industry is the fact that uranium is available from very politically stable countries, primarily Canada and Australia.  With production now increasing in Kazakhstan and Africa where there are deeper political issues, is there now an increased risk to future supply?  Well, so far if we use the uranium price as a proxy for international concern, it appears that there is some concern.  But with the need for uranium supply and demand to be in good balance for the industry to move forward and build the many new nuclear plants under consideration, as a minimum, we would suggest that the bigger nuclear markets carefully review their supply strategies and ensure that they are sufficiently diversified to minimize their risk.  Each uranium producing country has different political issues – and none are immune.  Therefore diversification is an essential part of long term strategic uranium supply strategy.

MIT Report Update “The Future of Nuclear Power”

This week MIT released an update to its 2003 report, “The Future of Nuclear Power”.  Back in 2003 this report brought the economics of nuclear power in the United States to the forefront.  It supported new nuclear as a low carbon option for electricity generation and considered a scenario that would see the increase in capacity by a factor of 3 (meaning building about 200 new units) by the middle of this century.  It is commonly accepted that this report was an important input into the policy that followed with respect to nuclear power including the nuclear power 2010 program and the Energy Policy Act of 2005.

This update looks at progress over the past 6 years and of most interest, updates the economics.  The following table from the report shows the new versus old analysis.

Click on table to enlarge

Click on table to enlarge

As can be seen, the costs have increased significantly over this time period with the projected costs of nuclear increasing faster than the costs of the coal and gas alternatives.  However, the authors draw the same conclusions as they did in 2003; that nuclear is competitive with the alternatives. The report continues to assume a higher project risk for nuclear than fossil.  This translates into a higher cost of capital and the highest cost of electricity.  Assuming the same cost of capital as the alternatives results in nuclear being extremely competitive.

I want to comment on the costs and assumptions.  I have to admit, that back in 2003, when I worked for a nuclear vendor, I was not happy with this report assuming nuclear at $2,000 /kW.  At that time we all believed that we were making strides to lower the cost of new plants and we wanted to see that reflected in the analysis.  Well, I was wrong.  Today the cost of nuclear power has increased and I do accept that $4,000 /kW is a reasonable assumption to make in today’s world.  Does that mean that I think that it is OK for nuclear plants to cost $4,000 /kW?  I definitely think that more work needs to be done to bring these costs down but that is the subject for another discussion.

On the other hand, things have evolved so that the other assumptions do need to be challenged.   While it may have made sense to assume different costs of capital in 2003, this is no longer the case.  The argument in the report is based on the industry’s poor track record of building on time and on budget.  It states that issues with new plants since that date confirm this and that the risk premium can only be eliminated with proven plant delivery performance.  While I do agree that the industry needs to prove it can deliver a new fleet of plants to budget and schedule, things have changed since 2003.

In the current environment, the majority of new plants under consideration in the United States are with regulated utilities.  These plants will be financed on balance sheet so they will be financed at the cost of capital of the utility itself, no different than if it were to build a coal or a gas plant.  And now that the cost estimates have escalated significantly, it is reasonable to assume that part of this increase is due to utilities being more conservative and taking the risks into account in the cost estimates themselves.

Also, the risks of the alternatives have changed significantly.  The risk of new climate change initiatives being put into place after the coal or gas plant is committed has increased.  This means additional costs to the utilities to implement new carbon control requirements or charges due to additional costs for releasing carbon are likely.  Is $25/t sufficient?  At this stage nobody knows meaning higher risk.

And finally, it is interesting how the success of carbon capture and storage (CCS) is assumed, even though the technology has yet to be demonstrated while the success of building a new nuclear plant is consistently challenged.  The MIT study itself recognizes that CCS is not proven. The costs of CCS seem to go up every time a new estimate is made, yet they assume that nuclear has a higher risk profile and cost of capital than coal with a yet to be proven technology attached to it.

In the case of a merchant plant, should there be one; it will very likely only be implemented under the US government loan guarantee program.  This means that they can achieve the 80/20 debt/equity ratio assumed for the other technologies with even a lower potential cost due to the benefit of the government guarantee.

All that being said, the timing of this update is useful.  Their conclusion that more needs to be done is important.  As stated “The sober warning is that if more is not done, nuclear power will diminish as a practical and timely option for deployment at a scale that would constitute a material contribution to climate change risk mitigation.” It will be interesting to see how both government and industry respond.

Welcome to MZConsulting Inc

This is the beginning.  MZConsulting Inc was started about four years ago.  We are in the clean energy business.  We work with technologies that are low carbon.  This means renewables such as wind and solar and nuclear power as the major large scale low carbon option.  Our primary business is advising companies and governments with respect to new build nuclear projects.  Our experience is mainly related to the commercial aspects of energy generation projects so our focus is on energy economics and competitiveness. 

We also advise companies looking to make investments in the uranium sector.  This is focused on companies in Asia as major users given their growing nuclear programs.  We are not investment advisers in the sense of recommending stocks; we recommend and work with companies who have a need for uranium and help them find and implement suitable investments that meet their requirements.

We do have a web site at www.mzconsultinginc.com that summarizes our capability and records all of our public presentations and papers.  So why start a blog?  I have been thinking about it for some time now and what pushed me over the edge was recently reading a book by Jeff Jarvis called “What Would Google Do?”  I thoroughly enjoyed this book as it made me think of how quickly things are changing and the direction that world is moving.  I want to be part of the change.  I want to contribute and get feedback from others to help me shape my own company direction for the future.  Energy issues are certainly high on many people’s agenda these days and the interaction between energy and the environment is crucial to creating the low carbon future that we seek.

I don’t want to make this first post too long so I will stop about now.  I hope to provide input on a somewhat regular basis on a number of energy related topics and get some interesting discussion going.

So as I said at the top “Welcome to our Blog”.

Milt