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02 May 2015

Press review 02-05-2015 - Still under the waterline

The Brent index is still holding well to its rally, closing the week near 66 $/b. The WTI index, used to price petroleum extracted in the US, is in contrast under 56 $/b, a difference of almost 20%. The price rally is not really happening across the Atlantic, leaving the American industry without relief for now.

Geo-political developments continue to dominate the economic outlook for the years to come, with competing powers continuously challenging the dominant role NATO acquired after the fall of the USSR. There are many points of tension around the globe, which could not possibly be entirely covered in this review. But by focusing on energy flows, it is clear other actors now have a say in the plot of this show.
Sputnik News
The Pentagon's 'Long War' Pits NATO Against China, Russia and Iran
Pepe Escobar, 29-04-2015

As much as US President Barack Obama tried to dismiss it, the Russian sale of the S-300 missile system to Iran is a monumental game-changer. Even with the added gambit of the Iranian military assuring the made in Iran Bavar 373 may be even more efficient than the S-300.

This explains why Jane's Defense Weekly was already saying years ago that Israel could not penetrate Iranian airspace even if it managed to get there. And after the S-300s Iran inevitably will be offered the even more sophisticated S-400s, which are to be delivered to China as well.

The unspoken secret behind these game-changing proceedings actually terrifies Washington warmongers; it spells out a further frontline of Eurasian integration, in the form of an evolving Eurasian missile shield deployed against Pentagon/NATO ballistic plans.
Another week goes by and another energy export project is known in Iran. The eventual lifting of sanctions from NATO could unleash a watershed of events with major impacts for the energy predicament of the region.
Iran backs pipeline to China under ‘One Belt, One Road’ initiative

This has been announced by Iran’s Ambassador to China Ali Asghar Khaji.

Khaji said Iran would expand its railways, roads, ports, telecoms sector and energy security under a five-year development plan. "Setting up an extended network of energy pipelines would help regional security and development," he told China’s media.

Iran has already built a natural gas pipeline to its border with Pakistan, which has so far balked at constructing a link on its side amid threats of sanctions from Washington.

But Pakistan is now seeking Chinese funding to build its portion. The country signed a basic agreement with China last Monday to construct a pipeline from the southern port of Gwadar to Nawab Shah District in the southwest of Pakistan. Islamabad says the pipeline will be extended to the border with Iran after the US engineered sanctions against Iran are lifted.
And not every country is waiting like Pakistan for sanctions to be lifted for an economic reproach to Iran. These developments make an about-face by the US/NATO on the Iranian Nuclear programme far more complex.
India's oil imports from Iran jump in April

India shipped in more than 17 per cent more Iranian oil in April than a year before, buoyed by prospects of a diplomatic deal on Iran's disputed nuclear programme by end-June, preliminary data from trade sources and compiled by Thomson Reuters Oil Analytics showed.

Six Iranian vessels with about 264,000 barrels per day (bpd) of oil were received in April, the first month of the contract year, the data showed, and two more ships will reach Indian ports by the weekend.

The eight cargoes were loaded with an average 316,000 bpd of Iranian oil, the data showed.

The shipments from Iran in April are the highest since January. Last year in April, India received about 225,000 bpd.
Midweek there was some commentary on Libya, reminding how the careless toppling of Gadaffi's regime is largely at the root of the illegal migration crisis lived these days in the Mediterranean. The downward spiral of Lybia into chaos goes on, with energy infrastructure ever more affected.
Libyan chaos threatens more oilfields, power supply and gas exports to Italy

Libyan protesters have shut down an eastern gas field and threaten to close the western Wafa oil and gas field, which would stop gas exports to Italy, a spokesman for state oil firm NOC said on Wednesday.

The closure will worsen widespread power cuts and might shut down one of the last revenue generators for the central bank as major oilfields have already stopped working.

The eastern Irda gas field had shut down and a second gas field called Sahel might follow in the next two days, said Mohamed El Harari, a spokesman for NOC. Both fields have a combined gas production of 150 million cubic feet a day.

He said protesters had blocked the headquarters of state firm Sirte Oil Co at the eastern Brega port, demanding jobs.

"They demand 2,000 jobs though previously we already hired 20,000," he said. "This will impact electricity production in eastern and central regions."
In another European foreign policy débâcle battle ground things are taking long to improve. No one in Europe seems interested in a continuation of the armed conflict in Ukraine, but on the field things remain to a great extent out of control. The fact that dialogue is still possible between European leaders and Moscow is at least a good sign.
Deutsche Wella
Hollande urges progress on Minsk accord in one-on-one with Putin

Russian President Vladimir Putin acknowledged on Friday that trade ties between Russia, France - and Europe as a whole - had suffered in recent months amid sanctions and other responses to the conflict in Ukraine.

"Unfortunately, our ties are not in the best shape, trade turnover is falling including with France, which only causes regret," Putin told Hollande in the Armenian capital Yerevan. Both leaders were present for a memorial 100 years after the start of the genocide of Armenians in the Ottoman Empire during the First World War.

Hollande, meanwhile, called on Putin to push for the full implementation of the terms of the second Minsk ceasefire in a bid to halt fighting in the east of Ukraine.

"The best way to be able to move past what has hindered us would be to move forward with the application of the Minsk accord," Hollande said. Hollande, Putin, German Chancellor Angela Merkel, Ukrainian President Petro Poroshenko and Belarusian host Alexander Lukashenko brokered the peace plan in February.
Coming back to the US, the "shale boom" continues to provide plenty of fodder to the media meat grinder. But now crushed expectations and financial owes are the most common drivers of the news.
Post Carbon Institute
Marcellus Production Outlook
David Hughes, 28-04-2015

The Marcellus shale gas play of Pennsylvania and West Virginia came onto the scene in 2007 in a big way and has grown to become the nation’s largest. It has accounted for much of the growth of U.S. shale gas production, and made up for declines in former shale gas giants like the Haynesville and Barnett plays of Louisiana and eastern Texas. Companies have scrambled to build pipeline infrastructure to connect the Marcellus to consumers in the U.S. northeast. Canadians, once supplied by gas from western Canada, are also looking to the Marcellus (and the much smaller Utica play in Ohio) for future supply; the pipelines that delivered gas to the east might be converted to instead deliver bitumen from the western tar sands. Companies in both the northeastern U.S. and eastern Canada are looking to build LNG terminals to export the shale gas bounty, and the first LNG export terminal on the Gulf coast will open later this year.

The prognosis for the Marcellus is therefore very important, as it is being counted on to supply abundant cheap gas to the northeast and elsewhere for decades to come. One of the big problems in figuring out what is happening with the Marcellus is the tardiness with which the states provide production data to the general public and to data vendors such as Drillinginfo, which I utilize extensively to analyze shale plays. West Virginia provides data in one-year chunks, and won’t release what happened in 2014 until mid-2015. Pennsylvania is somewhat better, releasing data in six-month chunks. In the absence of recent accurate production data, there has been much speculation on Marcellus production using proxies such as pipeline receipts and algorithms to estimate what production might be. Pennsylvania’s recent release of data from the last half of 2014, however, provides an opportunity to take an updated look at the Marcellus, considering that Pennsylvania comprises 85% of Marcellus production.
If gas extraction from tight reservoirs is still holding, petroleum extraction seems well into the decline. Without prices returning to a comfort zone above 85 $/b, a "shale peak" is in for the record.
The Petroleum Truth Report

Arthur Berman, 29-04-2015

The U.S. oil production decline has begun.

It is not because of decreased rig count. It is because cash flow at current oil prices is too low to complete most wells being drilled.

The implications are profound. Production will decline by several hundred thousand of barrels per day before the effect of reduced rig count is fully seen. Unless oil prices rebound above $75 or $85 per barrel, the rig count won’t matter because there will not be enough money to complete more wells than are being completed today.

[...] Much of the new capital from junk bonds and share offerings is being used to pay overhead and interest expense, and to pay down debt to avoid triggering loan covenant thresholds. Hedges help soften the blow of low oil prices for some companies but not enough to carry on business as usual when it comes to well completions.

The decrease in well completions provides additional evidence that the true break-even price for tight oil plays is between $75 and $85 per barrel.
And of course, this decline in petroleum extraction is leaving the shale sub-prime out in the open. It can not possibly end well.
How Shale Is Becoming The .COM Bubble Of The 21st Century
Leonard Brecken, 30-04-2015

As I review the financials of one of the largest shale producers in the United States, Whiting Petroleum (WLL), I can’t help but notice the parallels to the .COM era of 1999 which, to some extent, has already returned to the technology and biotech sectors of today. Back then, the faster you burned cash to capture customers regardless of earnings to drive your topline, the higher your valuation. The theory was that after capturing the customers (in energy today, it is the wells) spending would slow and so would customer additions allowing companies to generate cash. By the way, a classic recent case is none other than Netflix (NFLX) which, in the past was exposed for accounting gimmicks that continue even today. It is still following this path of burning cash for the sake of customer additions, while never generating any cash in its entire existence.

[...] WLL, in its March quarter, generated over $200M in cash from operations and, with hedges and production expected to be flat sequentially for rest of year in 2015, expects to earn at least $850M in cash from operations, give or take. The problem is though, they need to spend $2B to keep it up because depletion rates are so high. They claim “growth” capital expenditures are discretionary (just like NFLX by the way, in capturing customers), but the realities are that wells in the Bakken deplete 80% in 12 months, so does that really sound discretionary?
The US being a country where freedom of expression prevails, there is always place for a balanced view somewhere. As well noted, the present petroleum price rout is but one phase of a larger cycle, itself part of a secular transition. From a short term outlook no appropriate energy policy can result.
Why this oil price collapse could be different
Michael Webber, 27-04-2015

The recent oil price collapse seems like a replay of a bad 1980s movie that we’ve seen before. If we are not careful, we’ll be doomed to make the same mistakes we made last time, allowing our domestic oil and gas producers to wither, watching energy imports soar, prematurely stunting the growth of alternative fuel sources, and tossing conservation and efficiency by the wayside. If we are smart we’ll seize this opportunity to double-down on good energy policies and support all of our domestic energy producers so that we’re prepared for the next time oil prices spike.
The petroleum price rout is not just exposing the shale sub-prime, it is also transforming the landscape in Canada. The foundering economics of tar sands is now even producing political upheaval. Ironically, the ousting of Conservative forces will likely mean a tightening of environmental regulation and thus a further hike to marginal costs.
Oilsands woes set to deepen as shaky petro-dynasty risks defeat
Jeremy Van Loon, 28-04-2015

One of the world’s longest-running political dynasties is on the brink of losing power, threatening to make life tougher for companies toiling in Canada’s oil patch.

Alberta’s Progressive Conservatives, in charge of the western province since 1971, trail the two main opposition parties in polls before a May 5 vote. Should they fail to keep the leadership, energy producers stand to lose some of the advantages they enjoyed on taxes, royalties and environmental rules that helped propel the industry to the forefront of Canada’s economy.

A crude-price slump that’s eroding profits for oil-sands companies such as Suncor Energy Inc. is also crimping provincial revenue. To balance the books, Premier Jim Prentice is proposing cuts to health spending and higher taxes for households, while sparing the rattled companies. His plan is backfiring as the unpopularity of the measures paves the way for less oil-friendly challengers to rise.
If this sort of upheaval is unheard of in OPEC countries (except Venezuela) it does not mean they can withstand such low petroleum prices for long. The speed with which they are spending their foreign reserves will soon cast doubt on their currencies and impair foreign investment.
Saudi Arabia Is Burning Through Its Foreign Reserves at a Record Pace
Nafeesa Syeed and Rinat Gaynullin, 30-04-2015

Saudi Arabia is burning through foreign reserves at a record pace as the largesse of the new king and regional turmoil ratchet up pressure on public finances already hurt by the oil price slump.

The kingdom spent $36 billion of the central bank’s net foreign assets -- about 5 percent of the total -- in February and March, the biggest two-month drop on record, data released this week show. The fall was in part due to King Salman’s order to give government employees and pensioners a two-month bonus after he ascended to the throne of the world’s biggest oil exporter in January.
The following piece of news is somewhere in the border between fossil fuels and alternative energy. Beyond the technical curiosities of such endeavour, one must wonder what the overall EROEI of such energy extraction system will be; and what its marginal cost.
Russia To Power Arctic Drilling With Floating Nuclear Reactors
Nick Cunningham, 27-04-2015

It would sit in the icy waters of the Arctic, and provide a constant supply of electricity to a massive rig drilling for oil. They could be mass produced, potentially cutting the cost of drilling projects. The twist? The electricity on these floating power plants would come from a nuclear reactor.

Russia is looking to deploy a floating nuclear reactor that could help power ports, industries, and also offshore oil and gas drilling in the Arctic. In what sounds like a horrible nightmare for environmentalists, floating nuclear reactors could help produce more oil in the Arctic.

Russia’s reactor, called the Akademik Lomonosov, will be about the length of one and a half football fields, and will have the capacity to produce 70 megawatts of electricity. It is not self-propelled, but future mobile reactors will be. Russia plans on mass producing them once the Akademik Lomonosov proves itself. The small floating reactors will be on icebreakers, so they will be able to navigate icy Arctic waters.
The double hit of declining electricity consumption and affordable renewable suppliers continues to make casualties in the European electrical sector.
Sweden's Vattenfall to slash jobs, shut two nuclear reactors
Niklas Pollard, 28-04-2015

Hurt by fallen power prices, Vattenfall will cut 1,000 jobs and shut its two oldest nuclear reactors earlier than planned, the Swedish state-owned utility said on Tuesday.

Its first-quarter earnings on Tuesday showed a fall in adjusted operating earnings to 7.7 billion Swedish crowns ($892 million) from 9.1 billion a year earlier.

Vattenfall, which operates seven reactors, said it would shut the 881-megawatt Ringhals-1 and 865 MW Ringhals-2 nuclear reactors between 2018 and 2020 instead of, as previously announced, around 2025.

"Unfortunately, we see market conditions with continued low electricity prices in the coming years. At the same time, we are facing increasing production costs," said Torbjorn Wahlborg, head of generation at Vattenfall.
This month there is a general election in the UK; Portugal is next, in September, and then Spain in November. In all these member states austerity-friendly parties are set to take a beating out of power, with more or less drama. Below is a story that matches that of many other Europeans today, a small picture of a deeply ill Union.
La fille d’un héros national a échoué au Grand-Duché
Jörg Tschürtz, 29-04-2015

Le 25 avril 1974, le jeune capitaine Jose Salgueiro Maia était un des leaders du coup d’état militaire qui allait permettre au Portugal de revenir sur le chemin de la démocratie. Décédé en 1992, Salgueiro Maia est considéré par les Portugais comme un héros de la «révolution des œillets». 41 ans plus tard, sa fille Catarina, se bat quant à elle sur un front totalement différent. Depuis le début de la crise de la dette au Portugal en 2011, cette femme de 29 ans vit au Luxembourg. Elle se dit heureuse au Grand-Duché, mais sa situation n’est pas des plus enviables.

Dans le cadre du 41e anniversaire de la «révolution des œillets», elle s’est confiée à l’agence portugaise «Lusa». Alors qu’elle a suivi des études universitaires, elle a notamment travaillé dans un café durant 17 heures par jour en dessous du salaire minimum. Pour ce travail, elle n’a gagné que 1 300 euros par mois au lieu des 1 900 euros qu'elle aurait pu revendiquer. Pendant la crise, les conditions de vie ont souvent été comparées à un pays du tiers-monde au Portugal, particulièrement au niveau des services de santé. La famille de Catarina a quitté sa patrie pour offrir à son fils asthmatique plus de stabilité financière et un meilleur accès aux soins de santé.
Have a pleasant weekend.

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