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17 January 2015

Press review 17-01-2015 - Shocks

This was a week of shocks. Thursday the Swiss Central Bank announced the de-pegging of the Swiss Franc from the Euro, leading to a flash appreciation of the Helvetian currency by some 20%. Albeit Switzerland being a small economy at the global scale, some frisson erupted with confusion and contradictions stamped in the mainstream press. Stock markets in Europe rallied, while that of the US tanked; India devalued the Rupee. Various commodities rallied to multi-month highs, petroleum inverted early week losses to close exactly where it closed the week before. That a small country as Switzerland can cause such an amount of turmoil around the world attests by itself to the uncertainty and fear presently dominating markets.

In fact, the Swiss gambit ended up covering another shock, with much more relevant and lasting consequences. The conflict in Ukraine drags on, without progress at the negotiations table and renewed intensification of military action. Finally Russia announced the likely outcome of this stand-off: gas deliveries to Europe through Ukraine are coming to an halt. As soon as the Russia-Turkey pipeline is finished, Ukraine stops being a gas transit nation.

The Commission spent decades promoting internal market deregulation as the tenant of energy security. Here is the outcome: there might be not enough gas to supply the deregulated market. Failing to deal with reality, the Commission got dealt back by reality.

Russia to cut EU gas transit via Ukraine
Peter Teffer, 15-12-2015

Russia has said it will stop EU gas transit via Ukraine and do it via Turkey instead in the second shock announcement on energy in as many months.

It said on Wednesday (14 January) that the EU should build new infrastructure to link up with a future Russia-Turkey pipeline or lose access to supplies.

Gazprom head Alexei Miller issued the ultimatum during a visit to Russia by EU energy commissioner Maros Sefcovic, who said he was "very surprised" by the statement.

The latest announcement comes after Russia said in December it won’t build the so-called South Stream pipeline via Bulgaria and Hungary to Italy in favour of a new project with Turkey.
Shocks aside, the petroleum bust continues to make ink (or bits) flow. The idea of a "bail out" to the petroleum industry has already been floated around in shady internet corners. Just as US authorities were compelled in 2008 to intervene strongly in the bond market to avoid a larger collapse in the banking system, some observers see now a similar need to avoid the "shale oil" bust percolating to the wider economy. This perspective was just defended in a major American news outlet.
America's Going to Lose the Oil Price War
Leonid Bershidsky, 12-01-2015

[...] This could be a bloody, prolonged battle with an uncertain outcome. Oil supply and demand are rather inelastic to the price in the short term. The price's trajectory this year will, therefore, be largely dictated by the news and the market's reaction to it. A wave of bankruptcies in the U.S. shale industry will probably drive it up because it will be perceived as a negative factor for supply. How high it will go, however, is unpredictable. It may actually rise enough to enable consolidation in the U.S. shale industry, giving it second wind and driving OPEC countries, Russia, Mexico and Norway into greater difficulties -- or it might just even out at a level that would make the U.S. forget about its shale boom. That would have dire consequences for the U.S. economic recovery.

It may be time for the U.S. government to consider whether it wants to up the stakes in this price war by entering it as a sovereign country. That might mean bailing out or temporarily subsidizing the shale producers. After all, they are competing with states now, not with businesses like themselves.
The full impact of the petroleum bust to the US bond market is to come only by the end of March, a typical date of bond maturity. But also for it is by then that petroleum companies must report their assets to banks.
Oil And Gas Investments Bulletin
How Much Oil Goes Missing at $50/barrel?
Keith Schaefer, 05-01-2015

[...] However, proven undeveloped and probable reserves could potentially decline in size but most important to the bank is the value of these reserves, which are now going (a lot?) lower after this recent oil price move down.

Reserve reports come in out March or April, based on Dec. 31 pricing. The bank lines, or amount of credit or debt that a bank is willing to lend to energy producers, is based on a company’s reserves. And like I said, reserves are the collateral for that debt.

It would be bad news if a company has already used most or all of their existing bank line in the push to boost 2014 production—and then the year-end reserve valuations end up being the same or lower than the previous year.

Banks don’t want to lend a higher value than the reserves of the company. So if there is a reduced reserve value, the producer could see their bank line get cut. And if they already owe more than their newly reduced line, producers may be forced into issuing new shares (which would be done at low, firesale stock prices) or sell assets to cover the portion of the loan called by the bank.
The number of drilling rigs operating is used as a proxy for future extraction rates and overall industry activity. There are already signs of a slowdown in the US, but nowhere near to match the implications of the present petroleum price.
Wolf Street
This Is Just the Beginning of the Great American Oil Bust
Wolf Richter, 12-01-2015

The peak in the number of rigs drilling for oil, according to Baker Hughes’ data series going back to 1987, occurred in the second week of October last year, with 1,609 active rigs. At the time, it was already clear that the oil price plunge wasn’t just a temporary blip. But rigs are contracted for well in advance, and breaking contracts isn’t easy, and changing capital-expenditure plans takes time.

Then late last year, the rig count began to edge down. But on Friday, Baker Hughes reported that oil rigs dropped by 61 to 1,421 rigs. It was the largest week-to-week drop in the data series. In percentage terms (-4.12%), it was the largest drop since the Financial Crisis. When the rig count started plunging like this in December 2008, the stock market was crashing.

And yet, it’s just the beginning
The price rout has been exposing the unsustainable growth of petroleum extraction from source rocks. According to the article below, mid-sized petroleum companies had been spending over 3€ for each 2€ earned. There was no way for such imbalance to last on wells with average lifetimes of 3 or 4 years.
Fuel Fix
North American oil spending to plunge $58 billion, Barclays says
Collin Eaton, 09-01-2015

[...] The industry downturn will prompt at least 500 U.S. land drilling rigs to come off the market by the end of the year, Anderson said. It’s a rapid change of pace for an industry that bolstered investments by nearly 10 percent last year.

Of the oil patches around the globe, North America’s is set to be the hardest hit by the oil crash. The pain could be intensified by the fact that North American small to midsized companies have outspent their cash flows around an average 157 percent, and larger firms have overspent by around 112 percent.

They also have less of their oil production hedged than last year. Just 32 percent of smaller firms had locked in prices for their production this year, compared to 46 percent last year. Larger firms have only hedged 14 percent of their production, compared to 26 percent in 2013, the bank’s data showed.

The proportion of North American oil firms expected to spend slightly less than their cash flow could move from 7.2 percent last year to 26.3 percent this year, according to Barclays. Fewer will spend more than they bring in.
While the bond market in Europe is not subject to the same stresses, things are not going much better to the petroleum industry. The North Sea has been especially hit; it might take a while before new fields are brought online and the overall extraction rate should take a decisive step down in 2015.
North Sea oil and gas up against wall
Daniel J. Graeber, 12-01-2015

Low oil prices are a growing cause for concern in the exploration and production sector of the North Sea, analysis published Monday by Wood Mackenzie finds.

The analytical group said the region brought in $19 billion in capital spending last year, making the British North Sea sector one of the top 10 for upstream spending. With oil prices falling more than 50 percent since June, data show exploration and production activity was slowing down.

Erin Moffat, a senior research analyst at Wood Mackenzie, said exploration activity in 2014 was off 18 percent from the previous year. Only four fields were brought online.

"The current oil price means 2015 will unsurprisingly bring further budget cuts, with exploration spending at the top of the list," she said in a statement.
The Arctic remains the story that never was. One by one petroleum companies pull out, leaving behind little more that promises.
Arctic Explorers Retreat From Hostile Waters With Oil Prices Low
Mikael Holter, 14-01-2015

When Statoil ASA (STL) acquired the last of three licenses off Greenland’s west coast in January 2012, oil at more than $110 a barrel made exploring the iceberg-ridden waters an attractive proposition.

Less than two years later, the price of oil had been cut by almost half and Norway’s Statoil, the world’s most active offshore Arctic explorer in 2014, relinquished its interest in all three licenses in December without drilling a single well, Knut Rostad, a spokesman for the state-controlled company, said by e-mail.

Statoil’s decision shows how the plunge in oil, with Brent crude trading at about $45 a barrel, has dealt another blow to companies and governments hoping to tap the largely unexplored Arctic. That threatens to demote the importance of a region already challenged by high costs, environmental concerns, technological obstacles and, in the case of Russia, international sanctions.
In Iraq things are stabilising somewhat. While war rages on, each faction seems now well established in its territory: Kurds to the North East, Sunni to the West, Shiites to the East and South. The intervention of Iran has been capital to reach this new equilibrium.
Associated Press
Iran eclipses US as Iraq's ally in fight against militants
Hamza Hendawi and Qassim Abdul-Zahra, 12-01-2015

In the eyes of most Iraqis, their country's best ally in the war against the Islamic State group is not the United States and the coalition air campaign against the militants. It's Iran, which is credited with stopping the extremists' march on Baghdad.

Shiite, non-Arab Iran has effectively taken charge of Iraq's defense against the Sunni radical group, meeting the Iraqi government's need for immediate help on the ground.

Two to three Iranian military aircraft a day land at Baghdad airport, bringing in weapons and ammunition. Iran's most potent military force and best known general — the Revolutionary Guard's elite Quds Force and its commander Gen. Ghasem Soleimani — are organizing Iraqi forces and have become the de facto leaders of Iraqi Shiite militias that are the backbone of the fight. Iran carried out airstrikes to help push militants from an Iraqi province on its border.

The result is that Tehran's influence in Iraq, already high since U.S. forces left at the end of 2011, has grown to an unprecedented level.
As reported many times in this blog, the extraordinary expansion of Coal consumption in China this century wished by many is not going to come true. The environmental impacts of the 400% increase up to 2100 expected by the likes of the IPCC would engulf the whole economy well before such eccentric goal could ever be reached. But if for the IPCC there is not much loose, to others things get slightly more serious.
Chinese Green Revolution Tramples Australian Coal Exports
Cecilia Jamasmie, 13-01-2015

Australian coal exporters are scrambling to clarify the fallout from China’s new coal import rules, which some fear could expose the industry to billions of dollars in lost sales as the Asian nation seeks to slash air pollution.

According to Australia and New Zealand Banking Group (ANZ), the fact that China began this month banning coal with ash content of more than 16% and a sulphur level of more than 1%, has spawned a perceived greater risk of rejection at Chinese customs. This, reports The Australian, is creating uncertainty over whether the buyer or seller should shoulder the additional risk.

“While ash content can be reduced through increased processing, higher costs of production and lower yields threaten the economics of these exports,” NZ head of industry economics and research Mark Pervan was quoted as saying:

With as much as 70% of Chinese coal capacity loss-making at current prices, Pervan added the National Development and Reform Committee had forced cuts on imports and domestic production.
A lone article on Copper mining in Peru provides valuable clues on the declining return on investment of this resource, even if almost unintentionally.
Planet Ark
Chile copper mine water use seen rising rapidly in next decade
Fabian Cambero, 14-01-2015

Most of the copper mines in Chile are located in the Atacama, the world's driest desert, and a series of droughts has raised concerns about water use in the country.

Seawater desalination plants are forecast to cover a third of water demand by miners in 10 years' time, from around 9 percent currently, according to Cochilco.

"The future of water supply in Chilean mining will come from the sea," said Jorge Cantallopts, research head at Cochilco.

Chile, producer of around a third of global copper, is facing slumping ore grades at many of its deposits, high energy costs, and strained water resources.
The ambitious solar energy programme announced a couple of months back in India is slowly getting some meat to its bones.
India gets $4 billion solar energy promise
Daniel J. Graeber, 12-01-2015

With New Delhi praised for its renewable energy role, Indian conglomerate Adani Enterprises said it signed a $4 billion solar agreement with a U.S. company.

Adani signed a memorandum of understanding with solar energy services company SunEdison to produce enough solar panels to develop a sustainable green power sector in India.

"India has embarked on an ambitious program to become a world leader in power generation from renewable technologies, and sees solar as a key part in realizing that goal," Vneet S Jaain, chief executive officer of subsidiary Adani Power Ltd., said in a statement Saturday.
To finish off another small example of how the transition to a sustainable economy based on sustainable resources is presently, not only technically viable, but also affordable. There are many other examples of such isolated communities where fossil fuels are less of an option that recently transitioned to renewable energies with plenty of advantageous outcomes.
A Caribbean Island Says Goodbye Diesel and Hello 100 Percent Renewable Electricity
Kaitlyn Bunker, 09-01-2015

The result is a transformed electricity system on Bonaire. The island is now home to 12 wind turbines with a total of 11 MW of wind power capacity, which contribute up to 90 percent of the island’s electricity at times of peak wind, and 40–45 percent of its annual electricity on average. Battery storage (6 MWh) is included in order to take advantage of available power in times of excess wind, and provide that stored electricity in times of low wind. The battery also boosts the reliability of the overall system — it is capable of providing 3 MW for over two minutes, allowing time for additional generation to be started when there is a sudden drop in wind.

The Bonaire system also includes 14 MW of diesel generation, five total generators, which provide the necessary power to meet the load when there is not enough wind power available. The generators are equipped to run on both traditional diesel as well as biodiesel. The next steps in the island’s energy transformation involve using local algae resources, grown in the large salt flats on the island, to create biofuel, which can then be used in the existing generators. This will allow Bonaire to operate a 100 percent renewable electricity system — with on average 40–45 percent from wind and 55–60 percent from biodiesel.

The new electricity system led to more reliable electricity, more employment opportunities, reduced dependence on oil (and its fluctuating prices), and a reduction in electricity bills. Bonaire residents currently pay $0.22/kWh for electricity, much lower than prices on other nearby Caribbean islands, which are often $0.36/kWh or above. When oil prices spiked in 2008, while Bonaire was still using temporary diesel generators before making its transition to renewables, electricity prices on the island reached $0.50/kWh. The new electricity system also created jobs for the construction and ongoing operation of the wind farm, and for research and development of algae production capabilities and conversion to biofuel. Additional employment opportunities will be created for continuing algae production and operation of the biodiesel plant.
And that's all for this week. The world might look somewhat threatening at this moment, but the real roller coaster ride is yet to start.

I have not suggested music in a long time, here is something recent that got my attention:

Have a pleasant weekend.

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