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12 September 2015

Press review 12-09-2015 - Back in business

A confluence of critical events in my professional life has meant an extended summer break for this review. I will be unemployed in a few days, which on the positive side means I might have more time to write. As always, the list of themes I would like to tackle is rather long.

Not much has changed during these past few weeks in the energy landscape. The economic slowdown in China is still dominating commodities markets with a dive in trade between the economies around the Indian ocean. Petroleum prices sank under the 2009 minimum for a few days in August, and the futures curve flattened considerably. Worldwide extracted volumes have been declining since the beginning of 2015 and look far from any bottom.

Petroleum exporting economies struggle: Venezuela, Angola, Canada, Russia... But the felling remains that the worst is still to come and the industry yet to take in the full impact of this under-priced market.

Bloomberg
As Canada’s Oil Debt Soars to Record, an Industry Shakeout Looms
Ari Altstedter, 19-08-2015

Canadian energy companies’ debt loads are the heaviest in at least a decade, boosting concern that some won’t survive the collapse in crude prices.

Trican Well Service Ltd., Canada’s largest fracking service provider, said last week it may be unable to continue because it’s in danger of breaching the terms of its debt. It’s the latest firm to see crude’s descent to a six-year low sap the cash flow needed to meet financial obligations.

Oil’s plunge has pushed a measure of the average debt burden among Canadian energy firms to the highest since at least 2002, and another measure of their ability to make interest payments to the third-lowest level in a decade, according to data compiled by Bloomberg. Facing some of the highest production costs in the world and carrying more debt than U.S. peers, the Canadian industry has become ripe for acquisitions.

“Your ability to be an ongoing entity is certainly decreased,” said Jason Parker, head of fixed-income research at Bank of Montreal. “You’ll see larger, more financially affluent entities coming in and picking away at those properties.”
Preliminary data had been pointing to a recession in Canada since the beginning of this year and is now officially confirmed. It is hard to see how any tar sand extraction process can be profitable with petroleum at 50 $/b.
Bloomberg
Canada Economy Shrinks for 2nd Straight Quarter on Oil Shock
Greg Quinn, 01-09-2015

Canada’s economy shrank again in the second quarter as plunging oil prices triggered a drop in investment, with fresh debate about a recession dealing a blow to Prime Minister Stephen Harper’s bid for re-election.

Gross domestic product declined at a 0.5 percent annualized pace from April to June, Statistics Canada said Tuesday in Ottawa. The agency revised the first-quarter contraction to 0.8 percent from 0.6 percent.

The Group of Seven’s biggest crude oil exporter is struggling as a global commodity slump guts business spending. The consecutive output declines, a so-called technical recession, are expected to shift into a slow expansion over the rest of the year, giving Bank of Canada Governor Stephen Poloz scope to avoid cutting rates Sept. 9.
The recession is having a deep impact in Canada's petroleum provinces. The housing market in Alberta has imploded at high speed, meaning that petroleum prices are now directly affecting other economy sectors beyond energy.
Wolf Street
It Gets Even Uglier In Canada
Wolf Richter, 30-08-2015

The Province of Alberta, the epicenter of the Canadian oil bust, may be sliding into something much worse than a plain-vanilla recession. And it’s not exactly perking up the rest of Canada.

Layoffs are already cascading through the oil patch, as companies are retrenching and adjusting to the new reality. New vehicle sales are plummeting. And home sales are taking a broadside.

In August so far, total home sales in Calgary plunged 28% from a year ago, on flat prices. Condo sales collapsed 39%, with the median price down 8%, according to the Calgary Real Estate Board. Year-to-date, total home sales in Calgary are down 25%; condo sales 30%. And those condos that did sell spent 30% longer on the market than condos did a year ago, as sellers hang on by their fingernails to the illusion of wealth, and sales are stalling.

And the Business Barometer Index for all of Canada, which measures the optimism among small businesses, dropped again in August for the third month in a row. An index level between 65 and 70 indicates that the economy is growing at its potential. But now it hit 56.7, the lowest level since April 2009.
The Angolan government set capital controls some months back, leaving many foreign companies and workers in trouble. The signals issued by the Angolan economy are rather worrying and can eventually result in the return of vast numbers of Europan emigrants.
International Business Times
Angola Economic Woes: Chinese Slowdown, Global Crude Glut Hit Angola's Oil-Dependent Economy
Morgan Winsor, 01-09-2015

Since the end of a 27-year civil war in 2002, billions of dollars in oil revenues and associated Chinese loans have bankrolled an immense physical transformation in Angola in the form of new roads, bridges, airports, hospitals and schools. Farms laced with land mines were cleared for planting, and urban slums were rebuilt into shiny, modern cities in the former Portuguese colony. In 2012, Angola’s booming economy grew by up to 12 percent, and the southern African country secured contracts with China worth $7.6 billion.

But Angola’s oil-dependent economy, with crude accounting for almost all of its exports and more than two-thirds of government revenues, could now be on a downward spiral after months of declining oil prices. Angola’s gross domestic product grew just 4.5 percent in 2014 and slowed further to 3.8 percent in 2015. Economic growth was forecast earlier this year to improve in 2016, but a potential economic slowdown in China, Angola’s top customer, could set back the petro state even further and threaten much needed infrastructure projects, analysts and experts said.
In the US the collapse of the so called "shale" industry still lingers over the economic recovery. It is now apparent that the deep contango structure that formed in the local petroleum market has helped petroleum companies avoiding the real impact of 50 $/b. However, the futures curve is now mostly flat and therefore this financial tactic is no longer possible.
Houston Chronicle
Some oil hedges are being clipped
Robert Grattan, 28-08-2015

Oil companies that enjoyed the security of locked-in crude prices as the market collapsed are getting more vulnerable now that those locks are wearing out.

They used a widely employed strategy called hedging to sell some of their expected oil production in advance, which meant that oil coming out of the well when the market price plunged to near $40 a barrel had been sold for a higher price months earlier.

But hedges are designed to smooth out producers' income for a short period of time, and few locked in 2014's $100-plus oil prices for more than about 18 months. New hedges are in line with today's market prices.
Funny enough, even the mainstream media is now open to disclose the troubles engulfing the US petroleum industry. Quite a change, after years darling the "shale".
CNBC
US drillers about to start hemorrhaging: Schork
Tom DiChristopher, 02-09-2015

U.S. oil exploration and production companies have been living on the Federal Reserve's easy money throughout the sharp downturn in crude prices, but their credit supply is about to run dry, oil analyst Stephen Schork said Wednesday.

"The E&Ps have been bleeding. They're going to start to hemorrhage in the next couple of months," the publisher of the Schork report told CNBC's "Squawk Box."

These drillers were able to hedge forward production because future prices remained high in the second quarter through 2018.

"Hedging equals collateral. So with that collateral, the E&Ps were able to live off of the Fed's easy money through the summer," Schork said.
Petroleum extraction in the US has not yet declined as much as the current price would indicate. In some mainstream media outlets this has been attributed to a fantastic technological advance that increased rig productivity overnight. In the alternative media more sober voices are heard.
The Petroleum Truth Report
Rig Productivity is a Red Herring
Arthur Berman, 07-09-2015

Rig productivity and drilling efficiency are red herrings.

A red herring is something that ​takes ​attention away from a more ​important ​subject. Rig productivity and drilling efficiency distract from the truth that tight oil producers are losing money at low oil prices.

Pad drilling allows many wells to be drilled from the same location by a single rig. Rig productivity reflects the increased volume of oil and gas thus produced by each of a decreasing number of rigs. It does not account for the number of producing wells that continues to increase in all tight oil plays.

In other words, although the barrels produced per rig is increasing, the barrels per average producing well is decreasing.

This summer was also marked by the largest gas discovery yet in the Mediterranean basin. It is mostly significant for being in Egyptian waters, a country that since becoming a net petroleum importer met great economic and political turmoil.
Energy Efficiency
The Largest Gas Field Ever Found in Mediterranean Sea
Alessandro Bellasio, 03-09-2015

Eni has made a world class supergiant gas discovery at its Zohr Prospect, in the deep waters of Egypt. The discovery well Zohr 1X NFW is located in the economic waters of Egypt's Offshore Mediterranean, in 4,757 feet of water depth (1,450 metres), in the Shorouk Block, signed in January 2014 with the Egyptian Ministry of Petroleum and the Egyptian Natural Gas Holding Company (EGAS) following a competitive international Bid Round.

According to the well and seismic information available, the discovery could hold a potential of 30 trillion cubic feet of lean gas in place (5.5 billion barrels of oil equivalent in place) covering an area of about 100 square kilometres. Zohr is the largest gas discovery ever made in Egypt and in the Mediterranean Sea and could become one of the world's largest natural-gas finds. This exploration success will give a major contribution in satisfying Egypt's natural gas demand for decades.

Eni will immediately appraise the field with the aim of accelerating a fast track development of the discovery that will utilise at best the existing offshore and onshore infrastructures.

Zohr 1X NFW was drilled to a total depth of approximately 13,553 feet (4,131 metres) and hit 2,067 feet (630 metres) of hydrocarbon column in a carbonate sequence of Miocene age with excellent reservoir characteristics (400 metresplus of net pay). Zohr's structure has also a deeper Cretaceous upside that will be targeted in the future with a dedicated well.
And days ago news broke on the second leg of the Nord Stream being under way. This is the preview of an inevitable economic reproach between Europe and Russia.
EurActiv
Germany helps Russia bypass Ukraine via ‘Nord Stream 2’
04-09-2015

Gazprom and its European partners signed a shareholders' agreement on the Nord Stream-2 gas pipeline project that will run beneath the Baltic Sea to Europe, bringing Europe closer to Moscow's energy orbit.

Russia provides for an estimated third of the EU's energy needs, but around half of the gas the EU imports from Gazprom is shipped via Ukraine, with which Russia is in conflict. Gazprom wants to find new ways to deliver gas to Europe, bypassing its neighbour.

[...] Gazprom, E.ON, BASF/Wintershall, OMV, ENGIE and Royal Dutch Shell formed the new consortium for the project, a spokesman for the consortium said on Friday.
France has been by far the hardest hit member state by the economic sanctions to and from Russia. Farming still has a relevant weight in the French economy, and with possibly the highest salaries among European farming economies, France has no practical means of detouring sanctions, as other member states have managed. Many farmers are posting in 2015 the first losses in over 30 years. It is therefore no surprise to see the French government so committed to a descalation with Russia.
BBC
Ukraine conflict: France hopes to end Russia sanctions
07-09-2015

French President Francois Hollande has said that following recent ceasefire progress in Ukraine he hopes to see the end of sanctions against Russia.

Mr Hollande has proposed a meeting of the leaders of France, Germany, Russia and Ukraine in Paris later this month on the situation in Ukraine.

He said there had been progress in recent weeks in implementing a troubled February peace deal.

But Mr Hollande said several commitments still had to be honoured.

They include holding local elections and implementing decentralisation reforms granting more autonomy to two breakaway pro-Russian areas in the east.
Here is something on which I have wondered for some months. What means exactly the declining Coal consumption in China? As reported previously in this review, the main reason for this trend is a collapse in steel production, which might well be a done deal. The pace at which infrastructure was deployed in China the past decade is likely unrepeatable. Peak Coal? Perhaps, but certainly too soon to call, as the author below dares.
Forbes
China's Economic Slowdown: We May Have Seen Peak Coal
Mark L. Clifford, 03-09-2015

The coal market has known that China’s economy has been slowing even before the recent bout of stock market turbulence. Every new data set suggests that the economy is weaker, and the transition toward renewable energy is happening faster, than the consensus view has expected.

Coal use in China dipped last year, the first time since economic reforms began in 1978 that coal use has fallen. Signs are that the decline is continuing this year. [...]

A weak economy is a key reason that a peak in China’s coal use may have occurred in 2013, more than a decade earlier than was thought possible even. Complementing the effect of a weak economy, investments in renewable power are starting to pay off.

China burns half the world’s coal, the main reason why the country accounts for about 30% of global greenhouse gas emissions. [...]
In Nuclear energy news we return to Egypt, were a long time sidelined project has been adjudicated to Russia. It is in the best European interest for Egypt, an important neighbour, to overcome its present economic frailties.
Al-Monitor
Russia to build Egyptian nuclear reactor
Walaa Hussein, 04-09-2015

The Egyptian government is about to sign a contract with Russia's Rosatom State Atomic Energy Corporation, which specializes in the manufacturing of nuclear plants, to build the Dabaa nuclear power plant in Matrouh governorate.

The Matrouh governor, Maj. Gen. Alaa Abu Zeid, said on Aug. 26 that Egyptian President Abdel Fattah al-Sisi will lay the cornerstone of the project in October, and Russia will take on the execution of the project.

On the same day, Cairo announced that Rosatom made the best offer from a financial, technical and political perspective, beating offers from other countries, including Japan, France, South Korea and China.
Closing, worrying news on recycling in Europe. Electronic waste has intrinsic value, dumping or sending it overseas is not only unsustainable, but economically nonsensical too.
EUObserver
Only a third of Europe's e-waste is recycled
Peter Teffer, 31-08-2015

The European Commission is not planning to introduce an EU-wide ban on cash transactions for scrap metal, or set up an EU waste agency, as recommended in a report about illegal dumping of electronic equipment waste, or e-waste.

The EU-funded report, published Sunday (30 August) by a consortium of seven organisations including Interpol and two United Nations bodies, concluded that only 35 percent of electronic waste was properly recycled in 2012.

The rest, an estimated 6.15 million tonnes, was exported, sometimes illegally; scavenged for parts; thrown in the waste bin; or recycled but not according to EU rules.

“Around 750,000 tonnes of mainly small appliances end up in the waste bin, with varying amounts per country of between 1 and 2kg per inhabitant per year,” the report said.
Have a pleasant weekend.