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10 October 2015

Press review 09-10-2015 - Peak Gold

One of the advantages of working for TheOilDrum was the possibility to edit Jean Laherrère's posts. I had a privileged insight into his work and his thinking on the many matters related to resource scarcity he studies. Professional duties made this editing work increasingly difficult and at some point I stopped keeping up with Jean's profuse writing and graphing. Now that TheOilDrum is frozen, Jean Laherrère's graphs are published by Ron Patterson over at PeakOilBarrel.

Back in 2009 I edited a long post by Jean on Gold extraction, that even had to be divided in two parts. Observing secular declining trends on ore grades and extraction volumes in the countries with the largest known reserves, Jean concluded a peak in world extraction was at hand. Yearly volumes kept creeping up a while longer, but the market became increasingly volatile.

In 2013 gold prices divided well below average extraction costs, as private funds in Europe flooded the market with their stocks. The mining industry endured a while longer, but the expected dive in extraction can no longer be adjourned. A return to the record volumes over two thousand tones in 2013 and 2014 seems increasingly unlikely.

Financial Post
For many miners, there’s no avoiding the gold ‘production cliff’ now
Peter Koven, 02-10-2015

When Steve Parsons and his colleagues published their first report on the gold “production cliff” in early 2013, they thought the thesis was obvious, even though almost no one was talking about it.

“It’s not a matter of if or even when the production cliff will happen,” the National Bank analyst said in an interview this week. “It’s really a matter of how companies respond.”

Gold miners hardly ever spoke up on this issue over the last several years. It may be that they didn’t agree with the conclusion, or perhaps they just didn’t want to think too hard about the implications. But there’s no avoiding it now.

Parsons’ thesis, in short, is that global gold production is set to fall in a big way. He calls it the “production cliff” while Goldcorp Inc. and others call it “peak gold,” but it amounts to the same thing.

The cliff appears to be imminent. According to numerous professional estimates, gold output will top out in 2015 or 2016 and then go into decline for several years at least. Using consensus figures, Goldcorp estimates that global production will drop six per cent in the next three years, and almost 18 per cent in the next nine years.
If a peak in world gold extraction shall not bring visible problems to common folk, issues with its sister metal silver might have a more salient impact. Apparently, silver extraction seems healthy, but since the 2008 financial crisis there have been regular periods of shortages in the retail market. This summer the market divided again into shortages, but unlike previous periods, it is yet to recover. Various mints seem to have sold forward all their coin production for 2015, and some 2016 issues are already under pressure. This shortage is so severe than even the mainstream media is taking notice.
Silver-coin shortage shows bright side of precious metal collapse
Marcy Nicholson, A. Ananthalakshmi and Jan Harvey, 01-10-2015

The global silver-coin market is in the grips of an unprecedented supply squeeze, forcing some mints to ration sales and step up overtime while sending U.S. buyers racing abroad to fulfill a sudden surge in demand.

The U.S. Mint began setting weekly sales quotas for its flagship American Eagle silver coins in July because it can't meet demand, and the Canadian mint followed suit after record monthly sales in July. In Australia, the Perth Mint sold a record of more than 2.5 million ounces of silver this month, nearly four times more than in August, and has begun rationing supply of a new line of coins this month, a mint official said.

"Silver [coin] demand is absolutely through the roof," said Neil Vance, wholesale manager at the Perth Mint. "There seems to be a bit of frenzy as people think there is a shortage of silver. But in fact it is a (crunch in) manufacturing capacity."

While demand has risen in response to the slump in spot prices to $14.33 an ounce in late July and its subsequent drop to fresh six-year lows below $14 an ounce in August, mint officials also said they were caught out by the sudden interest in coins. In July, the U.S. mint halted sales for almost three weeks after running out of "blanks", which are used to make coins.
The spectacular story of "shale oil" in the US is about for a spectacular ending. The inordinate hopes for the US to surpass Russia as the world largest petroleum extracting nation are definitely over.
U.S. oil output on brink of 'dramatic' decline, executive says
Dmitry Zhdannikov and Ron Bousso, 06-10-2015

Oil executives warned on Tuesday of a "dramatic" decline in U.S. production that could pave the way for a future spike in prices if fuel demand increases.

Delegates at the Oil and Money conference in London, an annual gathering of senior industry officials, said world oil prices were now too low to support U.S. shale oil output, the biggest addition to world production over the last decade.

"We are about to see a pretty dramatic decline in U.S. production growth," the former head of oil firm EOG Resources Mark Papa, told the conference.

Papa, now a partner at U.S. energy investment firm Riverstone Holdings LLC, said U.S. oil production would stall this month and begin to decline from early next year. He said the main reason for the decline would be a lack of bank financing for new shale developments.
The data is showing a steady decline in petroleum extraction settling in the US. From here onwards it is all downhill.
Crude Oil Peak
US shale oil too expensive, peaks 1H 2015
Matt Mushalik, 30-09-2015

[...] The April 2015 peak was caused by higher GOM production resulting from production start-ups after lifting the drilling moratorium in 2010. Shale oil peaked one month earlier, after the winter drop. However, month by month production can change and future revisions of data are likely due to reporting delays. What is more important than the month of peaking is the fact that US oil production stopped growing.
And as covered persistently in this space, a wave of bankruptcies is a guaranteed outcome of this unfolding extraction collapse.
US Shale oil industry will simply vanish

After many years of prosperity, the tough time has come for the US shale industry. Dramatic US oil production decline is inevitable and many shale companies face bankruptcy. Their assets can end up to larger producers, reinforcing market concentration. US energy independence can only be saved by government intervention. US government will remove exports limitation and FED September rate hike suspension is related to the unsustainable debt levels US oil industry is keeping afloat. But that is simply not enough to prevent a collapse of the US oil industry. From our research we learn that cost per barrel declined slightly but decreasing production cost is not enough to compensate for lower oil price. US oil production already declined 400K barrels per day from its April peak. We estimate an other 2 to 3 Million barrels can be wiped out the coming year.
Libya has mostly vanished from the western mainstream media. The odd article points to a continuation of political and military deadlock and petroleum extraction close to the floor. In Europe there are again hints of a military operation on the ground.
Libya's oil output down to 300,000 bpd - official
Ahmed Elumami, 05-10-2015

Libya's oil production has dropped to 300,000 barrels per day, less than a quarter of what it produced before the 2011 fall of Muammar Gaddafi, mostly because of insecurity and closed pipelines, a top official said.

The North African state is caught in a conflict between two rival governments and their armed allies -- one internationally recognised, and the other a self-declared administration that took over Tripoli last year.

Naji Moghrab, the top state oil official with the recognised government, told a local television channel late on Sunday output was at 300,000 bpd because of fighting between various armed factions and the closure of 50,000 km of oil pipeline.

Following the government split, Libya now has two rival state oil companies. One is with the recognised government and one with the Tripoli government, yielding often conflicting accounts of who controls what oil assets.
The following article puts in a different perspective the North Sea end game. Though decisions are ahead for the companies operating in this mature petroleum region.
The North Sea Dilemma: Continue to Invest or Start Decommissioning?
Roland Berger, 08-10-2015

This time last year, oil prices were at $95 per barrel and had been averaging around that level since 2011. Twelve months on, the factors that caused the initial price drop – such as unconventional reserves in North America and OPEC's unwillingness to reduce production – show no signs of abating and have been re-enforced or supplanted by new ones as China's demand slows and sanctions are lifted in Iran.

As a consequence, the price of oil dropped again in September to $48 per barrel and it is clear that what was originally thought to be a short-term phenomenon is looking increasingly more medium, if not, long term.

In this environment, capital expenditure budgets for exploration have been significantly scaled back and North Sea operators are facing an increasingly pressing dilemma. The economic dilemma facing operators – the high proportion of ageing assets, whose lifespans have already been extended many years beyond what was originally intended, compounded by the complexity of infrastructure required to extract oil in the North Sea – is further complicating an already-difficult question for operators: whether to continue to invest in life extension or to begin the painful process of decommissioning?
But not all is bad news in the petroleum market. Ambition grows in Iran to restore its pre-sanction extraction levels. Iran is not exactly a new region, but it still holds some of the last "easy oil" reserves in the world.
Iran Aims to Boost Oil Output by 2 Million Barrels From Projects
Brian Parkin, 01-05-2015

Iran plans to increase crude output by 2 million barrels a day from about 50 energy projects slated for investors at a conference in Tehran next month, National Iranian Oil Co. Managing Director Roknoddin Javadi said.

The package will also aim to boost natural gas production by 7 billion standard cubic feet, Javadi said at a conference in Berlin Thursday. Oil production is now about 2.8 million barrels a day, data compiled by Bloomberg show. Iran has the world’s largest gas reserves and the fourth largest oil reserves, according to BP Plc figures.

Iran will need $30 billion of investment over five years to boost oil production, starting with about 350,000 barrels of new output next year, Goldman Sachs Group Inc. said in a report Thursday. The supplies could keep pressure on oil prices and delay the market’s return to balance, Henry Tarr, a Goldman analyst, said in the report.

“The global oil market will stay bearish in the short to medium term,” Javadi told the conference.
Meanwhile, extracted volumes in Russia keep growing, in spite of official expectations of a peak in the short term. Russia is enduring the present price rout much better than could be anticipated and is a clear winner in this market.
Oil Bulls Lose Faith in Recovery as Russia Adds to Glut
Mark Shenk, 03-10-2015

Hedge funds trimmed bullish oil bets for the first time in six weeks, losing faith in a swift recovery as Russia boosted output to the highest since the Soviet Union collapsed.

Speculators reduced their net-long position in West Texas Intermediate crude by 9.1 percent in the week ended Sept. 29, according to data from the Commodity Futures Trading Commission. Longs dropped from a 12-week high while shorts increased. Investors also trimmed their bullish bets in European benchmark Brent.

[...] Russian oil output rose to a post-Soviet record last month as producers took advantage of the weak ruble to push ahead with drilling. The nation’s production of crude and condensate climbed to 10.74 million barrels a day, 1 percent more than a year earlier and topping a record set in June, according to data from the Energy Ministry’s CDU-TEK unit.

Shifting now to Coal, the thesis I have been putting forward regarding electricity shortages in India seem now fully confirmed by recent actions by the government. The coal is there but is no longer affordable.
Risking backlash, India's Modi to push power price hikes
Paritosh Bansal and Tommy Wilkes, 06-10-2015

India's prime minister is to tell states to raise electricity prices in return for access to a financial bailout package, a politically contentious move that risks a backlash from farmers and consumers long used to free or cheap power.

Narendra Modi has made overhauling India's largely loss-making utilities, buckling under $66 billion of debts, a priority, convinced that if he can fix their finances he will recover his reputation as an economic reformer willing to take tough decisions.

State-run electricity distributors are running out of cash and struggling to repay loans, squeezing banks' ability to spur credit growth and undermining Modi's campaign to attract more energy-hungry manufacturers to build new factories.
Coal is another commodity enduring a major downturn, with prices diving well under extraction costs in many nations. Hard data is not public, but it seems world coal extraction could fall over 5% in 2015, another data point nothing short of spectacular.
Half of World's Coal Output Is Unprofitable, Moody's Says
Mario Parker, 01-10-2015

Half of the world’s coal isn’t worth digging out of the ground at current prices, according to Moody’s Investors Service.

The global metallurgical coal benchmark has fallen to the lowest level in a decade, settling last month at $89 a metric ton.

“Further production cuts are necessary to bring the market back into balance,” Moody’s analysts including Anna Zubets-Anderson wrote in a report on Thursday.

China’s slowing appetite for the power-plant fuel and steelmaking component has depressed the seaborne market, creating a worldwide glut. In the U.S., cheap natural gas is stealing coal’s share of the power generation market. And the strong dollar has tempered exports.
In the world geo-politcal chessboard Syria has become the main battle ground, with NATO clearly caught on the wrong footing. The article below provides important insight on the reasons that lead Russia to intervene in the region.
Thomas Friedman, read your Chomsky: The New York Times gets Putin/Obama all wrong, again
Patrick L. Smith, 07-10-2015

The meeting with Obama in New York did not go well. It was extremely contentious, and Obama did not engage. Putin made the case that the important first priority had to be to eliminate Daesh [the Islamic State], and that after more than a year of the U.S. campaign there has been no significant success. Indeed, the contrary is the case.

Putin’s point was that air power alone will not succeed, and that now the only real boots on the ground are the Kurds and the armies of Syria and its supporters—Hezbollah and some Iranians, but the Iranians troops involved in the struggle with Daesh are operating mostly in Iraq.

Putin proposed creating a coalition, the equivalent of the anti-Hitler alliance, to focus on Daesh, and then focusing in Round 2 on the transition of Syria into a form of decentralized federation of highly autonomous regions—Kurdish, Sunni, Alawite-Christian and a few others—which all work together now.

Putin had been led to believe through the Lavrov /Kerry channel… that there would be a broader agreement to work together. So he was surprised that Obama did not seize the opportunity to engage the battle in a coordinated way…. In the end they agreed only on coordination between the two militaries to avoid running into each other.

Putin left New York with the view that it is now much more important to support the government in Syria than he had thought before he went, because he came convinced that the U.S., left to its present course, is going to create another Libya, this time in Syria. Israel has a similar view, as does Egypt, Iran, and, increasingly, countries in Europe. With Daesh already so deeply implanted, this would lead to vast crisis—military, political, economic, humanitarian—that would spread across all of the Middle East, into the Caucasus and across North Africa, with millions of refugees….
Zooming in on Europe, is a lucid analysis on the long term effects of the NOx emissions scandal involving VW. The European auto industry is likely up for big technological changes.
VW rivals risk bigger blow as emissions scandal hits diesel
Gilles Guillaume, Barbara Lewis and Laurence Frost, 02-10-2015

Volkswagen's cheating on emissions tests has soured the European car industry's heavy bet on diesel, with Renault, Peugeot and Fiat Chrysler potentially facing bigger long-term setbacks than the company that sparked the crisis.

In the face of that perceived injustice, tensions are mounting behind the united facade that European manufacturers present to regulators, some of their representatives say.

VW's use of a banned "defeat device" has drawn scrutiny of more widely practiced test manipulation which, although legal, has allowed real-world nitrogen oxide (NOx) emissions to surge to more than seven times their European limits.
Following a reportage from Euronews on the dramas presently lived in the farming sector. The economical embargo to Russia is all about pain to no gain.

To end on a more positive note come the forecasts on renewable energy from IEA. The forecasting record by the IEA is as poor as it can be, but in the case of renewables, they tend to be on underestimate side.
International Energy Agancy
Renewables to lead world power market growth to 2020

Renewable energy will represent the largest single source of electricity growth over the next five years, driven by falling costs and aggressive expansion in emerging economies, the IEA said Friday in an annual market report. Pointing to the great promise renewables hold for affordably mitigating climate change and enhancing energy security, the report warns governments to reduce policy uncertainties that are acting as brakes on greater deployment.

[...] Renewable electricity additions over the next five years will top 700 gigawatts (GW) – more than twice Japan’s current installed power capacity. They will account for almost two-thirds of net additions to global power capacity – that is, the amount of new capacity that is added, minus scheduled retirements of existing power plants. Non-hydro sources such as wind and solar photovoltaic panels (solar PV) will represent nearly half of the total global power capacity increase.

The report sees the share of renewable energy in global power generation rising to over 26% by 2020 from 22% in 2013 – a remarkable shift in a very limited period of time. By 2020, the amount of global electricity generation coming from renewable energy will be higher than today’s combined electricity demand of China, India and Brazil.
Have a good weekend.

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