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Mish note:
This topic was discussed today Wednesday 11, 2006 on HoweStreet. We also discussed
gold, china, Australia, M3, deflation, and credit. Here is the podcast
link if you wish to tune in. It is not a repeat of the following by any
means.
The End of and Era
The Business Online reported on January 8th an End
of Era as UK forced to rely on imported oil:
BRITAIN will be forced to rely on imported oil to meet its energy needs
this year for the first time in more than a decade and four years earlier
than government predictions.
The warning comes from the International Energy Agency (IEA), the world's
leading energy forecaster. It says North Sea oil production will dip below
1.7m barrels per day this year - 100,000 barrels per day below expected demand.
This will force the UK to rely on imported supplies.
The forecast will add to existing concerns about energy supplies after Russia's
recent threat to gas supplies to Europe which thrust energy security into
the foreground and emphasised the extent of the British government's failure
to secure the country's future energy requirements.
It also highlights the folly of Chancellor Gordon Brown's doubling of tax
on North Sea profits in his November Pre-Budget report. As The Business recently
reported, this led to Shell's decision to cut its UK exploration and production
programme and prompted every oil company in the North Sea to review its activities.
The IEA's supply analyst David Fyfe told The Business: "Given expected oil
production this year of below 1.7m barrels per day, the UK faces the prospect
of becoming a net crude importer again this year for the first time since
1992."
The UK government's forecasts do not see the UK becoming a net crude oil
importer until 2010.
Fyfe said: "In the past three years, production has declined every year
by more than 200,000 barrels per day. We are looking at the slate of projects
coming up and we are not factoring in any of the unexpected outages which
have happened in the past few years."
The IEA's warning raises the prospect that the government's forecasts on
the decline of UK oil production are as wrong as they were about the decline
of UK gas - a failure that has put the UK on the brink of a gas supply crisis
this winter.
UK Natural Gas Crisis
The January 8th TimesOnline is reporting Crisis
in the pipeline.
Britain escaped the effects of the gas
row between Ukraine and Russia. But our own supply is on a knife-edge.
In a long cold spell, demand would outstrip supply, with disastrous results.
When Russia turned off the tap to Ukraine last week, the Ukrainians diverted
gas that was supposed to head further west - the pipelines cross its territory
- meaning fearful shivers were felt in Berlin and Rome as well as Kiev. The
potential disruption of supplies to the heart of the EU was severely embarrassing
to Russia, and helped force the hasty peace deal on Wednesday in which Ukraine
agreed to pay a higher price for its gas.
Thanks to Britain's North Sea riches, Thatcher and her successors had little
fear of the Russian bear. Now that happy feeling of security has gone. Domestic
production is in rapid decline, and this year for the first time Britain
has been a net importer of gas, something that was unthinkable in the heyday
of North Sea production. Within 15 years, according to energy minister Malcom
Wicks, 80% of Britain's gas needs will be met by imports.
But, thanks to a fine balance between supply and demand, small reserves
and Britain's open energy markets, the gas crunch could come sooner than
expected - perhaps, if the weather turns nasty, as soon as the next few weeks.
British production has tailed off so quickly, and our reserves are so slim,
that a serious cold spell could spark cuts in supply to industrial users.
Gas prices are already so high that some industrial users have voluntarily
curtailed production - Terra Nitrogen, for example, closed its Teesside ammonia
plant indefinitely in November.
THE decline of North Sea output is not new. Labour's much-trumpeted energy
white paper, released in February 2003 after what one former civil servant
called "the longest consultation and preparation of a policy I have ever
known", made no bones about the dangers facing the nation.
"By 2020 we could be dependent on imported energy for three-quarters of
our total primary energy needs ... we may become potentially more vulnerable
to price fluctuations and interruptions to supply caused by regulatory failures,
political instability or conflict in other parts of the world," it said.
This warning was largely overlooked. Instead, politicians and commentators
spent most of their time on the white paper's top line - the need to embrace
renewable energy to meet commitments to cut greenhouse-gas emissions.
But North Sea production has declined more quickly than was thought possible
- at about 10% a year. The tightness of Britain's gas market has been dramatically
revealed in a series of sharp and unforeseen spikes in energy prices.
Wholesale gas prices have more than tripled in the past three years - from
about 20p a therm (a unit of energy) to the current level of 70p. A cold
snap in February and March last year sent prices rocketing past 100p, and
periods of cold weather since have done the same.
"They have gone higher than we ever thought they could," said Nigel Cornwall,
of Cornwall Energy Associates, an independent energy consultancy. "We are
talking about prices that are a factor of 10 higher than they were four years
ago, all without actual scarcity of supply."
British production has tailed off so quickly, and our reserves are so slim,
that a serious cold spell could spark cuts in supply to industrial users.
Gas prices are already so high that some industrial users have voluntarily
curtailed production - Terra Nitrogen, for example, closed its Teesside ammonia
plant indefinitely in November.
The company said it "did not anticipate resuming production ... until UK
natural-gas costs decrease to a level that allows the ammonia unit to operate
with positive cashflow".
Other energy-intensive industries - those making paper, steel, bricks, and
chemicals - fall into this category and face similar tough decisions.
Sir Digby Jones, director-general of the CBI, the employers' body, recently
told The Sunday Times that energy prices were the "biggest immediate issue" facing
British business. "What the civil servants have failed to realise is that
many of these companies have production sites across Europe or across the
world. They can choose to switch production away from Britain, and once it
is gone it's not likely to come back."
High energy prices can have unlikely knock-on effects. Ammonia, for example,
is the raw material for most commercial fertilisers. Farmers face steep price
hikes. "Fertiliser prices are currently £170 a tonne compared with
just over £140 a tonne this time last year," said David Handley, chairman
of Farmers For Action.
Phil Hudson, chief horticultural adviser for the National Farmers' Union,
confirmed the exposure of some types of farming to the price of gas. "Gas
prices remain of real concern, especially for farmers who grow crops under
cover," he said. "For some, energy accounts for up to 50% of their costs.
We have pointed out the impact of gas-price rises to the government but they
have indicated to us that even if there were something they could do, they
wouldn't be prepared to do it."
Ineos went further. "In the event of very credible temperature scenarios,
the interaction of the UK and European gas markets can result in very severe
gas shortages in the UK leading to the wholesale closure, for significant
periods of time, of vast sections of UK industry ... in our view it is unacceptable
to balance supply and demand by closure of massive sections of the UK's industrial
base or by putting vulnerable households at risk."
In extreme conditions National Grid could turn off supplies to the gas-fired
power stations that together generate about 40% of Britain's electricity.
This would lead to power cuts for domestic consumers or at best "brownouts".
EVENTS have quickly overtaken the 2003 White Paper. In November Blair used
his keynote speech to the CBI conference to announce a wide-ranging review
of energy policy. "Round the world you can sense feverish rethinking. Energy
prices have risen. Energy supply is under threat," he said.
Nuclear Negotiations between Russia and Iran
No doubt related to the emerging energy crisis in Europe is the January 8th
Times of India headline: Iran,
Russia resume nuke negotiations.
TEHRAN : Iranian and Russian officials on Sunday resumed nuclear negotiations
on forming a joint consortium for uranium enrichment on Russian soil, Foreign
Ministry Spokesman Hamid-Reza Assefi said.
The spokesman termed the trend of the talks in Tehran as positive and hoped
the two sides would reach a settlement while maintaining the legitimate rights
of Iran to pursue nuclear technology.
The first round of the talks on Saturday ended without any tangible results
although the Iranian side termed them as positive and satisfactory.
Javad Vaeidi of the Iranian National Security Council said Tehran needed
more time to decide on the Russian proposal.
Assefi further said that in line with the Non-Proliferation Treaty, the
nuclear research programme would be resumed under IAEA surveillance while
stressing that the issue had nothing to do with uranium enrichment.
He also rejected Saturday's European Union statement not to resume research
work, saying the research issue was never on the agenda of negotiations with
the EU and that the West had no right to ban Iranian scientists from conducting
research.
Assefi further called on the EU to skip the language of threats and stick
to a respectful dialogue.
India / Iran Natural LNG Deal
On January 7th the Times of India is reporting Iran
gas deal on track.
NEW DELHI : The $22-billion deal with Iran for importing 5 million tonnes
of LNG (liquefied natural gas) a year for 25 years was on track and the contract
was merely awaiting a procedural clearance from the new government in Teheran,
oil minister Mani Shankar Aiyar said on Friday.
"I am not the least worried. Everything is on track and things are moving
forward. Discussions (on the deal), including additional 2.5 million tonnes
are in progress," Aiyar said after inaugurating gas utility Gail's pipeline
network management hub at Noida in Delhi's suburb.
Gail chairman Proshanto Banerjee said he was confident LNG from Iran would
flow into India in 2010. He said a Gail delegation is to visit Iran for further
talks by the month-end.
The Politics of Natural Gas
On January 6th AsiaTimes is reporting on The
politics of natural gas.
NEW DELHI - The dispute between Russia and Ukraine over natural-gas supplies
that has rattled Europe has once again brought to focus the geopolitics that
revolves around the control, transportation and consumption of energy, and
more specifically, natural gas.
Natural gas has emerged as a more environmentally sound, cheaper and more
easily available substitute for oil. Compared with oil at more than US$60
a barrel, an energy-equivalent amount of gas costs in the region of only
$20. Experts predict that gas, which was once considered a wasteful by-product
of oil exploration, will turn into the No 1 fossil fuel. Vying for gas resources
are the world's top guzzlers of energy, the United States, Europe, China
and India.
The problem is that the US and India, as well as Japan and European Union
nations, are all some distance from major reserves of gas in countries such
as Iran (with reserves of 971 trillion cubic feet - tcf), Qatar (910 tcf),
Yemen, Russia (with the world's largest reserves of more than 1,700 tcf),
Central Asia, Nigeria, Angola and Venezuela. There is also the issue of these
supplier nations facing unstable political situations, so the gas from fields
there has to be carried through disturbed and often dangerous physical and
political quarters.
China and India have been quickly tying up with these countries to tide
over future requirements, with the US trying to balance growing Asian demand
with its own rising requirements. India has signed a $22 billion deal to
buy liquefied natural gas (LNG) from Iran over a period of 25 years starting
2009, this after protracted negotiations. India has also signed an LNG deal
with Qatar.
However, the tussle will turn more acute. A global energy crisis is brewing
as the economic powerhouses continue to consume more oil than they can possibly
produce or import. It is estimated that by 2025, today's global demand for
84 million barrels of oil per day will have grown to 121 million to 130 million.
The US is the world's largest energy consumer. No amount of digging domestic
resources in Alaska will yield the US requirements. China and India, too,
will have to import considerable quantities of crude oil to make up for gasoline-guzzling
automobiles. India imports 70% of its crude.
It is in this context that one can read the resistance of the US to the
proposed 2,575-kilometer gas pipeline from Iran through Pakistan to India,
despite the three countries agreeing to go ahead with the massive project.
In its latest caution, Washington has said that any plans by the Indian
government to sign energy deals with Iran are "years away" and exist only
in the hypothetical realm. Nicholas Burns of the US State Department did
not specifically mention the talks between India and Iran to build the $7
billion pipeline through Pakistan, but the message was apparent.
"The Indians have assured us that there is no plan on the table that is
ready for decision by the Iranian [and] Indian governments, that any plans,
any discussions, have been hypothetical and are years away," Burns said recently,
speaking at the Johns Hopkins University School of Advanced International
Studies. "We would hope that those relationships would not be consummated."
While India does not want to annoy the US, it favors a delinking of issues
concerning energy security and Iran's supposed nuclear aspirations. "We live
in a very complex neighborhood, surrounded by governments and rulers of different
orientation - communists, military dictatorships, monarchies ... we hope
the US understands the difficult choices we have to make for the well-being
of our people," India's ambassador to the US, Ronen Sen, has said while referring
to Washington's dislike for Iran.
Many nations, including India, have also been active in the recent past
to enhance their nuclear energy capabilities to reduce excessive reliance
on gas and oil. While India signed an expansive nuclear pact with the US
last July, reports from Pakistan indicate that the country is negotiating
to buy at least six nuclear power reactors from China over the next decade.
According to media reports this week, Islamabad's nuclear shopping from
Beijing would cost more than $10 billion. Islamabad has been unsuccessful
in pleading with Washington to open its nuclear gates, given Pakistan's dubious
record of proliferation. However, China, fearing the developing relations
between India and the US, has obliged. Elsewhere, Finland is moving ahead
with plans to build the world's largest nuclear reactor to lessen reliance
on Russian gas.
US View vs. India View
Let's see if I have this correct.
- On January 6th the United States proclaimed "any plans by the Indian government
to sign energy deals with Iran are 'years away' and exist only in the hypothetical
realm." "The Indians have assured us that there is no plan on the table that
is ready for decision by the Iranian [and] Indian governments, that any plans,
any discussions, have been hypothetical and are years away," Burns said recently,
speaking at the Johns Hopkins University School of Advanced International
Studies. "We would hope that those relationships would not be consummated."
- India's view of the situation is: "We live in a very complex neighborhood,
surrounded by governments and rulers of different orientation - communists,
military dictatorships, monarchies ... we hope the US understands the difficult
choices we have to make for the well-being of our people," India's ambassador
to the US, Ronen Sen, has said while referring to Washington's dislike for
Iran.
- On January 7th the Times of India is reporting India/Iran gas deal on track.
The World Marches On
Someone please tell me who has their head in the sand and who does not. While
the US seems mightily intent on pissing off the entire world, including our
best trade partner Canada (the latter over silly lumber disputes), and issuing
threats against Venezuela (another energy supplier to the US), the world marches
on with:
- Nuclear deals between Russian and Iran
- 25 year LNG deal between Iran and India
- NG deals between Iran and China
- Finland building nuclear reactors to lesson dependence on Russian NG
- Pakistan to buy 6 nuclear reactors from China
- China seeking investment deals with Canada over tar sands
- Australia / China 25 year LNG deals with 2006 deliveries
US / Australia Deal?
Years behind, Japan, China, North Korea, and others, on January 9th The Australian
is reporting a US
push for our clean gas exports.
WHITE House officials are working to clear the final barriers to the sale
of billions of dollars worth of Australian gas to the US by the end of the
decade.
Speaking ahead of crucial talks in Sydney this week on climate change and
energy markets, a senior Bush administration official said the US Government
was keen to see Australian liquefied natural gas gain direct access to US
customers for the first time.
Australian companies, such as BHP Billiton, have been lobbying for three
years to win access to the US market, with John Howard personally raising
the issue with President George W. Bush and Californian Governor Arnold Schwarzenegger.
However, concerns about the safety of LNG have delayed approval for a massive
terminal off the coast of California that would transfer Australian gas from
ships for sale in the US.
James Connaughton, Mr. Bush's adviser on the environment, said at the weekend
that the US Government was throwing its weight behind efforts to clear the
way for the sale.
Amid soaring energy costs for home heating in the US and predictions that
within two years demand for energy in California -- a bigger economy than
China -- will outstrip supply, the Bush administration is eyeing new and
clean energy sources.
Australia's prospects of securing long-term gas supply contracts in California
were buoyed last week when Mr Schwarzenegger announced a huge infrastructure
program in his "state of the state" address.
"Our systems are at the breaking point now," he said. "We need more roads,
more hospitals, more schools, more nurses, more teachers, more police, more
fire, more water, more energy, more ports."
[On a side note, he has no freaking idea how to pay for all of that - Mish]
Australian LNG sales to date have been focused on markets in Japan, Korea
and China, which in 2002 signed a $25 billion deal to buy gas from the North
West Shelf, off the coast of Western Australia -- Australia's biggest single
export deal.
Since the mid-1990s, imports of LNG to the US have been rising fast. But
the American share of world LNG demand is still only about 8 per cent --
against Japan, which consumes about half of the world's LNG.
Final Thoughts
The US is worried about "safety issues" while Japan buys half of the world's
supply of LNG and China is ramping up, both without concern. Meanwhile the
UK seems to be stuck in the same sorry boat with the US. By the time the US
is ready to be signing deals with Australia I have an inkling the rates will
not be as good as the 25 year deals negotiated by China.
If Australia was smart they would hold out for free trade deals on sheep and
cattle and everything else they want too. After all, if the US does not take
that natural gas, China or Japan or someone else surely will. Higher prices
are the consequences of letting the world pass you by with trade deals while
being preoccupied with silliness in Iraq.
It's high time the US stops trying to be the world's policeman (a role we
clearly can not afford) and starts thinking more like pragmatic India: "We
live in a very complex neighborhood, surrounded by governments and rulers of
different orientation - communists, military dictatorships, monarchies ...
we hope the US understands the difficult choices we have to make for the well-being
of our people," India's ambassador to the US, Ronen Sen, has said while referring
to Washington's dislike for Iran.
The sooner the US (and the UK) learn that lesson the better off the US and
the world will be. If we fail to learn that lesson, we risk a major world war
over energy. Perhaps we are sowing the seeds of that war right now, attempting
to police the world instead of securing energy deals for our future like everyone
else. Now we are eyeing Iran. Will India and China and Russia stand idly by
if we strike Iran? Do we want to find out?
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