Wednesday, October 22, 2008

Open Sources 10/22

1. William Branigin at the Washington Post report that President Bush will host a global summit November 15th to discuss the reformation of the international financial system. G-20 members will be invited as well as the officials from the IMF, the World Bank, U.N. Secretary General Ban Ki-moon, and the chairman of the Financial Stability Forum.

2. Katrin Bennhold at the New York Times reports that President Sarkozy of France urged European leaders to establish sovereign wealth funds in order to prevent European companies from being purchased via foreign capital when they are at their lowest market value. This is kind of an odd position given Sarkozy being at the forefront of calls for an international response to the financial crisis. What this underscores is that Sarkozy, in a way consistent with a history of Gaullism, is a European-ist, and not particularly an internationalist. Germany opposed a pan-European response to the financial crisis on what appeared to be nationalist grounds--that is, they didn't want German banks to fall as other European ones soldiered on--and opposes this suggestion as well, apparently because Berlin just doesn't want to let France look like its leading the European charge. Wall Street Journal Europe's editorial board also came out against the idea today.

3. Ann Scott Tyson and Philip P. Pan of the Washington Post report that Gen. Nikolai Makarov, head of the Russian general staff, told reporters in Moscow following his meeting with his American counterpart in Helsinki that:
"We agreed that on fundamental military issues, we will periodically hold dialogues by phone and, when necessary, at personal meetings that I think will be held on a systemic and routine basis."
This followed the first visit ever by an American Chair of the Chiefs of Staff in Serbia, which perhaps should be seen as the first move in a ... much needed ... "listening tour." The establishment of routine and systemic meetings between Russian and US military establishment chiefs is a very welcome development. In a related story, the Washington Post's Thom Shanker reports that US Chairman of the Joint Chiefs of Staff Adm. Mike Mullen said the NATO was considering increasing the number of military exercises in the Baltic. Adm. Mullen said it was a response to Russia's military action in Georgia. (I suspect it might also serve as a response to military exercises off the coast of Venezuela.)

4. Eric Watkins at the Oil and Gas Journal reports that Russia and Japan have signed an accord to cooperate on oil and gas development.
"The document stressed that the Japanese government promotes participation of Japanese companies in energy projects in Russia, including the establishment of gas processing and gas chemical production facilities in eastern Russia.

The two sides also hailed the start of joint exploration for oil in eastern Siberia, which they said would help to drive the East Siberia-Pacific Ocean pipeline."
Japan has been encouraging Moscow to build a pipeline from the Caspian, essentially, to the Pacific Ocean for some time. Tokyo offered $14 billion to help build the structure, but Russia seemed to have bet on China's market at that time. Chris Buckley has a related story at Reuters, that Chinese Premier Web Jiabao will visit Moscow next weeks in an attempt to jump start plans to build pipelines to deliver Russian natural gas to China. Russia has been reluctant to divert gas away from its main customer--and region with which it wants most to integrate--Europe. (It also has plans to ship LNG to the US East Coast from gas fields in the Barents Sea.)

The Wall Street Journal reports that Iran, Qatar, and Russia agreed to form a natural gas cartel yesterday in a meeting at Tehran. Together the three countries control about 60% of the world's natural gas reserves. Natural gas is relatively difficult to sell at spot, and tends to be sold on very long term contracts given the immense capital requirements for building the requisite infrastructure. Thus there is a bit of a shrug in the oil and gas world's response (pace the response in the papers, which is sure to be shrill.) That said, the Associated Press reports that the European Commission has said it will have to rethink it's energy security policy if the three countries go ahead with plans for the gas cartel. There may be some bite to this threat as some of Europe had abandoned nuclear power and is in the process of reconsidering it. (Natural gas is burned for power generation in Europe--it isn't really used as a transportation fuel.) The most notable countries reconsidering nuclear are Germany and Italy.

Though Iran has huge natural gas reserves, how it will participate in a gas cartel for the near term, at least, is a bit of a puzzle. Just now it is barely exporting to any country, and, in fact, is importing from Turkmenistan for power generation needs. As per Siamak Adibi of FACTS Global Energy, South Pars--the largest gas field in the world (shared with Qatar)--phase 6 is scheduled to come on line this winter, and phases 7-8 next year. (The field is being developed over the course of 24 phases, the completion of phase 6 is already two years late.) But the natural gas from these phases, 3.6 bscf/d's worth, is all slated to be reinjected into oil fields in order to boost the crude oil production from it. Phases 9-10 are slated for first gas this month and December, if they are not flowing at that time, Abidi fears there will be a heating crisis in Iran this winter as there will not be enough gas to meet the energy generation needs of the country.

Also today, Amie Ferris-Rotman and Vladimir Soldatkin at Reuters report that Russian First Deputy Prime Minister in charge of oil, Igor Sechin, told an industry conference that Russia was considering building a large oil reserve in order to serve as a second swing producer. It's an interesting idea guaranteed to produce headlines. But the critical item is this:
"OPEC Secretary General Abdullah al-Badri, who arrived in Moscow on Tuesday for a two-day trip, met with Russian President Dmitry Medvedev to discuss the exchange of market data."
The thing which bedevils the oil markets the most, of course, is the horrible data. Whether or not OPEC is honest even within itself, and thus likely to be with Russia, really is inconsequential if they are simply more honest with each other, and thus with Russia, than with the rest of the world.

5. China Chon at the Wall Street Journal reports on Iraqi Ministry of Finance officials' struggles to retool the 2009 budget on the back of lower oil prices. The budget was based on a $80/b assumption for oil price, and, as you know, oil is now below that. Evidently the budget already envisioned running at a deficit as the government would only have broken even had the price of oil averaged $111/b over the course of 2009. Running a deficit may be difficult for Baghdad, but one likely consequence of the fall in price is that small operators who have secured concessions from the Kurdistan Regional Government will find financing much more difficult to secure from international financial sources. If Kurdish areas become insecure as a result of conflict, as is possible in areas like the province of Diyala, the security costs might bring up the cost of production beyond what the price of oil would bear. Given that Baghdad has an interest--and believes the Kurds have violated the Constitution by selling concessions--in asserting control over all oil resources in the Kurdish regions, Baghdad may decide to incite conflicts in the north. Larger companies will be reluctant to bail out smaller entities engaged in the Kurdish regions as they will want to maintain good relations with Baghdad and thus continue to have a shot at much more lucrative potential concessions.

6. Emad Mekay at Bloomberg reports that Shokri Ghanem, chairman of Libya's National Oil Corp, told reporters a cut of 1 million barrels will not be sufficient and that "We are in agreement that the market is flooded and oversupplied." On the other hand, Felix Onuah at Reuters reports that Nigerian Oil Minister Odein Ajumogobia told reporters it was not in Nigeria's interest to cut oil production as it needed the revenues. If, as CGES has suggested, all countries but Saudi Arabia have made the cuts that their budgets can take already, then it really is up to Riyadh. Carola Hoyos reported in the Financial Times that the only primary signal the market has had to go on
are anonymous comments published this week by Al-Hayat, the Saudi-owned paper, which appear to reflect Riyadh's more conservative thinking.

The paper quoted an unnamed source expressing "doubt that demand for oil will adjust [downwards] requiring a substantial cut in production", adding that it was still uncertain whether even 500,000-1m b/d needed to be cut.
AP reports that Venezuela's budget for 2009 is assuming an oil price of $60/b and inflation of 15%/annum.
"The budget predicts next year's economic growth will be 6 per cent and inflation 15 per cent, despite the fact inflation was estimated at 36 per cent in Caracas in September."
Budget difficulties make it difficult for the major price hawks, ie Iran and Venezuela (and Iraq), to cut supply as a bloc within OPEC, because it would cut their market share, and thus net revenues given the time it will take for prices to recover. Indeed, generally the ability of price hawks in OPEC to cut independently as opposed to allowing Riyadh to act has been their perennial decision to include high oil price assumptions in their budgets.

7. Faiza Saleh Ambah and Candace Rondeaux at the Washington Post report that Saudi Arabia hosted a meeting between Taliban and Afghan officials in Mecca last month. Saudi Foreign Minister Saud al-Faisal made the revelation after a meeting with EU Foreign Policy Chief Javier Solana in Jiddah on Tuesday. The talks centered on the deteriorating situation in Afghanistan and Pakistan.
"Abdul Salam Zaeef, the former Taliban ambassador to Pakistan, attended the meeting and said there was no discussion of peace talks. Zaeef said Karzai's government missed an opportunity when it failed to engage the Taliban in talks three years ago. Since then, he said, the Taliban has grown stronger. 'Before, the Taliban had no hope that the American rule would collapse here,' he said. 'Now, they have hope.'"
The talks included Nawaz Sharif, former Prime Minister of Pakistan and head of the largest opposition bloc in the country's Parliament. Sharif is an advocate of negotiations with the Taliban.

It is critical that Sharif withdrew the support of his party--the Pakistan Muslim League (Nawaz)--for President Zadari because Zadari refuses to reinstate former Chief Justice Chaudhry. The summary dismissal of Chaudhry was the key rallying point in the lawyers' revolt in that country, which is credited with the fall of Musharraf. I wrote an analysis of the potential benefits of supporting the lawyer revolt, and the further development of the rule of law therefore, in Pakistan previously, should you be curious. It is my view that it is a disaster for the US if their positions are conflated with the political forces in Islamabad which flout the rule of law, especially given the obvious potency of both the lawyer revolt there and sympathy for tribal sentiment in the north.

8. Emily Wax of the Washington Post reports that the trade route connecting Jammu-Kashmir with Pakistan, and thus to the most convenient port city of Kashmir, was opened after 61 years of being shut. It is only open 2 days a week and just 21 products are allowed to be transported via the route, but surely it is a step in the right direction. Especially after the commissioning of the dam in Jammu-Kashmir earlier this month has exacerbated the fuel crisis in Pakistan.

9. Mongolia Web News has the story that India is looking to source uranium from Mongolia.
"Currently, India’s nuclear power plants are only running at half their capacity due to a shortage of uranium-based fuel."
10. Re: jboss's suggestion yesterday on Follow the Money, Winnie Lee at Platts reports that Chinese oil companies PetroChina and CNPC are interested in purchasing foreign oil companies hit by the financial crisis. Angolan assets owned by Marathon were mentioned.

11. Peter Fritsch at the Wall Street Journal reports that new oil from Africa may be too expensive to be produced at current prices. The article mentions that Angolan production has gone down, and sources the country's oil minister as stating that this was a result of an accident at an offshore block. Maybe, but we knew as early as September 16th that this was going to take place--I suspect compliance with the OPEC directive at the September 9th meeting. But the article cites many other issues--exogenous from the technical issues of the geology--most especially security, which has been an endemic issue throughout the continent. Some new oil is inland, which requires the construction of pipelines, which are especially expensive to build and maintain ... providing for their security is notoriously difficult (see all the speculation regarding the BTC recently.) Also, in the absence of a strong national state structure, oil wealth tends to exacerbate difficulties in securing the King's Peace further. Fritsch mentions a case in Uganda where the E&P company, UK's Tullow Oil, analysis has the project--which would require a 750 mile pipeline--profitable only at $80/b or more. (h/t

12. Chris Giles and Neil Dennis at the Financial Times report that the Governor of the Bank of England, Mervyn King, said that the UK was entering a recession likely to be prolonged. The rate setting committee of the Bank of England also announced it had voted unanimously to reduce the benchmark lending rate by 50 basis points to 4.5%. Mr. King said, “The age of innocence – when banks lent to each other unsecured for three months or longer at only a small premium to expected policy rates – will not quickly, if ever, return.”

13. Lisa Baertlein at Reuters reports that an analysis released by Wal-Mart shows that purchases are spiking around the time shoppers receive their paychecks. This appears to be the case even for baby-formula, which suggests that increasing numbers of people are finding it hard to pay for food. Eduardo Castro-Wright, Wal-Mart's CEO, said that the company's most recent poll of shoppers found that personal financial security was the number one issue for the vast majority--80%. (h/t Yves Smith, Naked Capitalism)

14. Meena Thiruvengadam at Real Time Economics reports that the Federal Reserve will increase the interest rate it will pay on funds deposited at the bank in excess of the deposit insurance requirement from 0.75% below the Federal Funds Rate to 0.35% below. The passage of the emergency financial stabilization bill allowed the Fed to pay interest on excess deposits immediately. Apparently this was ahead of schedule, as the Fed was slated to begin doing so come 2011. The linked post includes the full statement from the Fed. Neil Irwin at the Washington Post reports that yesterday the Fed established a program which will make up to $540 billion available to buy assets from money market funds so as to prevent the funds from experiencing any cash crunches and thus being short squeezed.

15. Eric Dash at the New York Times reports that Wachovia reported a $23.9 billion loss today.

16. The EIA reported that stocks of crude oil were up 3.2 million barrels, somewhat above the historical average. Stocks of gasoline were up 2.7 million barrels and distillate were up 2.2 million barrels, both now at about the bottom of the historical average. Analysts expected a 2.9 million barrel build in crude stocks, according to Platts' survey Tuesday. Taken in isolation, this would put downward pressure on prices.

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