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04 October 2014

Press review 04-10-2014 - The plunge

Petroleum prices took a further dive this week, definitely leaving the trading band of recent years, presently hoovering in the low 90s ($/b). The largest economic blocks of the world are either stalled or in recession, with political tensions blocking a short term recovery of international trade. In fact petroleum is just one of many commodities (and various currencies) affected by a general negative short term outlook on the global economy. This downturn is wrecking nerves, with uncertainty growing for many projects on widely disparate price expectations.

Short term the biggest risk in Europe remains the gas supply from Russia. News broke out this week of fresh cuts, affecting more member states. Negotiations on a deal over supplies to Ukraine seem to have staled. With storage facilities nearly full throughout Europe this issue does not seem pressing; but there should be no illusions: Europe can not make through the winter without regular supplies.
EU-Russia gas duel deepens with Slovakia supply cut

The cat and mouse game between Europe and Russia on gas intensified on Wednesday with Slovakia saying its supply from Russia was down by a half and its prime minister calling the move part of a political fight.

Since September, Russia's state-controlled Gazprom has sent less-than-requested deliveries to Poland, Slovakia, Austria and Hungary - after the European Union began sending gas to Ukraine - in a clear warning from Moscow ahead of the winter heating season which officially starts today, when the industry switches to higher pricing.

The 50 percent cut reported by Slovakia, a major transit point for Russian gas exports to Europe, was by far the deepest yet, and Prime Minister Robert Fico said he would call a crisis meeting of his government if the problems persisted.
The Russian establishment has been (correctly) vocal in condemning the role played by neo-nazi organisations in the coup d'état in Kiev. That however does not prevent Russian companies from making special deals with Viktor Orban. Apparently, Hungary is breaching a decision took by the European Council. Is it one more defiant step towards an inevitable exit from the EU? Or is Hungary aware of more supply cuts to come?
Hungary to import more gas from Gazprom, says PM Orban
Krisztina Than, 26-09-2014

Hungary has secured increased gas imports from Russia's Gazprom, Prime Minister Viktor Orban said on Friday, a day after Hungary's pipeline operator FGSZ stopped shipping gas to Ukraine.

Orban told public radio that he had held talks with Gazprom CEO Alexei Miller and the company had agreed to ship increased volumes of gas to boost levels at Hungary's storage facilities in the coming weeks.

Hungary is aiming to avert supply problems in the event of a potential halt in shipments of Russian gas stemming from the Ukraine crisis.
Russia keeps on expanding its costumer base, reducing its reliance on Europe. China is a natural partner in a a new drive towards the East, with whom Russia shares one of longest borders in the world. The gas pipelines recently referenced by the press are just the beginning of a large inversion of energy flows from Europe to China.
New Eastern Outlook
China and Russia in New Strategic Energy Deals
William Engdahl, 28-09-2014

Only weeks after Russia’s Putin and China’s President Xi signed what was called the “energy deal of the century,” a $400 billion eastern gas and pipeline project over 30 years from Russia to China, the two countries have followed with a dazzling array of major new energy agreements from gas to oil to coal. Taken as a totality it amounts to a major strategic and geopolitical shift in relations between the two giant nations of Eurasia that will have implications for the future of Europe as well as the United States.

[...] The two Russia-China gas pipeline projects are far from all being agreed between the two Eurasian countries at the moment. The deputy head of China’s National Energy Administration, Zhang Yuqing, announced on September 19, just two days after the news of the western Siberia-China talks, that China will “amplify cooperation” with Russian companies on Russia’s huge Yamal Liquified Natural Gas (LNG) project. The Chinese, who have been developing their own technology for creating LNG, will use their technology in the project in Yamal for gas deliveries to China.

[...] At the same time, in early September, the Russian state company, Russian Technologies, or Rostec, signed a $10 billion deal with China’s state-owned Shenhua Group Corp Ltd, the largest producer of coal in the world. It calls for the two to develop coal deposits in Russia’s Siberia and the Far East. The two companies will explore and develop the Ogodzhinskoye coal deposit in Russia’s Amur Region, with estimated coal reserves of 1.6 billion metric tons. Rostec expects coal production to start in 2019, with annual production reaching 30 million tons to be exported mainly to China.
Russia is also reportedly on the move to tame hydro-carbon supplies from the Caspian basin to Europe. Is Ukraine really worthy all this?
Caspian states fight over oil and gas riches
Jacopo Dettoni, 28-09-2014

As a new regional order emerged in Central Asia from the ashes of the Soviet Union, the five Caspian coastal states recognized the need for an update of the Soviet-Iranian treaties that had regulated the basin since 1921. Russia initially tried to veto any deal involving oil and gas, only to take a step back in the late 1990s, when it agreed to bilateral treaties with Azerbaijan and Kazakhstan that granted sovereign rights over the resources off their coasts.

Although Iran and Turkmenistan never recognized these agreements, the treaties gave Azerbaijan and Kazakhstan legal grounds for the development of oil and gas fields. With the construction of the Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzurum pipelines, which came on stream in 2006 and 2008 respectively, Caspian hydrocarbons began flowing from Azerbaijan on the west coast of the Caspian to Turkey, and on to western Europe. Both pipelines are outside Moscow's control.

[...] "Right now (the Russians) have a great foreign policy incentive to try to stop the flow of oil and gas to Europe," said Jim von Geldern, professor of Russian and international studies at Macalester College in the U.S. state of Minnesota. "If they go back to the 1921 convention, they treat the basin more like a lake, which means they have to negotiate any division of resources. If it is negotiation, rather than law, then it is to the advantage of the more powerful countries such as Russia and Iran."

Dmitry Shlapentokh, professor of Soviet and post-Soviet history at Indiana University, also in the U.S., said Russia's main objective is to protect its gas sales to Western Europe from Caspian Sea competition. "Because of that, Turkmenistan and its large endowment of gas resources is a major cause of concern for Moscow. If (Turkmenistan) joins forces with Azerbaijan through a trans-Caspian pipeline, that would pose a serious threat to the Russian monopoly. This is why Russia's priority is to prevent such a pipeline from seeing the light."
The petroleum price dive made up for contradicting headlines in the press this week. On the one hand were those expecting the world economy to keep struggling, dragging prices further down.
'Perfect storm' could send oil to $75, pro says
Michelle Fox, 02-10-2014

Oil prices will continue to slide down, with West Texas Intermediate possibly plunging to $75 a barrel, Jack Bouroudijan told CNBC's "Power Lunch" Thursday.

"This is a perfect storm for oil, think about it, between the Saudis trying to maintain market share and cutting and slashing prices, between the strong dollar … and the fact is that there is a huge supply out there," said Bouroudijan, chief investment officer at Index Financial Partners and a CNBC contributor.
On the other hand were those acknowledging present prices are not able to sustain many of the petroleum projects online today and the majority of those required in the near future. The key in this debate is timing.
Cheap oil 'a mirage' and heading to $140: Dicker
Bruno J. Navarro, 01-10-2014

Brent crude oil prices this week dropped 2.4 percent to $94.83 per barrel and West Texas Intermediate saw a 3.6 percent decline to $91.16 a barrel. Meanwhile, the U.S. dollar hit a four-year high.

On CNBC's "Halftime Report," Dicker called cheap oil prices "a mirage."

"If you put up any chart for any currency you like against the dollar—put up the euro, put up the yen, put up the pound, put up whatever you like—you see a ski slope. And that's really what's been affecting oil," he said. "And that, to me, is a financial connection that is specious at best. When it works, it works. But when it doesn't work, it fails spectacularly. This is one of those moments when it's really working. The dollar continues to get stronger and continues to force oil lower. But I tell you, this is a mirage, and this is why: It's all about future production."
Saudi Arabia felt forced to intervene, announcing a cut to its petroleum output. Some investors perceived this move as an end to the price slump, but in parallel to cutting output, Saudi Arabia is also cutting the price to cash deliveries, increasing the discount on the regional Arabian Light benchmark.
Worst Seen Over for Crude Prices as Saudis Cut Production
Grant Smith, 01-10-2014

The worst is over for global oil prices, according to UBS AG and Barclays Plc. After the biggest quarterly drop in more than two years, Brent is set to recover as Saudi Arabia cuts output and demand climbs, they said.

“Supply is the important thing and Saudi Arabia is in the process of rebalancing the market,” Giovanni Staunovo, an analyst at UBS in Zurich, said by e-mail yesterday. “The weakness in crude oil prices should come to an end.”

Brent fell yesterday by the most since Jan. 2 to $94.67 a barrel. It extended a quarterly drop to 16 percent, the largest since the three months ended June 2012. The benchmark grade for more than half the world’s oil will average $105 from October to December, according to the median estimate of 15 analysts compiled by Bloomberg since Sept. 11. It was up 0.8 percent at $95.41 a barrel at 10:47 a.m. New York time today.
In the wake of Scotland's independence vote, further assessments of North Sea resources keep coming. In this particular case, and after working through the usual mess up with units, this reports seems to inform that remaining petroleum in the British offshore will cost at least 66 $/b just in exploration. In between the lines this report is actually saying the end is near, which is not really a surprise.
Huge investments needed offshore Britain
Daniel J. Graeber, 30-09-2014

British offshore oil and natural gas reserves will stop providing a return on investments if costs continue to rise, an industry report said Tuesday.

Oil and Gas U.K., the British industry body, published its annual report Tuesday showing there may be as much as 24 billion barrels of oil equivalent left offshore, but it may require more than $1.6 trillion in investments to exploit.

It warned that operating costs on the British continental shelf were 60 percent higher than they were in 2011.
News of losses on the American source rocks keep flowing, now with petroleum resources frequently referenced. The losses made public by Sumitomo may be the largest yet reported on these resources, and will certainly not be the last.
Sumitomo to Probe $1.8 Billion in Shale And Coal Losses
Ichiro Suzuki and James Paton, 29-09-2014

Sumitomo Corp. (8053) will set up a special investigation into how it lost almost $1.8 billion in Texas shale oil and Australian coal mining.

The probe comes after the company, Japan’s fourth-biggest trading house, cut its annual profit forecast by 96 percent after writing down the value of the two investments. Most of the losses were incurred at the shale oil project it shares with Devon Energy Corp. (DVN) of the U.S.

“I didn’t expect the loss could reach this level at all,” said Jiro Iokibe, a senior analyst at Daiwa Securities in Tokyo, adding that the next threat for shareholders is a possible cut to the company’s dividend.
A deeper analysis of this case below. Clearly, the potential is there for more losses of this size with operations on these resources.
The Daily Impact
Shale Oil Boom Breaking Down
Tom Lewis, 01-10-2014

Recent research suggests that fracking causes earthquakes; they have no doubt of that at the fourth largest trading and investment company in Japan — Sumitomo Corporation — which has just experienced a Magnitude 10. The profit Sumitomo expected to make this year, a hefty $2.27 billion, has been all but wiped out. News of the disaster atomized 13 per cent of its stock value in one day. Its credit rating went to “negative.” And almost all of this was caused by hideous losses incurred in fracking for tight oil in Texas.

Sumitomo samurai rolled into Texas just two years ago (seems like only yesterday) with a $2 billion dollar investment in the Permian shale-oil play, in partnership with Devon Energy of Oklahoma. So here we have Japan’s fourth-largest trading company, along with one of the largest US fracking companies, going into the (potentially, according to the oil interests) richest tight-oil basin in the United States in the midst of a tight oil boom. What could possibly go wrong?
And to close the review on petroleum an excellent article diving into the popular debate around Peak Oil. Highly recommended weekend reading.
Comfort with Uncomfortable Thoughts
In Search of Oil Realism
Ray Long, 30-09-2014

Let's start at 10,000 feet. One of the key points of my blog is that people get into trouble because they confuse (or purposely confuse) Peak Oil and the Peak Oil Debate, or stated another way, they confuse what Peak Oil IS and what Peak Oil MEANS.

The definition of Peak Oil is the "maximum rate of oil production" - it's a number, nothing more, nothing less. Production of all finite resources eventually reach a peak in production. That's not controversial, it's not scary, it's just a number.

The Peak Oil Debate on the other hand is all the discussion surrounding that number. What will the peak rate be (what's the number)? When will it happen? How do we properly define "oil" (many argue that if you limit the definition to conventional crude, we're already past global peak)? How does the decline look after the peak (steep decline, plateau, et cetera)? What happens to price and costs to the oil industry? What consequences does the peak have for society? And many other questions.

With so many different questions to answer in the Peak Oil Debate, it should be obvious that many different positions exist in the debate. Peak Oil beliefs are not homogeneous - as Robert Rapier points out in his article Five Misconceptions about Peak Oil.
Coal is another commodity affected by the present negative economic outlook. That has not yet translated into relief in the internal Indian market, where power companies are still operating with dwindling stocks. Some analysts expect this surge in coal imports to come shortly, leaving a clear mark in the 2015 statistics.
Analysts Say India's Coal Imports Are About to Explode
Dave Forest, 29-09-2014

As I've discussed, India's coal sector is in crisis. With stalling domestic production leading to rolling blackouts of late--as many of the country's coal-fired power plants struggle to find supply.

As of September 23, a full 35% of the country's coal-powered plants were running at "super-critical" coal supply levels. With less than 4 days of inventory on hand.

And according to a few high-profile analysts this week, that's going to lead to a big jump in imports to fill the gap.

Local coal analysts OreTeam released a forecast predicting that coal imports could leap to 210 million tonnes in the fiscal year 2015/16 (which will begin April 1, 2015).

That would be a significant rise. Up 25%--or over 40 million tonnes--from the 168.4 million tonnes of coal India imported during the last fiscal year.
Following a sceptical article on wind energy that is worth the time. It portraits several projects still in the development phase that point were this technology may be heading to in the future.
NBC News
Will They Fly? Wind-Power Alternatives Buffeted by Technical Squalls
Miguel Llanos, 27-09-2014

Energy startups are trying to get power where no one has gone before: hundreds of feet up in the air, harnessing wind that blows steadier and stronger than on the ground.

But along with technical challenges that come on the cutting edge of the renewable energy industry, they now must factor in cheap natural gas — an obstacle for all kinds of alternative power technologies, say experts.
The IEA is joining the camp of optimists on solar energy, in the wake of persistent failures to forecast the actual ramp up of electricity generation capacity around the world (it would be great if they could do the same regarding their petroleum forecasts). There is however no word on the spreading drive to make PV illegal in many countries around the world.
Solar May Become Largest Global Power Source by 2050
Marc Roca, 29-09-2014

Photovoltaic plants may provide as much as 16 percent of global electricity, and concentrating solar facilities could generate another 11 percent, the IEA said in an e-mailed statement today. The Paris-based organization details what is required to reach these figures in two scenarios it sets out to reach the goal.

“The rapid cost decrease of photovoltaic modules and systems in the last few years has opened new perspectives for using solar energy as a major source of electricity,” Executive Director Maria van der Hoeven said.

[...] Photovoltaic installations have grown much faster than the agency expected when it released its first outlook for solar in 2010, when it saw them covering 11 percent of global power by 2050. More solar capacity has been added since 2010 than in the previous four decades, the IEA said.
Have a good weekend.

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