Copenhagen and the aim to create the biggest bubble in energy

Energy, On the cover, Sin categoría

(This article was published in Cotizalia on December 10th)

We are reading many headlines these days about the Copenhagen summit and the commitments that are expected to come out of it. I will not discuss the scientific findings that lead to this group of nations to meet, but would warn about the plan to create the biggest energy and financial bubble in history: a huge fund to drive CO2 through the roof.

In this summit governments will take the first global decision since the industrial revolution that is not based on an improvement in economic efficiency. It is about intervention on a global scale to promote industrial processes which are more expensive and inefficient than current technologies, and managing the global energy policy from the UN, not from markets and sovereign governments.

The interventionist governments have already created a commodity, CO2, and assigned a fabricated supply and imposed demand. This artificial commodity was allowed to trade on the markets with the goal of encouraging speculation, the same speculation that is demonized when it comes to gold or oil.

But the problem is that the prices that they had expected, €40-50/ton CO2 did not materialize; given that when markets are allowed to work they fastidiously often reflect the true dynamics of supply and demand, and prices sometimes fall. Now the CO2 (December 2010 contract) is trading around € 15/T. And the plan does not accept price falls, as they need to generate price inflation to justify the transition to expensive alternative technologies. Thus, the world’s governments are meeting this week to create a huge fund, estimated at more than 300 billion dollars, financed with our taxes, to revive the bubble, where the laws of efficiency, supply and demand are abolished in favour of a supposed climate benefits in 2050. A bargain.

The expected agreements could be summarized in three parts. First, developed countries would commit to reduce their emissions to a specified amount.

Second, developing countries would commit to reduce the “growth in emission intensity.” As the reader may have guessed, the sum of the two will not reduce emissions, but increase it. Why? Is there no commitment to save the Earth? No, because the objective is not to save anything except the mega-bubble by creating more emissions than required so countries will buy more expensive CO2.

Come to the third: They want to create the previously mentioned $300 billion fund dedicated to the transfer and technological adaptation.

Let me translate: Dear friends of developing countries… please forget about using your natural resources to grow at $ 40/bbl as we will force you to use foreign technology and increase your energy bill to $ 110/bbl or more.

In short, a fund controlled by politicians from the UN, with such a great track record as managers, that decides and orders on global industrial development with an objective that is unquantifiable in any economic or efficiency term. The UN will impose foreign and expensive technologies on developing countries at a reasonable price or free to begin with, but a very high cost subsequently, in order to increase their dependence. This is a fund that will be created through higher taxes, increasing the bill for the CO2 bubble. And the bill to purchase CO2 credits will cost Spain, for example, 3 billion Euros between 2008 and 2012, and the UK will pay around 5 billion in the same period.

I agree that CO2 emissions are a problem to solve. I am convinced that many renewable technologies will be competitive without subsidies in the short term, and I firmly believe in companies that innovate and lead the change process. But this change can not be managed by supranational agencies with no positive track record. The law of supply and demand, as well as innovative and efficient technologies should be the axis of a profitable and efficient change, but not imposed.

A 2010 Warning Risk for Non-OPEC supply

Energy, On the cover, Sin categoría
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(Graph above shows Russian Crude Production). From an article I published in Cotizalia on Dec 3rd 2009.Today we saw Rosneft production figures reach a disappointing 2.119mbpd (only +1.5% y-o-y). This includes Vankor production at 160kpd in October (104kbpd in 3Q).

While Vankor crude output is expected to increase from 3.5MMt this year to 11.5-13.5MMt, production in the rest of the upstream portfolio (including the Priobskoye field) is expected to go down, leaving 2010 output “close to 2009 levels”. This is new and somewhat disappointing, taking into account that previously the company had expected crude output from the Priobskoye field to reach peak in 2012. This suggests that output growth at the Priobskoye field has been probably too high in 2005-09 and the field may stabilize lower than 2009 even after pick-up in drilling expected in the next two years. Investors will be concerned that Priobskoye might repeat the Sibneft fate when its fast production growth phase (2001-05) was followed by a steep decline in 2006-08. This is also new.

The market had continued to have a positive view of non-OPEC supply growth 2010-2012 despite the warning signs that we have highlighted for months. We already saw Lukoil back down from their strategic growth targets (from 4-7% production growth to flat), predominantly due to the fact that under the current tax system that eats 90% of revenues, Caspian and West Siberian oil fields are uneconomical. Furthermore, the other Russians are declining steeply: Surgut’s year-to-date production declined 3.2%, Tatneft declined 0.9% and Slavneft 3.7%.

Consensus on non-OPEC supply for 2009 versus 2008 calls for a 400,000 bpd increase, and the subsequent reduction of the call on OPEC, predicated on Russia growing to a level that offsets Norway-North Sea and Mexico declines.

I believe my bearish view on non-OPEC supply needs to be even more bearish for 2010, probably by 200kbpd given the capex, high tax and credit environment hitting Russia, Mexico and Norway.

So far YTD:

  • Norwegian volumes are at 2.24mbpd (below consensus estimates of 2.3-2.4mbpd)
  • Mexico volumes are at 2.65mbpd versus consensus at 2.96mbpd
  • Russian volumes are close to 10mbpd versus consensus at 10.3 mmbpd.
  • Total oil production by countries outside of OPEC averaged 50.1 million bbl/d during the first 3 quarters of 2009.

Over 1.2 Billion Chinese can’t be wrong

Energy, On the cover, Sin categoría,
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(Published in Cotizalia in Spanish on Nov 26th 2009). Chart shows monthly car sales in USA vs China.

“Data from China is not credible.” This phrase and similar ones have led many funds, especially traditional ones, to miss part of the rally in stocks and commodities, to give just one example. It seems to me that in 2009 many suffered from a bit of excess of caution and a lot of looking at the growth data in the wrong places (USA, Europe). And it’s already more than a year since the launch of China’s economic stimulus program and the data continue to surprise on the rise.

In 2010, China’s GDP will grow c9%. But more importantly, it is likely to do so with very moderate inflation, around 2.5%, thanks to the fact that OECD countries will continue to be in a difficult economic environment and therefore, prices of products imported by China will probably not increase dramatically, as has happened with oil, coal and gas between 2008 and 2009.

Remember that China imports 3.6 million barrels per day of oil, and growing. Well, that consumption is only 2 barrels a year per capita, c4% of global demand. Meanwhile the U.S. remains about 24 barrels a year per capita, 24% of the total, but falling. This scenario, moderate rise in prices of imported commodities as high domestic growth is financed, is ideal for China to deliver long term economic growth and credit expansion without causing major inflationary moves, and that will likely generate the next local stock market rally. Do you remember Europe in 1950? The same.

Investments in fixed assets in the country will continue growing by c30% in 2010. Over 300 projects implemented on a large scale in 2009 lead me to think that we will see an increase in infrastructure investment over several years. This investment will force Chinese authorities to keep the current loose monetary policy at least for the medium term. Thus, according to several analysts, the figure of bank loans will double in three years. And this expansion of credit obviously generates a massive increase in consumption and spending power of families. The increase in disposable income is what is leading car sales to exceed U.S. figures, and we will see the same for other assets.

The important thing to remember is that the figures for 2009 are the result of a recovery from a downward cycle, and do not include the results of credit expansion and domestic demand, so China will be able to harness the greatest growth in its history without depending so much on exports and with relatively moderate inflation.
And what keeps me comfortably optimistic about Chinese stocks and those companies exposed to the growth of the country is this period of expansion, which coincides with the decline of the OECD, which makes it impossible for Western Central Banks to raise rates in a relevant way, and which will likely make investors increase exposure to risk assets. Alternatively we might lose the other 50% rally worrying about data from mature economies in decline.

Dragon Oil… A cool 11.5% return to December

Energy, On the cover, Sin categoría

chartDragon Oil and its takeover bid (rejected by big shareholders) is set to deliver a minimum 11.5% return.

The critical step is the Court Meeting and EGM of Dragon shareholders which are scheduled for 10.00 and 10.15 on December 11th respectively, at the Grosvenor House Hotel in London.

ENOC needs to achieve 75% of the minority votes by weighting and 50% of the number of votes cast. While the decision to hold the meeting in London rather than in Ireland may appear to place an obstacle in the way of smaller Irish retail investors, voting may be done by proxy up to 48 hours before the Court Meeting. I believe that the vote will be tight, as already indicated by the statements of rejection issued by some of the major shareholders, and the failure of ENOC to respond by even a small increase in the bid strongly confirms that the 455p reflects what ENOC can afford to pay, not what the assets are worth.

The statement repeats that ENOC has undertaken not to sell its shares in Dragon until at least August 2009. If the offer lapses, ENOC could sell its stake at a higher price. So 11.5% is a minimum to make,