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30 August 2014

Press review 30-08-2014 - The North Sea End Game

Scotland is voting an independence referendum in two weeks time. The debate has heated up considerably in recent weeks with the North Sea petroleum and gas resources coming into play. A great deal has been debated around reserve estimates and the implications for an hypothetical sovereign Scottish budget. However, far more important than reserves is knowing the net revenues that such resources can yield. And it is here than EROEI chimes in.

There is not much wealth in a resource that, however plentiful, is a marginal producer, parked at the head section of the supply curve. Yes, there is still petroleum and gas under the North Sea, but these are now mostly low return resources, that - as the article below explains - hardly provide revenues for their own exploration. The moment costs per barrel go above the market price it is all over.

Nevertheless, the sheer political risks associated with either the "yes" or the "no" supersede the budgetary questions and should be the main driver of the Scots' decision.

Reuters
UK oil output threatened by platforms running out of juice
Claire Milhench, 22-08-2014

Britain's oil industry is facing the threat of a cascade of North Sea rig closures, unless ageing platforms can urgently source more gas to help squeeze out the remaining barrels.

The potential threat to oil revenues looms as Scotland prepares to vote in September's independence referendum -- a debate in which oil production forecasts have become a political football.

The affected Northern North Sea (NNS) is a very mature part of the basin where producers are trapped in a vicious circle of falling output, rising costs to patch up ageing platforms, and dwindling power supplies.

[...] Sharp described a downward "death spiral" where less power leads to lower water injection, so production falls and there is less fuel gas for water injection. Eventually the platform becomes uneconomic and has to cease production.
One of my Scottish friends has a more numerical approach to this subject with similar conclusions. Within or without the Union, petroleum and gas resources matter little in Scotland's future.
Energy Matters
North Sea Oil and Scottish Independence: where does the truth lie?
Euan Mearns, 25-08-2014

How much oil and gas is left in the North Sea? 16 billion barrels oil equivalent (boe) according to Sir Ian Wood or 24 billion boe according to Oil and Gas UK? The correct answer for official proved+probable reserves is between 8 and 9 billion boe, a figure that both DECC and Oil and Gas UK agree on. With over 9 different classes of reserves, this debate is sterile and this is not the correct question to ask.

How wealthy will oil make Scotland? In 2013, the direct tax take from oil and gas production for the whole of the UK was £4.67 billion and falling. This compares with annual spending of the Scottish government (plus UK spending on Scotland) running at £65.2 billion. Hence, direct taxation of oil and gas production may account for less than 7% of the Scottish budget. What we should be asking is where the other 93% is going to come from?
This issue of rising costs has been prevalent in the market during the past year or so. Not even the "cheap oil" bastions are safe, as Saudi Aramco exemplifies. I estimate Saudi Aramco's net revenues with the 7 Mb of petroleum it exports every day to yield almost 200 G$ at the end of the year. The company will be spending a fifth of this sum every year for the next decade, just to keep production capacity where it is today. And note here that production definitely does not mean the same as extraction.
ArabianBusiness.com
Saudi Aramco to invest $400bn to keep oil production steady
Courtney Trenwith, 25-08-2014

[...] Speaking at a conference in Stavanger, Norway, Al Falih said rising costs across the sector would underpin oil prices, which fell to a 14-month low of $101.07 last week as global demand growth weakened despite an increase in production in several locations creating an oil glut.

“To meet forecast demand growth and offset [global output] decline, our industry will need to add close to 40 million barrels per day of new capacity in the next two decades,” Al Falih said.

“Although our investments will span the value chain, the bulk will be in upstream, and increasingly from offshore, with the aim of maintaining our maximum sustained oil production capacity at 12 million barrels per day, while also doubling our gas production.”

[...] Al Falih said fundamental problems within the industry, including rising costs, increasing technical challenges and the falling size of reserves at new locations would determine the price of oil, and the Organization of the Petroleum Exporting Countries (OPEC) or the International Energy Agency (IEA) should not interfere in the market.
The so called "oil sands" are today at the very top end of the supply curve, as highlighted last week. These are thus the first resources to get phased out of the market when the price founders, as is presently the case.
Financial Post
Cost-cutting fever grips oil sands players as economics called into question
Yadullah Hussain, 22-08-2014

Canadian oil companies are ruthlessly enforcing capital discipline as project costs creep up and shareholders pressure management to focus only on the most profitable ventures.

Suncor Energy Inc. announced a billion-dollar cut for the rest of the year even though the company raised its oil price forecast.

Others such as Athabasca Oil Corp., PennWest Exploration Ltd., Talisman Energy Inc. and Sunshine Oil Sands Ltd. are also cutting back due to a mix of internal corporate issues and project uncertainty. Cenovus Energy Inc. is also facing cost pressures at its Foster Creek oil sands facility.

“Given that the low-bearing fruit have already been developed, the next wave of oil sands project are coming from areas where geology might not be as uniform,” said Dinara Millington, senior vice president at the Canadian Energy Research Institute.
As noted in previous reviews, many of these petroleum operations have been supported by endless credit put up by improvident investors. Now these investments risk serious losses, at least without a relevant price hike in the coming months.
Financial Post
Oil sands dream evaporates with bondholders facing 40% loss
Cecile Gutscher, 25-08-2014

Southern Pacific Resource Corp.’s failure to find a buyer may leave bondholders struggling to recoup little more than half their investment as the Canadian oil-sands energy explorer burns through cash.

The Calgary-based company’s 8.75% notes due 2018 dropped 10 cents today to 63 cents on the dollar. Desjardins Capital Markets analyst Justin Bouchard estimates the notes are worth 57 cents, based on the company’s assets. Raymond James Ltd. analyst Chris Cox projects Southern Pacific has six months before exhausting its remaining $34 million of working capital.
Shell is largely pulling out of Nigeria, also due to rising costs. It is just that in this case these costs are not necessarily of a geological nature.
Bidness Etc
Shell To Divest Assets Worth $5 Billion From Nigeria
Micheal Kaufman, 27-08-2014

Royal Dutch Shell Plc (ADR) (RDS.A) will be selling off four oil fields and a co-owned pipeline for $5 billion to local buyers. This marks the divestment spree carried out by major overseas oil and gas companies from Nigeria, as they have incurred losses owing to oil theft and production losses in the country. In July, ConocoPhillips (COP) also announced the sale of its oil assets in Nigeria worth $1.5 billion, reinforcing the oil giants’ divestment strategies.

Shell’s sell-off in Nigeria is in response to the problems it has been facing, regarding production losses due to oil theft and controversies surrounding oil spills in the country; due to efforts by local gangs to steal crude oil from pipelines.
The rising costs vs. sluggish prices news continue popping pretty much everywhere. In spite of relevant discoveries in recent years, petroleum extraction in the Norwegian side of the North Sea seems as fated as that of the Scots.
Bloomberg
Norway to Cut Oil-Production Forecasts as Costs Delay Projects
Mikael Holter, 26-08-2014

Norway, western Europe’s biggest oil producer, will probably cut its long-term forecast for crude production as companies reduce spending to counter rising costs and improve shareholder returns.

As investments in Norway’s oil industry fall after a peak this year, production beyond 2015 will be lower than expected, according to Bente Nyland, head of the Norwegian Petroleum Directorate. The estimate cuts are expected to be reflected in the NPD’s annual prognosis scheduled to be published in January.

“There might be a certain decrease,” she said in an interview in Stavanger today. “It’s capital discipline, it’s costs.”

Norway is struggling to sustain oil production that’s more than halved since a peak in 2000 as producers including Statoil ASA (STL) scale back spending plans. The NPD in its latest prognosis in January predicted oil production would rise this year and remain stable through 2018. Still, the forecasts were lower than those made at the beginning of 2013.
This unsustainable situation is leading to some apparently hyperbolic expectations. Resources such as the "oil sands" indeed require a 50% price hike to be economical, but a straight path there is highly unlikely.
Yahoo Finance
Oil ‘super spike’ is coming: Dan Dicker
Pras Subramanian, 20-08-2014

[...] The demise of offshore oil drilling could also be a catalyst in Dicker’s mind, not to mention oil supplies going offline in places like Libya, and decreasing in countries like Iran and Iraq. This is leading to an upcoming oil supply crisis he says, and ultimately with liquidity not what it once was, and with the cost of oil now making it prohibitive to develop new sources, ultimately the fundamentals will have to matter again.

“When you have an oil price that’s hanging around $95, you won't see a $10 spike, you’ll see a $40 spike, because that’s what will be necessary to get these guys (oil exploration and production companies) ginned up” in order to produce more crude supply.
The Ukraine story is back to the front pages. Earlier in the week, claims of important military victories by the russophone forces percolated through the alternative press and blogosphere. Such reports would be eventually confirmed by the western mainstream media, which in its turn claim these victories to be the result of an invasion by the Russian army. A military victory seems presently out of reach for either side, leaving the Kiev government in a dire situation: money is drying up and energy supplies are far from adequate to tackle the coming winter.
Reuters
Ukraine faces difficult winter without Russian gas - PM
22-08-2014

Ukraine faces a long and cold winter, Prime Minister Yatseniuk warned on Friday, saying the country needs a further 5 billion cubic metres of Russian gas and may need to import coal due to the impact of the conflict in its industrial eastern regions.

Months of fighting between government forces and separatist rebels in eastern Ukraine has forced coal mines to cut production or close entirely, imperilling the country's electricity market.

Meanwhile Russia, which supplied about half of the gas Ukraine used last year, cut supplies on June 16 in a row over pricing and in the wake of Moscow's annexation of Crimea.
The Russian press in its turn spawns around the idea that at some point Kiev will cut gas supplies to Europe, either for its own consumption or even to definitely drawn Europe to the military fray. This is mostly speculation, but be mindful that such scenario is indeed catastrophic for many member states.
Reuters
Italy struggles with Plan B if Russian gas supplies cut
Stephen Jewkes and Oleg Vukmanovic, 26-08-2014

Italy will struggle to stay warm this winter if Russia's conflict with Ukraine disrupts gas supplies and Libya veers towards collapse, putting at risk an already shaky economic recovery following years of recession and sluggish growth.

Caught between dwindling gas imports from North Africa and a rising dependency on Russia, Italy's contingency plans for a complete breakdown in Ukrainian transit flows consist of raiding stockpiles, arranging costly emergency shipments, as well as forcing heavy industry to cut its output.

Import-reliant Italy uses gas to fuel almost half its power plants, triggering fears the conflict between Russia and Ukraine as well as tit-for-tat sanctions between the West and Moscow could disrupt deliveries by Gazprom to Europe.
Another small step in the shaping of a new international monetary system, that as noted before has been greatly accelerated by events in Ukraine.
UPI
Russia to take rubles, yuan for oil
Daniel J. Graeber, 27-08-2014

Russian oil company Gazprom Neft said it agreed Wednesday to accept rubles and the Chinese yuan for crude oil deliveries.

For exports from the Novoportovskoye field in the arctic, the company said it would accept the Russian currency, while China could use its own currency for oil delivered from the Eastern Siberia-Pacific Ocean pipeline.

The switch could help the Russian economy reduce its dependency on the U.S. dollar in an era when Western economies are imposing tough sanctions on Moscow in response to the ongoing crisis in Ukraine.
In that region of Africa where once was a country named Libya chaos reigns. Two competing parliaments, spread out gun fighting and three million refugees, a score hard to rival that NATO can be proud of.
Reuters
Libya warns United Nations of possible slide into civil war
Louis Charbonneau, 27-08-2014

Libya warned the U.N. Security Council on Wednesday that the chaotic North African state could descend into full-scale civil war if heavily armed warring factions are not disarmed.

The 15-nation council met to discuss Libya days after its parliament, which was replaced in an election in June, reconvened and chose an Islamist-backed deputy as the new prime minister. That left the country with two rival leaders and assemblies, each backed by armed factions.

"The situation in Libya is complicated," Libya's United Nations Ambassador Ibrahim Dabbashi told the council. "Yet the situation since the 13th of July has become even more complicated and the situation might unravel into a full-blown civil war if we're not very careful and wise in our actions."
And the mystery of the air strikes last week on Tripoli was undone this week. Apparently the US and the British knew nothing about it. Perhaps the latest releases of the NSA software are yet to reach Egypt and the UAE.
BBC
Libya crisis: US 'caught off-guard' by air strikes
26-08-2014

US officials say Egypt and the UAE were behind air strikes in Libya last week that targeted Islamist militia.

A senior US official told the BBC that Washington was not consulted about the attacks and was "caught off-guard".

The air strikes on militia positions around Tripoli's international airport were reportedly carried out by Emirati fighter jets using bases in Egypt.
In Iraq the first declines in petroleum extraction are starting to show in the numbers. Definitely something to keep an eye on in the following months.
Al Arabiya
Iraq’s southern oil exports fall by 140,000 bpd so far in August
27-08-2014

Iraq's oil exports from its southern terminals so far in August have fallen by about 140,000 barrels per day, according to loading data and industry sources, dropping further from a record high reached in May.

Exports from Iraq's southern terminals have averaged 2.3 million barrels per day (bpd), according to shipping data for the first 26 days of August tracked by Reuters. Two industry sources who also monitor the exports had similar estimates.
My criticism towards the strategies of NATO for the Middle East have had a good deal of echo in recent weeks, as Assad suddenly goes from foe to friend and Iran becomes an indispensable partner in Iraq. Not that these authors have been reading this blog, but the growing awareness of these incongruences is noticeable.
Alternative News
Putin may have been right about Syria all along
26-08-2014

The irony of the moment is tragic. But to some, it doesn’t come as much of a surprise. Many cautioned against the earlier insistence of the Obama administration (as well as other governments) that Assad must go, fearing what would take hold in the vacuum. One of those critics happened to be Russian President Vladimir Putin, who warned against US intervention in Syria in a New York Times op-ed last September.

He wrote: “A strike would increase violence and unleash a new wave of terrorism. It could undermine multilateral efforts to resolve the Iranian nuclear problem and the Israeli-Palestinian conflict and further destabilise the Middle East and North Africa. It could throw the entire system of international law and order out of balance.”

Some of the crises Putin catalogued have worsened anyway, but his insistence was couched in a reading of the conflict in Syria that is more cold-blooded than the view initially held by some in Washington. “Syria is not witnessing a battle for democracy, but an armed conflict between government and opposition in a multi-religious country,” he wrote, suggesting that the nominally secular Assad regime, despite its misdeeds, was a stabilising force preferable to what could possibly replace it.
A different take on the same subject. It is my impression that the US never switched sides, it has always supported both sides of the conflict with varying intensity and means.
The Intercept
The Fun of Empire: Fighting on All Sides of a War in Syria
Glenn Greenwald, 26-08-2014

U.S. military action against the Assad regime was thwarted only by overwhelming American public opinion which opposed it and by a resounding rejection by the UK Parliament of Prime Minister David Cameron’s desire to assume the usual subservient British role in support of American wars.

Now the Obama administration and American political class is celebrating the one-year anniversary of the failed “Bomb Assad!” campaign by starting a new campaign to bomb those fighting against Assad – the very same side the U.S. has been arming over the last two years.

It’s as though the U.S. knew for certain all along that it wanted to fight in the war in Syria, and just needed a little time to figure out on which side it would fight. It switched sides virtually on a dime, and the standard Pentagon courtiers of the U.S. media and war-cheering foreign policy elites are dutifully following suit, mindlessly depicting ISIS as an unprecedented combination of military might and well-armed and well-funded savagery (where did they get those arms and funds?). Something very similar happened in Libya: the U.S. spent a decade insisting that a Global War on Terror – complete with full-scale dismantling of basic liberties and political values – was necessary to fight against the Unique Threat of Al Qaeda and “Jihadists”, only to then fight on the same side as them, and arming and empowering them.
This is an interesting story that revives older tensions in the Near and Middle East. This news once again points to a level of technological development in Iran that not always is acknowledged in the West.
Fars News
Iran Downs Israeli Spy Drone near Natanz Nuclear Site
24-08-2014

"A pilotless Israeli spy plane was shot down after it was traced and intercepted by the IRGC Aerospace Force," a statement by the IRGC's Public Relations Department announced minutes ago.

According to the statement, the Israeli pilotless aircraft was a radar-evading, stealth drone with the mission to spy on Iran's enrichment activities by flying over Natanz nuclear enrichment plant.

The IRGC also pointed out in its statement that the Israeli hostile aircraft has been targeted by a surface-to-air missile.
On a more brightened up note, there was a a surprise announcement of a new operating system soon to be released by official institutions in China, as part of the drive to ban Microsoft systems from the administration in that country. Speculation is rife on this system being Ubuntu Kylin, or at least something based on it.
BBC
China plans new PC operating system in October
25-08-2014

The Chinese Academy of Engineering has disclosed plans to release a new operating system for PCs as soon as October.

It hopes a version for mobile devices could subsequently be released within three to five years.

The news was reported by a paper run by the Ministry of Industry and Information Technology (MIIT).

It follows a decision in May to ban the use of Windows 8 on many Chinese government computers.
And all this is possible (even this blog) because 23 years ago a young Finn decided to code a simplified operating system during his summer holidays. And he kept doing it the rest of his life...
Softpedia
Linus Torvalds Started a Revolution on August 25, 1991. Happy Birthday, Linux!
25-08-2014

The Linux project has just turned 23 and it's now the biggest collaborative endeavor in the world, with thousands of people working on it.

Back in 1991, a young programmer called Linus Torvalds wanted to make a free operating system that wasn't going to be as big as the GNU project and that was just a hobby. He started something that would turn out to be the most successful operating system on the planet, but no one would have been able to guess it back then.

Linus Torvalds sent an email on August 25, 1991, asking for help in testing his new operating system. Things haven't changed all that much in the meantime and he still sends emails about new Linux releases, although back then it wasn't called like that.
Have a nice weekend and enjoy the last days of summer.