FYI.
Dear Reader,
Before we get into today's dispatch on North America's natural gas future, I'd like to comment on breaking news in another energy sector: uranium. You may have seen that President Obama just declared a national emergency "to deal with the threat posed to the United States by the risk of nuclear proliferation created by the accumulation in the Russian Federation of a large volume of weapons-usable fissile material."
Isn't the Cold War over?, you ask. Don't we now work with the Russians in dismantling nuclear warheads? The answers are yes and yes. Moreover, there is absolutely no reason to be concerned about this "national emergency," because with this order President Obama is not trying to rile up old tensions or threaten Russia in any way. In fact, what he's doing is lobbing a conciliatory ball into Russia's court in the hopes that Putin will pick it up and play a game called "Let's Trade Uranium."
Here's the deal. The United States relies on Russia for half of the uranium that feeds US nuclear reactors. That uranium comes from a deal called "Megatons to Megawatts," struck in 1993, that saw Russia agree to dismantle some 20,000 old nuclear warheads and downblend the highly enriched uranium (HEU) in those warheads into the low enriched uranium (LEU) that is used to power nuclear reactors.
It has all gone very well so far. Since the first downblended LEU arrived in the US in 1994, both parties have honored their sides of the deal; the US has gone so far as to thrice declare that Russian goods on American soil related to the Megatons deal are protected, by order of the president. Today's executive order was the third iteration of that order of presidential protection.
Why is Obama reiterating that Megatons-related payments and properties are off-limits to all? Because Megatons is set to expire in about a year, and the United States is desperate to convince Russia to extend the deal. And we don't think Putin is interested at all.
You see, Megatons provides the US with a reliable source of inexpensive nuclear fuel. That's a hard thing to come by today. Global demand for uranium is set to climb 33% from 2010 to 2020, and then will climb almost that much again in the next ten years. Can production keep up? Not likely. That means prices are going up. Putin know this - in fact, he's been working for several years to position Russia to profit from the looming uranium-supply crunch.
Not only does Russia produce a fair bit of uranium, Putin also carries a fair bit of clout in neighboring Kazakhstan, the world's top uranium producer. So Russia already controls a lot of primary production... but that's just the start. Since primary production (from mines) will not be able to meet demand, secondary sources will become extra-important. There is only one significant secondary source - downblended warheads - and Russia operates some of the only facilities in the world that can downblend HEU into LEU.
Putin has positioned Russia to capitalize on the looming global uranium-supply crunch. That's why he will not be at all interested in extending the Megatons deal - why agree to old terms when the global uranium scene is now on a completely different stage? Instead, Putin will be more than happy to sit down and hammer out a new uranium supply deal.
Obama knows this. This executive order is his nod to Putin, his acknowledgment that Putin has the upper hand but the US still wants to play, and his underlying plea to Putin that he play nice. Because if he doesn't, the United States will find itself scrambling for a new uranium supplier.
Our subscribers are already familiar with this topic - we have written about what we're calling the Putinization of resources several times already. Vladimir Putin is a smart, savvy leader who has long believed that natural resources can be a source of great power. After analyzing Putin's moves to corner the uranium market, his efforts to control Europe's natural gas supplies, and his use of Russia's oil wealth to gain international heft, we laid out a plan letting our subscribers know how to profit from Putinization.
So, in summary, there's nothing to worry about in this "national emergency"... for now, at least. We'll continue to watch the cat-and-mouse activities between the countries in order to stay on top of the trends.
Marin Katusa
Chief Energy Investment Strategist
Casey Research
