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19 September 2015

Press review 19-09-2015 - The decline sets in

This Sunday, Greece is going for the third decisive election in less than one year. This time however, it is mostly decisive on a political level. A parliamentary status quo seems likely, without a clear government emerging from the election, but the austerity doctrine seems no longer in question. Portugal is having similar elections in two weeks, and even though harnessing little attention from the international media, a few surprises could be in the pipeline. Watch this space for details in the coming week.

The energy world is well alight in this reentrée. The decline of world petroleum is accelerating and the news meet grinder is in overdrive. The Supply destruction process settles in, with all petroleum exporting nations struggling. There are now hints of a 1 Mb/d decline in the US alone. And more is certainly to come.

The Petroleum Truth Report
The Party is Over For Tight Oil but Raymond James Says, “Party On, Dude!”
Arthur Berman, 12-09-2015

The party is over for tight oil.

Despite brash statements by U.S. producers and misleading analysis by Raymond James, low oil prices are killing tight oil companies.

Reports this week from IEA and EIA paint a bleak picture for oil prices as the world production surplus continues.

EIA said that U.S. production will fall by 1 million barrels per day over the next year and that, “expected crude oil production declines from May 2015 through mid-2016 are largely attributable to unattractive economic returns.”

IEA made the point more strongly.

“..the latest price rout could stop US growth in its tracks.”

In other words, outside of the very best areas of the Eagle Ford, Bakken and Permian, the tight oil party is over because companies will lose money at forecasted oil prices for the next year.
Beyond the expected collapse of the American "shale" industry, Canada seems to be one of the countries most inflicted by present petroleum prices. The article below provides interesting insight on how banks may be forced to deal with the tar sand bust. And how deep into the economy this bust can reach.
Oil Price Increase Will Not Come Fast Enough To Save Alberta
David Yager, 13-09-2015

“There’s just no cash.” That’s the Coles Notes from a senior banker describing the book of oil service loans he manages for one of Alberta’s leading lenders. There’s simply not enough cash flow to support current levels of debt.

Bankers and borrowers have kicked the can down the road about as far as they can as more oilfield service (OFS) and exploration and production (E&P) companies default on their loans and seek more relief on lending covenants. While a significant oil price increase to lift all the sinking boats will surely come, it won’t happen soon enough. More of the same won’t work.

[...] If the whole industry only has 43 percent of 2014’s cash flow, then in theory it can only carry 43 percent of last year’s debt. Of course, debt is not evenly distributed but the point is clear; the industry’s macro balance sheet is under severe stress. When Canada’s Big Six banks reported their earnings for the third quarter ended July 31, 2015 it was noted these lenders had total exposure to the upstream oil and gas industry of about $44 billion. Including other sources of debt (bonds, other banks, equipment leasing companies), this figure is likely only a fraction of total obligations. It could easily be $60 billion, probably much more. With so many private operators complete figures are impossible to compile.
Here in Europe, this under 50 $/b market seems to be closing the curtains on the North Sea. Also of note the hint at poor economics already before the price rout.
U.K. North Sea Oil Industry Warns Investment May Fall 80% to '17
Angelina Rascouet, 08-09-2015

[...] “This great industry of ours is facing very challenging times,” Deirdre Michie, Oil & Gas U.K.’s chief executive officer, said in a statement. “Exploration for new resources has fallen to its lowest level since the 1970s” and few new projects are gaining approval from “hard-pressed” companies, she said.

The decline in crude prices of more than 50 percent over the past year has forced the oil industry to review projects and reduce operating costs. The U.K. North Sea is one of the world’s most expensive areas to operate and resources that were first tapped in the 1960s are depleted. Employment supported by the industry has shrunk by 15 percent since last year and the lobby group predicts more reductions.

“Last year, more was spent than was earned from production, a situation which has been exacerbated by the continued fall in commodity prices,” Michie said. “A continued low oil price will inevitably cause companies to reflect on the long-term viability of their assets.”
The Wall Street Journal has published two articles in the span of two days providing important insight on the impact present petroleum prices are having on Iraq. Compliments to the journal and all those that worked on these stories, not all is bad about the mainstream media.
Wall Street Journal
Iraq Warns Oil Companies of Spending Cuts
Kevin Baxter, 14-09-2015

Iraq’s oil ministry has issued a stark warning to the international oil companies running its energy sector that it will slash spending in 2016 as the country feels the full effect of low crude prices and the fight against Islamic State.

A Sept. 6 letter from an oil ministry official is fresh evidence that Iraq is struggling to maintain a swift expansion of its energy sector that has made it the Organization of the Petroleum Exporting Countries’s second-largest producer with 4 million a barrels a day or more this summer.

The letter—addressed to “all contractors” and reviewed by The Wall Street Journal—warned big oil companies in Iraq such as Eni E 0.35 % SpA of Italy, Russia’s Lukoil Holdings, LUKOY -2.16 % Anglo-Dutch firm Royal Dutch Shell PLC and U.K. giant BP BP -0.06 % PLC to submit conservative funding requests in 2016. Independent energy companies maintain and expand Iraq’s fields with government money and are reimbursed for production with oil.
Present budget and political difficulties are such than even production declines are now a possibility. Iraq remains as one of the key petroleum exporters to watch in the near future.
Wall Street Journal
Stalled Oil Field Project Adds to Iraq’s Woes
Matt Bradley, 15-09-2015

A stalled project aimed at sustaining Iraq’s record oil production has become a symbol of missed opportunities for a country reeling from the fall in crude prices and the war against Islamic State.

The government has ramped up production to meet its large payroll and fund the battle against the Sunni Muslim extremist group which now controls large parts of the country.

Iraq had hoped to expand output beyond its current level of more than 4 million barrels a day by injecting seawater from the Persian Gulf into its southern oil fields to extract the remaining resources. But now, the project isn’t expected to be completed until 2020 at the earliest—seven years behind schedule.

Without it, production in the southern oil wells is expected to fall by some 10% a year, said Michael Cohen, head of energy commodities research at Barclays.
Closing the petroleum news is an ongoing rumour of the imminent launch of a crude benchmark in China. If it turns out to be true this could be the most important happening for the petroleum industry this year.
China oil market reform paves way for new crude benchmark
Jacob Gronholt-Pedersen, 02-09-2015

China may launch a global crude oil futures contract as early as October to compete with the existing London Brent and the U.S. WTI benchmarks, three sources said, as it pushes ahead with reforms to open up its oil markets.

The long-awaited crude contract would better reflect China's growing importance in setting crude prices, as well as boost the use of the yuan in which it will be traded, although volatile global trading conditions and China's recent interference in stock markets have raised some concerns.

The Shanghai International Energy Exchange, also known as INE, circulated a draft of the futures contract to market participants last month, saying the launch could happen as early as October, the sources who saw the draft, told Reuters.
Regarding Gas, a declining extraction trend is forming in the US too. This has been hardly reported in the mainstream media so far, but luckily there is always some attentive analyst somewhere.
Is This The End Of The U.S Shale Gas Revolution?
Charles Kennedy, 16-09-2015

While everyone is watching the oil bust, there is another bust going on – one for natural gas.

Before there was a boom in oil production in the United States, there was the “shale gas revolution.” That is where we all became familiar with terms like “fracking.” And the Marcellus, Haynesville, and Barnett Shales were famous long before the Bakken or Permian.

[...] Dry natural gas is produced in association with oil. With oil prices extremely high, especially in the period between 2010 and 2014, drillers continued to produce natural gas even if they were looking for oil.

So only after oil prices busted did natural gas production start to slow down. In fact, while the markets are eagerly watching for declines in oil production, few are noticing that natural gas production is also declining. The EIA reports that in October, several of the largest shale gas regions will post their fourth month in a row of production declines. With a loss of around 208 million cubic feet per day expected in October, the four-month drop off will be the longest streak of losses in about eight years.
The coal story in India is now entering a new chapter. When the shortages developed last year I conjectured that artificially low electricity prices should be having a role. Now that coal suppliers have recovered, it becomes clear that utilities are not able to pass the appropriate price downstream.
Hellenic Shipping News
Coal output on a high but demand dries up

Just three years after India’s power sector faced a fuel crisis, the domestic coal availability at thermal power plants has reached an all-time high. However, this is unlikely to translate into equivalent power availability, given that the country’s power distribution companies are suffering heavy losses.

The average coal availability at power stations in September has been at a record stock of 23 days. Coal India Ltd’s (CIL’s) production achievement in August stood at 96 per cent, while India’s coal imports in July declined 19 per cent from a year ago to 19.3 million tonnes. Thermal coal imports were down 11 per cent on a year-on-year basis.

In July, however, the national average plant load factor (PLF), or thermal power plants’ per-unit output, also declined to 58.36 per cent – the lowest in three years.

Senior CIL officials say states have started asking its subsidiaries to stop coal supply, as they cannot clear their past dues and pay for more coal. Rajasthan and Madhya Pradesh, for instance, have said they cannot lift any more coal, given their past dues, low power demand, and weak purchasing power.
In geo-political news is the much publicised arrival of Russian military to Syria, in support of the battered Shiite government. This development comes on the wake of news throughout Summer of NATO providing high technology weaponry to the Sunni. The mainstream media also reports NATO bombings to Sunni positions, in what must be the most confusing war scenario these days. This is now the second front where NATO and Russia clash openly in the war field.
Exclusive: Russian troops join combat in Syria - sources
Gabriela Baczynska, Tom Perry, Laila Bassam and Phil Stewart, 09-09-2015

Russian forces have begun participating in military operations in Syria in support of government troops, three Lebanese sources familiar with the political and military situation there said on Wednesday.

The sources, speaking to Reuters on condition they not be identified, gave the most forthright account yet from the region of what the United States fears is a deepening Russian military role in Syria's civil war, though one of the Lebanese sources said the number of Russians involved so far was small.

U.S. officials said Russia sent two tank landing ships and additional cargo aircraft to Syria in the past day or so and deployed a small number of naval infantry forces.

The U.S. officials, who also spoke on condition of anonymity, said the intent of Russia's military moves in Syria was unclear. One suggested the focus may be on preparing an airfield near the port city of Latakia, a stronghold of Syrian President Bashar al-Assad.
Important hints on how various members of NATO wished and worked towards this conflict in Syria. Meanwhile, there are those who blame this war on CO2...
The Guardian
West 'ignored Russian offer in 2012 to have Syria's Assad step aside'
Bastien Inzaurralde, 15-09-2015

Russia proposed more than three years ago that Syria’s president, Bashar al-Assad, could step down as part of a peace deal, according to a senior negotiator involved in back-channel discussions at the time.

Former Finnish president and Nobel peace prize laureate Martti Ahtisaari said western powers failed to seize on the proposal. Since it was made, in 2012, tens of thousands of people have been killed and millions uprooted, causing the world’s gravest refugee crisis since the second world war.

Ahtisaari held talks with envoys from the five permanent members of the UN security council in February 2012. He said that during those discussions, the Russian ambassador, Vitaly Churkin, laid out a three-point plan, which included a proposal for Assad to cede power at some point after peace talks had started between the regime and the opposition.

But he said that the US, Britain and France were so convinced that the Syrian dictator was about to fall, they ignored the proposal.
On a more positive note, the nationalist government in Kiev is slowly falling back to pragmatism. Peace seems to be holding in the russophone regions and economic ties with Russia are back on the table. Timely ahead of winter.
Ukraine expects new gas deal with Russia by end of next week

Ukraine expects to reach a new winter gas deal with Moscow by the end of the next week, its energy minister said on Tuesday, adding that he saw $220 per 1,000 cubic metres as an acceptable price for supplies from Russia.

The two countries, which are embroiled in a gas pricing dispute, are expected to meet with the European Commission soon to decide an agreement for the winter months. Russia accounts for about a third of Europe's gas needs, with Ukraine a key transit route.

"I think there will be a decision in the course of this week and next week," Ukrainian Energy Minister, Volodymyr Demchyshyn, said at a press briefing.
This review closes on a cultural note. This week Steve Hackett stopped by in Luxembourg; I only learnt about it two days before but decided to attend on an impulse. I was not really sure what to expect but this ended up being one of the best concerts I attended in years. The set was divided in two, with a first half focused on Hackett's solo works and a second composed by a selection of songs from Genesis' prime time. He ended up playing all my favourite songs from his solo LPs and some outstanding Genesis pieces throughout almost three hours of show. It is amazing how avant-garde this music sounds, it is like time has not passed by. A most recommendable concert; below one of my favourite moments.

And that is it for this week. See you next time.

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