**by Mike Shedlock
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:
* 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?
Talk BackTalk Back
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Michael Shedlock (Mish) worked in the financial services industry for
20 years at some of the top institutions in the country including
Harris Bank, the Bank of Montreal, Bank One, First National Bank of
Chicago, and First Data Corp. Mish is currently doing economic and
investment research for a number of clients.
Copyright © 2005 Mike Shedlock
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