After years of haggling, a long term deal for Russia to sell natural gas to China was finally announced during President Putin's recent state visit to China, involving up to 38 billion cubic meters per year over a 30 year period starting in 2018, at a total estimated sales value of 400 billion dollars. To complete this transaction, Russia will need to invest 55 billion dollars in pipelines to the border with China, which in turn will need to make pipeline investments on its side.
Russia exports annually about 200 billion cubic meters of natural gas, three-fourths of which to customers in Western Europe. The country has been eager to lessen its dependence on Western markets, not the least now that regional relations are less than warm after Putin's Crimean and Ucrainean escapades.
There are reasons to believe that this may not be such a sweet long term deal for Russia as may first meet the eye. Here is why.
Start with the caveat "up to 38 billion cubic meters". Then let us have a look at how important or not this whole deal may be to China.
The natural gas involved is presumably destined for production of electricity, as China is in desperate need to reduce air pollution from coal-fired generating plants. China's current annual electricity consumption is around 5.5 trillion kWh, and by 2018 it is likely to have reached 7.5 trillion kWh.
38 billion m3 of natural gas is sufficient to produce some 200 billion kWh of electricity, which by 2018 will most likely represent less than 3% of China's total consumption.
In other words, we are looking at a big deal for Russia but an inconsequential one for China. This kind of inbalance is often a recipe for trouble down the line. Guess for whom?
Sunday, May 25, 2014
Thursday, May 8, 2014
ALL ABOARD FLORIDA
Florida East Coast Railways (FEC) operates rail freight services on 351 miles of track between Miami and Jacksonville. It is a highly indebted company with interest expenses, except for 2013, exceeding its operating income in every year since 2009. The company's equity ratio to total assets was a low 23% in 2009, and an even lower 18% in 2013.
In addition to its core freight business, FEC aims to initiate a high speed passenger rail service between Miami, Fort Lauderdale, West Palm Beach and Orlando on its own right-of-way between Miami and Cocoa Beach, and from there on 40 miles of new track to be built to Orlando International Airport. In addition to several bridges along the way which need regularly to be opened for boat traffic, there are 350 high volume grade road crossings along the way, 114 of which in Palm Beach county alone. FEC plans to operate 16 trains offering a 3-hours transit time between Miami and Orlando with hourly departures in each direction, reportedly counting on three million passengers per year yielding operating revenue of $ 145 million. This works out to about $ 0.15 per passenger-mile. In 2012 the project was said to cost $ 1.0 billion, an amount currently stated to be $ 1.5 billion, still not unlikely to being seriously under-estimated.
It is my opinion that FEC and its financial backers would do well in reconsidering this venture.
A lot can be said against the technical practicality and safety issues of such a service on FEC tracks. For starters, high speed rail traffic in other parts of the world are fenced off over the entire length of the track and do not coexist with grade road crossings. As I understand it, FEC has no plans to invest in changing status quo in this respect. But before getting too worked up about these issues, I believe it to be relevant first to have a closer look at the economic fundamentals of the venture on the basis of well established data from the operation of high speed rail services in Europe.
Looking at 15 major European high speed rail services - which by chance work out to an average travel distance close to the one envisioned between Miami and Orlando - ticket prices average $ 0.40 per passenger-mile. Only a single one of these services, the one between Paris and Lyon, manages to exceed operating and capital costs. All the others lose money and are dependent on large tax-payer subsidies to stay in business.
We will understand why when we look at European high speed rail operating costs (capital costs not included) of more than $ 0.25 per seat-mile which, at typical average occupancy rates of 50%, works out to around $ 0.50 per passenger mile. Compare this to FEC's revenue projections for All Aboard Florida of of $ 0.15 per passenger-mile, and you will get the drift. And don't let anybody tell you that it can be done cheaper in the United States. European conditions for high speed rail services are vastly superior to ours.
And how likely is it that 3 million people would actually use this rail service?
Miami receives annually close to 7.0 million foreign visitors, Orlando about 4.5 million. Orlando statistics reveal that foreign visitors average 8.8 nights in Orlando and 16.1 nights in the United States, which brings me to the assumption that most of the foreign Orlando visitors come in through Miami and also spend time there. When visiting a European city you get around with public transporation. Two weeks in Florida is going to require a rental car, which will take you from Miami to Orlando in 3.5 hours for less than $ 0.10 per passenger-mile. Why then bother to lug a lot of luggage on and off a train, which ends up costing you more without really having saved any time? Not to mention that the foreign visitors to Florida are avid shoppers at the outlet malls along the route.
My prediction is that very few, if any of them, will ever set their foot on All Aboard Florida.
Then let us assume that 10% of the entire populations of Dade, Broward and Palm Beach counties visit Orlando once a year. This would render some 600,000 posible candidates for train travel. But do you seriously believe that they would pack their car, only to park it for a week in the All Aboard Florida rail terminal garage at $ 15 per day, rather than heading straight for Orlando via the Florida Turnpike? I, for one, don't.
Let us get real about this. The economics behind All Aboard Florida just are not there, nor are the practical traffic and safety realities on the ground. If you get the urge to delve deeper into the subject of high speed rail, I can recommend "High Speed Rail in Europe and Asia: Lessons for the United States".
In addition to its core freight business, FEC aims to initiate a high speed passenger rail service between Miami, Fort Lauderdale, West Palm Beach and Orlando on its own right-of-way between Miami and Cocoa Beach, and from there on 40 miles of new track to be built to Orlando International Airport. In addition to several bridges along the way which need regularly to be opened for boat traffic, there are 350 high volume grade road crossings along the way, 114 of which in Palm Beach county alone. FEC plans to operate 16 trains offering a 3-hours transit time between Miami and Orlando with hourly departures in each direction, reportedly counting on three million passengers per year yielding operating revenue of $ 145 million. This works out to about $ 0.15 per passenger-mile. In 2012 the project was said to cost $ 1.0 billion, an amount currently stated to be $ 1.5 billion, still not unlikely to being seriously under-estimated.
It is my opinion that FEC and its financial backers would do well in reconsidering this venture.
A lot can be said against the technical practicality and safety issues of such a service on FEC tracks. For starters, high speed rail traffic in other parts of the world are fenced off over the entire length of the track and do not coexist with grade road crossings. As I understand it, FEC has no plans to invest in changing status quo in this respect. But before getting too worked up about these issues, I believe it to be relevant first to have a closer look at the economic fundamentals of the venture on the basis of well established data from the operation of high speed rail services in Europe.
Looking at 15 major European high speed rail services - which by chance work out to an average travel distance close to the one envisioned between Miami and Orlando - ticket prices average $ 0.40 per passenger-mile. Only a single one of these services, the one between Paris and Lyon, manages to exceed operating and capital costs. All the others lose money and are dependent on large tax-payer subsidies to stay in business.
We will understand why when we look at European high speed rail operating costs (capital costs not included) of more than $ 0.25 per seat-mile which, at typical average occupancy rates of 50%, works out to around $ 0.50 per passenger mile. Compare this to FEC's revenue projections for All Aboard Florida of of $ 0.15 per passenger-mile, and you will get the drift. And don't let anybody tell you that it can be done cheaper in the United States. European conditions for high speed rail services are vastly superior to ours.
And how likely is it that 3 million people would actually use this rail service?
Miami receives annually close to 7.0 million foreign visitors, Orlando about 4.5 million. Orlando statistics reveal that foreign visitors average 8.8 nights in Orlando and 16.1 nights in the United States, which brings me to the assumption that most of the foreign Orlando visitors come in through Miami and also spend time there. When visiting a European city you get around with public transporation. Two weeks in Florida is going to require a rental car, which will take you from Miami to Orlando in 3.5 hours for less than $ 0.10 per passenger-mile. Why then bother to lug a lot of luggage on and off a train, which ends up costing you more without really having saved any time? Not to mention that the foreign visitors to Florida are avid shoppers at the outlet malls along the route.
My prediction is that very few, if any of them, will ever set their foot on All Aboard Florida.
Then let us assume that 10% of the entire populations of Dade, Broward and Palm Beach counties visit Orlando once a year. This would render some 600,000 posible candidates for train travel. But do you seriously believe that they would pack their car, only to park it for a week in the All Aboard Florida rail terminal garage at $ 15 per day, rather than heading straight for Orlando via the Florida Turnpike? I, for one, don't.
Let us get real about this. The economics behind All Aboard Florida just are not there, nor are the practical traffic and safety realities on the ground. If you get the urge to delve deeper into the subject of high speed rail, I can recommend "High Speed Rail in Europe and Asia: Lessons for the United States".
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