Τετάρτη 20 Φεβρουαρίου 2013

The Top Eight Energy Risks For 2013

GULF OF MEXICO - SEPTEMBER 4: (EDITORS NOTE: I...

What’s hot and what’s not for the energy world in 2013? With so many confusing headlines hitting your inboxes on a daily basis, here’s an early tonic to focus into 2013. A top eight ‘risks, ruses and rumblers’ for energy in 2013. Here goes:

1) Risk: MENA Unrest & Succession Struggles

Hardly new I know, but no matter what any investment house tells you on benchmark prices, we’re stuck in a $50-150/b world, that’s defined by whichever part of the supply-demand balance proves to be most dysfunctional at any one time. The key supply side risk remains the Middle East. The political debris from 2011-12 will continue into 2013 and beyond, with popular pressures continually growing. That’s not just in the Arab Nationalist Republics such asEgypt, where vocal demonstrators on Tahrir Square have made clear President Morsi needs to deliver the goods or else. Or indeed Syria, whose internal implosion will have increasingly regional effects: But in Gulf Monarchy’s as well. The trigger point to watch is all about political succession. The exact timings are by definition uncertain, but Bahrain, UAE, QatarKuwait and most importantly Saudi Arabia, are in the same boat. If the old succession model passing power from one aging leader to another is seen to be broken, then prices will rapidly lift when the Arab Street erupts. The fact that Saudi Arabia has a very ‘awkward neighbourhood’, with deep seated problems in Bahrain, Yemen and Iraq hardly helps its own Eastern Province either. Forget ‘Arab Spring’; think ‘Salafist Séance’.
2) Risk: Producer States Overreact To Falling Prices
Holding things together in the Middle East will in large part depend on maintaining high oil prices in the first place. Given likely Eurozone failures, a realisation that the U.S. debt position is unsustainable, and daunting domestic challenges in India, Brazil and China to head off hard landings, then demand side fundamentals all point towards two digit oil prices. Having made over $1.115trillion in 2012, you could be excused for thinking OPEC would have ample wiggle room to buy themselves more political time; not so. $100/b is no longer deemed expensive across OPEC ranks, but a necessary price for regime survival. Besides notoriously overstretched patronage states like Algeria, Nigeria, Venezuela or Iran, even Gulf States are starting to feel the pinch. There are no true price moderates left in the oil cartel, merely gradations of hawks. The geopolitical cost of survival is what matters, and it’s seriously out of sync with the geological cost of production. Bottom line: It’s $100/b or bust for petro-states.
While it’s true that most recessions since the 1970s have been preceded by oil price spikes, OPEC has never been very good at heading the lessons of demand destruction, and with emerging markets dominating the headlines, it is unlikely to do better now. Most producer states will be caught seriously short if this happens. Russia will be first out of the money, Central Asian budgets will be squeezed and MENA producers will have to make uncomfortable trade-offs. Latin America is in no better shape, no matter whether you look at Venezuela, Bolivia, Ecuador or indeed Brazil.
In a back to (conventional) basics scenario, the bulk of producer states will go for volume over price, in the hope that the Saudis will do the heavy lifting to set a viable floor. Riyadh might play ball for a while, but it’s unlikely to stop producer states reverting to what they know best as a short term coping mechanism: ‘blunt repression’. Whether that works or not remains to be seen, but if nothing else, we could see a ‘2013 paradox’ of heightened instability across producer states underpinning prices as panic sets in. Pleasant OPEC meetings in Vienna will be irrelevant to the political unrest sweeping producer states. ‘Cyclical’ will take on a whole new meaning as far price and political instability is concerned – the lower the price, the more likely we will see supply disruptions as more vulnerable producers opt for a Libyan or Syrian course. Watch out for Iraq on that score; Kurdish plays look good right now, but Baghdad is unlikely to give up the Northern ghost without a fight – Sunni factions could easily get caught in the crossfire.
3) Ruse: Iranian Nuclear Position Comes To A Head
Amid all this, Iran will be the nuclear dog that doesn’t bark. Sanctions will remain in place, with the U.S. turning the screw a little harder around June presidential elections in Tehran. The Iranian’s will increase their bluster around the Strait of Hormuz in response, not to mention continuing to vie for regional influence across the Gulf, and especially in Syria, Bahrain and Iraq. But for all the huffing and puffing in Washington and Tehran, the nuclear question will remain a stalemate. As long as Iran can find Eastern outlets for its crude, the only way the nuclear clock is stopped is by impatience, miscalculation or misreading of intent that prompts somebody (aka Tel Aviv), to hazard a high risk first move. That’s an unlikely prospect given the political factors in play, Iran will be deferred to 2014 or 2015. Traders who don’t ‘get that’; expect to get burnt.
4) Rumbler: Russia Goes To Internal Energy War
Classically Russian, but in the midst of extreme market uncertainty, the main wars they’ll be fighting are internal between Rosneft and Gazprom. It’s quite clear after the TNK-BP deal that Rosneft has become the new national champion of choice, producing up to 4.6mb/d (taking overall state control of hydrocarbon output to over 50%). How well Rosneft performs remains to be seen, as does the amount of international capital Russia can attract into Arctic plays, but it’s Gazprom that’s the canary in the Moscow mineshaft here. After pursuing endless political goals such as Nord Stream (and nascent South Stream pipelines), Gazprom failed to respond to the most fundamental ‘fundamental’ of all; the unconventional gas world developing around them. To remain a ‘market maker’ rather than price taker, Gazprom had to get out of petty pipeline politics and into serious quantities of LNG. That never happened, and with most Russian fields now looking horribly expensive to develop, Gazprom will need to fork out over $45bn per anum over the next five years. That doesn’t bode particularly well for the Kremlin to fall back on gas revenues, especially if shale plays and LNG continue to cut international market share. Gazprom only contributes 7% of total state revenues, a figure that will be squeezed into 2013.
But the competition isn’t just coming from overseas, but directly from Rosneft. Igor Sechin’s outfit has already secured a 25 year gas supply agreement with Inter RAO (the state electricity provider), next stop will be going after Gazprom’s gas export monopoly. That spells trouble for Gazprom, and indeed private players such as Novatak. Gazprom gets left holding the European baby, playing regional pipeline politics, while Rosneft performs a global energy role. As the battle unfolds, expect Russian production to suffer in the interim and for Moscow to fall back on its free-rider role wherever possible. Hostilities will be brutal, but Rosneft is likely to be the long term winner. Civil war is an ugly thing, and especially so in Russia.
5) Rumbling Risk: American Schizophrenia Sets In
Then we have America. It’s been the trail blazer for shale gas gains over the past decade, and’s increasingly replicating the ‘revolution’ for liquids. As everyone knows, U.S. shale gas gains have turned gas into a perennial buyers’ market, so much so that henry hub prices have become a victim of their own success. The key question in 2013 is not whether America will maintain its number one (650bcm) gas slot, but how much it intends to export as LNG? Those expecting the floodgates to open next year could be disappointed; any volumes signed off in Washington will keep a very keen eye on domestic prices. Of the 125bcm/y of LNG trains awaiting FERC approval, 40-50bcm would be remarkably good going. But even if America gets cold LNG feet, price convergence will slowly continue to play out across the Atlantic and Pacific Basins. The mere prospect of U.S. liquidity hitting the market has been seized upon by Asian buyers, with the upshot that Washington’s virtual impact on the gas world will be far larger than its physical presence in 2013. That’s not particularly great news for global energy companies trying to develop expensive LNG projects in West Africa, East Africa and Australia, but as the old adage from abundant energy goes, ‘be careful what you wish for’. Qatar and Russia serve as the perfect case in point, rueing the slow, but painful death of oil indexed prices for gas.
In terms of liquids, America will probably push towards 11.5mb/d production next year. That means very different things to different people. It’s ‘energy independence nirvana’ for some, especially those willing to lump the Americas all under a single Washington production figure. When President Obama signs off the Keystone XI pipeline in 2013 the narrative will gain far greater traction, even though it’s actually the first step towards fixing WTI prices back towards international benchmarks. That’s chilling news for OPEC of course, not because America can play any kind of swing producer role, but because of the collateral damage it will do to oil prices. Where things get considerably worse for the cartel, is not only that the Americas will use Washington as a production hedge to send tankers East, (Canada, Brazil, Argentina, Venezuela and Mexico all know that relying on a single source of supply and single source of demand is a no brainer), but that Beijing will continue to go ‘long’ in the Americas to make sure they remain firmly tied into global energy markets. Just as China is strategically investing in any cost overruns on LNG plays right now, it’s going to do exactly the same for liquids. Why? Because China wins most from a cheap and abundant energy world. 2013 will mark a transitional step towards that outcome; the vexed Nexen deal will be the watershed moment underpinning Chimerica’s physical and virtual stake in the game. But a word of caution for Beijing, political risk is just as lethal, if not more so in the U.S. than anywhere else in the world. Just ask BP.
6) Risky Rumble: G2 Failure, EU Bind
The perceived U.S. upside from its energy gains is that it no longer has to do all the heavy lifting for global energy supplies. True enough; but the blunt fact to consider is that two-thirds of global oil supplies are still sitting on politically shaky ground, and doing so in an increasingly large external power vacuum in the Middle East. The vacuum will get significantly bigger as US power (and interest) ebbs and Chinese oil flows, albeit without overarching political or security guarantees in place. It also had the distinct potential for conflict should Washington and Beijing end up misreading each other’s actions. Both of whom remain OPEC price takers at this stage.

The 2013 headlines will relate more to Asia-Pacific rather than the Middle East given that the U.S. has made a clear stand to stake its future geopolitical credibility containing the regional rise of China. U.S. fingers have already been firmly stuck in Vietnamese and Australian dykes, more digits will be applied across the Pacific Rim and Indian Ocean. Some might say that’s a bit like running a marathon during rush hour, particularly as Beijing ultimately holds U.S. purse strings and indeed, the economic aces in its own back yard. But as far as MENA states are concerned, few doubt that post-Libya, post-Iraq and pre-Iran, American commitments to global supplies are not what they once were.
The more the Middle East resembles a ‘Chimerican lake’, the more China will be expected to take up some of the security slack. China’s predicament is that it knows it can’t keep getting a free energy lunch off the U.S. military table, but that it can’t build up or project its military might without fuelling American paranoia. If anything, 2013 will be marked by variations of this Chimerican dissonance being played out across producer states in Africa, Central Asia, the Middle East, and Latin America.  But as ‘litigants’ caught between two very differing claimants, the downside problem is that ‘external political protection’ will be in very short supply for producers and consumers states globally.  Top of the list is Europe: The EU urgently needs to get to grips with diversity of hydrocarbon supplies, but hasn’t got the political pull or military muscle to do so. With the U.S. taking a back seat, Russian supplies looming larger than ever - and Caspian output heading predominantly East - it’s brutally clear that Europe needs to start working with China at the other end of the Eurasian pipeline to safeguard its consumer interests. Relying on the trans-Atlantic certainties of old will leave them high and dry. For a ‘reference point’ just ask Delhi; it’s far easier working with the Chinese than against them to orchestrate mutual energy gains.
7) Rumbler: Unconventional Contradictions

Irrespective of the unfolding geopolitical contours of the energy world, energy economics are in a state of flux from unconventional developments. In the past five years we’ve added 200bn barrels of potential oil reserves and 28,000tcf of gas. The result is that oil majors have no clue where to place their upstream bets. Price signals are too confusing; the unconventional landscape utterly bewildering. The snag isn’t just that reserves are trickier to extract in hard to reach places, but if anything happens to go wrong, CEO’s know they’ll pay a very heavy price on stock markets. Kashagan (Kash-All-Gone) is a long standing case in point in Kazakhstan, with the Russian Arctic and Alaska’s Chukchi Sea leaping off the page as similarly difficult marginal calls. The geography is uncertain, nobody really knows where to go, particularly where large resource prizes are heavily intermingled with political, regularity and resource risk. Brazil, Argentina, Canada, Venezuela, Russia, Australia, America, Africa, the Caspian, you name it, there are no free lunches left in the energy world. And for those claiming to understand the geological costs of extraction in exotic places, forget it. They’re taking a giant leap in the dark as well. Any kind of downside price corrections could wipe out vast swathes of Canadian tar, Brazilian pre-salt, Arctic ice, Aussie LNG, and even U.S. tight plays.
The upshot is that some will manage to place decent bets in the race to unconventional riches in 2013; others will catch serious colds. That certainly applies to grandiose pipeline plans laid out in the early 2000s. They now look terribly old fashioned in a new age of unconventional bounty. The likes of TAPI and IPI will remain stuck in the political long grass of South Asia. Pipelines from the Caspian and Levant supposed to feed into European markets will remain on hold. It’s only China that will provide the necessary finance and ‘policy certainty’ to cut through the risk and ensure Turkmenistan, Uzbekistan, Tajikistan and Kazakhstan continue to build pipelines East. Not to mention Beijing pressing ahead with its own unconventional resources. Piece all that together, and the biggest Eurasian loser from new energy gains is Russia. Moscow’s ‘grand Asian designs’ look more like primitive blue prints with weak foundations. Unless Russia’s willing to sell large volumes of energy set at Beijing prices, Moscow’s inherent arbitrage potential will go wanting. China plays the unconventional game to perfection.
8 ) Risk: Renewables Takes Major Hits
But if the unconventional boom is a tricky hand for energy majors (and major resource holders) to get right, it spells absolute disaster for the clean tech sector. From all the energy ‘risks, rouses and rumbles’ noted here, renewables will be the greatest loser of all. As the Doha climate talks attest, we’re going nowhere fast to arrest global emissions to 450 parts per million. Kicking the can down the road to 2015 for a new global agreement that will supposedlymaterialise around 2020 is hardly the stuff of carbon busting. The inconvenient truth is that emissions reduction will remain a piecemeal affair, driven by national agendas and regional agreements. A Beijing-Delhi climate pact might or might not transpire by 2015, but even if it does, don’t expect to have any startling commitments drawn up unless the advanced economies go an extra mile to pay for transitional climate costs. Meanwhile it’s becoming abundantly clear across the Americas that energy earnings will trump climate concerns, especially when it comes to unconventional resources. Efforts to contain the traditional US-China mutual suicide pact have backfired, energy economics is back with a vengeance, while climate economics is lagging. The irony here is Europe tried to do the most on emissions, but stands to achieve the least. A mish-mash of policy mandates and market mechanisms has conspired to see coal fired growth return with a vengeance. Green wash at its worst: NGOs didn’t complain as they saw carbon as a fiscal transfer to the developing world on the sly, while traders were (and still are) happy making money in a broken market. European states should have cracked on with domestic shale as the easy (and elegant) climate win, not to mention creating greater optionality of supply.
Obviously that’s not to say that green investments are dead. But the problem is that the $200bn (plus) global investments have always been driven by government tax incentives and subsidies inflating green tech bubbles, rather than ‘cost curve’ basics. 2013 runs the real risk of seeing government props being knocked out of the renewables market. Purely through scale and a ‘portfolio approach’, China will remain the key green growth market, with wind and solar likely to suffer sharp declines across the board, albeit with notable ‘bright spots’ of solar growth in the Middle East. Nuclear will continue on a slight upward slope, despite Fukushima and the lack of long-term carbon prices, with pretty much the same point applying to CCS technologies. But that hits on the real space to watch for emissions: The interplay between coal and gas. The U.S. has turned the corner from shale gains, but coal is still the ‘fuel of the future’ in Asia, and indeed, ‘back to the future’ in Europe. No matter how far we think we’ve come in the energy world, there’s no way of escaping our Victorian legacy. So, ‘risks, ruses, rumblers’; the only safe bet is the black stuff at the end of day. 2013, it might as well be 1813…
more at http://www.forbes.com/sites/matthewhulbert/2012/11/29/eight-energy-risks-for-2013/2/

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