Traders Don’t See OPEC+ Substantially Lifting Oil Prices
Portfolio managers continued to be bearish on crude oil prices ahead of the now-delayed OPEC+ meeting, further selling off Brent and WTI futures and options and halving the net bullish bet on oil in two months. The bearish positioning in crude oil in the past eight weeks suggests that hedge funds and other money managers are skeptical about OPEC+ managing to offset non-OPEC+ supply rising faster than expected, as well as concerns about economic growth. Some of the moves down in oil were also triggered by technical selling, while some hedge funds have stayed on the sidelines waiting for the next decision of the OPEC+ group. In the week to November 21, bullish bets were slashed – with net-long positions being cut by over 19,000 positions to the lowest since June, according to data from the ICE Futures Europe exchange and the CFTC. The latest Commitment of Traders (COT) report was released on Monday, delayed due to Thanksgiving last week. “Unsurprisingly, given the weakness seen in the market, speculators continued to reduce their net long in ICE Brent over the last reporting week,” ING strategists Warren Patterson and Ewa Manthey said on Tuesday. The net long position – the difference between bullish and bearish bets – in Brent Crude futures slumped by 15,880 lots to 155,105 lots as of November 21—the smallest net-long position since early October. Most of the sell-off was due to the liquidation of long positions. In NYMEX WTI Crude, portfolio managers cut their net long by 19,751 lots over the last reporting week to 104,545 lots. This was the smallest bullish position since July, ING’s analysts noted. “While longs are liquidating as sentiment in the market sours, there is also likely an element of speculators taking risk off the table ahead of the OPEC+ meeting,” they said. Amid record-high U.S. crude oil production, money managers have been selling WTI futures for eight consecutive weeks, reducing their position by the equivalent of 216 million barrels since the end of September, according to data compiled by Reuters market analyst John Kemp. The combined net long in WTI and Brent has seen eight weeks of selling apart from a geopolitics-driven bid higher in the week of October 17, after the Hamas attack on Israel, Ole Hansen, Head of Commodity Strategy at Saxo Bank, said, commenting on the latest report on traders’ positioning. During those eight weeks, the combined net long in WTI and Brent has more than halved to 260,000 lots, driven by 188,000 lots of long liquidation and 112,000 lots of fresh short selling, Hansen added. Traders are now expecting the next move from OPEC+, which is set to hold a virtual meeting on Thursday, November 30, if the group doesn’t delay it again, as some reports suggested on Tuesday. A rollover of the current cuts is the likely scenario, according to OPEC+ sources who have spoken to Reuters. The alliance is said to be continuing talks with African producers about their quotas, but no agreement has been reached as of late Tuesday. If the current cuts are only extended, they could erase most of the surplus on the market expected early next year, ING’s analysts said. “However, if OPEC+ want to provide more solid support to the market and ensure that we do not see stocks building early next year, they will need to agree on deeper and broader cuts,” they added. “The Saudis and OPEC+ have made a habit of surprising markets in recent years when it comes to their meetings. However, with aggressive cuts already in place, it does leave one wondering the degree to which the group could surprise the market with deeper-than-expected cuts.”
India becomes the 2nd largest supplier of refined oil to Europe, thanks to cheap Russian crude
India has become the European Union’s second-largest supplier of refined petroleum products in 2023, despite relying almost fully on imported crude, thanks to the availability of cheap Russian oil imports. Since Russia’s invasion of Ukraine and the imposition of several trade sanctions on Moscow, Saudi Arabia has been the largest supplier of refined petroleum products to Europe. According to reports, the European Union imported a cumulative 7.9 million tonnes of refined petroleum products from India between January and September of this year. This figure is more than double the amount on a yearly basis and triple the volumes from the same period in 2021. India’s refined petroleum products volume for this year catapulted it from sixth place in 2022 to first place in 2023. France, the Netherlands, and Italy emerged as the three biggest importers, followed by Croatia, Latvia, Romania, and Germany. India holds the position of the second-largest oil refiner in Asia after China. The country imports around 40 percent of the crude oil it refines from Russia, with volumes increasing exponentially due to a discount on Russian crude oil amidst Western sanctions. Interestingly, Russian crude continues to make its way into European markets indirectly via alternative channels. The Centre for Research on Energy and Clean Air (CREA), Bulgaria’s Black Sea, Neftochim Burgas refinery imported over 4.95 million tonnes of Russian crude between January and October 2023. Bulgaria was granted an exemption from the EU’s Russian oil embargo implemented in late 2022 in order to ensure sufficient domestic supply. However, Russian oil is being supplied to the European markets via India (refined oil) and crude through smaller countries in Europe. CREA finds Bulgaria as the fourth-largest imported of Russian seaborne crude, after India, China, and Turkey. It is worth mentioning here that Western countries led by the United States of America and the European Union imposed economic and other trade sanctions on Russia after its offensive in Ukraine in February 2022. Diesel exports Europe suspended most oil shipments from Russia almost a year ago, but continued to buy diesel that may well have been made from Russian crude oil. The region’s imports of diesel from India, one of the largest importers of Russian crude oil, are on course to soar to 305,000 barrels per day (bpd), the highest since at least January 2017, data compiled by the market intelligence agency Kpler showed. Since India imports crude oil from other countries such as Saudi Arabia, Iraq, Iran, and a number of other countries, it cannot be accurately said that New Delhi’s diesel exports to Europe is made of Russian crude. However, given that the volume of exports increasing significantly, one can easily assume that the diesel being exported to Europe is made of Russian crude. Meanwhile, increasing Moscow’s crude deliveries has given Indian refineries the ability to produce abundant diesel and boost exports. Arrivals into Europe in November include a rare shipment from Mumbai-based Nayara Energy Ltd, which imported almost 60 percent of its crude oil from Russia this year. Reliance Industries Ltd, Europe’s leading supplier of Indian diesel, draws more than a third of its crude oil from Russia, Kpler reported. This is considered Europe’s fundamental shift towards India after Russia’s invasion of Ukraine. The European Union banned most seaborne imports from Russian crude oil in December and oil products in February.
Saudi Arabia Expected to Cut the Price of Its Oil to Asia
Saudi Arabia is expected to reduce its official selling price for crude for Asian buyers, a survey among analysts conducted by Bloomberg has shown. According to the survey sample, including a total of six refiners and traders, the move would be prompted by intensified competition for the Asian market and cheaper crude from the United States and Europe, as well as Guyana. The influx of non-Middle Eastern oil comes as Brent crude, the global benchmark, is at near parity with the Dubai benchmark, according to PVM Oil Associates. The development, which is unusual, is the result of OPEC production cuts—notably Saudi Arabia’s voluntary cut—that have pushed Middle Eastern oil prices higher, and closer to Brent. As a result, Bloomberg reports, non-Middle Eastern oil has become more attractive for bargain hunters in Asia, doubling as evidence of the unintended effects of the production cuts, such as increased demand for less expensive oil. According to the Bloomberg survey, the average price cut forecast is for $1.05 per barrel of Arab Light, for deliveries in February next year. However, the individual forecasts ranged between $0.75 per barrel and $2 per barrel, the news outlet also reported. In the past few months, Saudi Arabia has been raising its prices for Asian buyers. In fact, it raised them for five months in a row until November, before announcing it would keep prices for Arab Light unchanged for December deliveries, earlier this month. It did, however, raise the price for Arab Extra Light by $0.70 per barrel. This suggests healthy enough demand for Saudi barrels in Asia despite competition from the U.S. Guyana and the North Sea. Supply, on the other hand, is likely to remain tight for the foreseeable future. The overwhelming expectation of analysts and traders from the OPEC+ meeting set to take place tomorrow is that the Saudis and the Russians will extend their production cuts into 2024. At this point, they probably can’t afford not to.
U.S. Crude Oil, Gasoline, Cushing See Inventory Dips
Crude oil inventories in the United States fell this week by 817,000 barrels for week ending November 24, according to The American Petroleum Institute (API), after a 9.05-million-barrel rise in crude inventories in the week prior, API data showed. Analysts had expected a 2 million barrel draw. API data shows a net build in crude oil inventories in the United States of more than 20 million barrels so far this year. On Monday, the Department of Energy (DoE) reported that crude oil inventories in the Strategic Petroleum Reserve (SPR) broke a seven week streak of status quo, rising by 300,000 barrels. Inventories are still near the 40-year low of 351.3 million barrels, with total purchases for the SPR coming in at about 4 million barrels since the Biden Administration began its buyback program. Oil prices were trading up substantially ahead of API data release despite OPEC+ chatter that dampened the markets hopes that the group would cut production deeper at its next meeting, which is currently scheduled to take place this Thursday. At 3:40 pm ET, Brent crude was trading up 2.13% at $81.68—still $.30 per barrel short of where it was this same time last week. The U.S. benchmark WTI was trading up on the day by 2.06% at that time, at $76.40–$1 per barrel below this time last week. Gasoline inventories also fell this week, by 898,000 barrels, on top of the 1.79 million barrel decrease in the week prior. As of last week, gasoline inventories were 2% below the five-year average for this time of year. Distillate inventories saw the only rise this week, with a gain of 2.806 million barrels. Last week, distillates fell by 3.51 million barrels in the week prior. Distillates are roughly 13% below the five-year average. Cushing inventories fell by 465,000 barrels, after rising by 640,000 barrels in the previous week.
After tanking in September, India’s crude oil imports rise in October
India’s crude oil imports appreciated in October 2023 largely propelled by growing domestic demand after the inbound shipments hit their lowest in the last 12 months in September this year. According to the Petroleum Planning and Analysis Cell (PPAC), crude oil imports by the world’s third largest importer rose 6 per cent q-o-q and more than 2 per cent y-o-y to 18.53 million tonnes (mt) last month. Analysts and market players said that imports rise during October-December in line with the revival in industrial, mining and construction activities. Besides, Rabi sowing also commences during the same period. Also, the December quarter also witnessed higher demand for petrol and diesel due to the festival and marriage season, which commenced last week. The consumption of petrol and diesel rose to a four-month high in October, while jet fuel sales surged to their highest in the current financial year and calendar year as rising industrial and construction activity coupled with the onset of the festival season boosted sales. Domestic oil marketing companies (OMCs) have also increased refinery runs for the remainder of 2023 to meet the growing demand for auto fuels, bitumen, fuel oil and other refined petroleum products. India imported 4.66 million barrels per day (mb/d) of crude in October 2023, which is almost flat compared to September, Kpler data shows. OPEC in its latest monthly oil market report for November 2023 said that India’s oil demand outlook in Q4 2023 should continue to benefit from strong annual GDP growth in 2023, combined with robust manufacturing activity and a proposal by the Indian government to increase capital spending on construction. Besides, the post-monsoon harvesting season and construction activity are also expected to support oil demand growth. In addition, the forward-looking indicators show strong manufacturing and services PMIs, suggesting prospects for healthy oil demand in the near term, it added. “In Q4 2023, oil demand is projected to grow by 243,000 barrels per day (b/d), y-o-y. Distillates are expected to be the driver of oil demand growth, supported by harvesting, construction and manufacturing activity. Additionally, traditional festivities are expected to support mobility and boost gasoline demand, while increasing air travel is expected to support jet/kerosene demand,” OPEC has projected.
Adani Total to blend green hydrogen with natural gas
Adani Group’s city gas distribution company Adani Total Gas Ltd on Tuesday announced a pilot project on green hydrogen production and blending as it looks to diversify its energy mix, develop a hydrogen ecosystem as well as reduce CO2 emissions. As part of the project, Adani Total Gas will use the latest technologies to blend Green Hydrogen (GH2) with natural gas for over 4,000 residential and commercial customers in Ahmedabad, Gujarat. GH2 is produced using electrolysis of water with electricity generated by renewable energy. Hydrogen blending is less carbon intensive than burning gas but has the same heating capabilities. The project is expected to be commissioned by the first quarter of 2024-25 and the percentage of green hydrogen will be gradually increased in the blend to up to 8% or more, depending on regulatory approvals, the Adani Group company says in a stock exchange filing. After successfully completing the pilot, hydrogen blended fuel will be supplied stepwise to larger parts of the city and other license areas of Adani Total Gas, the company says. As per studies, an up to 8% hydrogen blend can reduce emission by up to 4%. With this pilot, Adani Total Gas says it would like to partner with various stakeholders including regulatory authorities to share its firsthand learning and develop ecosystem about hydrogen blending in city gas distribution in India. This will also help in gaining and sharing knowledge on the operational aspects and the compatibility of blended fuel on existing infrastructure, it says. “We are fully committed towards building an environmentally sustainable operation and this project represents our ongoing dedication towards national infrastructure building for India to become energy independent by 2047. This project will reduce our carbon footprint and by investing in such innovative projects, we are actively contributing to the evolution of the industry and driving progress in sustainable energy solutions,” says Suresh P Manglani, executive director and CEO of Adani Total Gas. Adani Total Gas supplies piped natural gas (PNG) to industrial, commercial and residential customers and compressed natural gas (CNG) to the transport sector. Given its gas distribution mandate catering to 38 Geographical Areas (GAs), which account for 8% of India’s population, the company plays a significant role in the nation’s efforts to enhance the share of natural gas in its energy mix. Of the 38 GAs, 19 are managed by ATGL and the rest by Indian Oil-Adani Gas Private Ltd, a 50:50 joint venture between Adani Total Gas and Indian Oil Corporation. In September 2023, India’s largest commercial vehicle manufacturer Tata Motors delivered Hydrogen Fuel Cell powered (FCEV) buses to Indian Oil Corporation. These buses are to be assessed as potential mass transport solutions for inter and intra-city commute.
Traders Cut Bullish Bets on Oil Ahead of OPEC+ Meeting
Hedge funds and other institutional traders have reduced their bullish position on oil substantially ahead of the OPEC+ meeting on Thursday. In the week to November 21, bullish bets were slashed – with net-long positions being cut by over 19,000 positions to the lowest since June, Bloomberg reported, citing data from ICE Futures Europe and the CFTC. Long-only positions, meanwhile, also dropped by nearly 19,500 to the lowest since April. OPEC+ is meeting on Thursday to discuss production policies. News of internal disagreements added volatility to oil prices last week, while the possibility for deeper cuts from Saudi Arabia lent upward potential to benchmarks. Even with the potential of deeper cuts, oil began the week with a decline, extending a series of daily losses that began last week. Earlier today, however, the mood changed and both Brent crude and West Texas Intermediate began to trade with gains. Analysts attributed these to the nearing OPEC+ meeting and the predictions of deeper cuts. “Oil bears should be careful not to underestimate Saudi’s resolve,” Vishnu Varathan, Asia head of economics and strategy at Mizuho Bank, told Bloomberg. “But it will be hard for them to secure buy-in from all member states.” Last week, African members of the cartel were reported to have asked for higher production quotas despite Saudi Arabia’s attempts to keep a cap on production to keep prices higher. The latest reports suggest disagreements have been ironed out, after OPEC announced a postponement of the meeting, originally planned for last Sunday. This should help the group agree on net steps that, according to Eurasia Group analysts, could include additional cuts of up to 1 million bpd on top of Saudi Arabia’s voluntary cuts of the same size. In the absence of additional cuts, the Eurasia Group team said, Brent crude could drop to the low $70s, Bloomberg reported. This forecast suggests worries about economic growth have remained enduring despite factual data about oil demand so far this year.
New Reactor Design Is A Gamechanger For Green Hydrogen
The total market potential of hydrogen technology could reach $11 trillion by 2050, with major advancements and falling production costs, says Bank of America, which firmly believes “we are reaching the point of harnessing the element that comprises 90% of the universe, effectively and economically”. This year, in particular, has seen major momentum … Germany and Norway have agreed to build a hydrogen pipeline as a replacement for Russian natural gas and coal. Australia’s hydrogen project pipeline is one of the biggest in the world, with 12 million tons per annum–the bulk of which is green, or clean, hydrogen, according to Wood Mackenzie. In the U.S., McKinsey sees potential for the Gulf Coast–led by Houston–to become the world’s leading clean-hydrogen hub by 2030. Hydrogen could be far bigger than LNG, even. Texas alone, could see demand for hydrogen top 21 million tons per annum by 2050. “The effect would be significant: a clean-hydrogen hub could possibly generate around $100 billion in additional GDP by 2050 for Texas,” McKinsey says. Washington is also pouring money into hydrogen projects. The catalysts are lining up with phenomenal momentum, and there is a logical reason for this: Of all our climate change efforts, JP Morgan says hydrogen will be the “pivotal” source of energy over the coming decades, with both nuclear fusion and carbon capture, utilization and storage (CCUS) “unlikely to have a significant impact prior to 2030. Now, with all eyes on the real innovators here, a high-tech hydrogen breakthrough by privately-held GH Power opens another door in this burgeoning $ 11 trillion industry that’s created a hydrogen bull market. Reactor Hydrogen for North America North America is desperate for hydrogen breakthroughs, and GH Power’s new renewable energy technology is one of the latest. The technology uses exothermic reactions with only two inputs (end of life or recycled aluminum and water) to create three extremely valuable green outputs: hydrogen, alumina (aluminum oxide), and exothermic heat. The process uses recycled scrap aluminum as the key input. That aluminum is then mixed with water through a proprietary reactor designed to continuously operate to produce hydrogen, alumina, and exothermic heat (power) with zero emissions, zero carbon, and zero waste. That earns it a Carbon Intensity Score of -39 ( Based upon 3rd Party Report). The reactors are scalable and modular, which means they can be designed and built for small or scalable large power requirements with last-mile delivery. This advanced technology is simple to permit, build, operate and integrate with other industrial processes, even in remote areas. The reactor plant’s environmental footprint is extremely light: Each plant can fit up to 27 megawatts of green energy into a space that occupies only 2,000 square meters. GH Power is planning to develop a plant which produces 11,700 Tonnes of green hydrogen per year to fuel a 30-MW combined cycle plant with a net output of 27 MW. Led by world-class engineers with over 100 years of combined experience operating power plants, refineries, and other energy infrastructure, GH Power’s 2MW demonstration commercial reactor will start generating revenues in the second quarter of next year, and this is only the beginning. GH Power has a pipeline with blue-chip strategic partners to build out large-scale hydrogen power plants in North America and Europe. Its technology has won it global recognition, with a green technology grant in partnership with Germany’s RWTH Aachen University, sponsored by the Canadian and German governments. Finally, Low-Cost Hydrogen GH Power’s reactor is self-sustaining, zero emission, and is a net producer of energy for consumption. Most importantly, it’s a North American first: It’s cost-competitive with conventional fossil fuels. And the reactor’s value extends far further than this … It process also produces green hydrogen, exothermic heat, and green alumina, which has numerous commercial applications used for everything from lithium-ion batteries and LED lighting to semiconductor production. Green hydrogen produced from electrolysis costs about 3X more than hydrogen produced from natural gas, with the U.S. Department of Energy averaging green hydrogen at about $5 per kilogram. The enormous amount of money pouring into green hydrogen right now is intended to bring the cost down by 80% to $1 per kilogram within 10 years. So not only does GH Power say its reactor is already 60% cheaper than producing hydrogen by the currently most common method of electrolysis, but it’s also producing two other valuable green outputs for the market: exothermic heat that can be put back on the grid, and green alumina. The green alumina output is produced 85% cheaper than existing production processes of hydrochloric acid leaching and hydrolysis. GH Power’s technology is producing green hydrogen for 60% less than the current dominating process, thanks to its proprietary technology, which relies on only two inputs, water, and recycled aluminum, which is widely available everywhere for as little as $1.50/kg. GH Power’s reactor also produces green alumina for 85% less, it’s also going to play a role in decarbonization. The 27MW plant could produce 1.2 million tonnes of carbon offset every year. That’s a huge amount of carbon offset revenue potential considering that 1 metric ton of carbon offset costs between $40 and $80. Flipping The Switch On The First Reactor Phase 1 testing at GH Power’s first reactor in Hamilton, Ontario, has been completed, and Phase 2 testing was launched in late June. Phase 2 testing is preparation for commercial operations, which expect to be generating revenues by the second quarter of next year. Phase 3 moves to continuous operations of the 2MW reactor and integration into the final modular reactor design for a large-scale solution. The faces behind this green hydrogen breakthrough are major forces in the energy industry, led by CEO Dave White, a veteran engineer, and Chief Engineer Ken Stewart who has designed and managed thermal power plant and petrochemical processes across North America. COO Gary Grahn also has 25 years of international energy experience including in oil, gas, minerals, metals and utilities, CFO Anand Patel contributes a decade of real asset capital
IOC corners more than a third of D6 gas in latest Reliance auction
State-owned Indian Oil Corporation (IOC) has cornered more than a third of natural gas that Reliance Industries Ltd and its partner bp of the UK offered in the latest auction of the KG-D6 gas, sources said. IOC got 1.45 million standard cubic meters per day out of the 4 mmscmd of gas auctioned last week. The oil refining and marketing company, which was the top bidder even in the previous two auctions of gas from the eastern offshore KG-D6 block of Reliance-bp, bid the volumes as an aggregator on behalf of fertilizer plants. City gas companies including Torrent Gas and Gujarat Gas secured a total of 2.21 mmscmd of gas for turning into CNG for sale to automobiles and piped to household kitchens for cooking purposes, two sources with direct knowledge of the matter said. Gujarat Gas won the tender to buy 0.5 mmscmd, Torrent Gas 0.45 mmscmd, Adani Total Gas Ltd 0.29 mmscmd, IndianOil-Adani Gas Pvt Ltd 0.17 mmscmd and Indraprastha Gas Ltd and Mahanagar Gas Ltd 0.30 mmscmd each, they said. The auction saw participation from across the gas consuming sectors – fertilizer, city gas distribution, refineries and aggregators. A total of 38 successful bidders secured gas through the auction process, which concluded on November 24, they added. Reliance and bp last week auctioned 4 mmscmd of gas from the Krishna Godavari basin block starting December 1, 2023. They asked users to quote a price indexed to Brent crude oil price, according to the tender document. This was a departure from the previous two previous auctions, the last being in May this year, where gas was sold indexed to international gas benchmark, JKM. In the latest auction, Reliance-bp asked bidders to quote a premium ‘v’ they are willing to pay over and above 12.67 per cent of dated Brent crude oil price. The starting bid price for ‘v’ has been kept at USD 1.08 per million British thermal unit. Sources said the value of ‘v’ in the auction came to USD 1.98 per mmBtu. At the current Brent crude oil price of USD 80 per barrel, the gas price comes to USD 12.11 per mmBtu (USD 10.136 per mmBtu plus ‘v’ of USD 1.98). But the bidders will have to pay a lesser price as according to the tender document the sale price would be the lower of the government-dictated maximum rate payable for gas from difficult fields like deepsea, and the price arrived through the bidding process. The ceiling price payable for gas from difficult fields for a six month period starting October 1 is USD 9.96 per mmBtu. This means that even if Reliance-bp finds buyers for 4 mmscmd of gas are willing to pay USD 12.11 per mmBtu, the users will have to pay only USD 9.96 till March 31, 2024. The government bi-annually fixed ceiling price for gas produced from difficult fields such as deepsea and high-pressure, high-temperature (HPHT) fields, effective from April 1 and October 1. Natural gas, a cleaner-burning, efficient fuel, is being seen as a transition fuel for nations to move from polluting hydrocarbons to zero-emission fuels. In the last auction in May, IOC, the nation’s largest oil firm, had walked away with half of the 5 mmscmd of gas Reliance-bp had offered. In that auction, Reliance-bp had asked users to quote a variable ‘v’ over and above the JKM price, the spot market benchmark for liquefied natural gas (LNG) delivered to Japan and South Korea. At the end of that e-auction, gas was sold to 16 buyers at a price of JKM + (plus) USD 0.75 per mmBtu for 3 years. At the prevailing JKM price of USD 9.2 per mmBtu, the price for KG-D6 gas came to around USD 10. Reliance-bp had in April 2023 sold 6 mmscmd of gas. In that auction too, the final bid price came at USD 0.75 per mmBtu premium over the JKM price (JKM + USD 0.75 per mmBtu). The duo had a couple of years back used Dated Brent as the benchmark to sell KG-D6 gas before switching to JKM when international gas prices soared starting 2021. Gas produced from wells drilled below the seabed is used to produce electricity, make fertiliser, or turned into CNG for powering automobiles or piped to household kitchens for cooking as well as in industries. Reliance-bp produces about 29-30 mmscmd of gas from three sets of gas fields in the KG-D6 block.
Does the Natural Gas Industry Have a Future?
The natural gas industry’s domestic sales pattern over the past two decades makes one wonder whether the industry has much of a future. Okay, sales volume has gone up, at a slow pace, but most of that growth is due to increasing sales to wholesale electric power generators. The rest of the market has shown barely any growth. Table 1 shows annual rates of growth for major customer classifications as well as an estimate of the growth in propane usage. The table calculates growth using both compound annual and average annual growth rates. Either way, the numbers are dreadful. But not out of line with other energy growth rates, generally above the rate of population growth and below the rate of real economic growth. What does the future look like? Warmer winter weather means lower sales. So do more efficient appliances. And so do more efficient competitive products that use electricity like heat pumps. The Energy Information Administration projects that growth in overall demand will hover just below zero, although slightly higher for industrial use and lower for electric generation. Could be worse. What does the stock market think of that grim outlook? Presumably, investors have priced gas utility stocks as potential losers, selling at low ratios of price to earnings and paying ultra-high dividends, because they want immediate returns before the growth fizzles and the companies disappear. But not so. These stocks sell in line with what one might expect for reasonably safe, slow-growth utilities, not companies in terminal decline. What did the company’s senior management tell investors to convince them to take an optimistic view? The companies have a simple strategy. They invest in rate base, having convinced regulators that—like a perpetual motion machine—they must continuously spend money on plant expansion and on refurbishing of the network and strengthening connections to pipelines. A larger rate base requires higher earnings to cover costs, including cost of capital. The old regulated utility game is fairly straightforward. Expand rate base (i.e. assets) in order to grow earnings. As an aside, this is the same policy adopted by electric companies a few years ago, when they could anticipate little growth but they spent money on capital expansion anyway and got away with it. The difference, however, is that electric companies can now look forward to acceleration in demand, but gas companies cannot. Our question, then, is how long can gas utility managers continue with this strategy of making consumers pay more for a commodity when they keep using less of it? Especially when the sale of the product produces carbon dioxide which governments are attempting to limit. That does not sound like a sustainable business model to rational people, so why invest more money in such an industry? Okay, but consider this. Gas industry executives claim in response that their customers typically save $1000 per year over the alternatives. That’s not much of a sales pitch at a time when both residential and major business customers will pay more to get low carbon or no carbon alternatives, whether to be virtuous or to satisfy corporate “green” initiatives. What sensible marketer promises a low price for an inferior product? Now, technical developments offer the possibility of a cleaner (non carbon emitting) product. Renewable natural gas (from agricultural and municipal waste) could provide about 15% of end user needs. Hydrogen injected into the network might displace. another 15%. And gas derived from municipal wastewater treatment could displace another 15% of natural gas consumption. But here is the message for the gas distributors. The municipal wastewater plants will likely sell directly to generators of electricity, not inject the gas into the networks. The 30% reduction in total natural gas usage (through use of renewable gas and hydrogen) translates to a 40-50% replacement of natural gas within the networks of the distributors, the companies we are talking about, some of which, by the way, are making significant investments in renewable gas producers, opening up another avenue of growth for their stockholders. It means that gas companies could sell carbon-free gas to a large part of their customer base. That gives the companies time to figure out how to replace the rest of its gas supply, if possible. The smart companies are already telling shareholders that their networks can carry anything. So, to answer our opening question, the domestic gas industry does have a future, we think, at least over the medium term, despite stagnant sales, as long as it takes advantage of an opportunity to transform itself from a purveyor of carbon dioxide emitting products into a smart marketer of something else that’s cleaner and greener.