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20 December 2014

Press review 20-12-2014 - Contraction

The decline in petroleum prices continues to dominate the news. The Brent index fell further this week, finding an apparent bottom around 60 $/b; it may be merely temporary. All bets are off for 2015 and price forecasting at this stage is mostly a futile exercise. If earlier the owes of this price rout were coming mostly from North America, they now spread, with every other petroleum region facing a grim forecast.

Russia popped in the news in the first days of the week with drastic measures to support the ruble. The parallels with previous historical petroleum price bottoms in 1998 and 1985 are obvious and do not spell anything good. And it is not only petroleum, Russia relies on exports of all sorts of raw materials whose prices have fell across the board during 2014, in face of an anaemic world economy. One thing is now certain: 2013 will go in history as the year petroleum extraction in Russia peaked. Henceforth it is mostly about the steepness of the decline.

Bloomberg
Russia Defends Ruble With Biggest Rate Rise Since 1998
Olga Tanas and Anna Andrianova, 16-12-2014

Russia took its biggest step yet to shore up the ruble and defuse the currency crisis threatening its stricken economy.

In a surprise announcement just before 1 a.m. in Moscow, the Russian central bank said it would raise its key interest rate to 17 percent from 10.5 percent, effective today. The move was the largest single increase since 1998, when Russian rates soared past 100 percent and the government defaulted on debt.

The ruble lost 2.5 percent to 66.0985 against the dollar as of 12:53 p.m., reversing an early gain prompted by the news.

The announcement, as well as its timing, underscored the financial straits in which Russia now finds itself. If sustained, the new higher rates would squeeze an economy that is already being hurt by sanctions led by the U.S. and European Union, and by a collapse in oil prices. Some analysts said they doubted the economy could withstand such high rates for long.
Another example of an ailing petroleum exporter that does not make front pages is Angola. The 2015 budget was approved days ago and economists started computing: if prices stay where they are, the country will face next year a deficit of 14% of GDP. Concern is growing among European investors and there are already rumours of a liquidity squeeze in the infant Angolan bond market. The country has plenty of other natural resources to explore, but none can plug such deficit in the short term.
Agence Ecofin
L'Angola devrait recourir au marché de la dette pour 10,2 milliards $ en 2015
Idriss Linge, 12-12-2014

En Angola, le projet de loi de finance 2015 qui a été finalement approuvé jeudi 11 décembre 2014, prévoit un déficit d'un trillion de kwanzas (10,114 milliards $), qui devra être financé par des recours aux marchés de la dette, tant à l'intérieur du pays qu'à l'international, a-t-on appris de l'agence angolaise de presse.

Dans le commentaire fait de cette loi de finance, le gouvernement a expliqué que le besoin de recourir aux banques ou au marché international de la dette, pour combler son déficit budgétaire, est lié à la décision prise de réduire la pression fiscale en 2015. Du coup la pression sur le budget sera forte, car cet endettement correspond à 37% des ressources publiques pour l'exercice à venir.

Au total, la dette publique angolaise devrait atteindre les 48,3 milliards $, représentant jusqu'à 35,5% de son produit intérieur brut (PIB). Ce qui peut constituer un défi pour la stabilité macroéconomique de l'Angola, représentera une belle opportunité pour les investisseurs attirés par des dettes souveraines, offrant de meilleurs rendements
Things are also turning very sour in the North Sea. The industry is simply shutting down in the region and the end of the petroleum story here looks more real than ever. As noted before, the Brent index soon might have to be scrapped for a more lasting benchmark.
BBC News
North Sea oil industry 'close to collapse'
Ben King, 18-12-2014

Oil companies and service providers are cutting staff and investment to save money.

Robin Allan, chairman of the independent explorers' association Brindex, told the BBC that the industry was "close to collapse".

Almost no new projects in the North Sea are profitable with oil below $60 a barrel, he claims.

"It's almost impossible to make money at these oil prices", Mr Allan, who is a director of Premier Oil in addition to chairing Brindex, told the BBC. "It's a huge crisis."
Oil extraction from the Norwegian continental shelf declined 5% in this year alone, showing once more the advanced maturity of the region. At such rate Norway is just 20 years away from null extraction, and less than a decade away from null exports.
UPI
Norwegian oil production down 5 percent
Daniel J. Graeber, 17-12-2014

Production figures from Norway show average daily oil production down about 5 percent year-on-year, a national regulator said in Wednesday report.

The Norwegian Petroleum Directorate released production figures for November, showing an average daily production of 1.46 million barrels of oil.

"The oil production is 5 percent below the NPD's prognosis for November and 5 percent below the oil production in November last year," the agency said in its report.
The Arctic petroleum chimera got another important blow this week with one more major company announcing its withdrawal from northern Canada. These resources will remain shelved for the time being but will certainly return on the table on the next ascending phase of the price cycle. The question here is not so much if prices can return to levels sustaining Arctic operations, but wether if they will ever be stable enough.
Reuters
Chevron cancels Canadian Arctic drilling as oil prices slide
17-12-2014

Chevron Corp (CVX.N) is putting a plan to drill for oil in the Beaufort Sea in Canada's Arctic on hold indefinitely because of what it called "economic uncertainty in the industry" as oil prices fall.

In a letter to Canada's National Energy Board on Wednesday, the company withdrew from a hearing on Arctic drilling rules because it has walked away from plans to drill in the EL 481 block, 250 kilometers (155 miles) northwest of Tuktoyaktuk, Northwest Territories.

The drilling project is the largest yet put on hold after oil prices dropped by nearly half over the last six months, even as a long list of oil companies cut their budgets for 2015 because of the price drop.
In the US a lot was again written on the impeding shock to the bond market from declining revenues to the petroleum industry. Just on the high risk segment alone are 200 G€ of outstanding debt issued by companies that at this moment are money loosers.
Bloomberg
Oil Plunge Sets Stage for Energy Defaults: Credit Markets
Sridhar Natarajan, 17-12-2014

Bond investors, already stung by the biggest losses from U.S. energy company debt in six years, are facing more pain as the plunge in oil leads analysts to predict defaults may more than double.

While bond prices suggest traders see defaults rising to 5 percent to 6 percent, UBS AG said it may actually end up being as high 10 percent if prices of West Texas Intermediate crude approach $50 a barrel and stay there. Debt research firm CreditSights Inc. predicts a jump to 8 percent from 4 percent.

A borrowing binge by energy companies in recent years to finance new sources of oil has pushed a measure of leverage among the lowest-rated firms above its 2009 peak, according to CreditSights. The $203 billion of bonds outstanding have lost 14 percent this quarter and are poised for their worst performance since the end of 2008, Bank of America Merrill Lynch index data show. More than $40 billion of value already has been wiped out, Bloomberg index data show.
Some observers note that the uncertainty over such a wide segment of the bond market is contagious and seems already spreading. Liquidity is generally drying and high risk financing getting difficult.
Wolf Street
Great Unwind of Oil-and-Gas Junk Bonds to Defund Fracking?
Wolf Richter, 16-12-2014

[...] During these times of turmoil in the oil patch and on Wall Street, scores of bond issues become illiquid, and “price discovery” sets in where buyers and sellers are so far apart that no trades take place. And if forced selling sets in, prices collapse entirely. It’s brutal out there.

It’s a big market: energy junk bonds make up over 15% of the $1.3 trillion high-yield market. The rout has started to drag on the overall junk-bond bubble, and junk bonds ex-energy are now also declining.

At the riskiest and erstwhile frothiest end of the overall junk-bond market, it’s getting outright ugly: the effective yield index for bonds rated CCC or lower jumped from the record junk-bond-bubble low of 7.94% in late June to 11.72% on Monday. An increase of nearly 50% in funding cost for companies in that category.
An interesting outcome of these developments is the shelving of the plan to build a pipeline from Dakota to Oklahoma. Premonitory.
CNBC
Bakken oil pipeline project slammed shut
Javier E. David, 13-12-2014

Enterprise Products Partners is shelving a proposed pipeline that would have transported crude from North Dakota to Oklahoma, the company announced on Friday.

The news came in the midst of a brutal slide in global oil prices that have raised concerns about whether U.S. companies will continue to build on the expansion of oil production. Middle East oil producers have yet to announce a cut in production to offset the drop in crude, in what some analysts say is a slow-bleed strategy designed to make pumping crude as uneconomic as possible for the world's fastest growing non-OPEC oil producer.

Enterprise Products—a publicly traded partnership designed to provide financing on oil and gas infrastructure projects — said in a terse statement that investors had "decided not to move forward with development of its proposed Bakken to Cushing crude oil pipeline."
David Hughes, author of two reference reports on hydro-carbon extraction from source rocks in the US, gave an interview to PeakProsperity some days ago. He dives into the peculiarities of this market and the underlying causes of the financial bubble that just burst.
PeakProsperity
The Shocking Data Proving Shale Oil Is Massively Over-hyped
Adam Taggart. 13-12-2014

So, expect US oil production to suffer from these lower prices if they persist. But even if oil prices rise and rise soon, there's new data that indicates the total amount of extractable oil from America's shale plays is less -- much less -- than what we're being told (or better put, "sold").

On today's podcast, Chris talks with oil analyst David Hughes, who has analyzed the major shale plays utilizing a massive database of well production results from America's shale basins. The data show that declines tend to be hyperbolic in all shale fields. The average first-year decline is 70%; down to 85% by year three. And we're drilling the best parts of these plays first: meaning that future wells will yield less even under the best results.

We're pinning our hopes of "oil independence" on faulty assumptions. Worse, we're using it to dismiss the Peak Oil theme at exactly the time we should be using this extra oil to construct the infrastructure for our next energy age (whatever that may look like), while we still have the net energy available to us:
In Ukraine the new ceasefire seems to be holding, in spite of pledges from Russia and the US to further support militarily their side of interest in the conflict. Various members of the European Council are now trying hard the defuse the tension, in a much needed show of sanity. In parallel, the "shale gas" story in Ukraine is now shaping into something similar to Poland's story: in the end it is all just a lot of hot air.
Bloomberg
Chevron Shale Exit Shreds Ukraine’s Hope of Energy Independence
Ladka Bauerova and Joe Carroll, 17-12-2014

Shale gas was supposed to be Ukraine’s ticket to greater energy independence from Russia. Chevron Corp. (CVX)’s decision to pull the plug has smashed those hopes.

The second-largest U.S. energy producer will pull out of an agreement for exploring the Oleska field in western Ukraine, a government official said this week. It was the final blow to the country’s dream of becoming a big shale-gas producer after Royal Dutch Shell Plc (RDSA) retreated earlier this year from a similar deal in eastern provinces riven by a bloody war with pro-Russian separatists.
And naturally, the ceasefire is just a first step to resolve the owes of this ravished country, whose short term energy predicament is really grim. Let us hope the violence can remain quelled throughout the holiday season and that in January work on a sound peace arrangement can resume.
Rueters
Ukraine power units idled as coal reserves shrink
17-12-2014

Some 20 power units across Ukraine have been idled due to a lack of coal and the latest data shows coal reserves at plants have fallen by another four percent, state-run energy firm Ukrenergo said on Wednesday.

Ukraine used to be self-sufficient in coal, but separatist fighting in the Donetsk and Luhansk regions has halted production at more than half of the country's coal mines, prompting a power crisis.

Coal reserves at power plants have fallen to 1.39 million tonnes, Ukrenergo said, down from around 4 million tonnes a year ago.
Next week I will be travelling, and with limited internet connection; in all likelihood this was the last press review of 2014.

Merry Christmas and best wishes for 2015. See you then.