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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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State Owned Enterprises Take More Energy Business

Foreign state owned enterprises appear poised to take an even larger, more active role in the interna-tional energy business in all aspects--nuclear as well as renewables.

Press reports indicate that Korea Electric Power (Kepco), controlled by the government of South Ko-rea, might well be the only bidder for Toshiba’s Westinghouse unit that will pass muster with western governments. The South Korean government, say the reports, wants to make Korea a major player in the world nuclear industry. Kepco would be the "entry vehicle".

Like the French utility, EDF (the present woes with the EPR reactor design notwithstanding), Kepco shares the distinction of being the only other entity to consistently build new nuclear plants on time and within budget. No mean feat. Kepco, it should be noted has a spotty financial record, due largely to a strict domestic regulatory regime. Like most government entities, it is heavily indebted.

The big question, though, is what would Kepco actually purchase if it were to acquire Westinghouse from Toshiba? Asian investors are asking whether whatever Kepco pays for Westinghouse will be ade-quate to right the finances at parent, Toshiba, which is still reeling from the cost over-runs at two U.S. nuclear projects in Georgia and South Carolina. Conceivably, Kepco could make a deal that allows it to only take over future construction projects (probably in the UK) thus sidestepping U.S. cost over-run problems. Related: Oil Prices Wait And Watch For OPEC’s Next Move

Meanwhile, China’s battery industry continues to power up so to speak. Owing to government subsi-dies and prohibitions on foreign activity, one firm is expected to produce more battery output than Tesla's new Nevada “gigafactory.” Companies producing electric vehicles in China, to qualify for subsi-dies, must buy batteries from a list of approved suppliers. That enables approved suppliers to achieve scale, which, it is hoped, leads to cost reductions.

This policy also keeps foreign companies from entering the Chinese market. In addition, the largest Chinese producers of the metals required for the batteries have been buying up mining properties outside China. Some observers worry that the Chinese manufacturers will wreck the battery market. They will drive down price (good for consumers and electric car manufacturers) but bad for competing battery manufacturers. This is the traditional worry about so-called "dumping" although the charge has traditionally been hurled at foreign manufacturers of things like steel or flat screen televisions. Related: Can OPEC Resist The Temptation To Cheat?

In Europe, Hungary just signed a deal with Rosatom, the Russian state owned nuclear group, to build two nuclear reactors. Russia will finance somewhere between 80 percent and 100 percent of the deal. (The official announcement by the European Union said 80 percent but Vladimir Putin said the number could go to 100 percent, according to press reports.)

These stories fit into a developing pattern. Building a nuclear power plant of the currently approved size and design is now out of the reach of ordinary commercial enterprises no matter how large. Toshiba, an enormous, world class technology enterprise, self-destructed due to its ill-timed foray into the nuclear construction business.

The obvious investor-owned buyers for Westinghouse thus far have showed no interest in acquiring this obviously challenged unit. The Russian government may have had more in mind than making money when it signed the deal with Hungary. It is also lending the Hungarians €10 billion to purchase the new nuclear facility. This suggests an eagerness to showcase technology as opposed to a commer-cial motive.

The Chinese government targets markets for Chinese dominance and takes the necessary steps to achieve that dominance. State oil companies already control production in the Middle East, Africa and Latin America.

State owned entities are not like privately owned businesses. Their actions are not taken solely or even primarily with respect to commercial concerns. Their language, so to speak, is that of low cost debt financing, near unlimited state subsidies and the protection of local markets. As a result, nation states, whether your own or someone else's, make formidable competitors.

By Leonard Hyman and William Tilles for Oilprice.com

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