China Shale Gas... The New Frontier

China is really pushing its shale gas resource opportunity. And this will likely be another nail in the coffin for renewables in the country.

The NDRC (http://en.ndrc.gov.cn/) has unveiled its strategic plan to explore and develop China's huge shale resources. The plan sets a very ambitious growth and drilling plan, that will most surely find itself challenged by the lack of infrastructure and the technical issues, but nothing that will not be surmounted with a huge amount of international oil companies' money and government incentives. What shale gas in China will likely do is have the same devastating effect  on coal and renewable energy growth (as we discussed here in "Has Cheap Gas Killed The Renewable Star?") as abundant and cheap gas is likely to reduce coal demand and push back the subsidies to wind or solar.

China has the world's largest shale gas reserves with the potential resources of 134.42TCM and recoverable reserve of 25TCM (exclude Tibet), according to the 12th Five-Year Plan for shale gas. This is mainly distributed in five regions: the south areas, northwest, north, northeast, and Qinghai-Tibet.

Inland shale gas covers an area of 20,000-25,000 sq km, mainly in the Junggar, Tuha, Bohai Bay, Ordos, and Qaidam basins. Sea-land transition shale gas covers an area of 15,000-20,000 sq km in northern China. Marine shale gas underlie 60,000-90,000 sq km in southern China, north China, and the Tarim basin. The south and the northwest have the most favourable reservoir conditions and are the areas of main concentration.

China's production targets are 6.5BCM/yr by 2015 and  up to100BCM/yr by 2020. The country's drilling target aims to 200 wells by 2013. 

With Chinese gas demand expected by NDRC to reach 260BCM/year, shale gas would not make a massive impact on the country's imports. Last year, China imported about 12m tonnes of LNG, equivalent to approx. 4.9% of global traded LNG and current estimates suggest that the country will import approx. 50m tonnes per annum by 2015.

However, the demand growth estimates of NDRC look optimistic, as always, and I would expect the figure to stay close to the +2-4% pa level. Even in that case, shale gas would not make a massive impact on imports assuming the 2020 targets as realistic, and in any case, I also find that shale gas production growth targets seem very challenging .

As JPMorgan comments:

Lack of domestic technology for horizontal multi-stage hydraulic fracturing, deep gas deposits with complex geology, and high human population density, contributing to the difficulty of drilling for shale gas and lower economic returns. Significant capital investment and longer lead time to commercial production may result in slower capital recovery, while government incentives are not yet in place. Reserves are in central and west China, far from demand and more pipeline capacity and coverage is needed.

PetroChina so far has completed 11 appraisal wells in four blocks and four discoveries had commercial flow rates, while Sinopec completed five appraisal wells with two having commercial flow rates in three blocks and the most exposed to the resource growth vs capex, CNOOC, started preliminary work related to exploration, while Shaanxi provincial-owned Yanchang Petroleum discovered shale gas in three wells in Yan'an in the province. Agreements for future cooperation have been signed with companies including Statoil, ConocoPhillips, BP, Chevron, and ExxonMobil.

Shell signed a production-sharing contract with China National Petroleum Corp. to explore for and produce shale gas in China. The area covered under the contract is about 3,500 square kilometers in the Fushun-Yongchuan block in the Sichuan Basin. Shell is looking to jointly develop more shale-gas resources with CNPC.

The Sichuan Basin has a well-developed network of natural gas pipelines. In 2008, Chevron assumed operation and 49% ownership (CNPC 51%) of the 1,969-km2 Chuandongbei block in the Sichuan Basin. Shell announced it and CNPC had jointly submitted a 30-year PSC application to the government, targeting the 4,000km2 in the Jinqiu region and this block is now under exploration for shale gas. Also, EOG Resources holds a gas PSC in the Sichuan Basin that may also be prospective for shale gas.

To achieve the 2020 targets, 1,200-1,500 wells will be needed. The cost of wells using domestic technology ranges from US$3.5m for a vertical well to US$7-8m for a horizontal well involving multi-stage fracturing. Just to compare, a horizontal well costs US$3.5-3.8m in the US.

Interestingly, China is also pushing ahead with its support for natural gas vehicles. Westport Innovations announced the introduction of China's first natural gas engine featuring Westport high pressure direct injection (HPDI) technology. Based on the Weichai Power WP12 engine platform, the 12-litre engine features Westport HPDI technology which maintains the power and performance of the base diesel engine, but allows the replacement of up to 95% of diesel fuel with cleaner burning, less expensive natural gas.

How to play this?

. Equipment manufacturers and service companies, particularly the large US names who will benefit from the massive capex requirements to develop these assets.

. Resource plays: Careful as capex likely to eat away returns for a long time.

Thanks: NDRC, JPMorgan, NSBO

Attack Iran? Is It A Good Idea?

The picture above shows the recent move of warfare ships in the region (via zerohedge).

According to Israel's NRG and CNBC, Netanyahu has achieved a majority (8 over 6) supporting an Iran attack. NRG also notes that at this point Israel has decided to not wait until the US elections in November before proceeding with an attack.

I believe Israel is trying to push the US administration and Europe to be more forceful and strong in its sanctions against Iran, but as my friend David Simantob mentioned in my Facebook account:  "I think what we are dealing with is a lot of noise from Israel to push Obama and others to act to isolate Iran. Remember nobody did anything until Israel started threatening to attack. Now we have a EU embargo, Swift (the international financial transaction system) kicking Iran out and soon we may even have an embargo on Iranian imports of refined petroleum. I don't think Israel wants to attack Iran and I don't think any attack by Israel will sufficiently delay a nuclear weapons program in that country. What Israel wants and what will work is strict sanctions combined with efforts for regime change in Iran. Iran ruled by sane people like a western democratic movement would not be a threat even if it did have nuclear weapons".

I would like to highlight a few issues:

a) Iran cannot shut down the strait of Ormuz easily. It would be like shooting itself in the foot as the country would be undersupplied and unable to export, but it would also mean a declaration of war against Oman, as Ormuz is in its waters too, which is equivalent to an attack on Saudi Arabia and the Arab League.

b) The strait of Ormuz only moves 11% of world oil output now, so the impact on crude suppl would be very limited before the alternative route (the horn of Africa) is used by tankers.

c) Iran total oil exports average 2.15mbpd, of which virtually nothing goes to the US, 10% go to Italy, c18% to the rest of Europe, while most Iran's exports go to Asia (China, Japan, India and South Korea in particular). Spain imports c196kbpd from Iran. France (58kbpd) and Germany (15kbpd) can play hardball with Iran and not bear any real cost. So the EU embargo is not a real issue. The IEA estimates 2011 Iranian crude imports into Europe at 792k bopd (Italy 185k, Spain 196k, Belgium 36k, France 58k, Greece 103k, Germany 15k, Holland 15k).

d) So far in 2012, Saudi Arabia ouput increase has more than compensated the drop of Iran supplies. To the point that OPECsupply is at record highs, while OECD inventories, as we have explained here ( http://energyandmoney.blogspot.co.uk/2012/03/us-talks-of-releasing-strategic.html#) remain at very high levels, so it seems the world has been quietly preparing for a disruption of Iran supplies at least, whether there is conflict or not.

e) Israel is not defenseless, as it has more than two hundred atom bombs that can destroy Iran's facilities. The issue is that Israel does not want to be bullied and pushed to attack by Iran's threats and promises to "wipe Israel from the face of the Earth", and then "blamed" for the deaths of innocent civilians. Iran has carefully placed its nuclear facilities as close to population centres precisely to prevent such a situation. But Israel cannot live easily with the idea of a nuclear-powered country that promotes forums to debunk "the myth of the Holocaust", and that vows to destroy the jewish country.

Interestingly enough, all the problem would disappear with a moderate Iran and if Ahmadinejad stopped promising the destruction of the jews as a core part of his political agenda.

The problem of an attack on Iran is that it would be extremely costly, around $100m per day, a logistical nightmare, as Azerbaijan will not allow other countries to use its territory to launch an attack on Iran (according to Defence Minister Safar Abiyev) and probably highly ineffective as it would probably cause a popularity surge for Ahmadinejad, which is what we have seen so many times in the past. Former Bush administration National Security Advisor Stephen J. Hadley has already warned against an attack on the Islamic Republic yesterday. “If something needs to be done, it is not military action,” said Hadley. “There’s a wide spectrum between sheer diplomacy and military action.” 

On the other side of the analysis, some think an attack on Iran is the "least bad option", as this article highlights  http://www.foreignaffairs.com/articles/136917/matthew-kroenig/time-to-attack-iran . My concerns remain both on the risk of a surge in support for the Iran regime among muslim countries and also on the threat to the civilian population of Israel, and Iran.

If the issue is to halt the Iran nuclear programme, I believe the way is to impose really strict sanctions as well as promoting a true regime change at the same time, using the threat of an attack to its nuclear facilities as a threat, sort fo a multiple diplomatic attack, but I must say that the proposals I have read so far (here) don't seem too convincing.

In this article (http://www.haaretz.com/print-edition/opinion/sanctions-alone-won-t-stop-iran-s-nuclear-work-1.265981) the journalist warns against the resignation to an inevitable nuclear Iran: 

..The Chinese are still opposed to sanctions and the Iranians are enriching their uranium to a higher level. Obama's response is that he has had it and the time has come for sanctions and immediately - which means within a few weeks, perhaps by the end of March. In March, however, Gabon will assume the presidency of the Security Council, and it is not certain that Iran is at the top of its agenda. And there are still the problems with the Chinese.
And if we assume that ultimately there will be sanctions, so what? The involvement with sanctions, who's for and who's against, when, why and to what extent, deflects from the primary problem - the absence of an American strategy for tough negotiations with Iran. Even more serious, however, is that there are worrying signs that the Obama administration is beginning to resign itself not only to the fact that Iran will continue to enrich uranium, but also to recognition that the Islamic republic could ultimately build a nuclear bomb.

Credit Suisse had an interesting feedback from Dr Mohammed ElBaradei, the recent ex-head of the International Atomic Energy Agency (IAEA - ie the nuclear weapon inspectors) and Noble Peace Prize awardee. His view is that:

. There is extremely low probability of an Israeli attack on Iran.

. Iran is still a distance from actually making a nuclear weapon even if they have the technology, as, at the very least, they do not have enough nuclear material and obtaining it will alert the inspectors.

. He feels the US and Iran 'probably' will negotiate directly in Obama's, potential, second term. The deal would need to allow the Iranian leadership to claim retention of the technology to its population but privately stop the reality of a weapon.

. Iran has the ability to be extremely disruptive if/when the sanctions bite in Iran, Saudi border, Afghanistan, Palestine, Syria and the UAE - none of the western powers want this.

. China and Russia do not believe that a military or sanction approach will work and publicly and privately will rebuke them.

Let's hope there is no attack or any relevant conflict and that Iran allows inspectors to its nuclear facilities while we see a transition to a less aggressive government in the beautiful Persian country.

More on Africa... Things Just Keep Getting Better

This is a continuation and detail of my previous post "Africa, the most promising frontier area" http://energyandmoney.blogspot.co.uk/2010/12/africa-most-promising-frontier-area-for.html)

Sub-Saharan Africa has grown to represent a material reserves base, contributing 5% of total world proved oil reserves in 2010. Most of those reserves are located in Nigeria and Angola. Africa as a whole represented 10% of world total.

Reserves growth in sub-Saharan Africa has been faster than in the rest of the world in the past 30 years and has accelerated in the past 10 years while the rest of the world slowed down.

Sub-Saharan Africa outside of Angola and Nigeria was the world’s fastest growing reserves base in the past 10 and 30 years.

While representing 5% of total world proved oil reserves is material in itself, in contrast with some other regions of the world, most of the reserves in sub-Saharan Africa, as well as the opportunities for reserves additions in the future, are accessible to international investors.

. Apart from Oman, Yemen and Syria, most of the Middle East is closed to outside investment. Iraq is only slowly opening up to international explorers in the Kurdistan region and also to a limited extent in the south of the country;

. The FSU is open to international investment but in practice the best opportunities end up in the hands of powerful local oil industry players;

. In Latin America, Venezuela and Mexico have long been closed to international investors.

Only about a quarter of world proved oil reserves can be classified as accessible to international investors and that sub-Saharan Africa represents 20% of that accessible base.

The picture is similar for gas with Africa as a whole representing 25% of accessible world proved gas reserves, which are about a third of total world proved gas reserves.

Reserves evolution

In 2010, proved reserves in sub-Saharan Africa were 69Bbbl of oil and 228TCF (38Bboe) of gas and represented 52% and 44% of African oil and gas proved reserves respectively, up from 37% and 25% in 1980.

Africa as a whole with proved reserves of 132Bbbl of oil and 520TCF (86Bboe) of gas represented respectively 10% and 8% of world oil and gas proved reserves. Reserves life in Africa was 37 years for oil and 74 years for gas versus world reserves life of 47 and 63 years, respectively.

While oil reserves are diversified across the continent, proved gas reserves are still largely dominated by Nigeria, although potential future gas producing provinces are being discovered elsewhere, e.g. East Africa. The emergence of export and local markets for gas in Africa should provide incentives for gas exploration and increase further proved African gas reserves in coming years.

Shale gas

The US Energy Information Administration estimates that the technically recoverable shale gas resources contained in the Karoo formation in South Africa is 485TCF. However, given evacuation issues, demand being poor and low interest given the high reserves of conventional gas, shale is not an issue for now in Africa.

The South African Department of Mineral Resources announced in May 2011 a moratorium on applications for rights to explore for shale gas in the Karoo until it has formulated adequate policy, a process expected to take several months. No new applications will be accepted and existing applications will not be finalised until the Department has conducted the feasibility study.

Companies involved in exploring for natural gas in South Africa include, Shell, Sasol, Falcon Oil & Gas and Bundu Oil and Gas

Production

The growth of proved oil and gas reserves in sub-Saharan Africa in the past 30 years resulted in the growing importance of Africa as a major world hydrocarbon producer. Africa has consistently gained market share of world hydrocarbon supply to reach 12% of world oil production and 7% of world gas production in 2010, with annual production of 10.1MMbbl/d of oil and 1.2MMboe/d of gas.

Oil production in sub-Saharan Africa reached 5.8MMbbl/d and gas production 0.3MMboe/d in 2010 with oil production dominated by Angola and Nigeria.

M&A

Having realised the importance of Africa as a long-term hydrocarbon producer and in order to diversify their energy supply mix, the US and China are importing an increasing proportion of oil from Africa.

Currently 25% of US oil imports and 30% of Chinese oil imports are sourced from Africa, and those proportions are expected to increase in the future.

Petronas, from Malaysia, was the first Asian company into Africa with its purchase of 30% of Engen Ltd, a South African firm, in 1996. The reason for this acquisition was to assist Engen in expanding marketing in South Africa, sub-Saharan Africa and along the Indian Ocean rim. Engen became a fully owned subsidiary of Petronas in 1998. Also Energy Africa was owned 56.5% by Petronas through Engen when it was sold to Tullow in 2004.

In more recent years, China has been the most aggressive in proactively becoming operators of African oil and gas production by acquiring existing operators and/or participating in exploration/production activities, using a number of different vehicles.

In 2009 Addax Petroleum was acquired by Sinopec, a Chinese petrochemical major, for US$7.2bn while CNOOC bought in the Uganda oil development project together with Tullow and Total.

CNOOC was also interested in acquiring Kosmos‟ interest in the Jubilee field offshore Ghana in 2010.

Petrobras also acquired in Namibia and Gabon while Indian companies, led by public sector majors, have been also actively looking for upstream oil and gas assets in Africa, so far mainly as minority interest holders in upstream licences, e.g. in Mozambique with Anadarko.

In 2010 the Korean National Oil Company (KNOC) bought Dana Petroleum which had assets in Egypt and offshore Guinea, together with Hyperdynamics, a small US independent.

So far in 2009-2011 M&A activity has surpassed $58bn.

Why Africa

. No OPEC exposure, so no risk to volume cuts.

. Supportive regulatory and managed legal framework.

. Strong business-driven mentality.

. From a costs perspective, finding and development costs across Africa are inline with world average of some US$15 per barrel of oil equivalent (boe), but lifting costs at US$4-9 per boe are lower than world average of some US$11 per boe

East Africa

East Africa could prove to be one of the most prospective regions globally.

By applying old ideas to new basins, Tullow/Heritage and Anadarko/BG, respectively, opened the multi billion barrel Lake Albert Rift system, Uganda and the Rovuma Basin, Mozambique/Tanzania.

Tullow and Anadarko’s successes have coincided with a push by many of the NOCs/IOCs to capture frontier acreage around the world as they seek to fill their exploration portfolio. In addition to the several pure-play East African E&Ps, current IOC/NOC acreage holders include Anadarko, BG, CNOOC, Eni, Exxon, Shell, Petrobras, Petronas and Statoil.

According to Wood Mackenzie in 2010, 3.5bn barrels of oil equivalent (+33%y/y) were discovered in Sub-Saharan Africa alone.

The largest contributions were Anadarko’s gas discoveries in Mozambique: Windjammer, Barquentine, Lagosta and Turbaro with the Rovuma basin accounting for half of all discoveries.

Anadarko’s find is large. Following the recent results APC is now saying that the Windjammer, Barquentine, Lagosta and Camarão complex now holds at least 10tcf, while Cove has been saying 12tcf (base) for a long time now. The companies are looking for an FID by end of 2013. If reserves are 12tcf a 2 train LNG development would be feasible and commercial.

Ophir provided higher-than-expected gas resources in Jodari in Tanzania (3.4tcf vs pre-drill estimate of 2.2tcf) de-risking concerns about the pace of gas discoveries needed for an LNG development.

According to Afren “East Africa holds more than 31 billion barrels of oil, , three times as much as Brazil’s Tupi field”.

In addition to the 1bnboe already discovered within Uganda Tullow recently announced that it estimates that an additional 2.5bnboe of resource exists within the Lake Albert Basin alone.

Moreover, a recently conducted independent report estimated that c.2.2bnboe of prospective resource existed in Block 10BA, Kenya, alone with an upside case of 4.4bnboe.

Furthermore, according to BP, between 1989 and 2009, Sub-Saharan Africa's oil reserves more than doubled to 130 billion barrels.

East Africa deepwater

Big expectations in oil and gas from deepwater Mozambique and Tanzania after Anadarko’s Windjammer gas discovery confirmed the Rovuma basin as an emerging gas province.

With gas in nearby markets selling for $2-3/mcf, the lack of nearby infrastructure means that threshold commercial volumes will likely be high.

Much will be dependent on recovery rates per well (which can range from 50 bcf/d to 450 bcf/d offshore) but two subsequent gas finds (Barquentine and Lagosta) have already led to talk of there being enough gas to underpin an LNG development.

An even bigger prize is finding commercial oil after the Ironclad well penetrated a 38 metre column of oil and gas-saturated sands in one of two fan lobes of cretaceous sediments.

The ultimate prize would be the opening up of not only the Rovuma basin but also the other eight basins contained in the Mozambique channel which runs from Southern Tanzania to Madagascar.

Companies: (Mozambique) Anadarko, Tullow, Mitsui, BPRL, Videocon, Cove Energy, Artumas,

Eni, Statoil (Tanzania) Exxon, Statoil, BG, Tullow, Dominion, Aminex, Beach Energy, Orca

Exploration, Artumas, Maurel and Prom.

Guyana basin 

The Equatorial Atlantic Margin play has its origins when Africa and South America drifted apart. Following success in Ghana and subsequently Sierra Leone (with the Venus well), the industry is now turning its attention across the Atlantic to the stratigraphic potential of the Guyana basin, which stretches across Guyana, Suriname and French Guiana. The main challenge is to define prospective traps along the migration path from mature source rocks. Much of the multi billion barrel potential is thought to exist in stratigraphic traps in tertiary turbidite sandstones and deeper cretaceous fan systems similar to the Jubilee play.

In French Guyana, Tullow found one of their biggest successes (Tullow operator, Total and Shell also partners) with resources (P10) of 700mb.

Companies: Exxon, Shell, Total, Repsol, Tullow, Noble Energy, Murphy Oil, Inpex, Petro-

Hunt, CGX Energy, Staatsolie (state energy company of Suriname)

West Africa

Many companies think that West Africa’s pre-salt geology mirrors that of Brazil.

The theory here is that the pre-rift geology below the sealing thick salt layer remained the same even after Gondwana separated to form Africa and South America. 3D basin modelling and geochemistry suggests a close match between West African and South Amercian margin basins in terms of pre-salt depositional sequences. This holds out the possibility of large pre-salt oil deposits in Angola, Namibia, Gabon and Congo.

Possibly the biggest proponent of this is Marcio Mello, CEO of HRT, who thinks that giant deposits in the pre-salt in Angola is “a certainty, not a possibility” with objectives in the Upper Cretaceous turbidite sandstones and syn-rift carbonates and sandstones identified that are analogous to the Tupi and Jupiter fields in Brazil. Sonangol and Petrobras recently started a joint preliminary study into the Angolan pre-salt and Sonangol has stated that it intends to drill one or two pre-salt wells by 2012. Petrobras and Cobalt hold African pre-salt acreage in Angola and Gabon whilst Repsol and Chevron are showing a strong interest through public statements they have made. It is early days yet but it does look like the risk capital will come.

In Namibia the biggest success so far has been the Kudu gas field (1.3tcf of proven reserves – Tullow, Gazprom main partners). However, the development is still undecided. 

Companies: Petrobras, Sonangol, Cobalt, Chevron

Ghana

Tullow was responsible for the first major oil discovery in Ghana back in July 2007 with the Mahogany-1 well. The field was subsequently re-named Jubilee in honour of the 50th anniversary of the country’s independence from Great Britain.

Jubilee is now one of the most succesful and largest discoveries in the oil industry, holding 700 million barrels of recoverable resources with upside, according to Goldman Sachs, of 1.1 billion barrels.

First oil was produced from Jubilee just 40 months after first discovery – a world record – in late November 2010. A number of further discoveries have been made since then (including Tweneboa, Enyenra, Teak, Akasa and Mahogany East).

Jubilee is now producing at 85kbpd with ramp up to 120kbpd targeted for year end.

Field operations:

Tullow’s field operations are based in Takoradi, about half an hour’s flight west of Accra. The site was formerly an airforce base, which Tullow now leases.

Several oilfield service companies now have bases in Takoradi. I met with employees of FMC who are supplying the Christmas trees.

Tullow managers and suppliers were both in agreement about the ease of doing business in Ghana. It has a strong rule of law, a straightforward customs process and Takoradi has modern and efficient ports (Tullow has dedicated berths).

Given this accommodating background, Ghana could in time become a primary hub in West Africa for the oilfield service companies. Right now there are no supply chain bottlenecks.

Local content:

Ghana currently has a local content law in front of parliament, but nothing has been agreed to date. There was some discussion of this being as high as 90% but it is anticipated that the end result will be somewhat less onerous and, like Brazil, will vary depending on the specific product/service. However it is Tullow’s aim to stay ahead of the game in this situation.

Tullow has around 250 employees in Ghana, around 85% of whom are Ghanaian. Tullow has a very active education programme for local employees, many of whom are sent to the UK and elsewhere for training.

Jubilee

Jubilee was designed to consist of three separate phases: phase 1, 1a and 1b. Phase 1 scope was an FPSO/subsea scheme planned to cost $3.15bn (the eventual cost was $3.35bn, or 6% over budget) with 17 wells including 9 production wells, 6 water and 2 gas injection wells. Plateau of 120kbpd was expected to last for around 2.5 years. Phase 1a adds a further 8 wells and is planned to extend production plateau to 2014/2015, while phase 1b will incorporate 10-20 wells and will either extend plateau or increase production.

The development plan for phase 1b depends to a large extent on the design for Mahogany East Area (Kosmos operated) as this could involve a  second FPSO rather than producing through the current Jubilee FPSO.

  

Jubilee production ramp up – aiming for 120kbpd

Current production at Jubilee is c85-90kbpd from 7 wells. The path to 120kbpd sees the following:

. One water injection and one gas injection well yet to be drilled, to be brought on by year end (adding c15kbpd);

. Production contribution from well J06, which has been completed and is waiting to be tied-back (adding c10kbpd+)

. Drilling, completion and tie-back of well J07 sidetrack (adding c10kbpd+). Tullow is pushing hard to achieve 120kpd. 

Upside potential yet to be tested

Jubilee reserves and resources range is 500-700-1100Mbbls. While it is too early to tell whether the company could begin producing into the P10 case (phases 1a and 1b yet to be sanctioned and only 10 months of production history), Tullow is confident around the P50 number of 700Mbbls, saying that if things were going to go badly with respect to the ramp up and production levels, thus impact resource estimates they would know very early on and so far haven’t seen anything to give cause for concern. Aspects relating to recovery factor, such as effectiveness of water and gas injection will be the determining factors in achieving the upside case.

Key Drilling Campaigns 2012

Tullow Africa Oil and Tullow's Ngamia well discovered oil in Kenya. The well encountered 20m of net oil pay in Tertiary sandstones and is a significant play opener in Block 10BB. Pre-drill estimate was 45mmboe P50 and 180mmboe P10. 2012 drilling campain includes some strong high-impact wells like Paon-1 (Cote d’Ivoire) and Jaguar-1 (Guyana) plus multi-well campaigns in French Guiana, Uganda and Ghana

Afren has one of the busiest drilling campaigns this year, with the company looking to drill 13 wells across Ghana, Kenya, Kurdistan and Nigeria in FY 2012. Afren is currently drilling three wells Nunya (Ghana), Ain Sifni (Kurdistan) and an appraisal well in JDZ. Nunya is the most exciting well in the company’s drilling campaign for 2012, with pre-drill P10 estimate of 325mmboe. Afren will also drill the Pai Pai well in Block 10A, Kenya in H2 2012.

Ophir: 3.4TCF recoverable at Jodari is the strongest possible start to the five well 2012 Tanzania drilling campaign. Beyond Jodari-1, Ophir expects to spud 8 other wells before end 2012. These include 3 wells in Block R, Equatorial Guinea where are rig (Eirik Raude) has been contracted – the first well is to spud in May 2012. As a reminder, these wells are to prove up gas to feed a second LNG train in Equatorial Guinea. Preparations are underway for a more ambitious 12 well campaign in 2013, contingent upon additional financing.

Chariot: Expect Chariot (25%) to participate in the Petrobras-operated Kabeljou-1 well, on the giant Nimrod structure. Management hopes to continue drilling in 2013, from Delta-1 on the Central Licences, to the Zamba-1 well on the Northern Licences, which would test a separate play fairway to the Tapir Trend.

Other names like Africa Oil (Kenya/Ethiopia), African Petroleum (Liberia/Sierra Leone/Ivory Coast/Senegal), Chariot (Namibia), CGX (Guyana), Camac (Kenya/Nigeria/Gambia), Rialto (Ivory Coast), Pan Continental (Kenya), FAR (Kenya/Jamaica/AGC/Senegal) have intensive drilling campaigns throughout 2012.

Summary

Strong oil prices and a desire to escape out of OPEC and Russia onerous contract types have led the oil Industry to explore further into Africa. The quality and volume of the discoveries has led African plays to become a hot topic in the market. I believe this will continues as a low cost, high quality resource is the most sought-after in the current oil world.

Afren, Tullow, Ophir, Soco, Cobalt, Chariot, Cove, Africa Oil, Hyperdynamics, Kosmos among others remain at the top of the list of the independents driving the Africa theme.

Sources:

. Tullow Oil

. Morgan Stanley

. Chariot Oil Gas

. SBG Securities

. Oriel
. Nomura

US Talks of releasing Strategic Reserves of Crude as Saudi Arabia Production Rockets... And Iran Plummets

Saudi crude oil production has surged to 10.0million bpd, the highest level in 30 years, this as Iranian production has plummeted. Thanks to Goldman Sachs Research. This surge shows that the comments about Saudi Arabia not being able to increase production were meritless and also shows that they add production when demand is there.

Yet OPEC production is at record highs:



..And Morgan Stanley warns of rapidly rising inventories...

From Oriel: Despite the latest Obama rhetoric against Iran, he can hardly afford a pre-election attack, unless he taps the SPR (but even that is unlikely to be enough): An ABC News-Washington Post poll found that 65 percent of respondents said they disapprove of the way has handled rising gasoline prices - just 26 percent approve of his work on the issue, his lowest rating in the poll. Most Americans say higher prices are already taking a toll on family finances, and nearly half say they think that prices will continue to rise, and stay high.A new CBS News-New York Times poll released Monday evening shows Obama’s approval rating falling to 41 percent, a drop that “may be partially attributable to rising gas prices.” Hardly a surprise then that White House released a new report on Monday seeking to highlight the progress his administration has made on energy ….. and then I see in a report that ‘US President Barack Obama and British Prime Minister David Cameron discussed the possibility of releasing emergency oil reserves during a meeting on Wednesday, two sources familiar with the talks have told Reuters. Obama raised the issue during a broad bilateral meeting at the White House, according to a UK official with knowledge of the discussion, in the first sign that Obama is starting to test global support for an effort to knock back near-record fuel prices. 

This could look in time as one of the dumbest decisions, in my opinion, since the day when the UK sold all its gold reserves between 1999 and 2002 at around $280/ounce... unless Obama sees a material economic recession ahead and then the new QE of the economy is artificially lowering the price of oil.

The U.S. strategic petroleum reserve is at almost historic highs again with c696 millions barrels, of which 262 millions barrels are sweet and 434 millions barrels are sour. The International Energy Agency reported in April 2011 that SPR in OECD Europe and OECD Pacific totaled 186 millions barrels and 391 millions barrels, respectively.



This would be the 4th time in the past 50 years that IEA has released strategic reserves. The last three times, the improvement in oil prices that they looked for resulted in three subsequent super-spikes. This, I fear, will be the outcome again soon. So the call on OPEC, even if demand continues to slow down, will increase to 30.1mbpd, making prices go higher.

We are in a US election year and the political dividend from appearing to push oil prices lower is very attractive (Bill Clinton knows it well, he did it too). President Obama wants to appear tough on oil and keep gasoline prices low in July. But a few weeks later we will be back where we started. Lower prices only accelerate demand anyway".

Here we go... another QE in disguise.

Energy Disinflation as a Source of Stimulus?

As usual, lowly utilities are ignored, all we read about is the oil price issue. The real news is the savings coming to US consumers on power and gas bills. Assuming the average household pays about $100-$150/month for power and $85/month for natural gas. In the future, those bills should fall to $70-$120/month for power, saving perhaps $30-$40/month, or $375-$450/yr; and $45/month for gas, saving another $400/yr, for a total of about $700-$900/year.

This is before the weak weather effect too, which will have lead to much lower usage levels than expected during 2012.

Compared to a $0.50/gallon rise in gasoline, on 500 gallons/yr (15,000 miles at 30mpg), that equates to $250/yr. In other words, gasoline could move from $3.00/gallon to $5.00/gallon with no net impact at home. RBOB gasoline contracts are at about $3.32 today, up $0.80 since early 2010. Maybe not a big deal in comparison; and for further comparison, the Bush income tax rebate checks (remember those?) were about the same 'net' amount, $400/household/yr.

Importantly, the bills for gas/power are delayed--hedges roll off, rate plans adjust slowly, etc, but it all comes through eventually.

The impact to businesses and industrials in the US, you can imagine, will be large and accretive to earnings.

US-PJM Monthly Peak electricity price futures.

US WTI 12- month oil price

The rate consumers pay is set by PUC's in regulated markets; and in some markets like Texas, retail rates are largely competitive (with some regulation of provision).

Also of importance: in a power or gas utility bill, roughly 50-60% of the total bill will be fixed cost charges--largely invested capital and its cost--and thus not be impacted by a decline in power/gas prices, that is embedded in our calculation on total savings.

While it is true that some states won't see as dramatic a decline as others and the timing will be constrained by rate mechanisms, as well as the timing of puchased power contracts/hedges rolling off, it would be incorrect to assume that these declines won't flow through customers bills, eventually they will. In some states, power charges are disaggregated and run on a trailing moving average that simply run through bills.

While its true that the % of gas used to generate electricity is around 25%, the price of natural gas sets the price of electricity in many if not most of the major US power markets during peak hours, and during most of the year (exceptions being soft shoulders in April and October), due to marginal cost dispatch economics. This is particularly true for California, Texas and Florida, three enormous markets.

Now, a fully regulated utility is likely to use 'average cost ratemaking', in which case the moderations of natural gas price will be less impactful than in those markets with competitive structure (like PJM). Nevertheless, you would still expect to see 5-10% declines in a total bill in those regions. Where gas is on the pricing margin--some of the larger markets--you expect larger and faster declines in customer bills, as soon as this year in fact. 

We are getting some odd reads on the US economy at the moment, which have obviously made their way into the bond, equity and gold markets now. In the past few days, there appears to be a rapidly accelerating acceptance of a better economic tightener, confirmed by the Fed yesterday, albeit begrudngingly.

Goldman went so far as to outright recommend shorting/selling 10-yr Treasuries this morning (which the market did!). That is relevant inasmuch as they have been the leading cheerleaders for QE and much lower growth and rates, throughout the post 2008 period, well below consensus. Ironically, Morgan Stanley has been the leading proponent of inflation and faster recovery since QE1, and obviously got that very wrong...and yet this morning, they are out pounding the table that from their perch, most of the blast is inventory re-stocking and they see Q1 coming in at a very-low 1.3-1.5% GDP growth, below consensus

I'd love to say MS is getting it wrong both times (post 2008), but there are two factors out there that are puzzling....

According to analysis on power demand data in the US over the past 4-5 months, adjusting for the unusually low weather, power demand is growing at .6% per annum, and using historic correlations between power demand and GDP, GDP is growing at 1.3% now Y/Y. Prior period was 3.0%, though JP Morgan is out saying today that there will be a .5% revision upward to that number due to medical care spending up 15% vs 2.6% expected. (source: Macquarie, and others). The argument here is that efficiency, while slowly building in, can't explain all the decline in demand and something else is happening.

Using DOE Crude Oil output implied demand statistics, the US just seems to stay virtually flat now for several years now--despite rising population and decent GDP growth. Certainly some of this is low moving rates for homes and efficiency in auto mileage, but that also alone seemingly might not explain it all.

Maybe things are different this cycle--internet efficiencies, power demand efficiencies in devices and appliances, etc. But it bears watching, because these are big data sets that never used to 'lie'. Its possible the gas/coal switching is reducing oil demand enough to show up a smidge? As an aside, Macquarie calculates that based on real-time power generation data they are seeing in the US, as much as 100GW of coal is currently idled--that is 1/.3 of the entire fleet. Some is coming back online through forced burn due to dangerous stockpile levels (high) and maxing out their low point on annual allocations from the producers. Yikes.
Further read:

http://energyandmoney.blogspot.com/2010/10/has-cheap-gas-killed-renewable-star.html#

http://energyandmoney.blogspot.com/2010/12/can-oil-and-nat-gas-go-back-to.html#

http://energyandmoney.blogspot.com/2010/10/us-natural-gas-picture-gets-bleaker.html#

More on Peak Oil: Another (Valid) Opinion

Here is the response from a reader, Rich Lyon, to my analysis of peak oil (http://energyandmoney.blogspot.com/2009/11/peak-oil-realities-myth-and-risk.html):

Ref: "Also, 60% of world oil production declines from 1.5 to 2.5% annually"

Rich says "May I draw your attention to IEA's World Energy Outlook 2008 p.244 "It is necessary to estimate the underlying, or natural decline rate — the rate at which production at a field would decline in the absence of any investment — in order to ascertain how much capital needs to be deployed to sustain production or limit observed decline to a particular rate...The production-weighted average annual natural decline rate for the world as a whole is estimated at 9.0% — some 2.3 percentage points higher than the observed decline rate...At the world level, the increase in the production-weighted average decline rate over the projection period is about 1.5 percentage points, taking the rate to around 10.5% per year in 2030. That's a halving rate of 7 years.

Against any criticism you might make of the IEA, even CERA concedes 4.5% - a 15 year halving time. Schlumberger CEO used 8% in an internal newsletter."

My answer: If I take the top producing projects globally the decline rate dropped from 4.5% to 3% between 2003 and 2010. Added to the improvement in recovery rate seen in Russia we achieve a 2% annual decline. It's documented in our analysis of the main fields and in Goldman Sachs Top 330 projects as well. Schlumberger, like any oil service company, benefits from decline by taking more projects and increasing engineering. Their analysis might be interesting but not conclusive.

Goldman's analysis of the industry’s new legacy assets has grown from 91 bnboe in Top 50 Projects (June 2003) to 565 bnboe in Top 330 Projects. They estimate that these projects will deliver around 62 mnboe/d of production by 2020E (46% of current global oil and gas production)

In the Top 360 Project report (2012) decline rates are analyzed:

Decline rates have changed dramatically in the non-OPEC supply base over the past ten years and our forecasts. These declines are calculated by subtracting major new start-ups (Top 360 projects) from historical production, to estimate the base decline including enhanced oil recovery, satellites and small field developments. It is interesting to see that since 2008 the decline rates have improved and stabilized around 2.0%. This is the result, in our view, of increased spending on the production base and of debottlenecking of the service capacity. 

Source of graphs above and below: Exxon

Exxon, who are well known for being prudent and conservative, sees 2010-2040 global oil & gas supply: +5.3% pa (unconventional), +4.8% pa (heavy/oil sands), +3.5% pa (LNG), +2.8% pa (deepwater) and +0.3% pa (conventional)

Ref: "but global investments between $720 and $750 billion a year in oil and gas have also seen an unprecedented discovery and addition rate"

Rich says "In fact a perfectly good precedent exists - the discovery rate that was achieved in the period between 1940 and 1970, when global discovery rate rose from 5 billion barrels per year to 55 billion barrels per year. The rate of discovery peaked in 1968 and has followed a consistent 5% per annum decline rate ever since, punctuated by the isolated basin discoveries of Prudoe Bay and the North Sea, the recapitalisation of the FSU, and the modest (and now declining) contribution from deep water technology. It is perfectly straightforward to work out what discovery rate would be necessary to sustain 1.5% demand growth - about three North Seas every five years, commencing ten years ago. As it happens, that is the same discovery rate as they achieved 1940-1970. And, as it happens, the "unprecedented discovery rate" to which you allude is a pale fraction of that".

My answer:  The chart shows two distinct flaws. First, a 5% decline, and a 1.65% pa growth of demand.

Let's start with discoveries. An average of 3 bnbls of oil were discovered each year in 2003-05, vs.8 bnbls in the 2006-09 period (IEA, Goldman, CERA) .Most of the discoveries over the last five years have been made in the deep offshore, with Brazil dominating on size, followed by the Gulf of Mexico and Ghana. Onshore discoveries of large size have been rare and in general limited to Iraq (Kurdistan) and Uganda, although oil shales and field redevelopments in Iraq have provided very material additions to the pipeline of onshore oil projects .

Additionally, the old trend of delivery with only c.75% of the promised volumes delivered after five years has massively changed and a new trend of c.95% was identified 2005-2010 (Goldman). This proves that the "below to above ground" analysis of many peak oil defenders is not linear and that industry technology and delivery has massively improved.

The analysis you mention focuses only on conventional oil as we knew it in the late 90s... why? Not clear. Why don't we disregard any oil that is not onshore Saudi Arabia? why not disregard any oil that is not API perfect?. Very much in line with most peak oil theories, the analysis you ention completely forgets non-conventional and liquids as "inexistent". Just the addition of shale oil resources and heavy oil in Venezuela and Iran have brought reserve replacement well above 120%. In addition to that, the giant discoveries in West Africa have added to the base of low sulphur crude.



To ignore non-conventional, pre-salt and heavy oil would be the same as ignoring deep water in 1970, or ignoring oil sands in the 80s. Drivers and motorists do not make that distinction as it's as valid (if not better, given the excess capacity at high complexity refineries of 8mmbpd there is plenty of processing available at cheap cost) as a fuel as anything else. And EROEI analysis is available in this blog as well here http://energyandmoney.blogspot.com/2011/06/peak-oil-defenders-most-overlooked-myth.html.

Further read from Robin Mills: http://www.thenational.ae/thenationalconversation/industry-insights/energy/flawed-views-on-peak-oil-rear-their-ugly-heads-again

Ref: Inability of the oil industry to catch up with "growing demand"

Rich points to this chart:







My answer: The first thing I will question, as I have since 2003, is that "perennial growth of demand" of 1.6%pa. Demand moves in cycles and is not uniform. The lack of understanding of demand cycles and ignoring fuel efficiency as it happens is a key driver of the perception of scarce supply.



I am a firm believer of peak oil...demand. The assumption that demand growth will be linear and exponential and that the millions of new inhabitants of the world will consume as many barrels of oil per day as the Americans is simply impossible. First, efficiency continues to drive the transport industry, second, new technologies and alternative energies create a completely different scenario. We have not even talked of natural gas vehicles, but the reality is that when emerging markets reach the level of maturity in their economies that the OECD has, average oil consumption per capita in those countries will also be well below the current US-EU level. In our calculations average oil consumption per capita declines by 6%pa due to efficiency and alternatives:

a) IEA long-term demand estimates have only been going down since 2005.

b) Growth of demand in Asia and EM is mostly offset by OECD decline, and the added growth is slowing down, as evidenced in China. More importantly, the "China angle" assumes that every city in China will consume 23bpd per capita. This is overstated by the fact that all major cities in China consume already that figure, and it's slowing down, and like in Europe you cannot assume that the inhabitants of South Spain will consume as much as the Madrid citizens. It's not an averaging up to the maximum, it's an averaging down, as evidenced by efficiency impact in the US, where GDP grew 3% pa for a decade without a meaningful increase in power demand. Oil demand in the US went from 15mbpd to 18mbpd (a mere 3mmpd increase) in the period of highest GDP growth and monetary expansion (1970-2011).

c) Growth of demand in EM is overstated by the assumption that they will move to consume 23bpd per capita. If, as I expect, world consumption stays virtually flat to 2030, there would be no evidence of a supply problem.

Rich says:

Hi Daniel - I note your trick in the Saudi graph of starting the y axis at 6 rather than zero to exaggerate the appearance of an increase - a common statistical illusion. Saudi has about 15 million barrels a day of production capacity and 10 million export capacity - recent exports of 8 merely reflect demand stagnation, and your "rocketing" exports is in fact it reverting to its saturated maximum output.
Of far more interest is the erosion of export capacity by soaring internal demand, driven by Saudi population growth compounding rising cooling and water desalination power requirements. Saudi export capacity in fact falls to zero by 2030. Which is why Saudi is commissioning 16 nuclear power stations a conventional missile strike away from Iran and Israel. Details for your more curious readers here: http://richardlyon.net/blog/2012/02/10/end-saudi-production/

My answer: Saudi production increase, of course, is, as it always has been driven by demand. You can read in my post http://energyandmoney.blogspot.co.uk/2012/03/us-talks-of-releasing-strategic.html how Saudi production has behaved when demand has been there.Saudi Arabia is not an NGO and does not need to "prove" its capacity, neither needs to help to artificially lower oil prices for the sake of OECD consumption, when they have to take care of their own budget and population needs. The key for peak oil and the debate is that, since 2005, I have been reading of the "inability" of Saudi Arabia to reach 10mpd production, even saying that its production would fall below 8mpd. Well, here it is... when it's needed. Forgetting that OPEC  is a cartel and Saudi Arabia a part of it, and that supply will only be added if demand is stronger and sustainable, is the key differentiation between my opinion and the argument of "inability to produce more". Furthermore, if Saudi resources were depleting as quickly as predicted by some and for such a long time (since 2001), this recent increase in production would have been technically impossible.

Also, on Saudi Arabia's exportable capacity, the assumption of exponential demand growth in my view is also questionable. Saudi Arabia already consumes oil above the per-capita demand of many OECD countries. Efficiency will also erode that exponential growth and you will likely see solar, gas and nuclear be added to the energy mix not due to "lack of capacity" but driven by a logical generation mix planning, just like the mix we have in most countries. Saudi Arabia is expected to increase electricity generation capacity to 80 gigawatts, driving primary energy intensity from 257 (EU=100) to 150 by 2020. The efficiency of the power sector (thermal power plants) has regularly increased over the period 1990-2009, rising from 27
percent to 31 percent. I personally have Saudi Arabia peaking its oil consumption in 2015. More in detail, I see demand in The Kingdom going from 83.73 bbl/day per 1,000 people to 68 by 2020, still a high EU-type of consumption per capita.

I would like to thank Rich for his polite, informed and interesting comments. It was a true pleasure to discuss with him. You can follow Rich on the following blog: http://richardlyon.net/blog/

Here is my interview on CNBC:

http://video.cnbc.com/gallery/?video=3000076989

Further read:

http://oilprice.com/Energy/Crude-Oil/Why-is-Obama-Lying-About-US-Oil-Reserves.html

http://www.businessweek.com/magazine/everything-you-know-about-peak-oil-is-wrong-01262012.html

From Zerohedge:

They might cite the idea that oil prices are much higher than they were ten years ago. Yet this is mostly a monetary phenomenon resulting from excessive money creation beyond the economy’s productive capacity. Priced in gold, oil is still very cheap — almost as cheap as it has ever been:

Oil Prices Reaching Breaking Point For The Economy?

I just came back from a trip to New York and investors concerns about energy and oil prices were clearly at the top of the agenda.

Who's to blame for the current oil price?. Supply? demand?. Mmmm. I have a feeling that the blame this time is on Mr Draghi and friends in UK, Norway, Australia, US, with the ongoing mass liquidity injections and QEs, all driven to generate inflation one way or another, and driving investors to increase net length in crude.

Oil prices reached all-time high in Euro and in GBP last week. All US media is mentioning high gasoline prices and it's a permanent fixture in Europe news. If sustained, the price increase since December could trim 0.25-0.5% from annualized real GDP growth over the next year. Moreover, the combination of a stronger world economy, massive liquidity injections and quantitative easing programs with increased tensions in the Middle East suggest that a bigger shock is less of an issue than in the past.

Barclays highlights that "it is not necessarily the oil price itself that can pose a threat to economic growth but the pace of its growth that is more important. It is the sudden surge in oil prices that leads to an abrupt shock to consumer spending and economic growth. Consumer durable spending, the most sensitive component of spending, fell sharply when the 3-month annualised change in headline inflation exceeded 9%. In each case, the price of oil rallied in excess of 40% over a 3-month period. In contrast, the latest geopolitical fears have, so far, led to a 20% rally in oil" ...and inflation is way below 9%, at 3-5%.

Let's start with supply. Global oil supply, despite Iran, Syria and Lybia is at record levels. Not only Russia and other producers are keeping the pace strongly, but OPEC is producing at all time high, as per the figure below:

What is interesting is that, outside of the Euro crisis, the world's economies are behaving much more strongly than expected but oil demand is not reacting. Efficiency comes to the fore. What many call "weak demand due to crisis" is in many cases, US being the clearest, a relentless improvement of efficiency. See below:

Additionally, the US imports reached a 12 year low last year thanks to the shale oil and gas revolution we have mentioned many times in this blog. The US imported 8.91m barrels a day of crude oil last year, according to the US Energy Information Administration, the lowest amount since 2000. US and Europe implied demand is down between 5 and 7% yoy, while Asian demand is pretty much unchanged. Emerging markets are keeping global oil demand above the 87mmbpd, but every two weeks we read from the IEA or other agencies that they are lowering their demand estimates for 2012. The IEA said it expects oil consumption to rise a relatively poor 800,000 barrels a day, or 0.9%, in 2012, according to its latest monthly market report. That would be 300,000 barrels a day less than the IEA forecast just a month ago. As we said at the beginning of the year, I expect demand to be flat year on year.

Inventories at the OECD have been shrinking recently, but remain within the average band of the last five years, 57-60 days of demand covered. The market is tight but not excessively tight, as prove by the fact that demand is well covered despite geopolitical disruptions in Iran, Siria and Nigeria.

CFTC Non-Commercial long/short net positions (21st February)		CFTC MANAGED MONEY net positions (21st February)		ICE Brent long/short net positions            (14th February)
Crude	228,180 (prev 204,752)	215,802 (prev 202,222)		Non-Commercial	105,901 (prev 93,673)
Nat Gas	-124,929 (prev  -126,157)	-70,832 (prev   -72,314)		Managed Money	96,703 (prev 88,706)
Gasoline	90,298 (prev 87,696)	91,640 (prev 88,575)
Heat Oil	27,566 (prev 23,544)	43,207 (prev 39,379)

One of the areas that interests me the most is the growing net long interest in crude, reaching levels close to 2008. The inflation trade is on and the carry trade is guaranteed by the insane monetary policy and low interest rates "for the foreseeable future".

Think about it. Monetary supply is growing so fast, from China to Europe, because the developed world is worried about deflation, that we cause inflation in all commodities (except regional and local ones like US natural gas). The balance sheet of the ECB has multiplied by 3 since June. Monetary supply is twice as high as it was at the end of the past decade.

According to seeking alpha (see link here): "Developing China’s M2 money supply has been rising by a large 20% and Russia’s by a very large 30%.Even developed countries such as Switzerland have seen money supply growth of 25%. Japan’s M2 is gradually moving higher after the ‘Lost Decade’ and after recent events exacerbating an already fragile situation. Global money supply growth is increasing by 8%-9% per annum".

Then we go to the issue of "the oil burden" or the import bill versus GDP. It's  currently close to 5%, but the share of the oil burden in the OECD is diminishing, making high oil prices less risky for the recovery. Meanwhile, in emerging markets, high oil prices are also a less of a problem as the oil consumption generates products, goods and services of much higher productivity and higher added value. Remember that most emerging economies do not "need" low oil prices, that is more an OECD construct. Those economies have lived with high energy prices for a long time. When the oil burden reaches 7% is when we can start to worry. So far, demand destruction is a concern but not a worry.

Obviously, many of those emerging economies are also oil producers. Russia, Brazil, OPEC, West Africa and Asia are main beneficiaries of a wealth re-distribution out of US-Europe and into new markets.  

Brent-Urals has gone negative this week. In this environment, the trade is likely to be negative European refiners. Another trade starting to look attractive is long WTI short Brent as the tensions with Iran are played out and inventory issues at Cushing start to be solved. I do not expect the differential between Brent and WTI to go to zero, but closer to $10/bbl, which is more fundamental, as we mentioned in this blog here (http://energyandmoney.blogspot.com/2011/02/brent-wti-spread-more-fundamental-than.html).

Finally the other attractive trade that seems to be unwinding is a short European Big Oil after the companies showed no meaningful free cash flow generation at the 4Q results and poor refining and downstream margins added to sub-par production growth and upstream profitability. The sector is at the top of its trading range versus the market and the traditional strengths (balance sheet, dividend, safety) are still there but at much more demanding multiples. At 9.5xPE the sector trades at historical high EV/IC/ROIC/WACC. All above 1 (which means expensive).

Meanwhile the US is seeing the benefit of shale oil and shale gas in every part of its economy. Just a small calculation shows that the effect of WTI at $20/bbl below brent and Henry Hub gas at $2.5/mmbtu versus $8/mmbtu in Europe has the same effect as Bernanke's trillion QE... annually. Read this. In Europe we continue to ban it. Someone in Washington must be laughing hard. The US refiners seem in the best place to take advantage of a strengthening economy and lower feedstock. So do the US oil names. As for US gas names, careful when asset (land) value collides with low earnings multiples, because M&A comes back.... except in joint-venture filled companies, because JVs are giant poison pills.

I believe the risk of demand destruction remains, but unlike 2008, the risk of a financial meltdown and a credit crunch is much lower, and in fact if there is any risk is that loose monetary policy will remain for the foreseeable future, keeping the commodity-led inflation high. Draghi, Bernanke and friends want the carry trade, and need it to avoid deflation in a japanese way. Supply and demand remain well covered, printing money is the wild card.

The IEA March report left 2012 oil demand forecasts unchanged, but highlighted OPEC's ability to increase production, with OPEC volumes at the highest level since October 2008. OPEC supply in February was 1.3Mbpd ahead of the forecast call on OPEC for 1Q.
OECD inventories rose 13.6Mbbls in January and fell 26Mbbls less than usual in Feb. Furthermore, the IEA sees 625kbpd extra OPEC capacity by 3Q, adding to current spare capacity at 2.75Mbpd (Bernstein).

Data courtesy: Carnegie, Erste, Oriel, BP, BarCap, Bernstein and own research.

Here is my interview on CNBC:

http://video.cnbc.com/gallery/?video=3000076989

Worth a read:

http://energyandmoney.blogspot.com/2012/03/energy-disinflation-as-source-of.html#

http://seekingalpha.com/article/299410-global-money-supply-and-currency-debasement-driving-gold-higher

http://www.thenational.ae/thenationalconversation/industry-insights/energy/flawed-views-on-peak-oil-rear-their-ugly-heads-again