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17 October 2015

Press review 17-10-2015 - 50 dollars

As I write these lines, the Brent petroleum benchmark graph reads exactly 50 $/b. Prices have been hoovering around this round figure for two weeks, lacking major impacting news. This price was crossed sustainably for the first time a decade ago; back then it looked like petroleum was becoming very expensive.

Today, at this same price, it seems the petroleum industry as a whole is about to fall apart. Even if the media remains busier with other matters, the negative news on the industry succeed, from small to large companies, from private to state owned enterprises, no one is left to spare in this market. Much has changed supply side in the petroleum market, the curve is now steeper, and the "easy oil" tail has shrunk considerably. Smoke and mirrors are set up left and right to hide this reality; abnormities such as "peak demand" are employed to fool the fools.

There is no mystery to unravel, no complication to solve, reality is simple and in plain light for everyone to see.

Oil Slide Means ‘Almost Everything’ for Sale as Deals Accelerate
Aaron Clark and Stephen Stapczynski, 14-10-2015

More than $200 billion worth of oil and natural gas assets are for sale globally as companies come under renewed financial pressure from the prolonged commodity price rout, according to IHS Inc.

There are about 400 buying opportunities as of September, IHS Chief Upstream Strategist Bob Fryklund said in an interview. Deals will accelerate later this year and into 2016 as companies sell assets to meet debt requirements, he said. West Texas Intermediate crude has averaged about $51 a barrel this year, more than 40 percent below the five-year mean.

Low prices have slashed profits and as of the second quarter about one-sixth of North American major independent crude and gas producers faced debt payments that are more than 20 percent of their revenue. Companies have announced $181.1 billion of oil and gas acquisitions this year, the most in more than a decade, compared with $167.1 billion the same period in 2014, data compiled by Bloomberg show.
The following article rounds up a number of key figures depicting the financial state of petroleum companies, in particular those invested in American source rock resources.
Can The Oil Industry Really Handle This Much Debt?
Ekaterina Pokrovskaya, 13-10-2015

Throughout the oil price upturn that lasted until the middle of 2014, companies sold shares and assets and borrowed cash to increase production and add to their reserves. According to the data compiled by FactSet, shared with the Financial Times, the aggregate net debt of U.S. oil and gas production companies more than doubled from $81 billion at the end of 2010 to $169 billion by this June

In the first half of 2015, U.S. shale producers reported a cash shortfall of more than $30 billion. The U.S. independent oil and gas producers’ capital expenditures exceeded their cash from operations by a deficit of over $37 billion for 2014.
The recent auction failures in Mexico and Brasil are too symptoms of this new supply curve structure. At the head of the curve, offshore resources are the hardest hit by the price rout.
The Economic Times
Offshore oil output to plunge as producers scrap field upgrades

Global offshore oil production in ageing fields will fall by 10 percent next year as producers abandon field upgrades at the fastest rate in 30 years, in the first clear sign of output cuts outside the U.S. shale industry, exclusive data shows.

A drop in oil prices to half the level of a year ago has forced producers to slash spending and scrap mega projects that can take up to a decade to develop, but they are also taking less visible steps to cut investment in existing fields that will have an immediate impact on global supplies.

There have been few signs of how cost cuts of around $180 billion will impact near-term production until now. They could erode the glut that has forced down prices, and help balance global production and demand by the middle of next year or earlier, Oslo-based oil consultancy Rystad Energy said.
At similar (or even higher) marginal costs come the heavy petroleums. In Canada, where most petroleum extracted is of this nature, the 50 $/b price squeezes down the economy. The impact on the coming elections is an interesting twist.
The New York Times
Oil Sands Boom Dries Up in Alberta, Taking Thousands of Jobs With it
Ian Austen, 12-10-2015

At a camp for oil workers here, a collection of 16 three-story buildings that once housed 2,000 workers sits empty. A parking lot at a neighboring camp is now dotted with abandoned cars. With oil prices falling precipitously, capital-intensive projects rooted in the heavy crude mined from Alberta’s oil sands are losing money, contributing to the loss of about 35,000 energy industry jobs across the province.

Yet Alberta Highway 63, the major artery connecting Northern Alberta’s oil sands with the rest of the country, still buzzes with traffic. Tractor-trailers hauling loads that resemble rolling petrochemical plants parade past fleets of buses used to shuttle workers. Most vehicles carry “buggy whips” — bright orange pennants attached to tall spring-loaded wands — to help prevent them from being run over by the 1.6-million-pound dump trucks used in the oil sands mines. Continue reading the main story Related Coverage

Despite a severe economic downturn in a region whose growth once seemed limitless, many energy companies have too much invested in the oil sands to slow down or turn off the taps. In addition to the continued operation of existing plants, construction persists on projects that began before the price fell, largely because billions of dollars have already been spent on them. Oil sands projects are based on 40-year investment time frames, so their owners are being forced to wait out slumps.
Mare voices are heard claiming "peak oil". It is definitely a possibility, but it is likely too soon to make such call.
Seeking Alpha
Mexico And Brazil Oil Auction Failures Are Further Proof Of Peak Oil At Current Prices
Zoltan Ban, 15-10-2015

By far the most spectacular and talked about trend since the oil price collapsed more than a year ago, is the dramatic decline in drilling that occurred in the United States since the beginning of this year. For many months, we have been hearing about the resiliency of the shale industry, fueled by the delay in reaction of the industry in response to declining prices. At first, there was a delay in reaction to the price decline, most likely because companies were not entirely sure what to expect. Only some months later did the cuts in capital spending start to take a bite out of drilling activity. Then there was the delay between drilling activity and a corresponding decline in production. US production only started declining in May, which was almost a full year after the initial start of the oil price decline.

Since April, when US oil production reached 9.7 mb/d according to EIA data, production declined to about 9.1 mb/d, if we are to go by the EIA's weekly report. The EIA weekly report is not known for being very accurate, but it still provides an indication of the fact that there is a trend of significant production decline in place for the past five months or so. The whole debate over shale resilience can be put to rest now, because we know that at current prices the industry will shrink.
Syria has kept in front pages since the Russian-Shiite coalition went on the offensive. The western press have been widely ambiguous in this story, trying to wipe out the role of Al-Qaeda in the conflict (which NATO is supporting). The odd article in the not-so-mainstream media leaves a more sober account of events.
Putin Has What Obama Sorely Lacks: A Coherent Strategy For Syria
Juan Cole, 12-05-2015

[...] I have long held that Obama is simply trying to contain Daesh in Syria and Iraq, but that nothing he is doing will have the effect of rolling it back. Since Daesh is an enemy of the al-Assad regime, for Obama to contain and weaken it willy-nilly helps al-Assad. This outcome is not the one Obama says he wants, but it is an outcome impossible to avoid.

The place the rebels allied with al-Qaeda have made the big advances in recent months is the northwest province of Idlib. Most of the province fell to the “Army of Conquest,” which groups hard line Salafis like the Freemen of Syria (Ahrar al-Sham) with the Support Front al-Qaeda forces. The Support Front reports directly to Ayman al-Zawahiri, one of the masterminds of the 9/11 attacks on the U.S. With Idlib, the “Army of Conquest” can hope to move against Latakia to its west, Syria’s major port, on which the regime depends for survival.

I think that Obama can’t decently get involved in Idlib precisely because the victorious forces there are essentially al-Qaeda-led. (There are also remnants of small FSA groups in Idlib but frankly each just has a few villages and, in the aggregate, they don’t amount to all that much.) So the U.S. is irrelevant to the major military development on the ground in Syria in the past year!
A rare explanation for the decline in coal consumption in China. This sort of news pieces is hard to come by, so note carefuly all that it brings out. As I wrote in previous editions, coal consumption in China is likely set to decline more than 10% this year, a complete reversion of the growth trend registered up to 2013.
The Next China Default Could Be Days Away as Steel Firms Suffer

This time it’s the steel industry’s turn, as investors wonder if a potential bond default by Sinosteel Co. is an omen of things to come amid slowing demand for the metal used in everything from cars to construction.

The state-owned steel trader, whose parent warned of financial stress last year, may have to honor 2 billion yuan ($315 million) of principal next Tuesday when bondholders can exercise an option forcing the notes’ redemption two years before they mature. If that should happen, China Merchants Securities Co. thinks the firm will struggle to repay.

[...] China’s demand for steel will probably shrink 3.5 percent this year and another 2 percent in 2016 after consumption peaked in 2013, the World Steel Association said this week. That followed an Oct. 8 report from Xinhua saying that Haixin Iron & Steel Group, the largest private steel firm in north China, plans to restructure after filing for bankruptcy.

“Given the serious overcapacity problem and fluctuations in commodity prices, more steel companies may have losses,” said Zhang Chao, a bond analyst at China Investment Securities in Shenzhen. “More steel companies, including state-owned companies, may default.”
And while fossil fuel supply curves steepen, renewable energies curves flatten. This is what the energy transition is all about at this moment.
Solar and Wind Just Passed Another Big Turning Point
Tom Randall, 06-10-2015

Wind power is now the cheapest electricity to produce in both Germany and the U.K., even without government subsidies, according to a new analysis by Bloomberg New Energy Finance (BNEF). It's the first time that threshold has been crossed by a G7 economy.1

But that's less interesting than what just happened in the U.S.

To appreciate what's going on there, you need to understand the capacity factor. That's the percentage of a power plant's maximum potential that's actually achieved over time.

[...] For the first time, widespread adoption of renewables is effectively lowering the capacity factor for fossil fuels. That's because once a solar or wind project is built, the marginal cost of the electricity it produces is pretty much zero—free electricity—while coal and gas plants require more fuel for every new watt produced. If you're a power company with a choice, you choose the free stuff every time.
Have a pleasant weekend.

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