Featuring Lutts’ Logic:
What You Need to Know About Carbon Sequestration
An Attractive Low-Priced Stock in the Industry
Until recent years, the only time you heard the word “sequester” (to isolate) was in reference to courtrooms. Juries were sequestered to preserve their impartiality, and witnesses were sequestered so that their testimony couldn’t be influenced by the testimony of prior witnesses.
But now the word has broken free; it’s being used by the mass media to talk about the practice–mainly theoretical, so far–of large-scale carbon sequestration, of putting carbon away so that carbon dioxide (CO2) won’t contribute to further global warming.
If this carbon sequestration is physically achievable on the necessary scale, it’s going to be a very big business. Lots of money will be made, and early investors will profit. But there are some very big questions involved at this stage. Last week, I visited Massachusetts Institute of Technology to attend a Sequestration Seminar and Industry Panel, and here’s what I learned.
In the U.S., 50% of our electricity comes from burning coal. In India, the number is 70% and in China, between 70% and 80%. Coal-burning power plants are by far the greatest source of airborne CO2 today, and it’s going to get worse. In the next five years, China may build as many coal-burning plants as exist in the U.S. today.
Natural gas plants and petroleum refineries are also big emitters of CO2. But the biggest culprit is coal. And the big dream is that the CO2 from coal-burning power plants can be injected deep into the ground, ideally into saline aquifers, where it will stay for a very long time, while slowly dispersing into the earth. (There are other methods of sequestering carbon, including pumping it deep into the ocean and storing it in metal oxides, but today, the geological approach appears to be the most practical, and that’s what the panel focused on.)
Injection of CO2 into the ground is practiced now by companies that do it to coax more oil out of reservoirs in the process known as Enhanced Oil Recovery (EOR). In the U.S., there already exist more than 3,000 miles of pipeline that carry CO2 to these oil fields. But these fields, in the grand scheme of things, are tiny. On a larger scale, there are four places in the world where big oil companies are injecting roughly one megaton (1 million tons) of CO2 per year into the ground. These projects are in the North Sea, Barents Sea, Canada and Algeria, and they’ve proven the technology works.
But … compared to the amounts that need to be sequestered affect the climate, even these big projects are tiny! Today, the industrial world is producing 30 gigatons (30 billion tons) of CO2 per year. To handle all that CO2 would require the construction of 30,000 more plants like the four on earth now.
Of course, we don’t need to handle all of the CO2. The Waxman-Markey bill, which has already been passed by the House of Representatives but is stalled in the Senate, stipulates that emissions be cut gradually, eventually achieving a reduction of 83% by 2050. (Note: The Waxman-Markey bill focuses on coal, while ignoring natural gas and other industrial polluters, a fact that irks the panel’s moderator.)
But there remain big questions about how the earth will react to the injection of that much CO2. At worst, it could precipitate the movement of faults, resulting in earthquakes. Less dramatic but still insidious might be the eruption of local leaks that contaminate water supplies and upset local agricultural balances.
Interestingly, three of the participants in the MIT panel were geologists, so to some degree they were united in their judgments that carbon sequestration might work, but that the ability to scale up was still questionable. (To a hammer, everything is a nail; to a geologists, the earth has all the answers.)
Fortunately, the panel included an economist, who noted that aside from the geological uncertainties, there are major problems with the cost of carbon sequestration. The companies that practice it now only do it because they get oil in return! To do it without that carrot is another thing entirely.
His message was that there are other technologies that might solve the problem, as well, that many should be tried, and that the market should decide what works best. This line of thinking says the answer lies in putting a price (a cost) on carbon–most likely via a cap-and-trade system–and letting the market find the solutions. If the result is a doubling in the price of electricity or gasoline, so be it.
What we shouldn’t do, according to this economist, is accede to the demands of lobbyists who claim that the coal industry needs protection from any economic disruption. Artificially perpetuating the coal industry, in fact, is exactly the wrong thing do, considering that coal is the biggest polluter. A cap-and-trade system will allow the market to determine how much we really want to keep burning this most polluting of energy sources. And if workers are to be displaced from the coal industry as we transition to Greener technologies, the sooner the better. To artificially prolong the existence of a shrinking industry or industrial giant (a la General Motors) only defers the pain.
So what other technologies are available? Natural gas is a lesser evil, and it’s economically in the ballpark now, but the Holy Grail is “free,” non-polluting renewable energy like photovoltaic (solar) or wind power.
These technologies are expensive now, but costs are coming down, and my opinion is that the sooner these new technologies can take over, the better.
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Pondering these big questions, I’m reminded of the heyday of Ballard Power Systems back in the mid 1990s. The company, based in Vancouver, British Columbia, was a leading developer of fuel cell technology, which it promised would replace the internal combustion engine in automobiles. The common wisdom at the time was that batteries were simply too heavy, and that battery technology simply couldn’t be improved much more. Fuel cells were new and glamorous and full of promise.
Ballard went public in 1993 and the stock peaked in 1998 and then again in 2000 at the market top. Revenues, mainly from partners like Chrysler, peaked at $120 million in 2003. But Ballard’s technology never proved practical. The stock (BLDP) is now selling for two bucks. And today, as the roads are swarming with millions of hybrids and even beginning to see pure electric cars from numerous manufacturers, our experience with Ballard (we did make a profit) reminds me that no one knows the future, that technology evolves, and that the best investors are always updating their opinions to reflect market realities.
One beneficiary of the growth of wind power is American Superconductor (AMSC), which has been recommended here several times, most recently by Michael Cintolo last Thursday. The company makes the “brains” of wind turbines. Its biggest customer is in China. In the third quarter, its revenues grew 85%. And last week, its stock broke out to new highs. It’s now trading around 39.
But today I want to discuss a smaller and lower-priced company that has its roots in the traditional power converter market. It makes those “bricks” that convert AC power to DC power and run all sorts of electric devices. Half of its revenues last year came from the telecom industry. It also makes power converters for the railway industry, the medical diagnostics industry and the military.
But this little company is now breaking into the renewable energy business big-time, with inverters that convert DC power from solar panels and wind turbines into AC power that can mesh with the existing electric grid. In the third quarter, revenues from the company’s renewable energy sector were $31.1 million, up an impressive 63% from the year before. And the backlog from the sector was $40 million.
I’d love to tell you more about this company … and maybe I will in January. But I can’t tell you now because the stock, currently trading around $4 share, is one of the 10 stocks recommended in our traditional year-end report, “Cabot’s 10 Favorite Low-Priced Stocks for 2010.”
You can get your own copy by clicking here.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory