ODAC News
Friday 14 Sept
The Oil Depletion Analysis Centre
Next newsletter Sunday 23rd
September.
Economy -
1a/ Mervyn spanks banks
(BBC News [Robert Peston], Wed 12 Sep)
1b/ Scything the City (BBC News [Robert
Peston], Thu 13 Sep)
1c/ Northern Rock is bailed out by Bank of England
(The Times, Fri 14 Sep)
1d/ Northern Rock shares plunge 32% (BBC News,
Fri 14 Sep)
Biofuels
2/ Doubts raised over EU’s biofuels target
(Financial Times, Thu 13 Sep)
3/ Saudi to fence off
Iraq (Arabian
Business, Wed 12 Sep)
Natural Gas – UK/Norway
4/ Norway's giant Ormen Lange gas field starts production
(Platts, Thu 13 Sep)
Global Oil Production
5/ A Non-OPEC Progress
Report
(ASPO-USA, Wed 12 Sep)
Food Prices
6/ The market ingredients
are put in place for a more costly full English breakfast (The Times,
Fri 14 Sep)
Natural Gas Exports –
7/ Flash Points: Russia's
Pricing Weapon
(Energy Intelligence [Energy Compass], Fri 14 Sep)
Peak Oil Report –
8/ Govt warns of `peak
oil' chaos
(Courier Mail [
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1a/ Mervyn spanks banks
(BBC News [Robert Peston], Wed 12 Sep)
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2007/09/mervyn_spanks_banks_1.html
Comment: The Bank of England has taken
a lot of flak over the last week or two (in the media) for not doing enough to
help
Article: The headline news in today’s statement by Mervyn King,
Governor of the Bank of England, on turmoil in financial markets is his
forecast that “effective borrowing rates facing households and companies will
rise somewhat.”
It may be a statement of the bloomin’
obvious. But it confirms that the Bank of England is much less likely than it
had been to increase its base lending rate for the simple reason that financial
markets have done the work already.
We are already seeing signs – in Abbey’s
upward tweaks of its tracker mortgage rates for new borrowers – that mortgage
rates are rising.
It won’t be long before we
see rate rises on other kinds of loans to individuals and companies. And
because credit is in shorter supply than in recent years, those unlucky enough
to be classified as riskier prospects may be refused loans altogether or may be
charged an arm, leg and torso.
But King thinks it is “too soon… to quantify the
impact on the economy as a whole”. However he’s clear
that we face some uncomfortable weeks and months.
... During the journey towards a resumption of normal
service, some banks – those who have behaved less stupidly hitherto and have
stronger balance sheets – will clean up. They may become bigger and more
profitable.
Others, with balance sheets weakened by their recent
adventures will shrivel and even possibly disappear, probably by being
acquired.
So what should the Bank of England do about all of
this?
King is absolutely clear that the Bank should do
nothing to bail out banks who failed to calculate properly the risks they were
running in providing financial support to the investment vehicles which bought
crappy assets with short term loans.
He is very reluctant to do what many bankers want him
to do, which is to attempt to bring down interest rates for three-month interbank loans by lending them three-month money against
the collateral of all those debt securities no one wants to buy at the moment.
He thinks – and I agree – that the Bank would in
effect be underwriting the foolish, greedy behaviour of the banks that
precipitated the crisis. In helping them out this time, he would be encouraging
them to believe there is no cost to under-pricing risk, such that they would
almost certainly repeat their mistakes, only next time on a more colossal
scale.
... Also, King confirms that the Bank is prepared, in
its role as lender of last resort, to provide a special loan to any bank that
faced temporary funding problems but was otherwise seen as solvent. It would
wish to prevent the serious economic damage that resulted from a bank collapse.
But it would charge a penalty interest rate for such support, in the hope that biting
said bank would encourage all banking miscreants to rehabilitate.
1b/ Scything the City (BBC News [Robert
Peston], Thu 13 Sep)
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2007/09/scything_the_city_1.html
Comment: Robert Peston gives some idea
as to how many people are just about to lose their jobs in the finance sector,
in
Article: The humungous bonuses trousered by many investment bankers may seem a trifle de
trop.
But it’s not a stress-free
existence. They live in an eat-or-be-eaten world and are in work for as long as
they are economically productive - and barely a second longer.
So brutal redundancies are now only days and weeks
away, as it becomes commonly accepted that the turmoil in financial markets
will depress certain lines of business for months if not years.
The boss of one investment bank tells me he expects a
first wave of job cuts that will see individual banks reduce their headcounts
between 5 and 15 per cent.
And he says he wouldn't be surprised if that was
followed just a few months later by a second wave of similar or even greater
magnitude.
First out the door will be many of the creators of the
current crisis: the manufacturers and traders of assorted asset-backed
securities that you can hardly give away right now; all those debt whiz-kids
who engineered the poisonous collateralised debt and loan obligations; the
banking servants of a hedge-fund world that’s
shrinking fast and of a private-equity industry in cryogenic storage.
Should we weep for their plight? Some of you will
scoff at the thought. It’s a big hello to schadenfreude [Wikipedia: is a German word meaning
'pleasure taken from someone else's misfortune'].
Actually, there could be one or two benign
consequences from the slaughter of the not-so-innocent, such as a deceleration
in the rampant inflation of central
But don't think we'll get away scot-free.
The economy called
Lean times in the City means slower growth, less
wealth to spread around and a substantial dip in the Treasury's tithe.
When the bubble is pricked, no umbrella is big enough –
we all become a bit damp.
1c/ Northern Rock is bailed out by Bank of
Article: Northern Rock, the
In a rare move, the Bank of England agreed to throw
the bank a lifeline and become the “lender of last resort”, effectively
agreeing the first bailout of a British bank since money markets went into
crisis over the summer.
Financial experts and MPs urged borrowers and savers
with Northern Rock to stay calm, telling customers that they should not be
tempted to withdraw their funds or switch lenders.
John McFall, chairman of the
Treasury Select Committee, said: “I don’t think
customers of Northern Rock should be worried about their current accounts or
mortgages.
“The fact that the Bank [of
The Governor of the Bank of England, Mervyn King, said in a letter to the Treasury Select
Committee on Wednesday that the Bank would be prepared to provide emergency
loans to a bank that ran into difficulties, so long as those difficulties were
the result of temporary market conditions.
... Experts said that Northern Rock was suffering
because of its dependency on borrowing from other banks.Ray
Boulger, senior technical manager at John Charcol, a mortgage broker, said: “It is unusual. Banks
will try to arrange things so they do not go to the lender of last resort.
Northern Rock is the largest financial institution
based in the North East of England, according to its website. It was founded in
July 1965 as Northern Rock Building Society and converted to a public limited
company in 1997.
A £4.4 billion relief fund offered by the Bank of
England yesterday was drained by banking giants in less than an hour as they
struggle to secure finance. The Bank of England pumped the extra cash into the
system in a bid to ease soaring overnight inter-bank borrowing interest rates.
1d/ Northern Rock shares plunge 32%
(BBC News, Fri 14 Sep)
http://news.bbc.co.uk/1/hi/business/6994328.stm
Comment: Long queues outside branches -
looks like people are beginning to get worried.
Article: Shares in one of the
But experts and officials insist that Northern Rock,
which has £113bn in assets, is not in danger of going bust.
Despite the reassurances lines of customers formed
outside many Northern Rock branches around the
The bank has struggled to raise money to finance its
lending ever since money markets seized up over the summer.
Other bank shares fell, with Bradford & Bingley, Alliance & Leicester and HBOS down nearly 8%,
7% and 4% respectively.
House builders were also hit, with companies like
Persimmon, Taylor Wimpey, Bovis
Homes and Berkeley Group falling around 6% and more.
The
Northern Rock said that its profits for 2007 would be
hit, but that it remained solvent.
Unlike most banks, which get their money from
customers making deposits into savings accounts, Northern Rock is built around
its mortgage business...
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2/ Doubts raised over EU’s biofuels target
(Financial Times, Thu 13 Sep)
Article: A European drive to source a
tenth of vehicle fuel from plants by 2020 may have to be scaled down, the
chairman of international talks on biofuels said on Wednesday.
Brice Lalonde, the head of
the Organisation for Economic Co-operation and Development’s
round table on sustainable development, said that it may not be possible to hit
the target using “sustainable” methods, as called for by European Union leaders
in March.
A stinging report prepared for the OECD group of
developed nations on Wednesday warned that converting crops into energy risked
raising food prices and the chopping down of tropical forests because of
competition for scarce land.
The OECD report said that politicians were using subsidies
and policy to rig the market in favour of an untried technology that would
reduce energy-related emissions by 3 per cent at most.
“The current push to expand the use of biofuels is
creating unsustainable tensions that will disrupt markets without generating
significant environmental benefits,” the authors said.
Mr Lalonde, a French former environment
minister, said: “The message was to be careful and take a long hard look at the
issues. Several people were very blunt in saying that you cannot ask nature to
do everything. You cannot feed people and soak up carbon and protect biodiversity
and fuel cars.”
“European transport ministers set the target ‘as long
as it is sustainable’. That is a key sentence.”
Mr Lalonde said that many
lobbyists – not least farmers – were pushing for greater biofuel use and
subsidies.
The meeting was attended by ministers and government
officials from several EU members as well as the
Some diplomats in
However, a spokesman for Andris
Piebalgs, the energy commissioner, said he would
publish a plan for hitting the target by the end of the year. “We are carrying
out the mandate given to us by European leaders,” he said. “New technology will
play a big role.”
That is a gamble, say some, as such technology is
unproven. Most current biofuels use a lot of energy to break down plants. The
OECD believes governments should scrap subsidies to those and fund research
into second generation fuels, which use waste products such as cut grass.
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3/ Saudi to fence off
Comment: Following
Article:
... The contract is part of wider project aimed at
securing the country's 6,500-km-long borders, local contractors said.
Known as the Ministry of Interior, Kingdom of Saudi
Arabia (MIKSA) contract, the scheme includes adding hundreds of radar facilities,
coastal detection centres, telecommunications networks and reconnaissance
aircraft around the country.
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4/
Comment: The capacity of the Langeled
pipeline is about 25 billion cubic metres / year (25 bcm), which should be
enough to keep the
Article:
Tom Rotjer, Hydro's director for Ormen Lange
and the Langeled pipeline, said: "This is a historic milestone, not only
for Hydro, but also for the license partners and the Norwegian industry as a
whole. We are thrilled to be able to deliver gas from the Ormen
Lange field to the
"From now until the inaugural ceremony on October
6, we will be testing production. This may result in fluctuating volumes of gas
flowing from the field," he added.
Commercial operations at the field are timetabled to
start October 1, with the official inauguration following October 6. Gas market
observers had long expected flows from the field to start prior to the
commercial launch, however. Several traders said in the previous week that they
had heard rumors that the field would begin sending
gas to the
Hydro spokesman Lars Bjelvin
said volumes from the field would be "fairly moderate at the start--there
will be a gradual increase in volumes all the way out to 2010."
Ormen Lange could
flow around 70 million cubic meters/day into the
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5/ A Non-OPEC Progress Report (ASPO-USA, Wed
12 Sep)
http://www.aspo-usa.com/index.php?option=com_content&task=view&id=210&Itemid=91
Comment: Dave Cohen of ASPO-USA writes
clear and succinct articles on oil production/depletion. Here he analyses
non-OPEC oil production so far for 2007.
Article: A data-driven analysis of new
oil projects outside of the Organization of the Petroleum Exporting Countries
(OPEC) reveals that production growth is now surpassing the dismal performance
exhibited in 2005 and 2006. New project schedules and the EIA's
supply data make it possible to take a close look at the non-OPEC supply
situation, and thus make a rough estimate of how 2007 will turn out. Many
developments are scheduled to come on-stream in the 2007-2009 period, but new
projects peter out thereafter. It's important to keep our eye on the ball by
examining how declines or delays affect overall non-OPEC production growth
during these crucial years.
... These considerations point to an increase of at
most 700 thousand b/d in non-OPEC supply for 2007, a substantial improvement
over the 2 previous years. Growth beyond this ceiling requires that new oil or
existing field upgrades must surpass non-OPEC declines. If the IEA's estimate
of the decline rate for non-OPEC production is accurate, the world must put
2.324 million b/d on-stream each year to offset depleting fields. This number
is higher than the peak flows total in Table 1. It seems clear that new oil
from projects scheduled in previous years is making up much of the difference.
With so many 2007 projects experiencing delays, declines may offset additions
for the rest of the year, thus lowering the non-OPEC increment. Updates to the
EIA data will allow us to follow the situation more closely.
Production growth is stronger than it was in the
previous two years, but that doesn't mean that the non-OPEC supply picture is
rosy for the indefinite future. New developments become scarce after 2009
according to both Skrebowski's and Moritis' schedules
for upcoming upstream projects. These schedules are reasonably accurate because
of the long-lead times required to get new oil into production. Analysts like
the IEA and the Centre for Global Energy Studies (CGES) have been forced to
revise their non-OPEC forecasts downward in recent years (ASPO-USA, April 11,
2007). We await the final verdict for non-OPEC supply, which won't be in until
the 1st quarter of 2008.
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6/ The market ingredients are put in place for a more costly full
English breakfast (The Times, Fri
14 Sep)
Article: The cost of a cooked British
breakfast is about to surge as price inflation grips the animal feed industry
and threatens to create shortages of food staples, such as eggs as well as
soaring bacon, dairy and bread prices.
The inflationary spiral in wheat, which last month
forced up the price of a British loaf, is creating havoc in the farmyard. A
leading
Noble, which supplies about 40 per cent of the
“Farmers are deciding not to buy pullets. There could
be shortages in the market in the weeks leading up to Christmas,” said Finn Cottle, marketing director.
Egg consumption rises by 50 per cent in the run-up to
Christmas, as families have more cooked breakfasts in winter and bake cakes.
The cost of animal feed, mainly wheat and soya, represents half the cost of keeping hens and those
ingredients have doubled in price over the past year. Pig farmers are also
feeling the effect of soaring commodity prices and are demanding stiff price
increases for pork.
... The grain price is setting records every week just
as egg farmers enter contracts for animal feed, typically renewed in September.
If the business of producing eggs is to get back on an even keel, farm gate
prices must rise by 25 per cent, says Noble. That translates into an extra 20p
on six free range eggs on a supermarket shelf...
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7/ Flash Points:
No link. From newsletter.
Article: Russian state Gazprom's drive
to raise natural gas prices for neighboring states is
causing further strains, creating seeds for new crises and potential supply
disruptions when contracts expire at end-year. Price talks with all the major
transit nations for Russian energy exports to Europe -- the Baltic states,
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8/ Govt warns of `peak oil' chaos
(Courier Mail [
http://www.news.com.au/couriermail/story/0,23739,22419825-952,00.html
Article:
As crude oil prices hit a record high yesterday, an
as-yet unreleased Queensland Government report warns of massive social
dislocation, rising food prices and infrastructure headaches because of rising
oil costs.
The report on the looming "peak oil" crisis
concludes that we will have to re-think the way we live and travel in the next
few years as relatively cheap liquid fuels become a thing of the past.
"Peak oil" refers to when global output
fails to meet demand, a situation the report estimates will occur in the next
few years, although some economists believe we are now on the cusp.
The report,
The effect already is being felt at the bowser, with petrol in
The report was prepared by a taskforce of scientists
and industry experts, including
Of the three scenarios mapped out for world oil prices
by the report, Mr McNamara said we were already in the worst case "high
oil price" scenario.
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