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Friday, 27 June 2008

A Russian mirage?

The Moscow times reported last week that three Russian metals companies hope to announce a major investment worth more than $2 billion in Zambia next month, according to Russian diplomats. Well, not according to Mineweb. Apparently our Russian friends are used to making grand claims that never materialise. Technically we can't call them infestors, but much more like impostors.

20 comments:

  1. oh, you call them inFestors, lol

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  2. Cho! The Perfect Freudian Slip!

    I really needed a laugh today, and somehow I find it here in the first 30 seconds, after (obviously far too long) thinking that I didn't have enough time to devote to this "big picture" project. However I am not writing purely out of a desire to credit you for my latest and greatest instant gratification, as always I find this blog to be among the best sources for thoughtful insight into the issues facing Zambia and the region, and try to contribute accordingly.

    It is indeed true in my own experience and anecdotally through others that Russian capital can be rather more insubstantial than signed contracts might otherwise indicate. However, I feel it important to introduce the standard caveat of the investment industry in the reverse of its usual connotation, "past performance is not indicative of future results." Without attempt to reflect upon the individual or corporate entities of Russian nationality which are involved in this particular, allegedly shaky and/or non-existent investment, I would like to point out that purely due to the scale of known mineral and petrochemical reserves within the jurisdiction of Moscow, that it is likely that Russia will be a significant if not key player in any attempt to establish enforceable international standards for raw material extractions of the type to be most important to the Zambian economy over the same period of time.

    There is no real reason to view Russian investors (or infestors) any differently than any others. What it interesting to me is how the paradigms of commodity trading are changing. For example, there are many here in the US who are convinced that the unprecedentedly rapid increase in the price of petrol (which they are not aware is already massively subsidized by their govt. They have no idea that they pay half what most Europeans pay at the pump for example) is due to what their political leaders have deemed "speculation".

    There are of course the bulk of US financial analysts who go unnoticed in the popular (i.e. non-financial) press who blithely point out that by nature oil speculators cannot make tangible use of any futures in their possession, and therefore must dispose of such investments, presumably at a profit, before the actual oil is due for actual delivery. Given the standard dynamics of commodity markets over the last century or so, it is reasonable to assume that the optimal price for all oil futures contracts due on a given date will occur at the same time, and that the majority of persons speculating in any given commodity will therefore tend to sell their interest at or near to the optimal price. Thus far I know of no analysis which has shown such a clustering of oil futures sales as they approach their delivery dates over the past 12 months.

    There are others who point to increasing demand in high population emerging market states in order to attempt to explain the phenomenon, but it doesn't scan. Not in current real terms, which is what has OPEC flummoxed. First among all others, the OPEC countries know exactly how high the price of a barrel of crude oil must rise before each of a panoply of other energy production or conservation measures becomes viable as an alternative. I am not among those who think that the Saudis expected their announcement of an increase in production of half a billion barrels per day to result in a further increase in prices.

    I don't think that they expected it, but I am not surprised. That is because, in part due to the focus here on Zambia's resource extraction industry, I have been paying attention to the difference in how China has been approaching exploration and exploitation of natural resources outside its territorial boundaries. To cut to the chase, China is thinking ahead, they are adding 10+ million combustion vehicles to their domestic civilian fleet each year at present rates. Unlike the elected governments around them which react on the basis of the next 4 to 6 years, and the Western idiot-box commodities market (which increasingly approximates a home console video game) that strives to react in 4 to 6 seconds, the Chinese central government has reached an eminently rational conclusion:

    Given finite and dwindling oil supply vs. increasing demand globally and skyrocketing demand locally. Given that the vast majority of all transportation technologies and all that are associated with high economic status are run via combustion of petroleum derivatives. Given the world's largest population undergoing the world's fastest conversion to modern consumer economies and expectations of industrialization. Given nearly EU$1,000,000,000,000 in unexpended investment capital accumulated via taxes and tariffs on unprecedented export ratios and volumes. Is it any wonder that they are prepared to secure whatever oil supplies they can now, at whatever auction prices the short-sighted Western capitalists and politicians, who have become accustomed to mutually ignoring the finite nature of the oil supply, are unwilling to pay?

    Without adequate supplies of imported oil, metals, coal and other raw materials for at least the next decade or two, the Chinese economic "miracle" will fail, and given the expectations created in the meantime, such a failure is likely to be catastrophic for (even unelected) rulers of any state. The old energy economy had the US producing 3% and consuming 25%, in the assumption that they could afford to pay more than anyone else for imports, and so they set the price. Now China begs to differ, and from a perspective that looks a decade or more ahead of the current circumstance, it is obvious to them, and to me, that US$150 for a barrel of oil is CHEAP.

    For the last several years, or rather they last several years before this current one, many Western oil extraction companies have been mocking their Chinese counterparts for their expensive contract bids, that they, "don't seem to realize that it doesn't matter who takes the oil out of the ground, once it hits the open market it goes to the highest bidder." Instead they have been entering into more 'expensive' contracts, in places such as Angola and Sudan, which in fact place rather a premium on allowing the extracting entity to determine the destination of the product itself, without regard to international markets or prices.

    To me, this means that the Western oil traders cannot conceive of a day when dollars cannot be traded for petroleum, and the Chinese can. If the Chinese are wrong, then they will have paid too much for a product that is in limited supply and has a wide variety of uses. If the oil traders are wrong, the economies which they supply will effectively collapse before they can can adapt to new and/or drastically reduced energy supplies.

    Zambia cannot afford to get embroiled in this new "superpower" conflict. Tractors without fuel are pointless, and fertilizers made from scarce, multi-use natural gas won't be around for long at affordable rates, no matter what quick-fix subsidies the Gates Foundation tries to throw at Africa in a vain hope that the whole continent will then go away (or at least suffer sufficiently far out of sight and mind). Too bad so much of the available hydroelectric is tied up in the copper contracts, and proposed new dams will barely meet current shortfalls if that much. If the nation is to have sustainable mechanized irrigation on a majority of farms in the near future, it is likely that some form of subsidy for localized wind and/or solar power generation will be required.

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  3. Yakima,

    Atleast now when I tell Random about your insights on constitutional reform, he won't think I am referring to a ghost! lol!

    Always good to read your posts. As always you raise a number of important points. Focusing on three if I may.

    - On rising oil prices : I do think that rising demands for oil has something to do with, but clearly increasing production is not immediately the answer as the Saudis explained this week. There's only so much that can be refined at one time. Hence they can not pump out the stuff that will only sell at a cheaper price because refineries are operating on the maximum. Incidentally those that have argued that rising oil prices may see more investment in exploration are probably being too optimistic. In the medium term we more likely to see expansion in refineries. The capacity for pumping more oil from the ground exists, its the limited capacity to refine it.

    - On China's approach : very insightful indeed. Its clear that China (and Russia) are looking over longer horizons and they clearly do not see alternative energies. So they really have no other choice than to secure these resources. It is indeed interesting that even the Americans are now looking to drill more at home as they realise that there are just no alternative technologies out there which are cheap and have side minimal side effects (as we have learnt with the biofuels impact on food prices).

    - Zambia's choice : as you have correctly noted, much of our future depends on being able to have access to cheap energy. Last week for example we had an increase in Jet A1 fuel which is likely to significantly damage our aviation industry. We also have the usual problems with our refineries which feeds the inefficiencies into the final price. Clearly our copper production requires significant access to oil. The recent increase in fuel consumption of 35% underlines that point.
    What I am unclear about is what the optimal energy strategy for Zambia is. Is it biofuels?
    Or investment in electric powered vehicles for farming? Or is it as you have said more solar powered instruments for farming etc? A new energy strategy is certainly necessarily that articulates better how Zambia plans to position itself?

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  4. First of all:
    It is indeed interesting that even the Americans are now looking to drill more at home as they realise that there are just no alternative technologies out there which are cheap and have side minimal side effects

    The American Right wants to drill more at home (in national parks and on the coasts) not "Americans". And they want to do it because they're close the interests of big oil (they never liked the bans to start with), because they don't want to admit that low prices won't go down and because they do not want to even look into alternatives, especially since in the case of the US, adapting to expensive oil would mean more public transportation, more cities, less suburbs etc...

    Now as far as securing oil supplies, here's a thought:
    When oil gets rare and expensive, so rare and expensive that there will be plenty of incentives to acquire it outside the commoditiies markets, will contracts matter ?

    No really, do you think Angola will commit to a 30 years old contract they signed with the Chinese while Americans or Turks or whoever are willing to pay more ? And what will happen when Angola changes their mind ? A Chinese invasion ? Followed by an American invasion ?

    I think that if we're willing to look at a world where oil is so valuable that it's a good idea to lock supplies via contracts now, we have to also be willing to consider the fact that many will be willing to resolve such issues in a .. different way. And in war, I don't think contracts matter. After all, that was why Hitler tried to reach Baku, wasn't it?

    As far as alternative energy sources, I think that many of use think about it the wrong way, including the Chinese government. I mean, how come they're subsidizing oil consumption at home (which the americans don't do, btw. they just tax it less than europeans) ? How come a country that is still building its infrasctucture spends so much money subsidizing a product that they believe has no future AND "securing" the product abroad ? Wouldn't it cheaper to look into alternative energy or to build more energy-efficient infrastructure (oddly enough, they are building some, and contrary to the US, the Chinese gov doesn't deny global warming and all that).

    If there was a world government, the solution would be quite easy.. Let the prices go up and we would all use oil only for the best uses (fuelling boats) or the necessary ones (fertilizer). Trains can and do run on electricity and while we wait on electric cars, there is always the option of building more public transportation.

    Basically, the future of energy is in Europe and Japan, not China.

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  5. Random,

    If I understand your point - it is that long term contracts are pointless because they try and secure cheaper access in face of rising higher prices..when the incentive for reneging will be high..

    I do agree there's a commitment problem with long term deals thats why the Chinese are guaranteeing their Chinese investment with force. See Economic & military help...inseparable? .

    However, I do think their other things we standard "pre-commitment" arguments ignore e.g. development of cultural ties and so forth. In show the Chinese are not just securing deals but developing a deepening of culture and other exchanges etc.

    In addition, we must not forget the impact that such long term investments may have on OTHER countries in the short to medium term - they may respond with investment in alternative energies, raising the Yakima specter of China perhaps betting too highly and not bearing in mind that players may react to its competitive advantage in this area by investing greater in alternative and perhaps more efficient sources. In the end like speculators, the Chinese activity could simply turn out to be a generous public good...

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  6. If I understand your point - it is that long term contracts are pointless because they try and secure cheaper access in face of rising higher prices..when the incentive for reneging will be high..

    Exactly. And I go one step further by arguing that contracts aren't worth a penny if there's a war about ressources.

    I do agree there's a commitment problem with long term deals thats why the Chinese are guaranteeing their Chinese investment with force. See Economic & military help...inseparable? .

    No.
    First of all, one has to remember that weapon sales are.. well, sales. It's not "helping".
    Then I don't think that kind of military help China provides currently would guarantee those contracts in the face of a turn-about by Africa goverments.

    Arm sales, military advisors, military cooperation help current regimes improve their military capacity. That means that when Angola changes its mind, it will have an even stronger army (and I dare anyone to invade Angola anyway).
    The dependency only exists in the current conditions. Angola works with the Chinese because they offer the best deals (be it militarily or with loans), so quite logically, China will have to keep offering the best deals.
    Of course one could imagine that China is training a generation of military leaders that would be prone to stage coups against anyone threatenning chinese interests just like the Americans did in Latin America. But the Latin American policy had an ideological basis. Those officers were conditionned in intervenning against "communism". China's main ideological foundation, especially in Africa is the absoluteness of state sovereignity. And if it's in the state interest to renege on a contract, they don't have an argument against it. And with China priviledging state to state interaction, there is no comprador class who would loose a lot from the switch.

    And once again, if Angola decides to renege on that contract with the chinese in 2020 because they got a bigger offer by Chevron, will China send ships to fight against American ships for the control of Cabinda ?

    However, I do think their other things we standard "pre-commitment" arguments ignore e.g. development of cultural ties and so forth. In show the Chinese are not just securing deals but developing a deepening of culture and other exchanges etc. 


    Doesn't work either. A contract and some nice words from an ambassador are not cultural ties.
    it would take a whole lot more effort to establish such things. Especially since we're talking about countries that have much deeper cultural ties with someone else (the colonizers).

    In addition, we must not forget the impact that such long term investments may have on OTHER countries in the short to medium term - they may respond with investment in alternative energies, raising the Yakima specter of China perhaps betting too highly and not bearing in mind that players may react to its competitive advantage in this area by investing greater in alternative and perhaps more efficient sources. In the end like speculators, the Chinese activity could simply turn out to be a generous public good...

    Hmmm, yeah.

    Though one doesn't need China's bets for that. China's demand is enough, isn't it ?

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  7. Random,

    I take your point about the limitations of the "military / economic inseparability" argument, but isn't that Chinese level of engagement more symbiotic than you suggest?

    I mean the Chinese do not just sell things, they come and set up shop. They physically export chinese people to the areas...analogous to old style colonialism...

    This is the cultural and commercial deepening that I am talking about.

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  8. I mean the Chinese do not just sell things, they come and set up shop. They physically export chinese people to the areas...analogous to old style colonialism...

    There's nothing symbolic about that.
    I mean Lebanese, Greek, Indian merchands, traders, business people set up shops all over Africa during and after the colonial period. There was nothing symbolic about that. They just had plenty of people willing to go and set up shop (Portugal too, I mean outside of its colonies).

    The big thing about China is that they're able to be both the UK and Greece. They have big companies buying up mines and building big stuff and small merchands willing to go to the other side of the world to set up an auto repair shop or a grocery store. That of course confuses Westerners and you see people talking about how there's already more Chinese in Nigeria than there were British at the height of the British rule but then again, there are more Lebanese in Nigeria than there were British at the height of the British rule.

    There's simply a lot of Chinese people around. And I really don't think it's part of a cultural "deepening" strategy.

    Unless one day Zambia ends up being like Indonesia , Thailand, Singapore or Maysia with its powerful and numerous minority of chinese origin, I don't see it happening. And even then, China had had cultural influence over that area for centuries if not millenias.

    Now if we talk about Brazilians in Angola or Arabs in the Sahel, there may be something going on..

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  9. Not "symbolic" but "symbiotic"...

    As in simultaneous deepening...but I don't think that changes your assessment..since your assessment is considering scale..and your Brazilian / Angola example recognises the cultural dimension...

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  10. sorry i misread.

    I don't know. i think people overestimate China, mostly because westerners have a long habit of being scared of China.

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  11. Cho and Random,

    Having now read the ensuing discussion, I am even more sorry that the stresses of running a small business kept me away so much this year! I think you have both made so many sharp observations and raised so many thoughtful alternatives that this thread deserves resurrection after so long.

    One point I would have added early on had I been paying proper attention is that the presumed Chinese strategy actually does predict an end to the dominance of fossil fuels as energy source, within a matter of decades. Their behaviour indicates however that they are willing to pay a premium in order to secure a market share sufficient to enable them to both grow at projected rates and transition to a more advanced industrial base. Call it setting up a Distributional Cartel if you like, similar to the current market for precious stones. The contracts do not attempt to lock in a low price, they simply require that where bids are equal, they are given preference on delivery.

    Such a hypothetical future also assumes the priority on self-preservation and stability of governments such as the Angolan junta remain relatively unchanged, that the Chinese middle class has developed sufficiently to rival or surpass the purchasing power of the EU or North America, and that increased development of alternative energy sources will not be sufficient to overcome increased demand for several decades leading to chronic shortages as fossil supply contracts.

    The contractual instrument itself appears to be similar to tactics used by corporate boards to fend off hostile takeovers. In the event of a takeover bid sufficient to woo stockholders by an entity likely to liquidate or otherwise act contrary to the longevity of the core business, it is within the board's discretion to accept an equal bid from a friendly party first, to which the stockholders will presumably agree all things being equal.

    I think Cho is quite correct about refinery capacity over the next decade, and indeed that is where the western capital markets are concentrating to predict prices. It should be noted that the insufficiency of refinery capacity is due to increased demand, not reduced capacity. Given that fossil fuels are, well, fossil, it is inevitable that at some point refinery capacity will exceed crude supply. I think that is important, and apparently Chinese long term energy strategy does too.

    I am not afraid of China, they have sufficient problems ahead of them managing a fifth of the human race. It is to be hoped that by the same point in the hypothetical future Zambia is still possessed of abundant natural resources, with a vibrant domestic economy and stable national institutions. I do not think that will happen if Zambia relies on out-competing China over scarce resources like fossil fuels, the good news is that it doesn't have to.

    China needs to convert a huge communist era industrial base into a modern high technology superpower within a couple of generations. Zambia by contrast is still largely undeveloped, and while the bulk of what is currently in place is relatively low tech, there simply isn't much of it in absolute terms. In energy terms in fact, things could be a lot worse.

    The bulk of stationary power generation is hydro-electric, and presumably sustainable provided climate change doesn't dry up the rivers. Unfortunately, the rapid increase in mining operations has overwhelmed slow-growing sustainable capacities, leading to load shedding, imports from regional grids or for diesel generators. It is possible that a slow down in mining operations may have the unintended consequence of putting the country back on an even energy footing for a time.

    The long term problem is the transport economy, which currently is entirely dependent on imports. Zambia has copper and hydro, so electrified rail would seem an extremely attractive infrastructure choice for industrial sustainability. Light transport is likely to migrate towards the electrolysis/hydrogen/proton-exchange technologies in use in Iceland. However, like the Chinese, Zambia must be prepared to rely heavily on diesel for several decades.

    One solution is methanol, relatively easy to implement over the short to medium term, however not without its own hazards. Methanol is extremely dangerous to handle, and is very hard on equipment seals and other vulnerable machine parts. It can however be readily and cheaply produced from almost any organic waste material. Under carefully controlled conditions, use of methanol in industrial applications can significantly reduce demand for diesel.

    I think Random is quite right on this score, and overall consumption of fossil fuels will tend toward specific cost-effective applications. The problem for Zambia is that, unlike China, the basic industrial infrastructure does not need to be upgraded eventually, it needs to be built in the first place. Unless present infrastructure development is designed with an eye toward future usefulness in a changed energy economy, then the country will be just as far behind the global curve then as it is now.

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  12. Cho and Random,

    Some further belated responses and elaborations:


    With regard to Cho's questions, "What I am unclear about is what the optimal energy strategy for Zambia is. Is it biofuels? Or investment in electric powered vehicles for farming? Or is it as you have said more solar powered instruments for farming etc? A new energy strategy is certainly necessarily that articulates better how Zambia plans to position itself?":

    I think we have to be realistic about the near term prospects for energy self-sufficiency, as long as the planned expansion of the mining industry continues, generation will lag behind. So far load shedding appears to be confined to largely residential districts, however this can have a devastating effect on many service industry SME's and other public utilities. As we have discussed before, there are limited sources and routes by which Zambia can import power from other countries in the region, and almost all paths lead to someone else with a shortage before reaching someone with a surplus, if at all.

    I have never thought that it was just coincidentally ironic that the country which most heavily embraced solar power from the outset was Saudi Arabia. This isn't just because it is such an obviously sunny place, or that they had more money than they knew what to do with, but mainly because they have an intimate understanding for the nature of pipelines and a desert people's inherent value for resource conservation.

    They know that if you pour a barrel of oil into a well constructed pipeline of any length, you get a barrel of oil out the other end, give or take a tiny fraction, viscous fluids are like that. They also know that high voltage transmission lines must overcome the inherent resistance of the materials they are constructed of, primarily copper of course, which are never perfect conductors. The longer the lines, the greater the loss, so that it is hypothetically possible to construct a line so long that nothing comes out the other end at all. Grids are convenient and stable, allowing generation facilities to help each other overcome localized spikes in demand or shortages due to maintenance, but they are expensive in terms of actual electricity lost to resistance.

    Instead of burning oil for electricity in large, cost-efficient generation facilities and then transmitting it to widely scattered populations across hundreds of kilometers of deserts and mountains, they opted for solar installations, usually immediately adjacent to whatever they were intended to power. Incidentally this is exactly the strategy of the Hopi Tribe in the southwestern US, who have the highest proportion of licensed solar power technicians per capita in the world. The cost savings from not constructing and maintaining a complete grid significantly offsets the relatively high up-front cost of current solar technology. So for rural Zambia, speculative funds currently earmarked for grid expansion might be better expended for onsite generation.

    For areas already on or soon to be on the grid, the hydropower backbone should be enhanced beyond completion of current large scale projects with a series of small, dual purpose dams on tributary streams, primarily to secure reservoirs for irrigation and drinking water, with low pressure hydropower installations attached. Something as old-fashioned as a water wheel can still spin a small turbine. Even if they do not contribute large amounts of power overall, the scattered locations will help to stem losses in the grid and allow the same voltage to reach further more efficiently.

    I think it is desirable to encourage onsite generation by homes and businesses on the grid by Zesco directly offsetting kWh consumed with kWh produced, and paying out the same rates they charge consumers when production exceeds consumption. Anyone who can afford to do so should be encouraged to add solar, wind, or micro-hydro installations to existing structures as and where appropriate. Zesco and its oversight authorities should pay close attention to the average lifetime cost of producing such kWh, and ensure that rates paid for excess power sold to the grid are sufficient to justify the large initial outlay over time. The silver lining to this cloud is that here the relatively high rates of consumer price inflation serve to favour the choice of upfront over operating costs.


    With regard to Random's question, "I think that if we're willing to look at a world where oil is so valuable that it's a good idea to lock supplies via contracts now, we have to also be willing to consider the fact that many will be willing to resolve such issues in a .. different way. And in war, I don't think contracts matter. After all, that was why Hitler tried to reach Baku, wasn't it?":

    I think there is some validity to this point, but it may be overstated. While I can concede a hypothetical total breakdown of market systems over energy shortages is conceivable, in market terms such supply contracts would come into play far sooner. Refineries depend on steady supplies of appropriate weight crude, oil is not a totally fungible commodity, so the earliest effects are likely to be felt by the oldest, least adaptable installations long before overall shortages are apparent in the market. Chinese planners can foresee difficulty obtaining specific supplies for existing refineries whose operational lifespan they hope to extend beyond the next decade.

    More widespread effects come into play as overall refinery capacity and production capacity level off, so-called "peak oil", where adding refinery capacity becomes pointless because supply can only decline. The refinery industry will begin to contract much the way other resource exploitation industries always have, and competition over dwindling supply will determine the longevity of any enterprise in the market. Seems a bit like fighting over the chance to be the last one to die on a desert island, but we can hope they are just arguing over optimal designs for a raft.

    With regard to Random's statement, "subsidizing oil consumption at home (which the americans don't do, btw. they just tax it less than europeans)":

    Subsidies are delivered in myriad ways, as this unfortunately titled article summarizes fairly well. Without quibbling about exact calculations, suffice it to say that I stick by my original statement that many consumers in the US, "are not aware [that oil] is already massively subsidized by their govt."

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  13. Yakima,

    It’s the nature of these forums to resurrect topics! As it turns many such topics are clicked on and people offer new insights. Unless one has subscribed to the comments its often difficult to know! Random is currently moving countries, atleast that’s what he told me, I suspect when he comes in the new year, we shall see another resurrection!

    In the mean time, on with the substance :

    On the Chinese issue, I was intrigued by your assessment that ”The contracts [by the Chinese] do not attempt to lock in a low price, they simply require that where bids are equal, they are given preference on delivery.” I interpreted that to mean their contracts emphasise the “first call” option. The nature of this “first call option” is interesting, at least in financial terms. For example, I have observed on the ground – China giving African countries like Angola massive long term loans at very low interests, or at least we are led to believe. Which presumably when paid back, the low interest would go presumably go towards cheaper access to the oil. Or is the “low interest” itself the “call option”?

    Regarding the energy challenges Zambia is facing. You correct to draw the distinction between transport and non-transport.

    In terms of transport, there’s no doubt that the options there appear few and probably expensive. I suspect we will remain at the mercies of the global equilibrium. However, there’s much we can do to look for new sources from our neighbours, and through that we should be able to secure better and more stable deals going forward for the consumer. Angola and Congo Brazzaville can provide the necessary oil sources, provided we adapt our refinery capacity. I understand that at the moment Indeni cannot process Angolan crude!

    Separately, I would like to see the government may be take sets that aims at stable oil prices. By that I mean, when the price of oil is falling, perhaps it should not pass the savings onto consumers, but save them for a rainy day, when the prices are high. Of course it has risks, but its worth exploring. I am pretty sure other countries do this sort of thing.

    Now for non-transport, the energy issue I think should be straightforward. Yes, I agree with you, we need to build a more greener and sustainable economy of tomorrow, but surely Zambia has 10% of the rivers and the future must be Hydro? We should work from our comparative advantage. The key is how to leverage private sector investment in this area, and see are discussing on the “Mulongotism” post, its tricky indeed.

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  14. Cho,

    Great questions as always! I look forward to Random's return, his take on recent global events should prove fascinating. One thought, which admittedly would add yet more to the sidebar (but i like all the stuff in the sidebar), would be a list of most recently active threads under the recent comments cluster. With several comment threads active at a time, often it is difficult for me to find them again (the search function is a great help on this, but some of these discussions go on for so long that I forget the titles of the original articles ;).

    Given of course that this is all speculation on my part, as to your example that, "I have observed on the ground – China giving African countries like Angola massive long term loans at very low interests, or at least we are led to believe. Which presumably when paid back, the low interest would go presumably go towards cheaper access to the oil. Or is the “low interest” itself the “call option”?" I am supposing that the low interest is part and parcel of a quid pro quo that includes first access to distant oil futures. My hypothesis is that the central goal of these deals for the PRCh[ypothetical] central planners is to secure physical delivery to their own facilities for as long as they are willing to match any other bid for the oil. This would be based on planning for a scenario where suppliers are rationing delivery of limited reserves to a decreasingly captive market in order to maximize their own return. As a captive consumer (which the PRCh has calculated they will be, for a certain period, with regard to certain facilities), under "bidding war" circumstances the best position to be in is one where you win ties (sure seems to work for blackjack dealers). If you can further enhance your position by eliminating any possibility of blind auctions by stipulating that you be informed of any bids and given a mandatory time window in which to match them, the only limit on your ability to secure delivery is your own price-point.

    There is no guarantee that PRCh will have enough or be willing to pay enough to match all potential bidders, however they appear to be locking in advantages where they can in anticipation that they will. Presumably they have concluded that a certain amount and type of oil supply is crucial for their economic performance over the long term. Delivery of oil at all, rather than cheaper oil, appears to be their primary worry. I worry that Western traders are slow to understand the concept that they may be outbid before oil hits the open market, resulting in certainly higher prices for PRCh, but eliminating the ability of the traders to profit at all. Since this is likely to result in higher prices per barrel overall for suppliers, it is within their interests to play along with the PRCh on this one, especially if other strings are attached. I imagine that this sort of thing could go on for quite some time before escalating to the level where Random's . . . other means come into play, if recent experience with adherence to trade agreements is any indication.

    Turning back to Zambia's energy future, I agree with you that, "Angola and Congo Brazzaville can provide the necessary oil sources, provided we adapt our refinery capacity. I understand that at the moment Indeni cannot process Angolan crude!" Following your suggestion would seem to be the only prudent course, and planning should begin immediately, however I would advise further prudence in choice of refinery design with regard to ongoing petroleum exploration within Zambia herself. I suspect that anything they manage to find will be small and otherwise limited, and therefore best applied locally rather than for export which requires greater economy of scale to compete successfully. It would be a shame if overspecialization in regional crude sources left Zambia unable to use her own! I believe that something similar happened in the DRC, where the refinery was built before discovery of local deposits, requiring them to export their entire production and import their entire requirement, with resulting loss of efficiency.

    As you say, "for non-transport, the energy issue I think should be straightforward. Yes, I agree with you, we need to build a more greener and sustainable economy of tomorrow, but surely Zambia has 10% of the rivers and the future must be Hydro? We should work from our comparative advantage." Green is good, for a myriad number of reasons, but economically the main reason I like Green is because it is efficient and often relatively low tech, at least in part. Hydro is only Green as long as it is truly cost efficient, and the economy of scale provided by large projects starts to lose some of its luster when costs are viewed through a green lens. Flooding entire valleys has a lot of long term effects, not least of which for our purposes is eliminating access to some of the most desirable arable land, that which has been nurtured by countless seasons of abundant plant life into relatively rich, healthy loam. Increased fishing can offset this somewhat, but it is just one example of a largely overlooked cost of macro-hydro.

    At some point, even Zambia's abundant, cost efficient hydro sites will be maximized, and while technological improvement is likely to provide some measure of continuing productivity gain over time, Green hydro is a limited resource like any other. The other big limitation of hydro for our purposes is its reliance on established transmission grid systems for delivery, which may not be the best option for certain parts of the country going forward. I have also been encountering numerous examples of utility companies preferring small remote generation facilities over upgrades of transmission infrastructure due to resistance losses over distance.

    For many village communities, the costs of installing a micro-grid for delivery pale in comparison to the challenges of integration into the regional grid. In such circumstances small, modular power sources which can utilize abundant local raw materials appear to be highly competitive despite relatively high kWe costs for the generating equipment itself. For example, all indications are that the off-grid commercial version of the 5 mWe CPC Biomax generators (utilizing woody biomass) will be priced under US$25,000 (batteries included), possibly far under, while the 50 mWe version (intended for grid connection) is likely to ring in somewhere around US$100,000 (some optimistic projections put it as low as US$35,000 which I find hard to credit). Even @US$5 per kWe, the cost of the generating equipment is made up in one year at a rate of 1.37 cents per kWday (battery generators run intermittently, this one is designed for 3-8 hours operation per day). Amortized over the medium term, the equipment cost is really minimal, and operating costs are mainly governed by fuel cost, which with something like woody biomass can be free or near free.

    I enjoy and recommend Google Earth (free) software to any who have the capacity to run it. I cannot count the hours I have spent peering into some of the better quality sat photos, getting an overhead view of the state of the nation to a limited degree. Anyhow, I spent a bit of time following transmission lines around, and there are a lot of places where it is obvious that the main grid will not reach any time soon.

    Very tricky, rascally perhaps, dastardly even, but not impossible!

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  15. How embarrassing, and apologies for sloppy math! So many orders of magnitude flopping around loose it can be hard to nail them all down. Somewhere in that last set of calculations I got my costs per kWe, kWh, MWe, and MWh all tangled up, so please disregard, I will check the math again and then rewrite the example with proper figures. Thanks for your forbearance!

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  16. No problem!

    I agree on the need for Zambia to look develop refinery capacity that can also handle "local crude" as and when that is available. I remain skeptical about this Zambian oil. Apparently four provinces have the potential, but I suspect that in practice, unless oil is found in North Western province, near the Angolan border there's little hope. Though I am reliably informed that Bangweulu really does hold promise of oil..but when you hear such noises more pronounced during elections it does give one pause...

    I will try out google earth...last time I used it, my laptop slowed down considerably...

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  17. Cho,

    Okay! I have tracked down better data on the costs of producing energy with the CPC Biomax generators, which have only been tested but not yet commercialized at 15kWe, though modular 5, 25 and 50kWe models are in testing currently. The actual equipment and installation costs are therefore uncertain, especially given ancillary outputs such as heat and even shaft power or gas-to-liquid fuels, which require additional investment to exploit. Currently the systems are configured to make use of widely available internal combustion technology for power generation, however are compatible with other systems such as biogas driven chemical fuel cells and microturbines. CPC describes the impact of different conversion methods thus, "Target electrical efficiencies vary by the choice of prime mover as follows:

    * Internal combustion: 15-30% (we have achieved 25% to date)
    * Stirling engine: 5-25%
    * Micro-turbine: 10-20%
    * Fuel cell: 25-45%

    When the waste heat can be used in a combined heat and power mode, the overall efficiency can be greater than 80 %.

    A larger system, rated at 50 kWe, is currently being testing with electrical efficiencies of at least 25%. With the use of higher compression ratios, and available control technologies we believe it is possible to achieve electrical efficiencies greater than or equal to 30%."


    All they have to say officially about costs is, "For the commercial system, cost will be a function of the prime mover, capacity, location, fuel used, and quantity. For internal combustion-based systems our long-range, commercial target cost is to produce systems for sale between $700/kW and $5,000/kW." They go on to caution that while their system can be cost-effective, "one would have to perform an analysis looking at their particular situation. The analysis should take into account such parameters as the intended application, installed capital cost, operating cost (mainly labor and fuel cost), hrs of daily operation, peak load and daily energy requirement.

    The best economics will occur when the user has high priced conventional energy (electricity and natural gas for example), where the user has a biomass supply on-hand, and where there is a need for both heat and power. If the user pays to dispose of the biomass, then the economics can be extremely favorable."


    As for Google Earth, if the whole program is too cumbersome for your machine, there is always Maplandia which is most of the same data in browser friendly form.

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  18. I was fortunate over Xmas. I found myself with a pro version of google earth which runs extremely fast. I am now playing around with the settlement patterns around Lusaka.

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  19. Cho,

    I am envious! Is the primary difference in the speed of the product, or is the content larger/higher quality? I have also learned the hard way to check on the dates for the Digital Globe imagery, which can be from as far back as 2002 in many cases around Zambia especially. Predictably, the Lusaka area has the best coverage, almost everything has been updated within the last three years, with Copperbelt a close second. On my free version I can access this "layer" via the tab labeled "More".

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  20. Yakima,

    As it turns out now, my wife got me an iPod touch over Xmas. I have enabled wireless access on it. That also has very fast google earth! I appear to have struck twice!!

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