Normally, I don't touch anything that does not affect the price of oil and gas, but today is Armistice Day, when The Great War ended. Presented without comment is John McCrae's poem, "In Flanders Fields."
In Flanders Fields
In Flanders fields, the poppies blow
Between the crosses, row on row,
That mark our place; and in the sky
The larks, still bravely singing, fly
Scarce heard amid the guns below...
We are the Dead. Short days ago
We lived, felt dawn, saw sunset glow,
Loved, and were loved, and now we lie
In Flanders fields...
Take up our quarrel with the foe:
To you from failing hands we throw
The torch; be yours to hold it high.
If ye break faith with us who die
We shall not sleep, though poppies grow
In Flanders fields...
Dedicated to my Grandfather, Robert M. Logan, and my Great-Grandfather, Howell B. Gwin.
The War ended before Dr. Logan could make it across the pond, but Dr. Gwin, like McCrea, served as a battlefield surgeon. I have two pictures of him, one taken in 1910 and one in 1928, and the horror of what he saw aged him 40 years in just 18. Unlike Dr. McCrea, he survived the war, bore children, and is buried in Mississippi.
Gentlemen, sleep well. Your service is remembered with humble gratitude. My sons carry your names.
Tuesday, November 11, 2008
Thursday, October 30, 2008
FT: World will struggle to meet oil demand
I'll comment on this more in depth when time permits, but this is an interesting article and speaks to one of the reasons I'm bullish long term on oil (and on career/investment prospects as an almost young-ish oil finance guy)
Short term (6 month) bearishness ($45-$50 Cal-09 crude) is due to an economic recession we probably have not seen the worst of and strengthening USD pushes down the trade deficit, lifting the dollar, and putting pressure on dollar-denominated CL.
Further reason for bearishness: As the price of oil drops, the incentive to cheat on the quote increeases...especially among countries like Iran and Venezuela, whose economies have been hurt by sanctions, bad policies, or both. As projects spurred by $100+ oil come online, and as Iraq continues to get more settled, supply will increase.
Many people would argue that those expensive projects will not, in fact, get built in this price environment; I'd argue 1). much of the production has already been hedged; and 2). even though sunk costs are irrelevant, Management is usually loath to abandon a project halfway through..both because of mob-demob costs and because it's embarrassing...you'd shoot credibility with the analysts and BOD, hampering both your future access to the capital markets and your likelihood of keeping your job, respectively.
I've spent 10 years in capital-intensive commodity businesses, and price almost always gets driven down to marginal cost. When I look at other capital-intensive commodity businesses (airlines), I see the same thing happening.
http://www.ft.com/cms/s/0/e5e78778-a53f-11dd-b4f5-000077b07658.html?nclick_check=1
World will struggle to meet oil demand
By Carola Hoyos and Javier Blas in London
Published: October 28 2008 23:32 Last updated: October 28 2008 23:32
Output from the world’s oilfields is declining faster than previously thought, the first authoritative public study of the biggest fields shows.
Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent, the International Energy Agency says in its annual report, the World Energy Outlook, a draft of which has been obtained by the Financial Times.
The findings suggest the world will struggle to produce enough oil to make up for steep declines in existing fields, such as those in the North Sea, Russia and Alaska, and meet long-term demand. The effort will become even more acute as prices fall and investment decisions are delayed.
The IEA, the oil watchdog, forecasts that China, India and other developing countries’ demand will require investments of $360bn each year until 2030.
The agency says even with investment, the annual rate of output decline is 6.4 per cent.
The decline will not necessarily be felt in the next few years because demand is slowing down, but with the expected slowdown in investment the eventual effect will be magnified, oil executives say.
“The future rate of decline in output from producing oilfields as they mature is the single most important determinant of the amount of new capacity that will need to be built globally to meet demand,” the IEA says.
The watchdog warned that the world needed to make a “significant increase in future investments just to maintain the current level of production”.
The battle to replace mature oilfields’ output could even offset the decline in demand growth, which has given the industry – already struggling to find enough supply to meet needs, especially from China – a reprieve in the past few months.
The IEA predicted in its draft report, due to be published next month, that demand would be damped, “reflecting the impact of much higher oil prices and slightly slower economic growth”.
It expects oil consumption in 2030 to reach 106.4m barrels a day, down from last year’s forecast of 116.3m b/d.
The projections could yet be revised lower because the draft report was written a month ago, before the global financial crisis deepened after the collapse of Lehman Brothers.
All the increase in oil demand until 2030 comes from emerging countries, while consumption in developed countries declines.
As a result, the share of rich countries in global demand will drop from last year’s 59 per cent to less than half of the total in 2030.
This is the clearest indication yet that the focus of the industry on the demand – not just the supply – side is moving away from the US, Europe and Japan, towards emerging nations.
Short term (6 month) bearishness ($45-$50 Cal-09 crude) is due to an economic recession we probably have not seen the worst of and strengthening USD pushes down the trade deficit, lifting the dollar, and putting pressure on dollar-denominated CL.
Further reason for bearishness: As the price of oil drops, the incentive to cheat on the quote increeases...especially among countries like Iran and Venezuela, whose economies have been hurt by sanctions, bad policies, or both. As projects spurred by $100+ oil come online, and as Iraq continues to get more settled, supply will increase.
Many people would argue that those expensive projects will not, in fact, get built in this price environment; I'd argue 1). much of the production has already been hedged; and 2). even though sunk costs are irrelevant, Management is usually loath to abandon a project halfway through..both because of mob-demob costs and because it's embarrassing...you'd shoot credibility with the analysts and BOD, hampering both your future access to the capital markets and your likelihood of keeping your job, respectively.
I've spent 10 years in capital-intensive commodity businesses, and price almost always gets driven down to marginal cost. When I look at other capital-intensive commodity businesses (airlines), I see the same thing happening.
http://www.ft.com/cms/s/0/e5e78778-a53f-11dd-b4f5-000077b07658.html?nclick_check=1
World will struggle to meet oil demand
By Carola Hoyos and Javier Blas in London
Published: October 28 2008 23:32 Last updated: October 28 2008 23:32
Output from the world’s oilfields is declining faster than previously thought, the first authoritative public study of the biggest fields shows.
Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent, the International Energy Agency says in its annual report, the World Energy Outlook, a draft of which has been obtained by the Financial Times.
The findings suggest the world will struggle to produce enough oil to make up for steep declines in existing fields, such as those in the North Sea, Russia and Alaska, and meet long-term demand. The effort will become even more acute as prices fall and investment decisions are delayed.
The IEA, the oil watchdog, forecasts that China, India and other developing countries’ demand will require investments of $360bn each year until 2030.
The agency says even with investment, the annual rate of output decline is 6.4 per cent.
The decline will not necessarily be felt in the next few years because demand is slowing down, but with the expected slowdown in investment the eventual effect will be magnified, oil executives say.
“The future rate of decline in output from producing oilfields as they mature is the single most important determinant of the amount of new capacity that will need to be built globally to meet demand,” the IEA says.
The watchdog warned that the world needed to make a “significant increase in future investments just to maintain the current level of production”.
The battle to replace mature oilfields’ output could even offset the decline in demand growth, which has given the industry – already struggling to find enough supply to meet needs, especially from China – a reprieve in the past few months.
The IEA predicted in its draft report, due to be published next month, that demand would be damped, “reflecting the impact of much higher oil prices and slightly slower economic growth”.
It expects oil consumption in 2030 to reach 106.4m barrels a day, down from last year’s forecast of 116.3m b/d.
The projections could yet be revised lower because the draft report was written a month ago, before the global financial crisis deepened after the collapse of Lehman Brothers.
All the increase in oil demand until 2030 comes from emerging countries, while consumption in developed countries declines.
As a result, the share of rich countries in global demand will drop from last year’s 59 per cent to less than half of the total in 2030.
This is the clearest indication yet that the focus of the industry on the demand – not just the supply – side is moving away from the US, Europe and Japan, towards emerging nations.
Wednesday, October 29, 2008
Slump Slows Carbon Efforts
Ken Silverstein at "Energybiz Insider" notes that "The economic downturn is pulling under the sweeping attempt in this country to cap carbon emissions. Until an uptick occurs, the focus will be altered and now concentrate on making gradual adjustments to limit greenhouse gas emissions. The global liquidity crisis is not just grabbing headlines. It's also causing a shift to the new paradigm. With credit tight, utilities and other industries are trying to preserve their cash and reduce their debt. It's now more about survival and less about cutting carbon emissions."
Read the whole thing.
http://www.energycentral.com/site/newsletters/ebi.cfm?id=587
Silverstein has always drunk more of the "Global Warming" Kool-Aid than I have. Though I disagree with his perception of the dangers posed by AGW, his analysis is thoughtful and he does illluminate the following thoughts:
--Environmentalism is a luxury good (people consume more as they prosper)
--Combatting AGW poses significant costs (1.1% of world GDP is the estimate provided by commentators who favor it..the true figure is certainly much higher) that cannot be borne in the current interest rate environment
--It is inherently a hard sell to require people to pay more for energy today for some undefined benefit in the future. People seem to understand instinctively that combatting AGW iwll reduce their standard of living.
Read the whole thing.
http://www.energycentral.com/site/newsletters/ebi.cfm?id=587
Silverstein has always drunk more of the "Global Warming" Kool-Aid than I have. Though I disagree with his perception of the dangers posed by AGW, his analysis is thoughtful and he does illluminate the following thoughts:
--Environmentalism is a luxury good (people consume more as they prosper)
--Combatting AGW poses significant costs (1.1% of world GDP is the estimate provided by commentators who favor it..the true figure is certainly much higher) that cannot be borne in the current interest rate environment
--It is inherently a hard sell to require people to pay more for energy today for some undefined benefit in the future. People seem to understand instinctively that combatting AGW iwll reduce their standard of living.
TD Securities expects a cold winter
"MDA EarthSat, a prominent weather forecaster concentrated on the energy industry, is forecasting that the 2008-09 winter will be the coldest in 5 years with average temperatures coming in 1.5 percent colder than last year and 0.3 percent warmer than the 30-year normal from 1971-2000. The prediction is based upon a weak La Niña that should be forming over the Tropical Pacific Ocean which has historically caused cooler winters across North America. "
I agree with this for the following reasons:
First Point: The JPL Laboratory reporst that 2008 has marked a shift in the Pacific Decadal Oscillation to a negative phase..resulting in a stronger than usual La Nina. http://www.jpl.nasa.gov/news/news.cfm?release=2008-066
Key Graf from the article: "The image also shows that this La Niña is occurring within the context of a larger climate event, the early stages of a cool phase of the basin-wide Pacific Decadal Oscillation. The Pacific Decadal Oscillation is a long-term fluctuation of the Pacific Ocean that waxes and wanes between cool and warm phases approximately every five to 20 years. In the cool phase, higher than normal sea-surface heights caused by warm water form a horseshoe pattern that connects the north, west and southern Pacific, with cool water in the middle. During most of the 1980s and 1990s, the Pacific was locked in the oscillation's warm phase, during which these warm and cool regions are reversed. For an explanation of the Pacific Decadal Oscillation and its present state, see: http://jisao.washington.edu/pdo/ and http://www.esr.org/pdo_index.html"
Second Point: Although the current sunspot cycle (Cycle 24) was expected to start in early 2008, the level of solar activity thus far has been minimal. http://www.dailytech.com/article.aspx?newsid=12823 "The sun has reached a milestone not seen for nearly 100 years: an entire month has passed without a single visible sunspot being noted. " As sunspot activity is correlated with solar output (See "Maunder Minimum" in Wiki), fewer sunspots would suggest a colder winter.
Just what the doctor ordered...and just in time. I hope that a series of colder winters will convince people that "Global Warming" is just another hoax, designed to convince the people to give more control over the economy to governments.
I agree with this for the following reasons:
First Point: The JPL Laboratory reporst that 2008 has marked a shift in the Pacific Decadal Oscillation to a negative phase..resulting in a stronger than usual La Nina. http://www.jpl.nasa.gov/news/news.cfm?release=2008-066
Key Graf from the article: "The image also shows that this La Niña is occurring within the context of a larger climate event, the early stages of a cool phase of the basin-wide Pacific Decadal Oscillation. The Pacific Decadal Oscillation is a long-term fluctuation of the Pacific Ocean that waxes and wanes between cool and warm phases approximately every five to 20 years. In the cool phase, higher than normal sea-surface heights caused by warm water form a horseshoe pattern that connects the north, west and southern Pacific, with cool water in the middle. During most of the 1980s and 1990s, the Pacific was locked in the oscillation's warm phase, during which these warm and cool regions are reversed. For an explanation of the Pacific Decadal Oscillation and its present state, see: http://jisao.washington.edu/pdo/ and http://www.esr.org/pdo_index.html"
Second Point: Although the current sunspot cycle (Cycle 24) was expected to start in early 2008, the level of solar activity thus far has been minimal. http://www.dailytech.com/article.aspx?newsid=12823 "The sun has reached a milestone not seen for nearly 100 years: an entire month has passed without a single visible sunspot being noted. " As sunspot activity is correlated with solar output (See "Maunder Minimum" in Wiki), fewer sunspots would suggest a colder winter.
Just what the doctor ordered...and just in time. I hope that a series of colder winters will convince people that "Global Warming" is just another hoax, designed to convince the people to give more control over the economy to governments.
Credit Crunch affects high yield M&A
The guys at Tudor Pickering Holt have this to say:
"E&P M&A stumbling block (S&P1500 E&P $366) – Just another factor we’re thinking about. Standard high yield 101% change of control provisions make takeouts/mergers-of-equals more difficult (not impossible) without credit market availability. If refinancing frozen/difficult, where does acquirer get the bucks to buy in aquiree's debt at 101%? Says M&A game may default to big companies buying small ones or debt holders may face tough negotiations."
I think this is on point. Traditionally, E&P companies tend to have lower credit ratings, all else being equal, than industrial companies. This is due to the double whammy of higher capex requirements for a wasting asset company and commodity price risk.
--Flight to quality - Basis has blown out...compare to small/midcap E&P's
--FAS 157 implications - no goodwill, destruction of Shareholder's Equity as debt is MTM. See Sept 08 "CFO" magazine.
--Deep discounts for debt
--arbitrage..have asset values dropped along with bond prices? What does this say about "Going Concern" value?
"E&P M&A stumbling block (S&P1500 E&P $366) – Just another factor we’re thinking about. Standard high yield 101% change of control provisions make takeouts/mergers-of-equals more difficult (not impossible) without credit market availability. If refinancing frozen/difficult, where does acquirer get the bucks to buy in aquiree's debt at 101%? Says M&A game may default to big companies buying small ones or debt holders may face tough negotiations."
I think this is on point. Traditionally, E&P companies tend to have lower credit ratings, all else being equal, than industrial companies. This is due to the double whammy of higher capex requirements for a wasting asset company and commodity price risk.
--Flight to quality - Basis has blown out...compare to small/midcap E&P's
--FAS 157 implications - no goodwill, destruction of Shareholder's Equity as debt is MTM. See Sept 08 "CFO" magazine.
--Deep discounts for debt
--arbitrage..have asset values dropped along with bond prices? What does this say about "Going Concern" value?
Venezuela is Doomed....
It’s well known that PDVSA’s oil production is down 25% in the past 10 years (since Chavez took over). It’s well known that Chavez fired most of his competent engineers after the failed coup and replaced them with loyal party hacks. It’s well known that capex has suffered as Chavez has transferred revenue toward social programs.
The article says that most people don’t realize that Chavez gives away much of his oil. He buys friends by giving away 1.2 MMbopd to members of the “Petrocaribe” club He sells the rest to the US for market price. The “Petrocaribe” nations pay 30% of the market price within 90 days and the balance over the next 25 years…it does not take an engineer to figure out that those countries will likely default on that debt as soon as it’s politically desirable. By my calculation, in a $65/bbl environment, Chavez gets about $42.25/bbl…the actual number is probably less because his Orinoco crude is heavy and sour and trades at a discount to WTI.
http://www.telegraph.co.uk/news/worldnews/southamerica/venezuela/3183417/Venezuelas-oil-output-slumps-under-Hugo-Chavez.html
Key graf:
“As production falls, the sales to the US become more important," said Pietro Donatello, an oil analyst from Latin Petroleum in the capital, Caracas. "Only the US is paying the full amount for Venezuelan oil and in cash, the rest are in some kind of barter agreements."
The state oil company, PDVSA, produced 3.2 million barrels per day in 1998, the year before Mr Chavez won the presidency. After a decade of rising corruption and inefficiency, daily output has now fallen to 2.4 million barrels, according to OPEC figures. About half of this oil is now delivered at a discount to Mr Chavez's friends around Latin America. The 18 nations in his "Petrocaribe" club, founded in 2005, pay Venezuela only 30 per cent of the market price within 90 days, with rest in instalments spread over 25 years.”
The article says that most people don’t realize that Chavez gives away much of his oil. He buys friends by giving away 1.2 MMbopd to members of the “Petrocaribe” club He sells the rest to the US for market price. The “Petrocaribe” nations pay 30% of the market price within 90 days and the balance over the next 25 years…it does not take an engineer to figure out that those countries will likely default on that debt as soon as it’s politically desirable. By my calculation, in a $65/bbl environment, Chavez gets about $42.25/bbl…the actual number is probably less because his Orinoco crude is heavy and sour and trades at a discount to WTI.
http://www.telegraph.co.uk/news/worldnews/southamerica/venezuela/3183417/Venezuelas-oil-output-slumps-under-Hugo-Chavez.html
Key graf:
“As production falls, the sales to the US become more important," said Pietro Donatello, an oil analyst from Latin Petroleum in the capital, Caracas. "Only the US is paying the full amount for Venezuelan oil and in cash, the rest are in some kind of barter agreements."
The state oil company, PDVSA, produced 3.2 million barrels per day in 1998, the year before Mr Chavez won the presidency. After a decade of rising corruption and inefficiency, daily output has now fallen to 2.4 million barrels, according to OPEC figures. About half of this oil is now delivered at a discount to Mr Chavez's friends around Latin America. The 18 nations in his "Petrocaribe" club, founded in 2005, pay Venezuela only 30 per cent of the market price within 90 days, with rest in instalments spread over 25 years.”
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