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03 October 2015

Press review 03-10-2015 - Life on Mars

Last Monday the media burst in excitement with the discovery of salty liquid water on Mars. From there to "life on Mars" was a baby step and an proper information evening was lost. Mars lacks a far more important essential element to life as we know it: a magnetosphere. The red planet is a dead place, with a cold core and no geological activity. Later in the week came the muffled retractions: it was not really water, just traces of minerals.

It is hard not to compare the life on Mars meme with the "shale oil" revolution. The media behaves just like a herd of sheep, without any sense of direction or critical appraisal; gullibility is their way of being. But soon enough, "shale oil" will acquire a whole new meaning. In Europe the "fracking" speak went totally mute, while in the US the dampened act of contritions emerge, in the wake of a serious financial disaster.

Frackers could soon face mass extinction
Stephen Gandel, 26-09-2015

Doomsday may finally be coming to the fracking industry.

Despite the big drop in oil prices in the past year, there have been relatively few bankruptcies in the energy industry. That may be about to change. James West, an energy industry analyst at ISI Evercore, says months of low activity have left many of the companies in the hydraulic-fracturing business either insolvent or close to it. He says as many as a third of the fracking companies could go bust by the end of next year.

“This holiday will not be a time of cheer in the oil patch,” says West.

So far oil and gas exploration companies, while cutting back somewhat, have continued to spend based on budgets set a year ago when oil prices were much higher. But now West says the price of oil is catching up to them, and they may soon have to drastically cut back their spending on services. The catalyst is the banks.
American banks have so far kept the "shale oil" industry afloat; even if it never made any real profits. Perhaps for knowing that a bond default wave is more threatening than slowly shoring up the red ink from the "shale oil" accounting books. However, the regulators in the US are starting to feel uncomfortable with the banks exposure to the shale sub-prime.
David Stockman's Contra Corner
Credit Crunch Time In The Shale Patch
Emily Glazer, Ryan Tracy and Rachel Louise Ensign, 25-06-2015

[...] So far, the regulators’ approach is winning out. Those biggest U.S. banks, Comerica Inc. and Capital One Financial Corp. collectively filed a record number of appeals to the spring review, arguing that reserve-based loans have a long history of low default rates. Late this summer, most of those appeals were rejected, according to people familiar with the matter. Some banks had all of their appeals denied, the people said.

The regulators didn’t make any concessions at the meeting in Houston, which was described by several participants as a fact-finding mission.

Regulators declined to discuss specific conversations with banks. The OCC has said it is concerned about energy lending exposure. In a June report on lending risks, it said OCC examiners would be focused on “banks’ actions to assess, monitor, and manage both direct and indirect exposures to the oil and gas sector, given the recent decline in oil prices and the potential for a protracted period of low or volatile prices.”

Oil prices fell below $40 a barrel last month for the first time since the financial crisis. On Wednesday, oil for November delivery dropped $1.88, or 4.1%, to $44.48, on the New York Mercantile Exchange and has declined 52% in the past year. Previous energy busts, like the one in the 1980s, have resulted in major losses at banks, with painful ripples through the broader economy.
The shale sub-prime blow up is right around the corner; gloom and doom are let through in the media.
Junk-Debt Investors Fight for Scraps as U.S. Shale Rout Deepens
Asjylyn Loder, 25-09-2015

[...] Investors in $158.2 million of Goodrich Petroleum Corp.’s debt agreed to take 47 cents on the dollar in exchange for stock warrants for some note holders and a lien on Goodrich’s oil acreage, according to a company statement today. That puts them second in line if the Houston-based company liquidates its assets in bankruptcy and pushes the remaining holders of $116.8 million in original bonds to the back of the pack.

"In the industry it’s called ‘getting primed,’" said Spencer Cutter, a credit analyst with Bloomberg Intelligence. "It’s every man for himself. They’re trying to get in and get exchanged, and if you can’t you’re getting left out in the cold."

Wildcatters attracted billions of dollars during the boom after years of near-zero interest rates sent investors hunting for returns in riskier corners of the market. U.S. high-yield debt has more than doubled since 2004 to $1.3 trillion while the amount issued to junk-rated energy companies has grown four-fold to $208 billion, according to Barclays Plc. Most of the companies spent money faster than they made it even when oil was $100 a barrel and are struggling to stay afloat with prices at $45.

[...] "The bubble is bursting," Cutter said. "And if oil stays where it is, the worst is yet to come."
The following article on source rock prospects in Argentina provides an important data point that puts the US "shale oil" revolution in perspective: marginal cost above 80 $/b. At this day and age, this is a totally unsustainable business.
Trouble Ahead For The World’s Next Shale Boom?
Nick Cunningham, 29-09-2015

[...] If Argentina is to succeed in developing its shale resources, the Vaca Muerta is where it will happen. The shale basin in central Argentina has been one of the most watched shale basins outside of North America, with significant interest and investment from major international oil companies including ExxonMobil, Royal Dutch Shell, Chevron, Wintershall, Total, and Russia’s Gazprom. Chevron’s $1.2 billion deal with Argentina’s YPF in 2013 raised expectations that the boom was not far behind. YPF says that the Vaca Muerta could require $200 billion in order for Argentina to erase its energy deficit.

Despite the presence of international companies and the few hundred wells drilled to date, it is still early days. Production has ticked up, but the shale region has barely been picked over. Chevron and YPF are producing around 43,000 barrels per day of oil equivalent from the Vaca Muerta.

Low oil prices, however, are dampening activity in the country. YPF’s Miguel Galuccio said in April that, with oil prices so low, some wells are not profitable. “It is not profitable with an $11 million well and prices at $50 per barrel. We drilled our vertical wells with the expectation that they would be profitable at $84 per barrel and with wells that cost between $6.5 or $7 million,” he said. YPF has succeeded in bringing down the cost of drilling, but it is still shy of its target of $4 to $5 million per well, which would be much closer to the drilling costs in North America.
Later in the week the focus shifted to the much anticipated military intervention by Russia in Syria. Slowly a grand-coalition supporting the Shiite government took shape: the Hezbollah, Iraq, Iran, Afghanistan and Russia are in to engage the various Sunni factions, some of which are armed and trained by NATO. Unlike NATO, Russia picked a side in the Sunni-Shiite war and is in to end the stalemate, for better or for worse.
Iran troops to join Syria war, Russia bombs group trained by CIA
Laila Bassam and Andrew Osborn, 02-10-2015

Hundreds of Iranian troops have arrived in Syria to join a major ground offensive in support of President Bashar al-Assad's government, Lebanese sources said on Thursday, a sign the civil war is turning still more regional and global in scope.

Russian warplanes, in a second day of strikes, bombed a camp run by rebels trained by the U.S. Central Intelligence Agency, the group's commander said, putting Moscow and Washington on opposing sides in a Middle East conflict for the first time since the Cold War.

[...] The Russian strikes represent a bold move by President Vladimir Putin to assert influence beyond his own neighborhood. It is the first time Moscow has ordered its forces into combat outside the frontiers of the former Soviet Union since its disastrous Afghanistan campaign in the 1980s.
And speaking of Russia, there is another temporary gas supply contract in place to let Ukraine survive through the winter. Even if a clear outcome is not yet divisible, the conflict in Ukraine seems clearly downscaling.
Russia, Ukraine, and EU agree winter gas deal
Peter Teffer, 26-09-2015

Ukraine, Russia, and the European Union concluded an agreement on the supply of Russian natural gas on Friday evening (25 September) which the three parties said will ensure Ukraine and EU countries will have sufficient gas the coming winter.

The so-called “winter package”, valid from 1 October 2015 to the end of March 2016 was agreed by European energy commissioner Maros Sefcovic and energy ministers Vladimir Demchyshyn (Ukraine) and Alexander Novak (Russia).

“Once implemented the winter package will lay the ground for smooth gas deliveries from Russia to Ukraine, and consequently also through Ukraine to the European Union”, Sefcovic told journalists at a press conference in the European Commission's Berlaymont building in Brussels, after a short signing ceremony.

However, the trilateral gas agreement was only “initialled”.
Still on Russia, some hints on how its petroleum industry is fairing through the sanctions imposed by NATO. There is however a clear conscience that no easy resources are left to sustain current extraction levels.
How Russia’s Oil Companies Are Defying Sanctions and Low Oil Prices
Colin Chilcoat, 24-09-2015

Ranked according to cash flow, profit margins, and share prices, Russian giants Rosneft and Lukoil as well as smaller producers like Gazprom Neft and Bashneft are outperforming Royal Dutch Shell, BP, and Exxon Mobil.

The success is largely attributable to a still-weak ruble and a favorable tax regime that reduces the overall tax burden when oil prices fall. Moreover, Rosneft cites a production cost per barrel nearly five-fold less than what U.S. E&Ps are paying.

Among Russian companies, Rosneft and Lukoil saw the greatest increases in profitability in the first quarter of 2015 versus quarter one of 2014. Exports of both crude oil and refined oil products are up, and the companies are yielding free cash flow at a rate more than two times greater than Shell or BP. After a precipitous drop in 2014, Rosneft’s earnings before interest and taxes (EBIT) are now approaching pre-collapse levels, and are already well above those of BP and Shell.
Some folk are getting a bit alarmed with budget execution figures coming out of Saudi Arabia. In principle the country's sovereign funds should last long enough for the shale sub-prime to blow up various times. However, a more worrying trend is emerging: a rapid decline in bank deposits.
International Business Times
Saudi Arabia Withdraws Billions Of Dollars From Asset Managers To Cut Deficit From Falling Oil Prices
Erin Banco, 27-09-2015

[...] Deposits into Saudi Arabian banks fell by about $4.53 billion from June to July, Bloomberg reported, and the country's three-month interbank lending rate climbed 12 basis points Tuesday from this year’s low in March.

Although some of this withdrawn cash has been used to fund the Saudi Arabian deficit, the central bank is also seeking to reinvest into less risky, more liquid products, FT reported.

Saudi Arabia isn't the only Gulf nation anticipating a cash drain. Deposits into banks in Qatar fell by about $6.6 billion from June to July, and $1.2 billion in the United Arab Emirates, Bloomberg reported.
The decline of coal extraction in China is breathtaking. Hard numbers are hard to come by but the hints percolated by the press point to something remarkable. A two digit decline percentage wise this year is not at all impossible.
The Times of India
In biggest layoff in China, coal company axes 100,000 workers
Saibal DasguptaSaibal Dasgupta, 27-09-2015

A coal company announced the biggest layoff seen in China in recent years as it is set to relieve 100,000 workers accounting for 40% of its labour force.

Heilongjiang Longmay Mining Holding Group Co Ltd. said it was taking action to reduce recurring losses, and will bring about the labour cut in the next three months. It has 240,000 workers on the rolls at present.

Company chairman Wang Zhikui said the job cut was a measure adopted to "stop bleeding" the company. It also plans to sell its non-coal related businesses to help pay off its debts, Wang said.

"Personnel is probably its largest cost," the State media quoted Deng Shun, an analyst at Shanghai-based energy consultancy ICIS C1 Energy, as saying. "Actually many traditional State-owned coal enterprises are facing the same kind of problem. It has become more severe as the industry remains on a downward trend," Deng said.
Odd news of financing to Nuclear research, and perhaps among improbable partners. China is clearly committed to expand its Nuclear park, while in the UK it becomes obvious the impeding retirement of the world's oldest Nuclear fleet must be addressed.
World Nuclear News
China, UK to fund nuclear research centre

China and the UK will work together to co-fund a £50 million ($78 million) nuclear research centre, to be headquartered in the UK. Chinese vice premier Ma Kai and British chancellor George Osborne announced the plan on 21 September during the 7th UK-China Economic and Financial Dialogue summit in Beijing.

The Chancellor also announced a regional collaboration agreement between Cumbria and Sichuan Province, deepening commercial ties between the province and the north west of England's expertise in nuclear decommissioning and waste management. These developments followed a landmark announcement by Osborne the same day that the UK government would provide up to £2 billion ($3 billion) in support for the planned Hinkley Point C nuclear power plant, which China may participate in.

The UK's National Nuclear Laboratory (NNL) said on 22 September that it will jointly lead the new UK-China Joint Research and Innovation Centre (JRIC) with the China National Nuclear Corporation (CNNC).
Slowly the anti-renewables policies settle in the US. In order to save traditional electricity suppliers special taxes are imposed on modern technologies that have become too cheap to handle. This will soon become the most important matter in energy policy worldwide.
Los Angeles Times
State solar users would lose savings if proposal is OKd; SolarCity describes 'catastrophic' future
Ivan Penn, 26-09-2015

Those savings, however, would eventually evaporate if state regulators approve proposals from California utilities to charge solar users more for their connection to the grid.

Existing rooftop solar customers would receive some exemptions from the net-metering changes for 20 years after they installed their systems. But their costs still could rise because of separate regulatory changes, already enacted, that allow higher rates for users who buy small amounts of electricity from the grid.

For new purchases of rooftop solar, the utility proposals could wipe out the potential savings on power — the main incentive for buying the systems.

[...] The proposed fees could make solar power systems unaffordable — which is exactly what utilities want, Rive and other solar proponents say.

"This is a clear indication that the utilities are trying to stop competition and the solar industry," said Rive, whose San Mateo, Calif., company operates in 19 states.
And finishing off with another musical suggestion. I heard this song some days ago on the radio and minutes later was buying the LP. Worth every penny.

Have a good weekend.

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