Sunday, March 04, 2007

Moly Demand from Pipelines

More moly news, the original link at the bottom.

Rusty Pipelines to Drive Up Moly Price
March 04, 2007 01:00 PM EST

As long as air conditioners keep us cool in the summer and central heating warms us in the winter, all is well in the world. In order to keep this gas and electricity continuously flowing into our homes, molybdenum has emerged as an essential metal to help preserve challenging energy transportation network. The anti-corrosive qualities found in molybdenum could also help prevent the collapse of the U.S. energy infrastructure.

Tucked beneath our streets, farms, deserts and forests lays a multi-million mile network of mostly aging pipelines supplying our energy needs. Meanwhile, hydrogen sulphide, carbon dioxide and common oxygen corrode the energy transportation system we rely upon to fuel our cars and power our computers. Corrosion annually costs the U.S. economy about $276 billion, more than three percent of the GDP, according to Technology Today (Spring 2005).

Unacceptably high percentages of two key energy-providing vehicles, such as nuclear power plants and the U.S. pipeline network, have begun aging beyond their original design life. About half of the nation’s 2.4 million miles of oil and gas pipelines were built in the 1950s and 1960s. And the composition of the liquids flowing through those pipelines has deteriorated over the past half century.

According the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (PHMSA) website, “Corrosion is one of the most prevalent causes of pipeline spills or failures. For the period 2002 through 2003, incidents attributable to corrosion have represented 25 percent of the incidents reported to the Office of Pipeline Safety for both Natural Gas Transmission Pipelines and Hazardous Liquid Transmission Pipelines.” Industry sources note corrosion is also a leading cause of pipeline leaks and ruptures.

Corroded Prudhoe Bay Pipeline Rupture

Corrosion makes each of us vulnerable to price shocks. On August 7th, public awareness about the impact of corroded pipelines in the energy infrastructure registered when prices shot up at the gasoline pump. BP shut down about eight percent of U.S. oil production. The international oil company cited ‘unexpectedly severe corrosion’ in its Alaska oil pipelines. This was the first shutdown ever in America’s biggest oil fields. According to BP, sixteen anomalies were discovered in twelve separate locations on the eastern side of the oil field. Earlier in the year, a pipeline spill was reported from the western side of the field.

Immediately following the corroded pipeline rupture, the industry introduced legislation, hoping to prevent a recurrence. Signed into law in December, the Pipeline, Inspection, Protection and Enforcement and Safety Act, affected low-stress crude oil pipelines, and included provisions for the improved controls and detection of pipeline corrosion. During Senate committee hearings, trade representatives pointed to the Department of Transportation’s Integrity Management program, implemented in 2001 and which was reported to have demonstrated a reduction of leaks and releases resulting from corrosion from high-stress inter-state gas pipelines in ‘high consequence areas.’

Official statistics published by the PHMSA Office of Pipeline Safety disagree. In the twenty-year period of 1986 to 2006, 2883 incidents resulting in 1467 injuries, 349 fatalities and nearly $860 million of property damage were reported by distribution operators at U.S. natural gas pipelines. In the five-year period ending in 2006, 25 percent of the incidents, about 20 percent of the fatalities, nearly 19 percent of the injuries and more than 69 percent of the property damage occurred compared to the previous fifteen years, before legislation was enacted. Similar percentages were reported by natural gas transmission operators.

Faced with aging, out-dated infrastructure, the pipeline industry aimed legislation toward the lowest-cost solution – detection of corrosion and piecemeal pipeline replacement – rather than addressing the separate issues which led to the problem.

Older Pipeline Steels Vulnerable to Corrosion

During its massive build up phase, U.S. pipeline infrastructure relied upon carbon and low-alloy steels for natural gas and petroleum transportation. As oil fields have aged, the risk of pipeline corrosion and pitting has increased. The Prudhoe Bay oilfield now produces more water than oil. This is a common occurrence in numerous U.S. oil fields and around the globe.

In the absence of water, hydrogen sulphide is non-corrosive to pipelines. However, increased moisture in pipelines is problematic, because it activates the corrosive capabilities of hydrogen sulphide. A combination of tensile stress, susceptibility of low-alloy steels and chemical corrosion will lead to sulfide stress cracking. Hydrogen ions weaken the steel. Over time, pressure causes the embrittled steel in the pipeline to rupture.

Similar problems have emerged in the natural gas sector. As deeper wells are drilled in hot, high-pressure gas deposits, the probability of hydrogen sulphide in gas can increase. An entire industry has sprung up around decontaminating sour gas. U.S. sulfur production from gas processing plants accounts for about 15 percent of the total U.S. production of sulfur.

Sour gas is a naturally occurring gas containing more than one per cent hydrogen sulphide (H2S) and sometimes above 25 percent. It is typically identifiable by a strong ‘rotten eggs’ smell. Commonly found in the foothills of western Canada’s Rocky Mountain region, sour gas comprises more than one-third of the gas produced in Alberta. It is ‘sweetened’ at more than 200 plants in this province to bring the gas up to pipeline quality.

The one-to-two percent of the H2S remaining in the gas is considered pipeline quality. But the interaction of the hydrogen sulphide with water can accelerate the pipeline corrosion process. Potentially, the combination of the old gas pipeline material and the rise of sour gas could pose the greatest risk to gas pipeline safety. Molybdenum is crucial in defending against hydrogen sulfide environments as reported in a metallurgical journal study and published by the Defense Technical Information Center.

High Strength Low Alloy Steels

Long running cracks, some stretching more than six miles, first began fracturing gas pipelines in the 1960s. The industry’s solution was the development of, and encouragement to use, High Strength Low Alloy (HSLA) steels. Older pipelines, built in the 1920s (or earlier), of 500mm or less, could only handle an operating pressure of about 20 bar. Annual capacity of gas transportation long those pipelines stood at about 650 million or less. Because of today’s high energy content of compressed gas at 80 to 100 bar and an annual transportation capacity of 26,000 million or more, pipelines require modern HSLA steel to prevent them brittle fracture behavior or ductile cracks.

HSLA steels capable of building large diameter pipes came about from the introduction of the thermomechanical rolling process in the 1970s, which maximized grain refinement. By increasing the strength of the steels, one could sustain the high operating pressure and reduce the wall thickness of the pipe. Steel manufacturers could use less steel, reduce the pipe weight and double the yield strength. Transportation costs from plate and pipe mills to construction sites were also reduced. Delivering a lighter-weight pipe to remote or arctic areas became more economical.

Steel is vulnerable to acids and is generally stable with pH values above 7. Acidity-causing corrosion comes about when magnesium and calcium are hydrolytically converted to form hydrochloric acid. Hydrogen sulphide and carbon dioxide are also acid-forming gases corroding steel. Molybdenum’s corrosive-resistant properties served beyond its original scope in manufacturing modern steel.

Initially, molybdenum was included to harden steel and increase weldability, while reducing the carbon content previously utilized. Higher toughness, but lower tensile strength, was required. By adding molybdenum in the range of 0.15 to 0.30 percent, depending upon the pipe wall’s thickness, carbon content in the steel could be reduced to 0.07 percent. The metal has played a key factor in oil and gas development projects as pipes continue being used in arctic, sour and sub-sea environments. Apparently, the more rugged the climate, the better the more recent gas projects have panned out. One example would be the Sakhalin oil and gas project in Russia’s Far East, where on- and off-shore pipelines in excess of 1,000 miles would transport some of the world’s largest natural gas reserves.

Steels for natural gas pipelines require higher standards than those used for oil. These pipelines must carry compressed gas at minus 25 degrees centigrade to minus 4 degrees centigrade. Crack growth and brittleness intensify in the severe arctic environment. Achieving low-temperature notch toughness, grain size control, and low sulfur content were some of the problems solved while developing this modern steel.

Since the 1970s, more than two million tons of molybdenum-containing HSLA steels for pipelines were manufactured. We checked with the world’s largest pipeline manufacturer Tenaris (NYSE: TS), which offers steel with high resistance to Sulphide Stress Corrosion Cracking (SSCC), to confirm continued interest in molybdenum. In a phone call to the company’s Houston office, we discovered the company had purchased $65 million of ferromolybdenum in the six-month period ending January 31, 2007 for use in its new pipeline steels. As an aside, the company representative, having checked with company’s central purchasing ‘sister company’ in Argentina, pointed to the rising cost of ferromolybdenum and anticipated paying $80 kg in the coming year. (This could help explain why the moly price has remained high through 2006 and could rise higher in 2007.)

Pipeline Projects on the Horizon Confirm Moly Demand

We talked with Rita Tubbs, managing editor of Pipeline and Gas Journal (P&GJ), about molybdenum content to be used in the construction of gas pipelines outside of the United States. “Most will adhere to the standards used in North America,” she told us. According to Adanac Molybdenum Corp consultant, Ken Reser, the new standard has grown to 0.5 percent moly content.

In a December 2006 worldwide pipeline construction survey, compiled by Rita Tubbs, she observed “81,593 miles of new and planned oil and gas pipelines under construction and planned.” She pointed out North American pipeline construction plans nearly doubled to 28,314 miles. In these figures, Tubbs spotlighted Canadian activity, which is expected to increase overall North American pipeline construction mileage. She wrote, “By 2008, contractors expect to see a workload that has not been seen in Canada for nearly three decades.”

Tubbs explained in her report, “Much of the activity will be generated by the massive oil production that will come from the oil sands in northern Alberta which contain the largest deposits of hydrocarbons on earth. Terasen and Enbridge plan to move oil sands by pipeline.” Molybdenum is likely to play a vital role in pipelines carrying the material, which is a mixture of sand bitumen and water – with high sulphur content.

An unexpected addition to the P&GJ report came on February 26th. Shanghai Daily newspaper reported a boom for China’s energy pipelines. The world’s most populous country plans to add another 15,000 miles of oil and gas pipelines to its existing infrastructure of 24,000 miles by 2010. In three years, the country hopes to extend its mileage by nearly 63 percent as China races to raise its energy mix for gas to 10 percent.

Perhaps the greatest number of new pipeline growth will occur in the United States – the world’s largest energy consumer. By 2025 EIA expects the US will need 47 percent more oil and 54 percent more natural gas. To transport this energy, transmission and distribution line mileage is expect to increase by approximately 30 percent. This implies pipeline projects on the order of some 600,000 miles.

Whether this would include the nearly one million pipeline miles sorely in need of replacement since the introduction of molybdenum in the 1970s to the steel in pipes is not known. However, whether one calculates the number of new pipeline miles potentially constructed or the number of replacement pipeline miles, one arrives at a staggering quantity of molybdenum required to more strongly protect the steel from future corrosion.

Depending upon the diameter of the pipe, wall thickness and environment, each pipeline mile could require between 600 and 1000 pounds of molybdenum. About one-half of the U.S. oil and gas pipeline network could call for replacement. In the United States alone, and solely to upgrade the out-dated portion of America’s pipelines, more than 300 million and as many as one billion pounds of molybdenum could potentially be required. While this should be considered a speculative extrapolation, based upon available data, it may not be that far off the mark. Pipelines aged more than thirty or forty years could very well be replaced before 2020. Chemical changes in the material passing through U.S. pipelines could accelerate pipeline corrosion. Based upon future natural gas incidents, future legislation could hasten the remediation process of America’s energy transportation infrastructure.

By comparison, the number of new pipeline constructions now on the books might require between 50 and 100 million pounds. This could be upwardly revised as the rest of the world, especially Russia and Europe, suffer from the similar aging pipeline problems found in the United States.

Molybdenum: Old and New Infrastructure

It’s not just new and replacement pipelines, which might create an avalanche of demand for the silvery metal. Molybdenum’s applications are wide, diverse and expanding. The metal is used in paint pigments, lubricants, catalysts and prosthetic legs; the radioisotope Molybdenum-99 is used in cancer treatment. Six-percent molybdenum is also used in stainless steel (S31254) for higher pressure piping in more than 30 desalination plants (sea water reverse osmosis) now operating in ten countries. As abrupt climate change impacts fresh water supplies, a great demand for desalination plants could emerge.

Because of the nuclear energy renaissance, condensers in the hundreds of planned and proposed nuclear power plants may need up to one million meters of four- to six-percent molybdenum stainless steel. The number of power plants under construction, planned or proposed rises weekly or monthly, and now approaches nearly 300. Aging U.S. reactors could require replacement over the next two decades. About 30 new reactors are in various stages of being moved forward in the United States. Not all will be of the size requiring a vast quantity of molybdenum, but sufficient growth in the nuclear sector should firm demand for the metal.

According to a recent article published by IMOA, “Molybdenum containing alloy sales for FGD applications are booming.” The U.S. Clean Air Interstate Rule (CAIR) set a deadline of 2010 for many coal-fired power plants to install FGD, or Flue Gas Desulfurization, systems. Basically, there are air pollution systems, which remove acid-causing sulfur dioxide from the exhaust gases of coal-fired electrical plants.

The nickel-based Alloy C-276, which includes 16 percent molybdenum, is a corrosive-resistant component in piping and component upgrades in Flue Gas Desulfurization (FGD) systems. During 2006, it was estimated more than $1 billion was spent on molybdenum bearing alloy. IMOA believes that FGD systems could rack up $168 billion in worldwide sales between 2006 and 2020, of which about $15 billion would be used for moly-bearing alloys. This assumes two-thirds of the world’s coal-fired generators install the FGD systems by 2020.

On the books, the U.S., China and India propose to build another 800 coal-fired power plants to meet energy needs before 2020. New plants would likely require the FGD systems, which could potentially increase the amount of molybdenum necessitated in the alloy-making process. As energy needs grow, more molybdenum production will be required to bring about increased energy production.

Molybdenum has corrosive resistance to many acids – such as sulfuric, hydrochloric, hydrofluoric and many organic acids. Because its melting point exceeds 4700 degrees Fahrenheit, molybdenum acts as a strengthener in the turbine blades and discs of jet engines. It is because of these factors that higher molybdenum percentages may provide the world’s first line of defense against pipeline corrosion in conjunction with the new generation of corrosion inhibitors.

Will There Be Sufficient MolybdenumMined to Meet the Increased Energy Demand?

Blue Pearl Mining executive chairman Ian McDonald recently reported that molybdenum prices should remain strong for a “number of years to come.” He cited increased demand and cited underinvestment in the molybdenum sector for a lengthy period. It also costs a fortune to build a new mine – some $500 to $700 million, according to McDonald. “It’s kind of a risky proposition for a commodity you can’t sell forward.”

Still the potential hazards – financial, environmental or otherwise, could provide a lucrative proposition for molybdenum mining companies. McDonald’s company forecasts annual demand by 2020 to surpass the 700 million pound level. This is more than double the amount of molybdenum mined just a few years ago, when the industry was in the pits and primary molybdenum projects were not economically feasible.

The biggest threat to the molybdenum mining industry is ‘price vulnerability,’ which Adanac Molybdenum Corp executive chairman Larry Reaugh warned us in a recent interview. This may help explain why some of the emerging moly mining participants walk on eggshells over the weekly blips on the commodity’s price chart. (The molybdenum price was last trading on March 2nd at $28.25/pound.)

Despite the rising molybdenum price, now stabilized above US$20/pound, so few realistic molybdenum mining projects appear on the horizon. Many of the junior molybdenum miners fret about price vulnerability and the re-appearance of the behemoth Phelps Dodge Climax molybdenum mine in Nevada by 2009.

One small-scale imminent Canadian molybdenum miner isn’t fazed by the anticipated molybdenum production coming into the market by 2009. His company plans to plow back cash flow after mining operations commence this spring, in hopes of expanding his molybdenum deposit in British Columbia, Canada. “We are going to move forward with further exploration as we mine the Max molybdenum deposit,” said Scott Broughton, chief executive of Roca Mines. As are some of the other near-term primary molybdenum producers, Broughton is bullish on the metal’s price.

According to the January 2007 issue of the IMOA newsletter, the following companies represent some of the new primary molybdenum mine projects, starting this year and running through 2009.

Roca Mines (TSX: ROK) should open the Max Moly mine in Canada this spring. The mine site is currently under construction with a small mine permit and should annually produce up to three million pounds.

Blue Pearl Mining (TSX: BLE) is presently the world’s largest publicly traded primary molybdenum miner. Its next mine, the Davidson, in Canada is currently going through a feasibility study, and could open as early as 2007. Announced annual capacity could run as high as 10 million pounds.

Australian-based Moly Mines (TSX: MOL; ASX: MOL) hopes to commence mining operations by the end of 2008. The Spinifex Ridge deposit is currently undergoing a feasibility study and could produce up to 20 million pounds annually.

Adanac Molybdenum Corp (TSX: AUA) has been advancing the company’s Ruby Creek deposit in Canada’s Yukon, and is nearing the end of its permitting stage. The company’s executive chairman hopes to commence construction this summer, having announced the deposit might produce between 12 and 15 million pounds.

The Climax molybdenum mine, a subsidiary of Phelps Dodge (NYSE: PD), is conditionally approved and could commence mining operations in Nevada as early as 2009. Annual production capacity could range between 20 and 30 million pounds per year.

Idaho General’s Mt. Hope deposit in Nevada is in the permitting phase. The company may be mining in 2009. Estimates indicate the Mt. Hope deposit may produce as much as 35 million pounds per year.

In a previous article we reported University of Montana’s Professor Courtney Young’s remarks, “The public doesn’t know where their energy comes from.” We’ll add to his comments – very few Americans know how this energy is transported into their homes, or how great a risk they have of being left out in the cold

(Editor’s Note: Special thanks should go to Adanac consultant Ken Reser and Roca Mines corporate development manager Doug Fosbrooke in providing strong research assistance in compiling this report.)

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