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08 November 2014

Press review 08-11-2014 - Brent is sinking

Commodities resumed the decline this week, pretty much all across the board. The economic outlook is grim, Governments appear week, with limited options, but are still keen on cutting ties with important partners such as Russia. This price rout is looking ever similar to what took place in 2008. For the energy sector in particular, these developments come at the worst of moments.

In a striking sign of times, the Brent petroleum field in the North Sea appears to be fast reaching the end of its economic life. The petroleum extracted from this field has been the benchmarks for about half of all the petroleum traded internationally. Ironically, the benchmark seems no longer able to support itself. Soon the media might have to start referring to a different international price index.

Voice of Russia
Is North Sea oil exploration nearing its expiry date?
Tim Walklate, 31-10-2014

The oil field which helped kick-start the North Sea oil boom in the 1970s now looks set to be approaching the end of its useful life. Anglo-Dutch energy company, Royal Dutch Shell, has announced that it will close two of its three remaining platforms this weekend, while the third will be decommissioned in the near future. It raises questions as to the future for Britain’s energy dependencies and whether North Sea oil and gas are now things of the past. VoR's Tim Walklate has more.

The multi-national oil and gas company also said that the remaining platform, Brent Charlie, would follow suit “in the next few years.” In late 2011 another platform, Brent Delta, was the first to be decommissioned and this marked the beginning of the retirement of the giant oilfield. Shell said in a statement that “from a technically innovative installation phase through to a long period of operation and production, these platforms have helped to sustain vital North Sea oil and gas supplies. We will now focus on safely decommissioning these assets.”
The credit that fuelled the so called "shale boom" in the US is drying up and great sums of money are being lost - unsurprisingly to whomever reads this review. These figures are still nowhere near the total amounts of capital spent by the industry on these resources in recent years.
Bloomberg
Oil Erases $8.4 Billion for Junk Traders After Debt Binge
Lisa Abramowicz, 04-11-2014

Traders are dumping dollar-denominated notes of speculative-grade energy companies today as oil reaches a three-year low: Petroleos de Venezuela SA bonds fell more than 4 percent and some Halcon Resources Corp. (HK) notes have lost about 6.5 percent.

The moves extend $8.4 billion of losses for junk-rated energy-company bonds that have accumulated since the end of August, Bank of America Merrill Lynch index data show.

Oil prices are driving credit markets -- where energy companies account for a record proportion of speculative-grade bonds -- as investors consider the possibility of both deflation and less income for commodity-dependent nations such as Venezuela.
The US media is slowly taking home the inevitable consequences of the present petroleum price rout. Changes are on the horizon and supporting the hype is no longer practical.
Associated Press
Low oil prices send chills through oil patch
Josh Wood and Jonathan Fahey, 03-11-2014

[...] Still, a $20 drop in the price of oil means $170 million less in revenue every day for the U.S. oil industry.

Investors are less willing to take on the risk of funding new expansion without hopes for a big reward and oil companies big and small are left with less money to go and drill the next well.

BP, Chevron and Shell told investors last week they would reduce spending on new development because of lower prices.

Mike McDonald, co-owner of Triad Energy, which usually operates 1 or 2 rigs in Oklahoma, says that low prices have stung and now he's not planning to get another rig going after current projects are complete.

Drilling in fields that aren't very prolific will stop because it won't be profitable. For example, drillers in North Dakota's Burke County need $81 a barrel on average to break even, according to the Department of Mineral Resources, while the price is just $28 in McKenzie County, the state's top oil producing county.
Kashagan popped up again in the news with more details on the mounting costs of the project. First production seems to have been delay yet again, now expected for the second half of 2016.
Reuters
New Kashagan pipes to cost over $3 bln, oil to flow in H2 2016 -official
05-11-2014

The consortium developing Kazakhstan's giant Kashagan oilfield will have to spend more than $3 billion to replace faulty pipes before output at the deposit resumes in the second half of 2016, a senior Kazakh official said on Wednesday.

Production at the Caspian Sea reservoir, the world's biggest oil find in recent times, started in September last year but was halted just a few weeks later after the discovery of gas leaks in the $50 billion project's pipeline network.

The Kashagan consortium will have to buy pipes adding up to a total length of 200 km (125 miles) to replace the entire network of the field's oil and gas pipelines.
In Libya fighting seems to be re-focusing on Benghazi, in what appears a last push from NATO supported forces to retake power.
International Business Times
Libya Update: Benghazi Descends Into Mayhem As Army-Backed Gen. Hifter Fights Militias
Alessandria Masi, 31-10-2014

The death toll on Friday alone is expected to surpass 190 as armed factions near their third week of open warfare in the streets of Benghazi, Libya. More than three years after dictator Moammar Gadhafi was killed, Libya is embroiled in an increasingly chaotic civil war.

Fighters aligned with the secular, army-backed former general Khalifa Hiftar launched an attack on Islamist militants in the country’s second city earlier this month, throwing Benghazi into what some have called a catastrophic humanitarian situation. Car bombs, air strikes, targeted assassinations on activists and journalists and rampant gunfire in the streets have now become commonplace.
Personally, I am not holding my breath. These regions that the media calls Libya are now years away from any sort of regular civil life.
International Business Times
Libyan Army Urges Residents Of Benghazi Port Area To Evacuate
02-11-2014

Libya's army urged residents to evacuate a central district of Benghazi that is home to its seaport, a spokesman said on Sunday, as it prepares a military operation against Islamists in the country's second-largest city.

At least 230 people have been killed since the army, backed by forces loyal to a former general, have waged an offensive against Islamist groups in the eastern city, part of chaos plaguing the oil producer three years after the ousting of Moammar Gadhafi.

The army has claimed to have seized back several barracks it had lost to the Islamists in August though fighting has been continuing in other parts of the eastern city.

"The chief of staff asks all residents of the Assabri district to leave by 12:00 noon (on Monday)," said Ahmed al-Mesmari, spokesman for the chief of staff.
In Iraq the Shiite have obtained symbolic victories against the Sunni, with the help of Iran and the Hezbollah, thus retaining control of the largest petroleum assets. But the Islamic State continues gaining ground against the Kurds, to whom the airborne aid from NATO does not seem to be helping much at the moment.
Associated Press
Iran general said to mastermind Iraq ground war
Qassim Abdul-Zahara and Vivian Salama, 05-11-2014

When Islamic State militants retreated from the embattled town of Jurf al-Sakher last week, the Iraqi military was quick to flaunt a rare victory. State television showed tanks and Humvees parading through the town and soldiers touring government buildings that the Sunni extremist group had occupied since August.

However, photos soon emerged on independent Iraqi news websites revealing a more discreet presence - the Iranian general Ghasem Soleimani, whose name has become synonymous with the handful of victories attributed to Iraqi ground forces. Local commanders said Lebanon's Hezbollah Shiite militia group was also involved.

The U.S. has awkwardly found itself on the same side as Iran and Hezbollah in the war against the Islamic State group, which rampaged across much of northern and western Iraq in June. While U.S. military advisers have been coordinating coalition airstrikes from within heavily fortified bases, Soleimani and his commanders are on the front lines and would assume a key role in the retaking of major cities.
The eternal promise of LNG from Noth America, it should turn both the European and the Asian markets upside down. Nothing like it yet to be seen.
Reuters
Promise of 'Captain America' fading for Asia's LNG buyers
Julie Gordon, 02-11-2014

North American liquefied natural gas projects, once believed to be the panacea that would save Asia from paying top dollar for the super chilled fuel, are proving to be less of a gamechanger than originally expected.

High costs, gruelling regulatory processes and mounting social opposition have slowed the development of new capacity in Canada and the United States, tempering early hopes that a flood of cheap western gas would drive down prices.

A sudden rise in demand for LNG after the Fukushima nuclear disaster in March 2011 created a tight market for the commodity, pushing Asian prices to new highs and sending buyers scrambling to make deals with fledgling producers in North America.

Three years later, the majority of projected U.S. and Canadian volumes are still as much as a decade from first shipment, making it difficult for them to spare Asia from LNG prices that have been up to twice as expensive as natural gas in European markets this year.
The coal shortage in India keeps deepening and can not possibly be solved without a massive opening to imports. The media is airing sound-bites from experts claiming that on the current tack it will take years to regularise the Indian coal market.
The Hindu
About 60% thermal plants suffer acute coal shortage: CEA
02-11-2014

Around 60 per cent of the total 103 thermal power projects in the country are reeling under acute coal shortage with less than a week’s stock at their disposal, according to official data.

Of the total 61 plants, with less than seven days of stockpiles, 34 power projects have less than four days of reserve, as per latest data (October 30) of the Central Electricity Authority (CEA).

The 34 projects with less than four days stock include seven power stations of state-run NTPC — Badarpur (Delhi), Indira Gandhi power station (Haryana), Singrauli (Madhya Pradesh) Rihand, Tanda and Unchahar (Uttar Pradesh).
Just across the border in China the problem seems to be exactly the opposite. Sluggish economic growth and the expansion of alternatives is bringing the industry to its knees. Those dreaming with a four fold increase in coal extraction up to the end of the century should definitely wake up to reality.
Want China Times
Overcapacity driving China's coal industry into the ground
04-11-2014

With coal prices spiraling downward, major Chinese coal firms are going to sink even further into the red unless they can improve and adapt their operations to the new industry climate, reports Shanghai's China Business News.

In the first three quarters this year, 20 major Chinese coal firms suffered a total net deficit of 10.56 billion yuan (US$1.7 billion), with only seven of them managing to scrape in a slim profit. Combined accounts receivable also topped staggering 130 billion yuan (US$21.2 billion), according to the report.

One major culprit for the industry's vexing problem is excess capacity, a result of two rounds of vigorous investments in the industry since 2006 in response to the booming market. The inflow boosted the industry's total annual capacity, including production facilities under construction, to an enormous 5 billion tons, with accumulated investments reaching upwards of 3 trillion yuan (US$490 billion).
The consumption of coal in Germany expanded visibly after the knee jerk decision to closure the country's Nuclear park in 2011. There have been some hints of this being also a symptom of failure of the German Energiwende. The article below presents an interesting take on the matter.
Renewables International
German coal phaseout debate addresses power exports
Craig Morris, 04-11-2014

My analysis from 2013 that the rise in German carbon emissions from the uptick in coal power production is directly connected to the increase in power exports is making its way into the German debate. Up to now, it seemed that the Germans did not want to use this argument as it sounds like pointing the finger at neighboring countries – “we Germans are not responsible for our rising coal emissions, you are.” But the connection is indisputable, and it must be addressed if the problem is to be solved.

The issue is as follows: in Germany, higher demand for power, including from foreign countries (exports), directly increases demand for conventional power. Wind and solar react to the weather, not to demand, but even power from biogas and small hydropower units are paid feed-in tariffs and therefore run as though they were baseload; they do not react to price signals from the power exchange. The word for the share of the market left over for conventional power plants to serve is “residual load.” Greater exports increase the residual load.
One of the commodities whose price has sank in recent weeks is silver. This metal is one of the resources with an uncertain outlook for the years to come. Its density and longevity has sparked a wave of speculative consumption that has been mostly visible since the price dip of late 2008. Since then various episodes of shortages have taken place in the retail market, especially in Europe. These past two weeks low seigniorage coins have almost disappeared from the market, with investors facing delivery delays of a month or more. I expect speculative consumption of silver to become the largest component of demand up to 2020, bringing this market closer to what is that of gold today. This process will probably be littered with shortage episodes like the one witnessed presently, accompanied by an increasing gap between wholesale and retail prices.
Reuters
Silver lining in precious metals' rout catches out coin mints
A. Ananthalakshmi and Frank Tang, 04-11-2014

A tumble in silver prices to four-year lows has triggered a global scramble by consumers to purchase silver coins and bars, as the spread between the price of the metal and gold reaches its widest in five years.

Retailers and distributors in Asia and the United States said they were struggling to get supplies of items such as Canadian Maple Leaf silver coins.

While demand for silver has been strong over the last few months, retailers say buying interest soared in recent days as the metal fell towards its lowest since 2010, along with gold.
Have a pleasant weekend.