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Russia offers to help Israel Develop Gas fields

by Phantom Ace ( 101 Comments › )
Filed under Economy, Energy, Israel, Russia at April 8th, 2016 - 7:00 am

For every action, there is a reaction. The Obama regime has been one of the most anti-Israel administrations. The god-king regularly trashes Israel and encourages the hard Left to demonize the nation state. Instead of isolating Israel, the Jewish state does what most nation when threaten do. They take an offer of friendship from whatever quarter they can get it.

Despite hostility with the US and Western Europe over the latter embrace of post modern cultural Marxism, Russia has gotten closer to the state Israel. The mutual dislike of Obama by both Israeli PM Netanyhu and Russian President Vladimir Putin. Frequent visits between the two, increase trade between the 2 nations and a growing distrust of the Neo-Marxist West has driven Israel and Russia closer than ever. Russia even double crossed Hezbollah whom they are allied with in Syria by assisting Israel in killing child murderer Samir Kuntar.

In the latest development of Russian and Israel cooperation, Russia is now offering to assist Israel develop their gas fields in the Mediterranean.

Consider it a form of ‘protection.’ Russia’s President Vladimir Putin has offered to invest in Israel’s natural gas development.

Diplomatic sources told the Middle East Newsline (MENL) on Wednesday, “Putin very much wants to make Russia into the major developer of energy fields in the Mediterranean, and the first target has been Israel.”

A decision last month by Israel’s High Court of Justice nullified a “stability clause” that would have blocked regulatory changes to an offshore gas outline for the next 10 years.

[….]

Hezbollah representatives spent months referring in various speeches to the reserve. Lebanon even attempted to recruit help from the United States in 2014 in seizing the reserve from Israel.

Putin, however, has pledged Russian influence to block attacks by Iranian proxies against any Russian-operated field. Efforts by Hezbollah to stop Israel from developing its natural resources beneath the Mediterranean would likely be among the targets of Russian ire.

[….]

Several weeks ago, Putin said he plans to meet with Netanyahu in the nearest future, noting that Russia and Israel have “many issues” to discuss.

Kremlin spokesperson Dmitry Peskov told media on Wednesday that such a visit is indeed under consideration. “We will make a relevant statement in a timely manner” Peskov said, according to TASS.

Israeli media reported this week that Netanyahu plans to travel to Moscow later in the month, allegedly on April 21, to meet with Putin.

Many Israelis are off Russian roots and many Russian even Orthodoxy Christians have Jewish roots themselves. In many ways both nations are natural allies a sboth believe in defending Judeo-Christian civilization and are rejecting the Neo-Marxists of West.

As the Obama regime and the European Union try to isolate Israel, they have also increased their military ties with the Russians.

The Pentagon announced on Wednesday that it was refusing to hold “de-confliction” talks with the Russian Defense Ministry to coordinate the two nations’ air-operations over Syria and would make do with just “technical details.” At the same time, de-confliction talks, of the kind the Americans rejected, between the Israel Defense Forces and their Russian counterparts, led by the deputy chiefs of staff of both militaries, were already wrapping up in Tel Aviv’s HaKirya headquarters.
Israel’s willingness to hold these talks reflects of course the recognition that after many years of operating nearly freely in Syrian airspace, things have changed with the arrival of a modern and well-equipped air force. But it also reflects the Russians’ desire not to have any confrontation with Israel in the region.

In the past, Israeli officials used to explain the desire to stay on Putin’s good side, despite his growing animosity towards the West and the erosion of civil rights in Russia, as part of its concern for the safety of hundreds of thousands of Jews still living in Russia. But there doesn’t seem to be any true basis for such fears, at least not under Putin. He is interested in the ties just as much as Israel.
To this day there are various explanations as to how Putin actually feels about Jews. His many supporters among the Jewish community in Russia insist that he is philosemitic, due to the friendships he had with Jewish classmates back in his childhood in St. Petersburg and the influence of Jewish teachers who perceived his potential. Putin’s critics ask why then are the Kremlin-funded propaganda channels filled with Holocaust deniers and anti-Semitic conspiracy theorists, masquerading as respectable commentators? But even those critics agree that Putin has a high regard for Jews and regrets the emigration of many thousands of Jewish scientists and researchers following the disintegration of the Soviet Union.

The Unites States is making a huge geo-strategic and moral mistake by turning it’s back on Israel. Putin always being the opportunist sees the potential of an a pro-Russian Israel as a means to extend his power into the Mediterranean.  Nations do not have permanent friends, but permanent interests. Russia wants to dominate the eastern Mediterranean, Israel wants to survive as  a nation. Both nation’s interest are coinciding and the growing ties are a result.

 

Monoeconomies, Debt, and False Growth

by coldwarrior ( 100 Comments › )
Filed under Debt, Economy, Energy, Open thread at February 8th, 2016 - 6:00 am

 This is a rather dense article, please read, if yinz have any questions I’ll answer them when I get home this afternoon.

Oil market spiral threatens to prick global debt bubble, warns BIS

An ‘illusion of sustainability’ has blinded borrowers and debtors, lulling them into a false of security. The BIS says liquidity is now drying up

The global oil industry is caught in a self-feeding downward spiral as falling prices cause producers to boost output even further in a scramble to service $3 trillion of dollar debt, the world’s top watchdog has warned.

The Bank for International Settlements fears that a perverse dynamic is at work where energy companies in Brazil, Russia, China and parts of the US shale belt are increasing production in defiance of normal market logic, leading to a bad “feedback-loop” that is sucking the whole sector into a destructive vortex.

“Lower prices have not removed excess capacity from the market, but instead may have exacerbated it. Production has been ramped up, rather than curtailed,” said Jaime Caruana, the general manager of the Swiss-based club for central bankers.

The findings raise serious questions about the strategy of Saudi Arabia and the core Opec states as they flood the global crude market to knock out rivals in a cut-throat battle for export share. The process of attrition may take far longer and do more damage than originally supposed.

Oil exporters are embracing austerity and slashing government spending, leading to a form of fiscal tightening that is slowing the global economy.

Speaking at the London School of Economics, Mr Caruana said the sheer scale of leverage in the oil and gas industry is amplifying the downturn since companies are attempting to eke out extra production to stay afloat. The risk spreads on high-yield energy bonds have jumped from 330 basis points to 1,600 over the past 18 months, amplifying the effects of the oil price crash itself.

The industry has issued $1.4 trillion of bonds and taken out a further $1.6 trillion in syndicated loans, driving up the combined energy debt threefold to $3 trillion in less than a decade.

While US shale frackers hog the limelight in the Anglo-Saxon press, many of these energy groups are giant “parastatals”, such as Rosneft, Petrobras or China National Offshore Oil Corporation (CNOOC).

The BIS said state-owned oil companies increased debt at annual rate of 13pc in Russia, 25pc in Brazil and 31pc in China between 2006 and 2014, much it in the form of dollar debt through offshore subsidiaries. These oil companies do not respond to pure market pressures since they are cash cows for government budgets.

The nexus of oil and gas debt is just one part of an over-stretched financial system, increasingly exposed to the dangers of a “maturing financial cycle” and to punishing moves in the global currency markets.

Mr Caruana said an “illusion of sustainability” has blinded borrowers and debtors, lulling them into a false of security when credit was easy and asset prices were rising. This illusion can die in the blink of an eye. “The turning of the financial cycle can be quite abrupt,” he said.

The BIS calculates that debt in US dollars outside the United States has surged to $9.8 trillion, a fivefold rise since 2000 and an unprecedented level for the global monetary system as a whole.

While some of this dollar debt is matched by dollar assets and dollar earnings, a big chunk has been used to play the local property markets of east Asia, Latin America or eastern Europe, and another chunk has been gobbled up by “non-tradable” sectors that have no natural currency hedge if it all goes wrong.

The BIS estimates that 23pc of every dollar raised in bonds by emerging market companies has been diverted into the “carry trade”, stoking internal credit bubbles.

The average level of private credit in these countries has jumped from 75pc to 125pc of GDP since 2009. Corporate leverage is now more extreme than in the US and Europe. Profit ratios have dropped from 16pc to 9pc in four years, a clear warning sign.

The carry trade was highly profitable in the heyday of zero interest rates and quantitative easing by the US Federal Reserve, when credit was temptingly cheap and the falling dollar generated a currency windfall.

What looked like a one-way bet has proved to be a Faustian Pact now that the Fed is turning off the spigot, especially in countries such as Brazil, South Africa, Turkey, Russia, Malaysia or Azerbaijan, which have seen their currencies plummet. The “broad” dollar index has soared by 32pc since July 2011, the steepest and most sustained rise since the Second World War.

Mr Caruana said there is now clear evidence that this liquidity is drying up. Dollar loans to emerging markets peaked at $3.3 trillion and began to fall in the third quarter of last year, as chastened debtors pared back their exposure. Chinese companies have slashed their dollar liabilities to $877bn from $1.1 trillion in late 2014.

We may be approaching the eye of the storm. “The feedback loop between deleveraging and emerging market currency depreciation presents challenges that should not be underestimated. The policy room for manoeuvre has been shrinking,” he said.

“The temptation may be to try to keep the financial booms going, or to give them a new lease of life, but this will be just a palliative unless the stock of debt is adjusted,” he said.

The BIS seems to be telling us that reckoning can still be orderly if we face up to reality, or end in a chaotic wave of defaults if we do not. Either way, the debt must clear.

And What of Shale?

by coldwarrior ( 156 Comments › )
Filed under Economy, Energy, Open thread at January 25th, 2016 - 6:00 am

SO now that we have reached the near bottom of oil prices, there is still room to go down, what will happen to American Shale?

The good news is that it is here to stay…might be time for an Escalade instead of that responsible 4 door sedan.

 

Saudis ‘will not destroy the US shale industry’

Energy guru Daniel Yergin says rich investors have $60bn war chest to buy up distressed fracking assets after Opec war of attrition

 

Hedge funds and private equity groups armed with $60bn of ready cash are poised to snap up the assets of bankrupt US shale drillers, almost guaranteeing that America’s tight oil production will rebound as soon as prices start to recover.

Daniel Yergin, founder of IHS Cambridge Energy Research Associates, said it is impossible for OPEC to knock out the US shale industry though a war of attrition even if large numbers of frackers fall by the wayside over coming months.

Mr Yergin said groups with deep pockets such as Blackstone and Carlyle will take over the infrastructure when the distressed assets are cheap enough, and bide their time until the oil cycle turns.

“The management may change and the companies may change but the resources will still be there,” he told the Daily Telegraph.

“It takes $10bn and five to ten years to launch a deep-water project. It takes $10m and just 20 days to drill for shale,” he said, speaking at the World Economic Forum in Davos.

In the meantime, the oil slump is pushing a string of exporting countries into deep social and economic crises. “Venezuela is beyond the precipice. It is completely broke,” said Mr Yergin.

Iraq’s prime minister, Haider al-Abadi, said in Davos that his country is selling its crude for $22 a barrel, and half of this covers production costs. “It’s impossible to run the country, to be honest, to sustain the military, to sustain jobs, to sustain the economy,” he said.

This is greatly complicating the battle against ISIS, now at a critical juncture after the recapture of Ramadi by government forces. Mr al-Albadi warned that ISIS remains “extremely dangerous”, yet he has run out of money to pay the wages of crucial militia forces.

It is understood that KKR, Warburg Pincus, and Apollo are all waiting on the sidelines, looking for worthwhile US shale targets. Major oil companies such as ExxonMobil have vast sums in reserve, and even Saudi Arabia’s chemical giant SABIC is already nibbling at US shale assets through joint ventures.

Mr Yergin is author of “The Prize: The Epic Quest for Oil, Money and Power”, and is widely regarded as the guru of energy analysis.

He said shale companies have put up a much tougher fight than originally expected and are only now succumbing to the violence of the oil price crash, fifteen months after Saudi Arabia and the Gulf states began to flood the global market to flush out rivals.

“Shale has proven much more resilient than people thought. They imagined that if prices fell below $70 a barrel, these drillers would go out of business. They didn’t realize that shale is mid-cost, and not high cost,” he said.

Right now, however, US frackers are in the eye of the storm. Some 45 listed shale companies are already insolvent or in talks with creditors. The fate of many more will be decided over the spring when an estimated 300,000 barrels a day (b/d) of extra Iranian crude hits an already saturated global market.

Shale hedges on the futures markets – a life-saver in the early months of the price collapse – are largely exhausted. IHS estimates that hedges covered 28pc of output in the second half of last year for the companies it covers. This will fall to 11pc in 2016.

The buccaneering growth of the shale industry was driven by cheap and abundant credit. The guillotine came down even before the US Federal Reserve raised rates in December, leaving frackers struggling to roll over loans. Many shale bonds are trading at distress level below 50 cents on the dollar, even for mid-risk companies.

Banks are being careful not to push them into receivership but they themselves are under pressure. Regulators fear that the energy industry may be the next financial bomb to blow up on a systemic scale. The Fed and the US Federal Deposit Insurance Corporation have threatened to impose tougher rules on leverage and asset coverage for loans to fossil fuel companies.

Yet even if scores of US drillers go bust, the industry will live on, and a quantum leap in technology has changed the cost structure irreversibly. Output per rig has soared fourfold since 2009. It is now standard to drill multiples wells from the same site, and data analytics promise yet another leap foward in yields.

“$60 is the new $90. If the price of oil returns to a range between $50 and $60, this will bring back a lot of production. The Permian Basin in West Texas may be the second biggest field in the world after Ghawar in Saudi Arabia,” he said.

Zhu Min, the deputy director of the International Monetary Fund, said US shale has entirely changed the balance of power in the global oil market and there is little Opec can do about it.

“Shale has become the swing producer. Opec has clearly lost its monopoly power and can only set a bottom for prices. As soon as the price rises, shale will come back on and push it down again,” he said.

The question is whether even US shale can ever be big enough to compensate for the coming shortage of oil as global investment collapses. “There has been a $1.8 trillion reduction in spending planned for 2015 to 2020 compared to what was expected in 2014,” said Mr Yergin.

et oil demand is still growing briskly. The world economy will need 7m b/d more by 2020. Natural depletion on existing fields implies a loss of another 13m b/d by then.

Adding to the witches’ brew, global spare capacity is at wafer-thin levels – perhaps as low 1.5m b/d – as the Saudis, Russians, and others, produce at full tilt.

“If there is any shock the market will turn on a dime,” he said. The oil market will certainly feel entirely different before the end of this decade.

The warnings were widely echoed in Davos by luminaries of the energy industry. Fatih Birol, head of the International Energy Agency, said the suspension of new projects is setting the stage for a powerful spike in prices.

Investment fell 20pc last year worldwide, and is expected to fall a further 16pc this year. “This is unprecedented: we have never seen two years in a row of falling investment. Don’t be misled, anybody who thinks low oil prices are the ‘new normal’ is going to be surprised,” he said.

Ibe Kachikwu, Nigeria oil minister and the outgoing chief of Opec, said the ground is being set for wild volatility.

“The bottom line is that production no longer makes any sense for many, and at this point we’re going to see a lot of barrels leave the market. Ultimately, prices will shoot back up in a topsy-turvey movement,” he said.

Mr Kachikwu said Opec needs to call an emergency meeting to sort out what the purpose of the cartel now is.

Saudi Arabia has made it clear that there can be no Opec deal to cut output and stabilize prices until the Russians are on board, and that is very difficult since Russian companies are listed and supposedly answerable to shareholders.

Besides, the Gulf states are convinced that Russia cheated last time there was an accord in 1998.

Mr Yergin said those hoping for a quick rescue from Opec are likely to be disappointed. “This is only going to happen if the crisis gets even worse,” he said.

Goodbye OPEC?

by coldwarrior ( 106 Comments › )
Filed under Economy, Energy, Islamists, Middle East, Open thread at August 6th, 2015 - 4:06 am

It appears that the oil ticks have over-played their hand. Showing the lesson once again, never play poker with cowboys.

 

Please read the entire article, there are many salient points in it that are worth your time.

(FYI: there will be a debate thread for later)

 

Saudi Arabia may go broke before the US oil industry buckles

It is too late for OPEC to stop the shale revolution. The cartel faces the prospect of surging US output whenever oil prices rise

If the oil futures market is correct, Saudi Arabia will start running into trouble within two years. It will be in existential crisis by the end of the decade.

The contract price of US crude oil for delivery in December 2020 is currently $62.05, implying a drastic change in the economic landscape for the Middle East and the petro-rentier states.

The Saudis took a huge gamble last November when they stopped supporting prices and opted instead to flood the market and drive out rivals, boosting their own output to 10.6m barrels a day (b/d) into the teeth of the downturn.

Bank of America says OPEC is now “effectively dissolved”. The cartel might as well shut down its offices in Vienna to save money.

If the aim was to choke the US shale industry, the Saudis have misjudged badly, just as they misjudged the growing shale threat at every stage for eight years. “It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short-run,” said the Saudi central bank in its latest stability report.

“The main impact has been to cut back on developmental drilling of new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience,” it said.

One Saudi expert was blunter. “The policy hasn’t worked and it will never work,” he said.

By causing the oil price to crash, the Saudis and their Gulf allies have certainly killed off prospects for a raft of high-cost ventures in the Russian Arctic, the Gulf of Mexico, the deep waters of the mid-Atlantic, and the Canadian tar sands.

Consultants Wood Mackenzie say the major oil and gas companies have shelved 46 large projects, deferring $200bn of investments.

The problem for the Saudis is that US shale frackers are not high-cost. They are mostly mid-cost, and as I reported from the CERAWeek energy forum in Houston, experts at IHS think shale companies may be able to shave those costs by 45pc this year – and not only by switching tactically to high-yielding wells.

Advanced pad drilling techniques allow frackers to launch five or ten wells in different directions from the same site. Smart drill-bits with computer chips can seek out cracks in the rock. New dissolvable plugs promise to save $300,000 a well. “We’ve driven down drilling costs by 50pc, and we can see another 30pc ahead,” said John Hess, head of the Hess Corporation.

It was the same story from Scott Sheffield, head of Pioneer Natural Resources. “We have just drilled an 18,000 ft well in 16 days in the Permian Basin. Last year it took 30 days,” he said.

The North American rig-count has dropped to 664 from 1,608 in October but output still rose to a 43-year high of 9.6m b/d June. It has only just begun to roll over. “The freight train of North American tight oil has kept on coming,” said Rex Tillerson, head of Exxon Mobil.

He said the resilience of the sister industry of shale gas should be a cautionary warning to those reading too much into the rig-count. Gas prices have collapsed from $8 to $2.78 since 2009, and the number of gas rigs has dropped 1,200 to 209. Yet output has risen by 30pc over that period.

Until now, shale drillers have been cushioned by hedging contracts. The stress test will come over coming months as these expire. But even if scores of over-leveraged wild-catters go bankrupt as funding dries up, it will not do OPEC any good.

The wells will still be there. The technology and infrastructure will still be there. Stronger companies will mop up on the cheap, taking over the operations. Once oil climbs back to $60 or even $55 – since the threshold keeps falling – they will crank up production almost instantly.

OPEC now faces a permanent headwind. Each rise in price will be capped by a surge in US output. The only constraint is the scale of US reserves that can be extracted at mid-cost, and these may be bigger than originally supposed, not to mention the parallel possibilities in Argentina and Australia, or the possibility for “clean fracking” in China as plasma pulse technology cuts water needs.

Mr Sheffield said the Permian Basin in Texas could alone produce 5-6m b/d in the long-term, more than Saudi Arabia’s giant Ghawar field, the biggest in the world.

Saudi Arabia is effectively beached. It relies on oil for 90pc of its budget revenues. There is no other industry to speak of, a full fifty years after the oil bonanza began.

Citizens pay no tax on income, interest, or stock dividends. Subsidized petrol costs twelve cents a litre at the pump. Electricity is given away for 1.3 cents a kilowatt-hour. Spending on patronage exploded after the Arab Spring as the kingdom sought to smother dissent.

The International Monetary Fund estimates that the budget deficit will reach 20pc of GDP this year, or roughly $140bn. The ‘fiscal break-even price’ is $106.

Far from retrenching, King Salman is spraying money around, giving away $32bn in a coronation bonus for all workers and pensioners.

He has launched a costly war against the Houthis in Yemen and is engaged in a massive military build-up – entirely reliant on imported weapons – that will propel Saudi Arabia to fifth place in the world defence ranking.

The Saudi royal family is leading the Sunni cause against a resurgent Iran, battling for dominance in a bitter struggle between Sunni and Shia across the Middle East. “Right now, the Saudis have only one thing on their mind and that is the Iranians. They have a very serious problem. Iranian proxies are running Yemen, Syria, Iraq, and Lebanon,” said Jim Woolsey, the former head of the US Central Intelligence Agency.

Money began to leak out of Saudi Arabia after the Arab Spring, with net capital outflows reaching 8pc of GDP annually even before the oil price crash. The country has since been burning through its foreign reserves at a vertiginous pace.

The reserves peaked at $737bn in August of 2014. They dropped to $672 in May. At current prices they are falling by at least $12bn a month.

Khalid Alsweilem, a former official at the Saudi central bank and now at Harvard University, said the fiscal deficit must be covered almost dollar for dollar by drawing down reserves.

The Saudi buffer is not particularly large given the country’s fixed exchange system. Kuwait, Qatar, and Abu Dhabi all have three times greater reserves per capita. “We are much more vulnerable. That is why we are the fourth rated sovereign in the Gulf at AA-. We cannot afford to lose our cushion over the next two years,” he said.

Standard & Poor’s lowered its outlook to “negative” in February. “We view Saudi Arabia’s economy as undiversified and vulnerable to a steep and sustained decline in oil prices,” it said.

Mr Alsweilem wrote in a Harvard report that Saudi Arabia would have an extra trillion of assets by now if it had adopted the Norwegian model of a sovereign wealth fund to recyle the money instead of treating it as a piggy bank for the finance ministry. The report has caused storm in Riyadh.

“We were lucky before because the oil price recovered in time. But we can’t count on that again,” he said.

OPEC have left matters too late, though perhaps there is little they could have done to combat the advances of American technology.

In hindsight, it was a strategic error to hold prices so high, for so long, allowing shale frackers – and the solar industry – to come of age. The genie cannot be put back in the bottle.

The Saudis are now trapped. Even if they could do a deal with Russia and orchestrate a cut in output to boost prices – far from clear – they might merely gain a few more years of high income at the cost of bringing forward more shale production later on.

Yet on the current course their reserves may be down to $200bn by the end of 2018. The markets will react long before this, seeing the writing on the wall. Capital flight will accelerate.

The government can slash investment spending for a while – as it did in the mid-1980s – but in the end it must face draconian austerity. It cannot afford to prop up Egypt and maintain an exorbitant political patronage machine across the Sunni world.

Social spending is the glue that holds together a medieval Wahhabi regime at a time of fermenting unrest among the Shia minority of the Eastern Province, pin-prick terrorist attacks from ISIS, and blowback from the invasion of Yemen.

Diplomatic spending is what underpins the Saudi sphere of influence caught in a Middle East version of Europe’s Thirty Year War, and still reeling from the after-shocks of a crushed democratic revolt.

We may yet find that the US oil industry has greater staying power than the rickety political edifice behind OPEC.