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13 September 2014

Press review 13-09-2014 - Back in Contango

Petroleum prices took a nose dive this week in international markets, pulling the futures contracts structure back into contango. Politicians in Europe insist on slashing GDP, while China finally faces its long waited housing crisis; demand is shifting and the outlook for consumption is turning to negative. To these issues adds the escalation of economic sanctions between NATO and Russia, a tit-for-tat game with unknown consequences.

These economic developments come at the wrong moment for the petroleum industry. Recent reviews have focused on the mismatch between prices and extraction costs, that for some marginal producers may be at this stage in excess of 50%. The sustained price hike necessary to support these producers seems remote at this stage, leaving great doubts over the gargantuan amounts of debt that allowed the industry to operate with prices under marginal cost. If in pasts weeks extra-heavy petroleum and off-shore resources have been the focus of these debt woes, now even the so called "shales" in North America are cast in doubt.

Bloomberg
Drillers Piling Up More Debt Than Oil Hunting Fortunes in Shale
Asjylyn Loder, 08-09-2014

Wilson has reason to curse, Bloomberg Markets magazine will report in its October issue. On the wall behind him hang framed stock certificates of the four public energy companies he’s built in his 44-year career. The third, Petrohawk Energy Corp., discovered the Eagle Ford shale, now the second-most-prolific oil formation in the country. He sold Petrohawk three years ago for $15.1 billion.

Then came Halcon. Since Wilson took over as chairman and chief executive officer in February 2012, the company’s shares have dropped by about half, trading at $5.67 on Sept. 5.

Halcon spent $3.40 for every dollar it earned from operations in the 12 months through June 30. That’s more than all but six of the 60 U.S.-listed companies in the Bloomberg Intelligence North America Independent E&P Valuation Peers index. The company lost $1.4 billion in those 12 months. Halcon’s debt was almost $3.2 billion as of Sept. 5, or $23 for every barrel of proved reserves, more than any of its competitors.
It is not just a lone trader, albeit famous, having a negative perspective on the crude locked in the source rocks of the US. Looking closer, it seems the largest companies have already started abandoning these much touted plays.
The Daily Impact
Rats Start to Leave the Fracking Ship
Tom Lewis, 06-09-2014

Traders who hold long-term contracts for delivery of crude at today’s prices — $100 or a little less — will make gazillions. Hard to know how they’re going to spend it, though, since oil prices much above $100 cause nasty recessions in all industrialized countries.

Others, oil guys deeply involved with the bidness, seem to be sidling toward the exits, nostrils twitching. Royal Dutch Shell, one of the biggest players in the fields of fracking — it amassed at least $13 billion in leases in five years, starting in 2008 — appears to be leaving the building. While laying down a fog of statements about “restructuring… refocusing… renewed commitment” and the like, the company seems to have all but abandoned the North American shale business (in which, interestingly, it never made any money).

British Petroleum seems to be executing a similar tiptoe toward the EXIT sign. It has rolled all its American shale holdings into a company that doesn’t even bear its name (how low do you have to go before you’re too disreputable to be known as BP?) which is often a precursor move to a sell-off. BP’s CEO now dismisses the fracking revolution as a “lower margin, lean business” more suited to “independent operators,” otherwise known among con artists as “greater fools.” And he talks excitedly about how well the company is going to do with new deepwater wells in the Gulf of Mexico. Yeah, that ought to go well. Hard to see what could go wrong with that.
BP is facing a particularly bleak outlook after a ruling by the US legal system on the famous Macondo spill. Recently, plenty of ink has been shed on Arctic resources, but as the following article shows, the call is on for the media to sober up on the subject.
Bloomberg
BP Ruling 'Wakeup Call' as Risks Mount in Oil Search
Bradley Olson, Margaret Cronin Fisk and Harry R. Weber, 05-09-2014

A U.S. judge’s watershed ruling means the final cost to BP Plc for the 2010 Gulf oil spill may eclipse $50 billion, wiping out years of profits and highlighting the risks of drilling as the industry pushes into more dangerous areas such as deeper waters and ice-bound Arctic fields.

Yesterday’s court decision that BP acted with gross negligence in the Gulf of Mexico disaster may hamstring the company financially as the industry’s search for resources becomes more expensive and dangerous. Companies including Exxon Mobil Corp. and Royal Dutch Shell Plc are also facing increasing pressure to show investors they can still grow as production declines.
Meanwhile the IEA sees a remarkable slow down in consumption, anchoring prices and producing the contango structure. In this article the wording is also interesting, repeatedly confusing demand with consumption.
Reuters
Oil demand growth slowing at 'remarkable' pace -West energy agency
12-09-2014

World oil demand growth is softening at a remarkable pace as the European and Chinese economies falter, the West's energy watchdog said on Thursday, while supplies grow steadily, particularly from North America.

"The recent slowdown in demand growth is nothing short of remarkable," the International Energy Agency (IEA) said in its monthly report, revising down its oil demand growth projections for both 2014 and 2015.

"While festering conflicts in Iraq and Libya show no sign of abating, their effect on global oil market balances and prices remains muted amid weakening oil demand growth and plentiful supply," it added.
Worse than the risk this market turn is casting on the piles of debt strapping the industry is the halt it imposes on the development of new resources. 100 $/b was an absurd figure just a decade ago; today it is not enough to kick-start the next exploration and development cycle.
The Motley Fool
Are Oil Prices About to Skyrocket?
Matt DiLallo, 03-09-2014

Given that oil markets are strong, one would think oil companies are making a lot of money with oil prices above $100 per barrel. That, however, couldn't be farther from the truth. Seadrill went on to note:
Even with these strong macro fundamentals, oil companies seem to be unable to generate free cash flow to grow their businesses and have entered into a period of selectivity on projects as costs escalated across their entire portfolio of projects.
[...] This pullback in spending, however, isn't something that's new to the industry. In fact, according to Seadrill, we saw the same thing just a few years ago, and what happened next as a result of the pullback in spending was a spike in oil prices:
The current situation has some similarities to the situation in 2002-2003, when oil companies had limited free cash flow to develop new reserves. This led to an increase in oil prices between 2003-2008, when Brent moved from approximately US$40 to US$100 and resulted in increased investment by the oil companies. Today, the majority of low-cost inventory has been produced, and oil companies are entering a new phase in which recently discovered oil must be developed in order to grow production. These reserves are in the deep and ultra-deepwater and are far more complex than reserves discovered in prior periods. We can thereby assume that the amount of rig capacity which is needed to produce a barrel of offshore oil in the future will increase.
The economic sanctions escalation between NATO and Russia is creating great uncertainty in Europe. The Russian government has conveyed to the European press that cuts to gas transit are now on the table; for now the Europeans hold on to their poker face.
Reuters
German and Polish gas operators report lower supply from Russia
Adrian Krajewski and Wiktor Szary, 10-09-2014

Poland said on Wednesday it was receiving 20 percent less gas than normal from Russia and a German gas operator said its supplies of Russian gas were slightly reduced.

Some European officials believe Moscow could use disruptions to the gas deliveries on which Europe depends as its trump card in a confrontation over Ukraine that has already brought ties between Moscow and the West to their lowest since the Cold War.

Russian gas monopoly Gazprom issued a statement saying it was pumping gas to all destinations "according to the resources available for exports and for the continuing pumping to storage facilities in the Russian Federation".
Poland has been complaining over lower than expected gas flows from Russia, even though no contracts seems to have been breached. There is here certainly much itchiness and perhaps an unspoken desire for confrontation.
Reuters
Poland says getting half as much gas from Russia as it wants
11-09-2014

Poland's gas importer said it received only about half of the natural gas from Russia that it had asked for on Wednesday, stoking tensions between the two neighbours at odds over the stand-off over Ukraine.

There was no sign of any shortages of Russian gas in Europe -- which relies on Russia for about a third of its gas -- indicating that this was not the 'gas war' that some European governments feared could break out this autumn.

But energy analysts in Warsaw said Russia may be using deliveries to Poland to send Europe a calibrated warning that it will retaliate if Brussels imposes new sanctions on Moscow over its intervention in Ukraine.
Ukraine is now reliant on gas flows from the west to make it through the winter. There is no guarantee EU member states will sacrifice their population for Ukraine.
Reuters
Ukraine govt says needs additional 5 bcm of gas for winter
11-09-2014

Ukraine needs an additional five billion cubic metres (bcm) of natural gas to get through the coming cold season without difficulties, Deputy Prime Minister Volodymyr Groisman said on Thursday.

Ukraine relies heavily on Russia for gas imports but Moscow halted them in mid-June in a dispute with Kiev over pricing. Kiev has turned to European Union countries to help compensate for the shortfall.

European operators said Russia's gas monopoly Gazprom reduced gas supplies to Poland and Slovakia in recent days Gazprom says it is pumping supplies according to contracts.
Spearheading the concerted economic attacks on Russia, the UK government seems to pay little attention to its internal energy policy. Clearly expecting gas shortages similar or worse to those of last winter, market players are building up diesel fired power capacity. This is today the most expensive source of electricity in Europe.
The Observer
Fuels rush in as energy blackout threat prompts action from National Grid
07-09-2014

How did it happen? The running-down of traditional electricity generating capacity, due to the closure of old atomic reactors and dirty coal-fired plants, has left the UK threatened by the lights going out at peak times. And so enterprising, if not green, entrepreneurs have realised there is cash to be made by assembling a load of old diesel generators in a field or industrial park and offering them as power sources when the National Grid is struggling to meet demand.

A high-profile energy specialist, who has asked to remain nameless, said he had received a steady stream of diesel-power providers over the last 12 months looking for City cash to expand, or advice on initial public offerings. These fossil-fuel projects tend to be small, but their total capacity is already in the hundreds of megawatts, which could just be the difference between lights on or blackouts as traditional capacity shrinks.
The US government made this week a public commitment to fight the Islamic State from now on, no matter where. At the same time the US Congress discusses sending weapons to Syria in order to topple Assad. Can it get more ambiguous? In any event, the air strikes by the US and its allies in the Kurdish region has definitely barred the expansion of the territories held by the Islamic State, at the same time keeping important petroleum resources in "friendly" hands.
International Business Times
ISIS Grip on Iraqi Oil Infrastructure Could Be Slipping Amid US Air Strikes, Kurdish Attacks
Maria Gallucci, 11-09-2014

The Islamic State, or ISIS, may be losing its grip on some of Iraq’s oil infrastructure. After months of capturing oil fields, pumping stations and refineries across northern Iraq, the extremists have recently ceded some control amid U.S. airstrikes and heavy fighting from Iraqi and Kurdish forces.

“The situation is in flux right now,” Robert Perkins, a senior oil writer at Platts, a commodity news service, said in a Thursday interview. At Platt’s latest count, on Aug. 15, ISIS held about 72,000 barrels a day of Iraqi oil capacity from six wells.

But in the weeks since, separatist Kurdish troops began pushing back against the ISIS intrusion in their region. The Obama administration has launched more than 150 airstrikes in the country to help halt ISIS advances.
The retreat of the Islamic State is noticeable in the return of foreign staff to petroleum operations. There are reports of spread damage to the infrastructure, the return to previous levels of extraction and exports will not be swift.
UPI
Oil companies bring staff back to Iraq
Daniel J. Graeber, 08-09-2014

British energy company Genel Energy said Monday it started returning staff to the Kurdish north of Iraq following improvements in the security situation.

"Genel's primary consideration is the safety and wellbeing of our employees," the company said in a statement. "The decision to resume full operations has been made following a close monitoring of the situation, and in consultation with the Kurdistan Regional Government, Foreign and Commonwealth Office of the British Government, and other well-placed authorities."
The military and political situation in Libya is reflected in the ridicule of the news piece below. Sad but true.
The Guardian
Libyan parliament takes refuge in Greek car ferry
Chris Stephen, 09-09-2014

A Greek car ferry has been hired as last-minute accommodation for Libya's embattled parliament, which has fled the country's civil war to the small eastern town of Tobruk.

The 17,000-ton Elyros liner has been deployed, complete with its Greek crew, as a floating hotel for a legislature clinging to power in the Libyan city that is last stop before the Egyptian border.

Tobruk is no stranger to last stands. In the second world war, British and Commonwealth forces endured months of attacks from Erwin Rommel's Africa Corps. Now the siege mentality is back.
Forbes has been one of the bulwarks of the "shale gas" hype, but even this media outlet seems now abandoning the idea, with the same ease with which it embraced it.
Forbes
The Popping of the Shale Gas Bubble
Bill Powers, 03-09-2014

For much of the past decade we have been inundated by reports of how the wonders of technology, specifically horizontal drilling and hydraulic fracturing, have unleashed a new era for energy supplies. Industry leaders have touted that shale gas, along with burgeoning shale oil production, will lead to America’s energy independence, kindle a manufacturing renaissance, lower bills for everyday Americans and create millions of much-needed jobs. While there is little doubt that booming shale gas production, along with a very deep recession put an end to the natural gas price spike of 2008, much of the accepted conventional wisdom about the longevity of the shale gas bonanza is wrong. America’s shale gas resources and reserves have been grossly exaggerated and today’s level of shale gas production is unsustainable. In fact, due the distortions of zero interest rates and other factors, an enormous shale gas bubble has developed. Like all bubbles, this one will pop sooner than expected and when it does, the aftermath will be very unpleasant.
Shifting now to coal, extraction and consumption have markedly declined in Europe the past few months. Surging electricity production from renewable energies allied to the forced contraction of economic activity have mustered a tough market.
Renewables International
German coal power generation at 10-year low in August
Thomas Gerke, 09-09-2014

This year electricity generation from coal is down in Germany and last month only 14.45 TWh. This is not only a hefty 20% decline compared to the previous year, but also the lowest monthly coal power production in more than a decade.

In 2013, coal power generation rose by 2.2%. Gross power generation from coal power stations totaled 283 TWh in Germany. Almost 10% of this electricity, some 27 TWh, was consumed by the power stations themselves. The remaining 256 TWh (net generation) was supplied to the grid. It marked the second consecutive year of rising coal power generation. This sparked worries that coal power could return to pre-recession levels, and some commentators even began calling this short term development a renaissance of coal.

So far, 2014 does not follow this alleged trend. During each of the first 8 months, coal generators were unable to match or surpass the output of the respective month in the previous year (see chart below). As a consequence coal power generation this year is already down by almost 17 TWh, or 10%, on a year-to-year basis.
A similar story refers to Poland. With the Equinox days way and the prospects of disruptions to gas flows from Russia, this trend could soon revert.
Platts
Poland H1 hard coal output falls 7.6% on year: ministry
09-09-2014

Poland's state-owned coal mines produced 34.1 million mt of hard coal in the first half of the year, down 7.6% year on year, the Ministry of Economy said in a report released Tuesday.

The mines also made a net loss of Zloty 772.3 million ($237.2 million) in the period due to falling prices and rising costs, the report said.

Europe's thermal coal market was characterized by "low demand, high levels of stockpiled coal and strong competition from alternative energy sources (above all renewable energy and natural gas)," which led to the lowest weekly coal price index in four years, the report said.
Finishing off the energy news a curiosity from Russia. In spite of its latitude, the country actually hosts a remarkable solar power resource in Siberia, where a persistent anticyclonic agglutination keeps clouds away most of the year. Albeit contemplating costs in the single digit € cents per kWh, capturing solar power at these latitudes is far more challenging in terms of seasonality.
The Moscow Times
Russia's Largest Solar Power Plant Opens in Siberia
04-09-2014

A solar power station opened Thursday in Siberia's Altai republic has become the biggest facility of its kind in Russia.

The Kosh-Agachskaya plant, which has a capacity of 5 megawatts (MW), will be the first of five solar power facilities to open in the region by 2019, the Kremlin said in an online statement.

The project, which has a price tag of more than 5 billion rubles ($135 million), will bring Altai's total solar power output to 45 MW, the statement said.

[...] The new plant will be located on Altai's Chuyskaya Steppe, which has an insolation level — the amount of energy present on the earth's surface — on a par with South Europe, according to Smartnews.ru website.
The closing note on technology re-visits the revelations by Edward Snowden on the activities of the NSA. I have previously expressed doubts on the reason behind the conduct of this agency, the volumes of data captured can not possibly be related solely to military operations.
The Intercept
The U.S. Government’s Secret Plans to Spy for American Corporations
Glenn Greenwald, 05-09-2014

[...] One of the principal threats raised in the report is a scenario “in which the United States’ technological and innovative edge slips”— in particular, “that the technological capacity of foreign multinational corporations could outstrip that of U.S. corporations.” Such a development, the report says “could put the United States at a growing—and potentially permanent—disadvantage in crucial areas such as energy, nanotechnology, medicine, and information technology.”

How could U.S. intelligence agencies solve that problem? The report recommends “a multi-pronged, systematic effort to gather open source and proprietary information through overt means, clandestine penetration (through physical and cyber means), and counterintelligence” (emphasis added). In particular, the DNI’s report envisions “cyber operations” to penetrate “covert centers of innovation” such as R&D facilities.

In a graphic describing an “illustrative example,” the report heralds “technology acquisition by all means.” Some of the planning relates to foreign superiority in surveillance technology, but other parts are explicitly concerned with using cyber-espionage to bolster the competitive advantage of U.S. corporations. The report thus envisions a scenario in which companies from India and Russia work together to develop technological innovation, and the U.S. intelligence community then “conducts cyber operations” against “research facilities” in those countries, acquires their proprietary data, and then “assesses whether and how its findings would be useful to U.S. industry”
Readers interested in politics may wish to visit an article published earlier this week on Scotland's independence vote.

Have a nice weekend.