Wednesday, November 12, 2008

Daily Sources 11/12

1. China's National Development and Reform Commission said today that it will build an additional 169 million barrels worth of storage for its strategic reserves program, reports upstream online. Purchases to fill strategic reserves push up prices--petroleum economist Philip Leverett identified US SPR purchases of light sweet crudes as a major contributing cause to the run up in prices to this Summer--and, as such, purchases could be coordinated with OPEC nations in order to provide them with a measure of price stability. In a related story, Abdallah S. Jum'ah, CEO and president of Saudi Aramco--Saudi Arabia's national oil company--said yesterday in Beijing that the company intended to take a larger share of the Chinese crude market, so as to increase their energy cooperation.

One of the major concerns of OPEC, and especially Saudi Arabia, is the notion of "demand security," their side of the "supply security" issue in the consuming countries. China's stimulus plan--whether it mostly PR or not--was very welcome in the commodity exporting nations (not just oil, but metals producing nations in South America) etc., because the stimulus in theory is an attempt to put a bottom on commodity prices. Similarly, China, by building large strategic petroleum reserves, gives itself the ability to try and manage price--in cooperation with OPEC--by filling its reserves when prices get too low.

2. Brad Setser at Follow the Money has another especially interesting post which argues that China may not stop purchasing US treasuries due to its fiscal stimulus plan. His post is well-worth reading in its entirety, but in essence I take his argument to be that China's imports will, at least in the near term, fall faster than exports, meaning, in the absence of foreign investors withdrawing their cash, that their China's foreign currency reserves will continue to grow. (That said, Sandra Tsui at Lloyd's List reports that southern Chinese ports are experiencing steep reductions in international container traffic.
"Guangzhou port said it had lowered its international container throughput target for this year by 10%. ... Nevertheless, boosted by strong growth of domestic traffic, the port is still set to record 24% increase in overall container throughput this year"

"Chiwan Wharf, a major operator in west Shenzhen, has posted a 19.4% decrease in October box volume, to 474,400 teu, compared to the same month last year.
I imagine that if the stimulus program is the mere repackaging for public relations of ongoing public spending that this outcome is even more likely. However, if the infrastructure program is new money, for which, in the medium-to-long term, represents a build in demand for commodities, and this is done in a global economy where Chinese exports continue to fall, I imagine that China's reserves will, in fact, fall.

3. The IEA released its World Energy Outlook 2008 publication today. Sadly, only the Executive Summary is freely available. Their reference scenario require investments of $26 trillion from 2007-2030. Over 52% of that is in the power sector. The organization also projected that OPEC would account for most additional oil production required by world demand, saying that non-OPEC production has already plateaued and is likely to start falling in the coming decade. The IEA estimates that the average decline rate for fields that have passed their peak to be at 6.7%. The conclusion they draw is that at least 1 mb/d of additional capacity must be added every year in order to meet demand. The executive summary's concluding line is "Time is running out and the time to act is now." According to Platts, the actual publication also concludes that African natural gas exports to Europe are set to triple by 2030, overtaking Russia as its largest supplier.

4. Oleg Shchedrov at Reuters reports that Prime Minister Vladimir Putin has told Finland's Prime Minister, Matti Vanhanen, that Russia will decide to build LNG plants if Europe does not decide to go ahead with the Nord Stream pipeline soon. Nord Stream would be a pipeline to pass through the Baltic Sea direct to Germany from Russia. Several Baltic states dislike the plan, because it means they would receive no transit fees from the gas, specifically Poland, Lithuania, and Estonia. The price of LNG shipments is higher than piped gas, in part because piped gas has no alternative market but its destination and LNG can be shipped anywhere with a LNG receiving terminal.

5. Guy Faulconbridge at the Washington Post reports that Russia has rejected recent overtures by Washington which were an effort to reduce their fears regarding the intentions of the missile defense program for Eastern Europe. Moscow does not want to conclude any deals prior to the US presidential inauguration. Tass quoted an anonymous source as saying the Bush Administration,
"is intent on putting the new U.S. president in a hopeless situation, so that he should take responsibility for what they concocted without him."
6. Anna Shiryaevskaya at Platts reports that Russia, Iran and Qatar are planning to set up a JV to develop South Pars natural gas fields, as per a story in today's Russian business journal Kommersant. The plan is to pipe the gas to a liquefaction facility in Qatar for export. Iran has been having trouble developing South Pars according to schedule, and there are arguments in the Majlis--the Iranian Parliament--as to how best to use the natural gas.

South Pars phases 11-14 have been all dedicated to various LNG projects. Phase 11 was to be a joint venture with NIOC, Total and Petronas (the Malaysian national oil company)--Total left the project this summer under pressure from the international community regarding Iran's nuclear program. Phases 13 and 14 were dedicated to the Persian LNG project, which was to be jointed developed by Shell, Repsol (a Spanish oil firm) and NIOC. Shell and Repsol also withdrew from Iran this summer. The phases were scheduled to come on line between 2011-14. It seems that Russia and Qatar are proposing to take their places.

Iran has grand designs for the development of South Pars, and much of the talk surrounding the programs will never happen. If Iran wishes to maintain production at its crude oil fields--and crude oil sells for much more, on a BTU and cost of production basis than natural gas--it will need to use a considerable amount of the South Pars gas for re-injection. Moreover, Iran's power generation needs are growing at about 8%/year (if I remember correctly), and, given that Tehran will not soon have nuclear generation and that it would prefer to export oil than burn it for power, it is reasonable to think that much of natural gas slated for export will end up being burnt for power instead. Moreover, recent analysis suggests that due to large additions to natural gas reserves in North America, mostly, upward pressure on international prices is less likely to be strong going forward than, say, for crude.

Nonetheless, Iran needs the technical expertise of foreign firms to efficiently develop South Pars, especially in terms of LNG, and Russia happens to have that expertise. Moscow has an interest in the eventual direction of this natural gas as one of the potential feeds for the Nabucco pipeline would be Iran. (The Nabucco pipeline would pass from Turkey through Bulgaria and Hungary to Austria, carrying 30 billion cubic meters/year and is a major effort by the EU to diversify their natural gas sourcing.) Moreover, Iran's nuclear power plants are being constructed by Russian firms. Qatar, though an ally of the United States, would be well-served by increasing cooperation with Tehran (and Moscow) and would end up being the locus of export.

All in all, the story could be that much more white noise, but there are some reasons to think, in my opinion, that the reported plans are genuine and will be followed up upon.

7. Marsoud Barzani, the President of the Kurdistan Region of Iraq, has an op ed in today's Wall Street Journal. In it he claims that obstructionist efforts by the Kurdistan Regional Government insofar as the new oil law and other parliamentary efforts in Baghdad go is an insistence upon the meaning and intent of the Iraqi Constitution. Insofar as Barzani is a strict constructionist, he is "only following America's great example." Pandering aside, Barzani also signals his commitment to closer relations with Turkey--which could prove especially significant going forward.

8. The Regional Times reports that the United States intends to drop Mullah Omar--of the Taliban--from its list of terrorists to smooth talks with the leader. (h/t Informed Comment)

9. Peter Finn at the Washington Post reports that the closure of the Guantanamo Bay facility is a priority for the Obama Administration. The news of its closure will be a soft power success, I believe. You cannot sustain such a prison in the United States, unlike most of the rest of the world.

10. Choe Sang-Hun at the New York Times reports that North Korea has announced new restrictions on nuclear inspectors there, preventing them from taking soil and nuclear waste samples. Such samples are required for determining the extent of the nuclear program in North Korea. Inspectors were also to be confined to Yongbyon, the main nuclear complex in the country, which apparently complicates investigations into whether Pyongyang is exporting nuclear technology.

11. Shobhana Chandra and Fergal O'Brien at Bloomberg report that a survey by the media company shows that there is very little confidence in the global economy internationally. The Bloomberg Professional Global Confidence Index read 6.6 in November--anything below 50 means pessimists outnumber the optimists. Greg Farrell at the Financial Times reported yesterday that the CEO of Merrill Lynch, John Thain, warned that the global economy is entering a slowdown comparable to the events following 1929.

12. Nouriel Roubini's RGE Monitor nicely summed up the European Union's action plan for the G20 meeting this Saturday, to wit:
"i) Submit rating agencies to registration and surveillance, especially with a view to credit ratings’ prominent role within the Basel II capital requirement framework.
ii) Adopt principles to ensure the ‘convergence of accounting standards’.
iii) Decide that no market segment, no territory and no financial institution should escape regulation or at least oversight.
iv) Establish codes of conduct to avoid excessive risk-taking in the financial sector, including on the ‘remuneration’ of executives.
v) Give the IMF the ‘initial responsibility’ and ‘necessary resources’ for ‘recommending the measures to restore confidence and stability’ in the international financial system."
13. Eurointelligence reports that the FT Deutschand has the story today that Germany's Council of Economic Advisers is calling for a stimulus program on the order of 0.5-1% of GDP. The plan would thus be for between €12-24 billion ($15-30 billion) as opposed to the current Merkel Administration plan for about €5 billion ($6.255 billion). The council is apparently referred to as "the wise men group" and has typically been skeptical of stimulus packages.

14. Brian Blackstone at Real Time Economics reports that in Luxembourg the Vice Chairman of the Federal Reserve indicated in his prepared remarks that "we will need to continue to consider whether additional steps are needed to re-open credit flows and support the economy." He also indicated that currency swap with other central banks and credit auction facilities might become permanent. (The Fed extended currency swaps with South Korea, Brazil, Mexico and Singapore on October 29 in order to ease downward pressure on their currencies as international redemptions of dollar-denominated debt were pushing up the dollar on the currency markets.) Also today, Bank of England Governor Mervyn King said policymakers are prepared to cut interest rates as low as possible to prevent the recession from causing deflation, as per Sarah Jones at Bloomberg.

15. The Treasury, FDIC, and Fed released a statement today urging banks use the public monies being made available to them to lend. Real Time Economics has the text of the statement.
"The agencies expect all banking organizations to fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers, and other creditworthy borrowers. Moreover, as a result of problems in financial markets, the economy will likely become increasingly reliant on banking organizations to provide credit formerly provided or facilitated by purchasers of securities. Lending to creditworthy borrowers provides sustainable returns for the lending organization and is constructive for the economy as a whole.

It is essential that banking organizations provide credit in a manner consistent with prudent lending practices and continue to ensure that they consider new lending opportunities on the basis of realistic asset valuations and a balanced assessment of borrowers’ repayment capacities."

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