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Strategic Hydrocarbon Inspace Terminal April 13, 2008

Posted by shubber in distracting PR, hot air, public service announcement, Wasting Money.
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A number of blog posts and comments i’ve come across recently as I’ve surfed through the alt.space environment made claims about the implicit value of lunar mines – essentially, attempting to make the case that it isn’t actually necessary to be able to mine the Moon, just to have the land and the metals, minerals, and such in your ownership and that alone is worth some money.

The people making this sort of argument make it based on the fact that companies here on Earth today DO in fact use the implied value of unextracted resources in oil fields and ore mines on their balance sheets, and can obtain financing against said resources. What is true on Earth it appears *must* be true in space.

A couple of minor points:

  • Resources on Earth (in a mine, well, etc) must still be “proven” before someone will give you money against the implicit value of what’s still left in that hole in the ground. This is done through such things as seismic work and geologic analysis (e.g., what’s the concentration of uranium in that land you were digging and sifting through?). If that weren’t the case, I could call up my local bank and say there’s a sea of oil under my swimming pool and they’d start handing me cash. Granted, that seemed to work for valuing houses over the past few years, but look where that’s led to…
  • The ability to access and extract a “proven” resource is still required. It does no good to talk about oil in the Marianas Trench if there are no oil platforms that can operate a 7 mile pipe. Same goes for digging ore out of lunar regolith. It’s not enough that the regolith is there – show me a PROVEN example of someone taking that regolith and extracting/refining out the desired materials (on a non-cost prohibitive basis, by the way). Until then, it might as well not exist.
  • There must be a way to take said refined materials and get them to market. There is currently no market ON the Moon. So if the market is back here on Earth, how is it going to get transported there? Delivered to the customer? De-orbited without taking out a small city? A few years ago, when I lived in Australia, there was a well-known entreprenuer (the Donald Trump of the mining industry, you might say) who had a grand plan – he had a gigantic piece of land that had proven iron ore reserves, but there was NO mine (multibillion dollar investment) and NO rail line to get that ore to market (60 km trip I believe). So he signed up a multi-billion dollar pay on delivery customer (Chinese of course), and used that to get financing for the rail line and the mine (oh, and he took the company public prior to that as a penny stock, so he could raise public market funds). That company is now trading for 100x what it was before, and Mr. Fortescue is a billionaire.

That being said, if those of you who believe that the mere existence of a material, without the proven means to extract it and deliver it to market (much less economically), is enough to get someone to give you lots of $$$, perhaps I suggest you focus on a bigger target. The outer planets are giant hydrocarbon balls of gas – and given the price of energy these days I’d say a small scoop taken from Uranus is worth more than the GDP of the US today. The Moon is chump change in comparison.

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Comments»

1. Alfred Differ - April 14, 2008

The version of this lesson I learned from a mining person is that an ‘ore’ is something that can be extracted for a profit. Absent that money it’s just a mineral or whatever.

If there was no path to profit, ownership of the rights was a speculation that a path would be found someday. The value of such a position may be non-zero, but there are ways to calculate them few in our community know.

2. nick - April 14, 2008

Taking this seriously for a brief second, as you observe there are big safety problems returning anything massive or bulky through earth’s atmosphere. It is orders of magnitude less risky to return mostly refined precious metals (e.g. platinum from the much maligned “trillion dollar asteroid” at about $64,000/kg) than hydrocarbons (less than $1/kg).

It is interesting, though, that from a solar system perspective it is free oxygen, not hydrocarbons, that is the scarce resource.

3. x - April 14, 2008

Importing oil from ANYWHERE beats drilling in America.

4. Alfred Differ - April 15, 2008

I think Shubber is looking more at the argument others make that property rights for celestial resources have some kind of value in the market. Bringing material back to Earth has a number of other inherent problems, but Earth’s surface isn’t where most of the plans make sense. With launch costs as high as they are, resources in space are far more valuable than on the ground. Even sand in orbit has potential value.

I also think the sanest argument for space property rights is to let the market decide the issue. If the ‘western’ governments and their treaties step aside I suggest they loose nothing and gain the slim chance that the market could decide to assign a positive value to claims if they prove to be fungible. Considering the state of the financial markets right now I doubt anyone will take such rights for collateral without taking a stock hit from the embarrassing media reports that would be written.

The difficulty with stepping aside is that those same treaties also cover nuclear proliferation issues in space. For now I’m more tempted to let those treaties stand.

5. nick - April 26, 2008

resources in space are far more valuable than on the ground. Even sand in orbit has potential value.

Ah, potential value.

Besides the lack of property rights, the other problem here is the unknown unknowns. If there was mere uncertainty, where we roughly knew the probability distribution of future outcomes based on past outcomes, then we could determine volatility and thus value of the real options that space property rights would constitute. We’d have the means to value the real options that a reliably owned but untapped resource grants us.

For example, owning the mineral rights to an untapped oil field gives you the real option to drill that oil if oil prices go up beyond a certain point, even if you can’t afford to drill it now. With a rough but conservative (i.e. highballing, rather than the NASA and alt.space practice of lowballing) estimate of the cost to drill, combined with knowledge of price volatility, one can put a value on the real option. If your drilling method is very costly, say $200 per barrel, the option value might be very small, but it’s never exactly or less than zero, because there’s a small probability that oil prices will go well above $200 a barrel.

These space mining rights would thus behave similarly to options with their value being a function of the current price and volatility of the product at the market and the estimate costs (with very wide error bars) of the technology for transforming the raw materials into the product and delivering it to market.

A big problem is that there is no market history to tell us what the price of sand might be if delivered to some orbit. Sure, in theory it might be very useful for radiation shielding, although ice would be better. An investor would have to rely on engineering estimates and speculations about future space projects and how they might make use of sand. For such estimates in the space activist crowd there is, alas, a long history of lowballing costs and highballing benefits.

So the MBA’s question for space property rights is, how do we value a portfolio of infinite duration call options, based on a set of contingencies that are extremely uncertain, for which we lack data to make good probability estimates about, but many of which would pay off handsomely if they panned out?

6. nick - April 26, 2008

Here’s an exercise. Let’s say the U.N. auctioned off, today, exclusive rights to mine diamonds anywhere on Mars, a right lasting 50 years. What would be the highest bid, and why?

7. Tobias Holbrook - May 28, 2008

$00.00. On account of the UN not having that right.


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