Energy Crisis & the Politics of Oil

By: Mike Shedlock | Thu, Jan 12, 2006
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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.

  1. 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."
  2. 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.
  3. 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:

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?


 

Mike Shedlock

Author: Mike Shedlock

Mike Shedlock / Mish
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Mike Shedlock

Michael "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Visit http://www.sitkapacific.com/ to learn more about wealth management for investors seeking strong performance with low volatility.

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