Press review 06-12-2014 - Bitter Oranges

This week I attended the opening session of a photo-exhibition on the life of illegal immigrants stranded in Italy. Either because they fail to obtain a working visa or because they are prosecuted in their country of origin, these immigrants are left to their luck, at best getting a place to sleep in a container or a tent.

Three Luxembourgish researchers have been visiting regularly the camps where these immigrants live, documenting their stories and the ordeals they go through just to survive. They have to work to buy food and clothing; the orange harvest is the only possibility, where they can earn 0.5 € for each box of 22 kg. At the height of the harvest they earn little over 200 € per month; many months go by when they have no income at all. Although these migrants originate from all over North Africa, more than half of them were settled in Libya at the beginning of 2011. Back then they had relatively normal lives, with a real job and proper housing.

I have been writing on Libya and its demise for over six years, studying the implications to our economy and way of life. Behind all these big stories are real lives and great human suffering. All this happens literally in our neighbourhood, and goes largely unnoticed to the general public.

Bitter Oranges is the name of this research project. There is a photo gallery to visit and also a short video to watch.

Bellow is a graph of petroleum extraction in Libya according to the IEA. It is a good proxy for the turmoil lived in the country.



Does Libya still exist? Possibly not, albeit few would admit to it. In inner pages and small characters are referenced direct talks between Turkey and the Islamists presently ruling Tripolitana. Perhaps a first step towards international acknowledgement of a split.

Daily Times
Struggle over Libya’s oil risks breaking up country
30-11-2014

Libya’s self-proclaimed prime minister has warned that attempts by a rival government in the east to assert control over the oil industry could escalate the political conflict dividing the OPEC member state and force it to break in two.

Libya has had two governments competing for power since August when a group called Operation Libya Dawn, which opponents say is backed by Islamists, seized Tripoli and forced the elected Prime Minister Abdullah al-Thinni to flee 1,000 km to a small city near the border with Egypt.

Both sides have so far avoided talking publicly about prospect of a split.

There are all sorts of weird stories coming out of Ukraine. An American citizen is to take office as Finance Minister of the nationalist government. The Central Bank governor is to be prosecuted over the demise of the country's treasury. A programme of public assets fire sales is to start in short order (it will be interesting to see who the buyers will be).

Throughout the week there were rumours of an imminent payment to Russia for gas supplies. I delayed this edition of the press review to have something solid to write on. Naftogaz is paying "only" 300 M€ to Gazprom, apparently outside the agreement struck early last month. The agreement arranged by the European Commission also included the payment of the debt accumulated by the nationalists (well over 1 G€), to which there is no reference. I see it unlikely for Gazprom to resume deliveries over such limited payment.

Press TV
Ukraine makes prepayment for gas imports from Russia
06-12-2014

Ukraine's state energy firm says it has transferred money to Russia as an upfront payment to buy natural gas for December 2014.

“Naftogaz Ukraine has transferred USD 378 million to Gazprom in prepayment for deliveries of 1 billion cubic meters of gas," the Ukrainian company said in a statement released on Friday.

Earlier this month, Yuri Prodan, the then Ukrainian minister of energy and coal industry, announced Kiev’s plan to buy up to one billion cubic meters of natural gas from Russia in the first quarter of 2015.

Gas flow to Ukraine is expected to resume within 48 hours from the time the Russian energy giant receives the transfer.

And mid-ways in the week came the bombshell on South Stream. Not entirely unexpected in the present setting, but still another important economic tie with Russia that may have been permanently severed.

EUObserver
Putin says will not build South Stream gas pipeline
Andrew Rettman, 02-12-2014

Russian leader Vladimir Putin has said he will no longer build the South Stream gas pipeline due to EU opposition.

He made the announcement in Ankara on Monday (1 December) at a press briefing with Turkish leader Recep Tayyip Erdogan.

“We believe that in the current conditions Russia cannot continue with the realisation of this project [South Stream],” Putin said.

“Bearing in mind that you need to construct the pipeline under the Black Sea, we cannot begin construction so long as we do not have permission from Bulgaria. To begin construction in the sea, get to the Bulgarian beach, then stop - it would be ridiculous”, he added.

Following is a perspective from the other side of the (American set up) fence, to contrast with the litanies from the western media.

Vineyard Saker
The Importance Of The Cancellation Of South Stream
Alexander Mercouris, 03-12-2014

[...] This is the background to the conflict over South Stream. The EU authorities have insisted that South Stream must comply with the Third Energy Package even though the Third Energy Package came into existence only after the outline agreements for South Stream had been already reached.

Compliance with the Third Energy Package would have meant that though Gazprom supplied the gas it could not own or control the pipeline through which gas was supplied.

Were Gazprom to agree to this, it would acknowledge the EU’s authority over its operations. It would in that case undoubtedly face down the line more demands for more changes to its operating methods. Ultimately this would lead to demands for changes in the structure of the energy industry in Russia itself.

What has just happened is that the Russians have said no. Rather than proceed with the project by submitting to European demands, which is what the Europeans expected, the Russians have to everyone’s astonishment instead pulled out of the whole project.

A few more bits of information came out this week on the Coal supply in Ukraine. The nationalists seem to have enough stocks to keep power plants running for the moment; the question is for how long.

AFP
Ukraine faces coal shortage with rebels controlling mines
29-11-2014

Ukraine gets some 40 percent of its power from coal-fired plants, and has traditionally had a surplus of coal, producing some 86 million tonnes at last count in 2012.

But the Russian-backed rebellion in the east has cut the government off from large swathes of the coal-rich mining region of Donbass.

Then, without warning, Russia announced it was stopping coal supplies to Ukraine last week, claiming "force majeure" but offering no explanation.

"I don't know for how long Russia intends to stop coal deliveries. If it stops them for a long period, our thermal stations will not be able to function at full power," said Ukraine's Energy Minister Yuriy Prodan.

In one of its various avenues of diversification away from Europe, Russia tightens its ties to Iran. Here's a good example of how Atlantic centred policies impact Europe: in one go we may loose a key supplier and a relevant client. Brilliant.

UPI
Russia revisits oil-for-goods deal with Iran
Daniel J. Graeber, 01-12-2014

Russia's minister of economic development said an oil-for-goods deal with Iran is on the cusp of realization.

The deal in which Iran would send oil to Russia has been in the works for much of the year.

"We can export a big volume of our non-raw materials exports, such as equipment for the oil and gas industry, agricultural machinery, motor vehicles, aircraft, railway cars, power machines, electricity generators," Minister Alexei Ulyukayev told reporters Sunday from Moscow.

Iranian Oil Minister Bijan Zanganeh has hinted that the Iranian government endorsed such a deal, but nothing was formalized. Both sides already cooperate in a variety of fields, with Russia supplying fuel for Iran's nuclear reactor at Bushehr.

In fact, Iran is clearly returning to international markets, even if no agreement on its Nuclear programme has been reached.

Press TV
Iran’s oil exports to Japan up 28% in October
28-11-2014

New figures show Iran’s oil exports to Japan increased by more than 28 percent in October compared with the same period last year.

According to the data released by Japan’s Ministry of Economy, Trade and Industry on Friday, the world’s third-biggest economy imported 163,288 barrels per day (bpd) of Iranian crude during the period.

India, Iran's top oil client after China, also imported about 309,900 bpd of crude from Tehran last month.

The data show that India’s oil imports from Iran rose 60 percent in October year on year.

Iran is not only back to international markets, but also to international politics. Recent news strongly suggest coordination with the US in air strikes against the Sunni in Iraq. If this is possible, then Iran might have a change in convincing the Americans to stop harassing the Shiites in Syria and Lebanon.

International Business Times
Iranian Airstrikes In Iraq Suggest Warming Relations With US, Maybe Even Coordination
Erin Banco, 03-12-2014

Iranian jets conducted airstrikes against Sunni extremists in Iraq last week along the two countries' border, according to various media reports. The U.S. has not officially confirmed the airstrikes, although U.S. officials have said they did take place, and Iran has denied them. But if the airstrikes took place, the U.S. likely knew about them, experts said, and tolerated them. This would mark a momentous shift in relations between Washington and Tehran, analysts said, even if the U.S. had not coordinated the airstrikes with Iran -- which the Pentagon's press secretary said it did not do.

The lack of a strong reaction from Washington, and even the remarkably relaxed tone of several top officials when discussing the possibility of Iran hitting inside Iraq, indicates a deep change of attitude.

“The Pentagon had a very mellow reaction to Iranian presence in Iraq. This is not what we are used to,” Alex Vatanka, an expert on Iran at the Middle East Institute in Washington, said. “That matter-of-fact kind of reaction ... is an indication of a new atmosphere that is now in place between the U.S. and Iran.”

In the US itself the big news remain the consequences of the petroleum price collapse (that this week closed under 70 $/b). Panic among investors is no longer possible to hide as thousands of millions of dollars are lost.

Reuters
Billions wiped off energy shares as investors rush for exit
Lionel Laurent, 28-11-2014

A fresh slide in the price of crude wiped tens of billions of dollars off oil companies' market value on Friday and signalled an end to the sector's safe-haven status, as fears mounted over future profits and dividend payouts.

Fund managers described the last 24 hours of trading as "capitulation" - the point at which a sell-off becomes widespread and panic-driven - as investors reassessed whether the sector could keep gushing cash after OPEC's decision not to cut oil production to fight a supply glut.

"Oil stocks are currently in the final phase of capitulation," said UniCredit strategist Christian Stocker.

Oil prices have been sliding for months, but the pain has mostly been felt by oil-services suppliers rather than majors like Royal Dutch Shell (RDSa.L) or Total (TOTF.PA). Investors maintained some faith in them based on their record of paying reliable dividends.

The first effects of the price rout are here, with a dramatic slowdown of drilling on source rocks. In a few months this will translate into an even worse slowdown of cash flows, straining the immense amount of bonds issued by the industry in recent years.

Reuters
New U.S. oil and gas well November permits tumble nearly 40 percent
Kristen Hays, 02-12-2014

Plunging oil prices sparked a drop of almost 40 percent in new well permits issued across the United States in November, in a sudden pause in the growth of the U.S. shale oil and gas boom that started around 2007.

Data provided exclusively to Reuters on Tuesday by industry data firm Drilling Info Inc showed 4,520 new well permits were approved last month, down from 7,227 in October.

[...] New permits, which indicate what drilling rigs will be doing 60-90 days in the future, showed steep declines for the first time this year across the top three U.S. onshore fields: the Permian Basin and Eagle Ford in Texas and North Dakota's Bakken shale.

Popular writer Charles Hugh Smith published this week a series of articles reflecting on how the "shale subprime" story came to be and what its consequences can be. He uses unconventional concepts of supply and demand that may not be straightforward to understand. In any event, the remarks on the mismatch between economic growth and the (lack of) physical growth in petroleum extraction are very well placed. Search in his blog for the follow up articles.

Of Two Minds
The Oil-Drenched Black Swan, Part 1
Charles Hugh Smith, 30-11-2014

[...] As for concocting explanations and rationalizations after the fact, consider the shaky factual foundations of the current raft of rationalizations. The primary explanation for the free-fall in oil is rising production has created a temporary oversupply of oil: the world is awash in crude oil because producers have jacked up production so much.

[...] The EIA estimates the global economy expanded by an average of 2.7% every year in this time frame. Thus we can estimate in a back-of-the-envelope fashion that oil consumption and production might rise in parallel with the global economy.

In the six years from 2009 to 2014, oil production rose 3.9%, from 74 MBD to 76.9 MBD. Meanwhile, cumulative global growth at 2.7% annually added 17.3% to the global economy in the same six-year period. What is remarkable is not the extremely modest expansion of oil production but how this modest growth apparently enabled a much larger expansion of the global economy. ( Other sources set the growth of global GDP in excess of 20% over this time frame.)

The intertwining of source rock petroleum extraction with the US bond market has kept these resources under the spotlights, but there are other resources far more pressed by prices at 70 $/b. Such is the case with the Arctic prospects, especially those offshore.

OilPrice.com
Is The Arctic Dream Dead?
Colin Chilcoat, 02-12-2014

[...] The market tailspin hatched by OPEC spells disaster not only for the Arctic offshore, but also a number of expensive plays across the globe. Most notably, the depressed prices will wreck capital expenditures in a sector with notoriously long lead times. A pessimistic futures market makes hedging above $80/barrel difficult and US shale fields will likely see a 10 percent decrease in investment. If money is leaving shale, you can be sure it’s already left the Arctic. Arctic’s breakeven, onshore included, ranks last among its competitors, behind oil sands, shale oil, and ultra-deepwater. Globally, oil and gas exploration is expected to decline up to 20 percent in companies’ and states’ 2015 budgets. Collapsing commodities prices and breakeven figures are easy targets, and rightly so as they properly demonstrate the Arctic’s competitiveness, or lack thereof. Still, they fail to account for a number of variables.

Last weekend there was a rare reference to Peak Oil into the mainstream press. I am happy to note that Euan Mearns was an inspiration to this article; not all is in vain in this life of news crunching and data processing.

The Globe and Mail
Why oil prices will bounce back … eventually
Eric Reguly, 28-11-2014

Euan Mearns, an oil analyst I like a lot because he is independent and not really an analyst – he’s a geologist and good researcher who strays off the beaten path – produced a fascinating little chart recently on his Energy Matters site. The chart showed that conventional oil and condensate – the “black” oil that comes out of the ground easily and relatively cheaply and can be refined into gasoline – reached a production level of 73 million barrels a day in 2005. Guess what? Almost a decade later, conventional oil production has not climbed even though prices were high for most of that time.

What drove global production up to the current 92 million barrels a day or so was non-conventional production – the oil sands, U.S. shale oil, biofuels and natural gas liquids. The problem is that most of this production is highly expensive and a lot of it, like the gas liquids, is refined into heating fuels, such as butane, not transportation fuels, which are the biggest oil products market. Barring a technological breakthrough, the world has probably seen “peak” conventional oil production. That means any significant production gains will have to come from non-conventional oil. Continued low prices can only damage that production.

Nature dedicates part of its December issue to gas extraction from source rocks. It has an editorial to the matter and publishes a long article by Mason Inman. While such initiatives must be acknowledged, I can not stop wondering if an issue of this character would have been possible just one year ago.

Nature
Natural gas: The fracking fallacy
Mason Inman, 03-12-2014

Companies are betting big on forecasts of cheap, plentiful natural gas. Over the next 20 years, US industry and electricity producers are expected to invest hundreds of billions of dollars in new plants that rely on natural gas. And billions more dollars are pouring into the construction of export facilities that will enable the United States to ship liquefied natural gas to Europe, Asia and South America.

All of those investments are based on the expectation that US gas production will climb for decades, in line with the official forecasts by the US Energy Information Administration (EIA). As agency director Adam Sieminski put it last year: “For natural gas, the EIA has no doubt at all that production can continue to grow all the way out to 2040.”

But a careful examination of the assumptions behind such bullish forecasts suggests that they may be overly optimistic, in part because the government's predictions rely on coarse-grained studies of major shale formations, or plays. Now, researchers are analysing those formations in much greater detail and are issuing more-conservative forecasts. They calculate that such formations have relatively small 'sweet spots' where it will be profitable to extract gas.

Finishing off some concerns brewing up in Belgium after a fire in the largest Nuclear reactor in the country. This would be one more reason not to follow the US strategy against Russia, but the public discourse is so infected with the anti-Russian sentiment that blackouts may become acceptable simply to make a stand.

EUObserver
Harsh winter could spell trouble for Belgium's electricity supply
Peter Teffer, 02-12-2014

A Belgian nuclear reactor which was shut down over the weekend after electrical cables caught fire was reconnected to the grid on Tuesday (2 December).

Although the temporary shut-down of the reactor, Tihange 3, did not appear to have caused problems for Belgium's electricity supply, harsh weather in the coming months might lead to blackouts.

Tihange 3 supplies electricity to about a million Belgian households. With its 1,046 megawatts, it is the largest of Belgium's seven nuclear reactors, which together are responsible for almost half of the country's electricity generation.

With the temporary closure of Tihange 3, Belgium's power grid was surviving on just two nuclear reactors over the weekend.

A lot is going on around Ukraine at the moment, next week will certainly bring further developments there. Petroleum prices should keep declining and the bad news on the US petroleum industry will keep piling up.

Have a pleasant weekend.