The price of CO2 emission rights in Europe has fallen 20% in two days. The move is the most drastic seen in the commodity space in a long while and can be attributed to the following dynamics:

a) Financial investors went long CO2 rights buying into the catalyst of the phase III of Kyoto, the stronger policies towards renewables announced by the EU and the infamous “Fukushima effect” (buying into renewable themes on a vague promise of policy changes and the German nuclear phase out).

b) At the same time, European industries, which were already long EUAs in 2009 and 2010, see less need to hedge because industrial demand is poor and there is excess supply.

The EU decision to make an early sale of 300mn allowances from a post-2012 reserve is also weighing down on prices.

Poland recently vetoed the proposal to toughen EU’s emission reduction program, which is also adding pressure on the price.

Also, Greece’s decision to auction off  their EUA reserves to raise funds for the government had a bad start last week, as the first auction on Wednesday saw only 4% of the available credits sold at €16.11/t. They are still selling. Panic can be partially explained also by the concern that, if Greece sells all its EUAs, what if Belgium, Portugal or others do the same?

c) Lower demand. Deutsche Bank has cut its 2011 forecast of CO2 price by 19% to €17/t and 2012 estimate by 14% to €19/t, largely driven by expectations of slower economic growth in Europe…

d) … Creating the perfect storm. When CO2 prices broke the support level of €15.5/t, we saw large stop losses because of the previously mentioned large options positions… and the stop-loss forced selling added to the governments selling and lack of demand has generated this slump.

At the core of the problem we have the issue that Europe’s debt crisis affects CO2 markets the most because the European Union is 30% of the emissions of the world, but (hold on) 100% of the cost as no other country has adhered to emission trading schemes. Therefore, a slowdown in industrial production and a debt crisis that could delay the extremely aggressive and optimistic plans for a low carbon economy announced for 2050, added to the slow but sure slowdown in power demand is proving that a system that was artificially created (see my comment here) is causing the demise of a government-forced scheme that ultimately was only a tax, as emissions actually rose in 2010 despite all the good intentions.

As a very knowledgeable friend of mine says: “Investing in renewable themes right now is risky because everything is a donation”.

Further read:
http://energyandmoney.blogspot.com/2011/01/some-energy-thoughts-for-2011.html

http://energyandmoney.blogspot.com/2009/10/careful-with-german-power-prices.html

http://energyandmoney.blogspot.com/2009/05/reserve-margins-are-clearly-acceptable.html

The Norwegian oil production decline is staggering. The figures are simply incredible. Total liquids production in April came at 2.10mbpd, flat from March, but down 7.1% year-on-year. Production has fallen by more than 20% (440kbpd) from 1991 levels, Problems have come in all shapes and forms. Corrosion of old infrastructures, lack of proper investments prior to the merger of Statoil and Norsk Hydro, lack of in-depth analysis of reservoir and the optimal recovery techniques, added to a less than stellar appraisal and development process.

Let’s start with a fact: There is a technical and cost challenge that is evident, but given the success in exploration and the experience of similar geological structures, it is not clear that the decline is impossible to offset due to an irreversible geological problem.

Statoil has set itself to correct this issue and has in the pipeline more than 100 projects targeting 1.2mbpd. Will they be able to offset decline?.  Well, the track-record so far does not lead me to be optimistic. Since 2004 Statoil has been a story of consensus downgrades (it was supposed to deliver 16% production growth in 2006 and it ended being flat), cost overruns and delays. True, the merger with Norsk Hydro did not make things easy, but the under-delivery was simply jaw-dropping. Now things are set to change.

Statoil, at its Capital markets Day in New York, set itself with the ambitious target of growing production by 3%pa to 2020. The problem is that the road will be bumpy. 2012 growth will be strong, only to be flat in 2013 again, and project delivery gets trickier as we move into the back-end of their target period.

Capital intensity to deliver this offset of decline and subsequent growth will not be small. $16bn per annum and $90/bbl break-even (remember taxes are very high in Norway) until 2015, when the growth projects finally kick in and costs could, if delivered, start to fall.

From an investor perspective, and from a global-supply demand standpoint, the most relevant point is that Statoil intends to keep production flat as a base case from 2011-2020 implying an absolutely categorical view that  decline will be offset. Skrugard, which could add 60-90kbd (gross) by 2020, or a Train 2 at Snoehvit could be the main surprises. Also, new “fast-tracked” projects beyond the existing 10 fast-tracked projects – could add another c.70kbd by 2020.

What can go wrong? First, such a large number of relevant but complex projects can be delayed easily. Skarv has already been delayed, resulting in a 20kbd impact at the project level in 2011.

Although average breakeven for Norwegian Continental Shelf projects stands at c$50/bbl, there are also significantly higher cost projects. Costs per barrel have escalated with the production decline, but once the main technical challenges have been well understood, the infrastructure has already been in place and can be used for multiple projects, costs can rapidly fall. Now it’s time to deliver. It will not be easy.

Further read:

http://energyandmoney.blogspot.com/2011/01/some-energy-thoughts-for-2011.html

http://energyandmoney.blogspot.com/2009/11/2010-warning-risk-for-non-opec-supply.html

(This is a merger of two articles I published in Spanish in Cotizalia)Nine hundred billion euros.This is what Europe could save in its goal of reducing CO2 emissions by 80% in 2050 if, in addition to further renewable energy, the continent would develop its shale gas reserves according to this sector study. And what will Europe do? If it follows the example of France, threaten to ban hydraulic fracking.

The funniest thing is that the coal, conventional gas and solar lobbies have all joined forces in the war against shale gas. There must be something truly threatening and interesting to see such an unholy alliance.

None of the three are interested in cheap gas prices, because they have seen with horror how gas prices in the U.S. have plummeted due to the shale gas revolution, and therefore obliterated the use of coal for power generation and the grants of succulent subsidies as abundant energy reduced power prices (see my previous post about this). And for a continent obsessed on energy independence, it seems funny for Europe to deny the chance of developing domestic gas, not Russian or Nigerian or Qatari. European. And 50% cheaper if production grows as it has in the United States. What a horror. Ban It!

Europe has no fewer than 156 tcm (trillion cubic metres) of estimated shale gas reserves. That means c90 years of demand covered and saving up to €24bn p.a of subsidies for alternative technologies. Ban it!.

Fracking technology, thanks to the revolution of shale gas in the United States is tried, tested and of negligible ecological impact. However, we have seen many alarmist reports, even a movie, Gasland, which was immediately refuted by the industry, scientists and the Department of State U.S. Energy as inaccurate… But best of all in these alarmist reports is that in every one you read that “we could not confirm accurately any of (these) claims “(Cornell study, for example). When I wrote this post about the shale gas revolution many just ignored it as uneconomical.

Point by point, it is worth noting:

Hydraulic fracturing technology is proven, is used in thousands of wells in the U.S. annually safely, and there have only been one or two cases of minor accidents. The fluids used in the fracking of the rock are composed by more than 99.98% of water (94.62%) and sand (5.24%), with a minimal amount of chemicals, highly diluted, easily stored and handled safely.

Of these chemicals, the majority (hydrochloric acid, ethanol, methanol, ethylene and sodium hydroxide) are recovered perfectly in the extraction process.No state or local department in the U.S. has found evidence of water pollution of aquifers. The industry is also using more than 5,000 tons of steel and cement to protect the groundwater, and the fracking process occurs at least a mile deep, well away from the aquifers.

This reality, Europe’s available natural resources is what none of the politicians and lobbyists mentioned, fans of subsidies, want you to see. They prefer inculcating fear with tales of energy dependence and expensive subsidised technologies. Before looking for a solution to develop the continent’s natural resources efficiently, in a clean and competitive manner, they prefer to ban. And then complain about the energy dependence.

Europe wants cheap energy, but does not want nuclear, and now seems unwilling to develop shale gas. Meanwhile, in the 1st quarter of 2011 energy costs, paid by businesses and consumers, are again the highest in the OECD. The EU will continue to be 100% of the cost of CO2, 70% of energy subsidies in the OECD and will further reduce its ability to compete.

While gas production in the U.S. has pushed prices for gas and electricity at highly attractive levels for industrial productivity, the policy of “not in my backyard” of the EU continues. It’s easy to complain about the evil energy exporting countries when at the same time domestic production is curtailed. Instead of collaborating with the industry and with proper regulation to monitor that gas is extracted in the safest and most ecological way, they prefer to ban, with the risk of sinking the competitiveness of our economies with expensive energy as we demand that the rest of the world changes.

But Poland is different. Wood MacKenzie estimates that Poland could hold 3 trillion cubic feet of gas reserves in unconventional (tight gas and shale) spread between the North and the Midwest,which, if confirmed, would mean an increase in European gas reserves of 47%.

Poland depends on Russian imports by more than 75% (11.6 BCM / year) and the unconventional gas reserves can be a very important factor to improve its ratio of domestic production.

Given an opportunity to access new reserves in countries with no geopolitical risk, European companies are starting to wake up and rushing to the challenge. Total has just moved in. However, in Poland the main companies betting on the resource base are Chevron, ExxonMobil, Marathon, Talisman and Conoco.

The Polish government has awarded over 85 exploration licenses lately with the goal of achieving results in three to four years. Conoco (with 3 Legs) has been the first to drill near Gdansk, and the results are very solid although it is early to know the cost structure or plan development.

Besides the major U.S. oil companies in Poland there are several independent exploration companies present, 3 Legs, San Leon or Aurelian, for example.

Poland’s shale gas opportunity shows the following key points, according to Tudor Pickering:

1. Geologically thick, organic, brittle, with multiple targets at <10,000 ft.
2. EIA ranks the Baltic Basin as 80% play success factor.
3. Thermal maturity indicates abundant gas generally, but oil windows are possible.
4. Lifting costs in Poland may be a quarter of the US.
5. Political and public support is very high.
6. Seismic is being acquired and 30+vertical wells are being planned for 2011-12.
7. Low royalty and corporate tax at 19%.
8. Poland gas price is more attractive than US Henry hub as it is oil linked, and priced at $8-8.5/MMbtu (versus US at $5/MMBtu).

The recent IPO by 3legs values the Baltic Basin shale acreage at ~$450/acre.

It is worth alerting the risks of being overly optimistic.That’s why it seems very exaggerated what seeking Alpha said that Poland shale gas may be the end of Gazprom.

Poland has signed an agreement with Gazprom to increase its supplies by 30% in 2011 and Ukraine has increased its commitment to buy Russian gas by 11% this year …And Ukraine has its own potential in shale gas exploration, as Chevron knows. that is why the US giant is reviewing prospects in the Polish border with Ukraine, in Zamosc.

And in the rest of Europe? It is still very difficult to see real possibilities due to lack of political support. Statoil and Chesapeake are analysing more than 15 new areas in Germany, France and the North Sea, among others. The last time I saw the CEO of Chesapeake in March he was confident of the geology but not optimistic about political support.

In my opinion, the shale gas in Europe is an excellent opportunity but also carries an operating cost of not less than $2/mmbtu given the enormous cost of water in Europe, representing nearly 60% of the cost of drilling. and water is essential to fracture the rock.

Poland is now beyond the stage of “promise” and is a country we will follow closely in this blog, because when you see such concentration of oil companies in one area, there is a reason.

Further read:

http://www.thegwpf.org/press-releases/2938-new-report-shale-gas-shock-challenges-climate-and-energy-policies.html

(This article was published in Cotizalia on Thursday, 16th June 2011)

The Oil & Gas sector, the world’s most profitable and less indebted one, will invest in 2011 for the first time in its history more than $500 billion in exploration and production alone. The level of value creation and development that these investments generate can not be compared to any other industry or sector in the world, and if we include gas and refining they will reach a total of $790 billion.

Saudi Arabia announced this week an increase in production, showing the frustration they have after being one of the few OPEC countries to comply with the quotas. Imagine, if they presented themselves later this year at the next meeting and see that OPEC produces 26.2 million barrels/day (when the quota is 24.9) and found that the output gap between them and others had widened. Iran, for example, has increased production by 45,000 barrels/day (to 4.24 million barrels a day) despite a 35% drop in oil investments since the beginning of the embargo.

Saudi Arabia will not appear at the next OPEC meeting as the only good boy in the class with homework done. Because if quotas are revised up, then everyone has to start from the same base, and there is no evidence that the other OPEC countries will decide to reduce their current output.

Anyway, it’s a good decision which, together with increases in other countries over the quota, partially mitigates the effect of the lost Libyan barrels. Partially because Libyan barrels are of exceptional quality and the oil that is to replace them is heavier, making it difficult to replace, for example, in the Italian refineries.

In the last three weeks I have seen over twenty-five executives from oil companies, including all the big oil companies and if there’s a comment that is repeated each time over and over it’s this: Almost no one believes the sustainability of demand in China. And watch out for the estimates of the IEA, EIA etc., which use “diplomatic” data, especially in their demand models, where the estimates depend on GDP projections which are generated by the governments, which have a nasty habit of being wrong (as a fun exercise, look at the growth estimates published in 2006 for 2009).

As John Watson, CEO of Chevron, says, if the industry had listened to these agencies in the past twenty years, or whomever recommended them to “improve” their cost of capital by re-gearing, the sector would all be in bankruptcy.