Daily Archives: June 14, 2013

A spectacle to behold: Markets usurp central banks

Thu, Jun 13 2013, 09:04 GMT
by Peter Baxter Jr. | Kondratieffwinter.com

K Winter Endgame now playing out in Japan

Mark May 23rd of 2013 as a potential key date in the unfolding of this fourth Kondratieff Winter of the modern era. In the afternoon session of trading in Tokyo that night, at approximately 7:30 PM EST, everything suddenly changed. The juggernaut that had propelled the Nikkei average up almost 90% since early November took a bit of a breather by plunging almost 10% from its peak hours earlier, settling down over 1140 points from the previous close. As of yesterday it had declined 2343 points (15%) in just one week. With one more day like Thursday the Nikkei would have achieved the impossible- a 90% gain in six months that turned into a bear market (20% down) in just one week. Ho, hum, just another day in the life of a world distorted with tens of trillions of central bank intervention.

I suspect this will become the new normal going forward in the next few years that will mark the twilight of the winter cycle phase of this present Kondratieff cycle that began in 1949. Our theory holds that paper assets have never been more overpriced because there’s too much unpayable global debt that will default. Is there a day in our future when our Dow will also plunge over 1000 points in a grand mal seizure from too much debt?

What was so transformative that occurred in that Thursday session in Japan, one that was preceded hours earlier by a sudden whipsaw in US markets? Simple- too much volatility. This grand experiment by central banks is much like a ponzi scheme because it has absolutely no room for error that could undermine confidence. Yet that is what is occurring right before us. Could this be the beginning of the endgame scenario I have promised here for over two years- a dreaded deflationary bust caused not by an economic slowdown but instead by rising yields?

It’s very possible this may be the case given the scale and speed of the move higher in yields all across the globe. Don’t forget here that the entire premise of these massive QE programs by all the global central banks is to keep rates DOWN, not up. They are failing miserably in their primary objective and I implore our readers and all investors to sit up and take notice. It seems the bond vigilantes have now finally emerged from many years of hibernation.

Remember the Apple bonds floated a few weeks ago in the biggest corporate offering in world history? It was way oversubscribed as everyone wanted them so badly. They are now down over 4% in a matter of days losing investors around $700 million in no time on this “safe” investment. Given that global bond markets are 4-5 times larger than stocks the potential for even a small rise in rates would be very devastating. Few may appreciate that nothing could cause more wealth destruction than a large and sustained rise in interest rates.

It seems that peak euphoria was being tested in the US last Wednesday as unfettered exuberance mid-morning gave way in the afternoon to discontent and outright scorn over Fed policy by the end of the session, one that saw the indexes plunge more than 2% on a single day after making an intra-day all-time high that same day. That has only happened twice before and both times (2000 and 2007) marked major cycle peaks in the markets. Could this be true again?

Cycle theory and common sense both say yes in prohibitive terms. Why can we advance this notion? Because if one were to peel back the layers of what has been unfolding recently in many other financial markets you could only come to one conclusion: global central banks have lost control of their mandates. The end must be near when the confusion over the meaning of one or two words from Chief Bernanke could cause such an uproar in the financial markets. Has it really come to this? Valuations are determined through hyper-parsing of nuanced words that are so carefully prescribed as to not achieve that effect?

The unintended consequences caused by policy decisions that could be called quite extraordinary has caused many individual asset classes to have a mid life crisis recently. They have seen explosive moves in all directions in degrees several standard deviations removed from their historic benchmarks. In other words, all hell is breaking loose just about everywhere. Everywhere except in the US, of course, where investors from Japan to Timbuktu have blindly reallocated so much capital since last November.

The action resulting from these audacious central bank moves has been dramatic across the board. The third largest stock market in the world (Nikkei in Japan) has rallied almost 90% in just over six months while their currency has declined against the USD by over 25% in the same period. Both of these moves are so enormous they can hardly be explained in a cogent manner without an overload of superlatives that would understate their true meaning. In the month of May we saw many strange events- gold plunging over $200 in a matter of hours, no fewer than 17 mini flash crashes in five NYSE stocks and silver halted four times in one session due to a lack of bids in a disorderly marketplace to say the least. And as of Thursday the Nikkei had plunged over 15% in just one week. Just another day in the parallel universe created by the global central banks.

These moves are alarming at best and who knows at worst. They are the best evidence yet of true parabolic moves one could expect to see at the end of grand super-cycles of credit such as the tail end of a Kondratieff Winter. And much like the geometric explosion of global debt, they are just not sustainable. My gut tells me two things- 1) markets are out of control,; and 2) very few investors agree these markets are out of control. This can be seen by tame levels of the VIX index and the release this week showing that margin debt had reached an all-time high. It all sounds a bit frothy to me and could signal the end of an era.

But the ludicrous nature of the these awesome moves in certain paper assets just keeps coming. Greek bonds sure to default have tripled in the past year. The Dow Industrials as of the end of May 2013 will not have seen a three day decline for the longest period since 1900 and that defies all sensibilities. It seems to many that there is some force or entity out there (the Fed ?) that’s not willing to allow such an event to occur, perhaps to create a myth that the markets will nudge ever higher. Incredibly, many now think that is the case as they believe the Federal Reserve and other central banks are in complete control. Or so it seems.

Our theme here today is that there is abundant exculpatory evidence hiding in plain sight that indicates the opposite- that central banks are losing control of the markets. In last month’s comments I noted the disturbing explosion of yields in the JGB’s (long term Japan bonds) that sent their prices crashing overnight, beginning a period extreme apprehension over a more serious bond crash could be looming. That worry has only worsened since then as the yield on 10 year JGB is now a whisker away from the 1 % level that is seen as crucial to hold to maintain the appearance that the world’s second largest bond market is not spinning out of control.

One thing that bulls and bears and nearly everyone can agree on this this- bad consequences will occur if global bond yields rise fast and far worse will happen if they rise too fast. The reason for this is that when volatility spikes and endures, leverage is taken off the table and that means lots of securities will be sold. So what are the chances yields could spike higher (making bonds plunge) given this universal belief of the consequences of such an outcome?

I believe the chances of such an outcome are quite underappreciated by investors today all along the the spectrum. This would include brokers, money managers, hedge fund managers, CFO’s managing billions of corporate cash coffers, pension fund managers, individual retail investors, sovereign wealth fund managers, and so many more. Their worldview could be soon shattered if global bond markets usurp the collective actions of global central banks. It would only take one of these markets to crash to induce a large global sell-off. Such an event would finally showcase the folly that rampant global central bank printing is beneficial to modern industrial economies. The central theme of Kondratieff Wave theory holds that the long term credit cycle cannot continue unabated and the excesses of this cycle must be removed. Clearly this is not the case.

Most investors and investment pros are still beholden to a worldview that puts no premium on long wave credit cycles. They insist on owning paper assets such as stock, bonds, and derivatives,etc. These instruments have on balance have been performing well since 1982 but not so well for the past 13 years. They subscribe to the same worldview that emphasizes yesterday’s metrics- PE multiples, PE expansion, cash on the sidelines, nowhere else to put your money other than stocks, and this chase for yield has pushed them into more risk and leverage than they otherwise would have deployed. Such an approach did not work too well in 2000 or 2007 when yields were still historically very low, so this mindset makes even less sense today now given the tens of trillions in global debt that has been added in the past few years.

But a closer look at the performance of money managers over that period since 1982 clearly shows a persistent underperformance by them over time even in bull markets? How can this be? Even in 2013 it is all too clear that hedge funds and professional money managers on balance are prohibitively underperforming the S&P index. Such statistics are meaningful in gleaning what could be missing from their equations. I advance that a coherent appreciation of the existence and the significance of long wave super-cycles would be a good place to start.

If they had an appreciation of the higher truths offered by the K-Wave theory perhaps they would be more likely to realize compounded gains over time from their acumen in the day to day, month to month decisions on asset allocation they are well suited to execute. Typically their lack of performance over the years can be attributed to poor decisions made during those critical inflection points in the the markets that seem to always occur when there is universal agreement upon the near term direction of the market (up in 2000, down in 2002, up in 2007, down in 2009 as recent examples). If they could only avoid the pitfalls at these junctures then I suspect most fund managers would instead outperform the broad market averages. Bubbles are not black swans, they hide in plain sight and lend themselves to distinct patterns that can be useful in making decisions.

Many are bewildered that the market has surged so much higher despite any meaningful help from retail investors. It is worth noting that a key element in the overperformance of the US market in recent years has been the collective impact of corporate stock buybacks by the healthiest US corporations. These buybacks have served to satisfy shareholders over employees or their local or national communities. The end result has been a historic drop-off in cap-ex and R&D and a dramatic increase in layoffs for even the best companies. The mandate of the modern corporation has never been more evident- making profits at any cost. Yet empirical evidence suggest these buybacks occur when stocks are relatively expensive. You wanna bet that some of them may regret this down the road? But why have they been so prevalent lately despite price levels that are so rich?

Large corporations have been for many years enduring the pitfalls of this deflationary Kondratieff winter that assures very low or negative growth rates globally that make it very difficult to grow the top line. So what to do if you are a CFO? Just resort to financial gimmicks such as stock buybacks so that your reduced operating profits during this winter period can be better cloaked with higher EPS through reduced shares outstanding. This behavior, much like the hoarding of cash by commercial banks unwilling to lend but dying to speculate in paper assets tells me the recent new highs in the S&P do not reflect a new bull market, only desperation to please investors at any price. They are creating less and less and investing less and less. Several studies have concluded that perhaps as high as 40% of the rally in recent years can be attributed to these buybacks. At any rate these buybacks I believe have cloaked more serious problems in the financial performance of corporations and their stocks. Global aggregate demand is slowing despite central banks accommodation and exponential increases in the population base. You just can’t hide from deflation.

The gains in stocks have diverged from the macroeconomic landscape for many years now and that trend has really accelerated this year. And we all know why- controversial central bank policies that range from keeping rates too low for too long during the mid- 2000’s to outright destructive ones such as printing several trillions to create a wealth effect whose benefits do not trickle down to the middle class and serves in effect to cushion political leaders from making unpopular structural reforms that are sorely needed. Today developed countries in the western world are staring down the barrel of a gun of their own making that can still be dismantled.

But sadly we have not taken the necessary steps to deconstruct our debt warheads to prevent the collateral damage they could cause. I suspect soon we will reach the brink, stare into the abyss, and determine once and for all if we can thrive in a world dominated by debt. I hope that our financial. corporate, and political leaders can find the will to reign in the central bankers before it’s too late. They may have good intentions but their approach has proven to be a failure and they should be called out on this at once. But time is running out, and several key market metrics described above are now flashing red lights. And remember the long wave chart of the US market still sports and ending diagonal bearish wedge that implies a severe plunge once key support is broken.


Worldwide Field Development News Jun 8 – Jun 14, 2013

This week the SubseaIQ team added 5 new projects and updated 28 projects. You can see all the updates made over any time period via the Project Update History search. The latest offshore field develoment news and activities are listed below for your convenience.

Europe – North Sea

Total Locks EPC for Edradour Project Management

Jun 14, 2013 – Total E&P has secured the services of EPC Offshore to support the development of the Edradour gas and condensate discovery in block 206/4 on the UK continental shelf. EPC will provide project management services for the development as part of a 6-month contract worth more than $400,000. Edradour was discovered in 2010 and will be tiebacked to the West of Shetland Laggan-Tormore development project. Total operates Edradour with 75% interest while it partner, DONG, maintains the remaining 25% interest. The partners expect the discovery to begin producing in 2016.

Project Details: Laggan-Tormore

AMEC Secures Position in Bentley Development

Jun 13, 2013 – AMEC has been contracted by Xcite Energy to provide engineering services to support development of the Bentley field in the UK North Sea. Both companies have also entered into a Memorandum of Understanding (MOU) to develop a wider service agreement for the field relating to development scope and ongoing field operations. The MOU includes project and program management and controls, engineering and design through the FEED stage and beyond, fabrication management, sub-contractor management, hook-up and commissioning, operations and maintenance planning and duty holder services.

Project Details: Bentley

WGPSN Receives Beatrice Life of Field Contract

Jun 13, 2013 – Ithaca Energy signed a $200 million managed services contract with Wood Group PSN (WGPSN). The life-of-field contract is a continuation of a contract that WGPSN was awarded in 2008. Terms dictate that WGPSN will operate and manage the Beatrice Alpha and Bravo platforms and the Nigg onshore terminal until the end of their operational life. Production started at Beatrice in 1981 with an estimated 30-year lifespan. Several asset life extension programs have been carried out that have greatly increased the life of the field.

Project Details: Greater Beatrice Area

Appraisal Adds to Johan Sverdrup Potential

Jun 13, 2013 – Statoil announced the results of two appraisal wells that were drilled by the Ocean Vanguard (mid-water semisub) in the western margin of the Johan Sverdrup field. Well 16/2-17S reached a depth of 6,617 feet and penetrated 270-feet of gross oil pay in Jurassic sandstones. A production test was conducted and yielded almost 6,000 bopd with exceptional flow properties in the upper part of the reservoir. Well 16/2-17B was drilled as a sidetrack to the 17S well. Its target was the Cliffhanger South prospect but no hydrocarbons were encountered and the well has been classified as a dry hole.

Project Details: Johan Sverdrup

Mjosa Appears to be Non-Commercial

Jun 11, 2013 – Bridge Energy, minority partner in Norwegian license PL511, indicated that reservoir quality sandstones have been encountered by the Transocean Arctic (mid-water semisub) while drilling exploration well 6406/6-3 on the Mjosa prospect. Initial results indicate the presence of a sub-commercial volume of gas within the reservoir. Data is still being acquired and further interpretation will be needed to determine what potential exists within the prospect. The current plan is to plug and abandon the well upon reaching total depth.

Project Details: Mjosa

Africa – Other

Indian Pair Eyeing Mozambique Area 1 Assets

Jun 11, 2013 – India’s ONGC Videsh (OVL) and Oil India Ltd (OIL) confirmed that they are in advanced negotiations to buy Videocon Industries’ 10% stake in Area 1 offshore Mozambique for $2.47 billion. Several high-profile discoveries have occurred in the area since 2009 and the potential exists for Area 1 to be one of the world’s largest LNG producing hubs by 2018. Recoverable gas reserves for Area 1 are estimated between 35 and 65 Trillion cubic feet (Tcf). If approved, the acquisition will be executed through a 60/40 joint venture between OVL and OIL.

Project Details: Atum


ConocoPhillips and Karoon Struggle Getting Proteus to Bottom

Jun 13, 2013 – ConocoPhillips and Karoon Gas Australia, partners in WA-398-P, have been forced to sidetrack an exploration well being drilled on the Proteus prospect being drilled by the Transocean Legend (mid-water semisub) off Western Australia. Proteus-1ST1 was successfully kicked-off and drilled to 14,740 feet where a well control event forced the partners to shut-in the well. Drilling will continue once the well control issues are remedied.

Project Details: Proteus

N. America – US GOM

Noble Announces Results of Gunflint Appraisal

Jun 14, 2013 – Noble Energy announced results from the second appraisal well drilled on the Gunflint discovery in Mississippi Canyon block 948 in the US Gulf of Mexico. The well was drilled by the Ensco 8501 (DW semisub) to a depth of 32,800 feet. A net pay of 109 feet was encountered within the primary reservoir targets. Logging results confirmed an estimated gross resource range of 65 to 90 MMboe in the main target. An adjacent three-way structure is a candidate for future exploration. Noble and its partners are likely to develop the discovery as a subsea tieback with project sanction expected later 2013.

Project Details: Gunflint (Freedom)

2H to Provide Julia Riser Design to ExxonMobil

Jun 13, 2013 – 2H Offshore, a subsidiary of Acteon, was awarded a contract by ExxonMobil regarding the first development phase of the Julia project in the Walker Ridge area of the US Gulf of Mexico. Julia will be a subsea development tied back to the Jack/St. Malo floating production unit. Under the contract, 2H will conduct a detailed design study of two 10-inch steel catenary production risers. ExxonMobil and Statoil made the decision to proceed with the chosen development concept in May 2013. Production start-up is planned for 2016.

Project Details: Jack/St. Malo

Subsea 7 Lands Heidelberg Gig

Jun 11, 2013 – Anadarko continues to shop for its Heidelberg development in the US Gulf of Mexico with a recent contract award to Subsea 7. Work scope includes the engineering, fabrication and installation of risers, pipelines and flowlines. The installation work will be performed in over 5,200 feet of water. Project management and engineering will begin immediately with offshore activities to follow near the end of 2014.

Project Details: Heidelberg

Asia – SouthEast

Nido Secures SC58 Drilling Extension

Jun 14, 2013 – Nido Petroleum, operator of Service Contract 58, secured a 6-month extension to its Election to Drill Date from its joint venture partner PNOC Exploration. The extension gives Nido until January 11, 2014 to make the decision to drill one of the prospects identified in the area. Located adjacent to the Malampaya gas field, SC58 covers almost 3,335,922 acres. Water depth exceeds 3,280 feet over most of the block. Promising prospects located in the license include Balyena, Butanding and Dorado.

Project Details: Balyena

Stena Clyde Turns to The Right on Hagana Prospect

Jun 14, 2013 – The Stena Clyde (mid-water semisub) has spud the second well in its current drilling program in the Gulf of Papua off Papua New Guinea. Hagana-1 is being drilled in PPL 244 in almost 350 feet of water. The rig is expected to be on location for roughly 40 days as it tests the Pleistocene sandstone structure. Oil Search (40%) operates the license with support from its partners Total (40%) and Nippon Oil (20%). Hagana has been estimated to contain up to 1.3 Tcf of mean, unrisked, prospective gas resources.

Project Details: Hagana

Otto Receives SC69 Extension

Jun 13, 2013 – Otto Energy received a 6-month extension from the Philippines Department of Energy for Exploration Sub-Phase 3 of Service Contract (SC) 69. Sub-Phase 3, which began February 7, 2011, now has an effective expiration date of November 7, 2013. Three potential drilling targets, Lampos, Lampos South and Managau East, were identified with 3D seismic that was acquired in 2011. Otto will use the extension to complete outstanding technical work, begin well planning and start a farm-down process.

Project Details: Lampos

VIDEO: ‘Overdrill’ Drillship Design by Fincantieri and Aker Solutions

Fincantieri, one of the world’s largest shipbuilders, has launched a video showing its drillship design: The Overdrill.

The vessel is the next generation drillship which will enable the drilling contractors to drill to a maximum depth of 50.000 feet.

The design has been developed by joint effort of Fincantieri and Aker Solutions. The OVERDRILL design was first introduced to the public last month during the Offshore Technology Conference in Houston, USA.

During the event, Giuseppe Coronella, EVP of Fincantieri Offshore, stated: “The offshore drilling market is driven, on the one hand, by demand for traditional standard systems and, on the other, by ultra-deepwater exploration demanding innovative solutions. With support from Aker Solutions, Fincantieri has produced a rig design that provides solutions to both these needs”.

Click here to see the video.


Noble Energy Hits Net Pay at Gunflint Well in U.S. Gulf of Mexico

Noble Energy, Inc. today announced that the second appraisal well at Gunflint well in the Gulf of Mexico, successfully encountered 109 feet of net pay within the primary reservoir targets.

Results of drilling, wireline logs and reservoir data have confirmed an estimated gross resource range(1) of 65 to 90 million barrels of oil equivalent in the primary structure, which was in line with Company expectations. The Mississippi Canyon 992 #1 well, located one mile west of the original discovery well, was drilled to a total depth of approximately 32,800 feet in a water depth of 6,100 feet. Commercial hydrocarbons were not encountered in the deeper exploration objective. Additional exploration potential remains in an adjacent three-way structure to the north, a candidate for future exploration following development of the confirmed resources.

Once operations are completed, the well will be suspended for future use. The net cost of drilling the lower exploration zone was approximately $15 million, which will be expensed in the second quarter of 2013.

Susan Cunningham, Noble Energy’s Senior Vice President Deepwater Gulf of Mexico, West Africa and Frontier Regions, commented, “Our appraisal program at Gunflint solidifies our plans for a subsea tieback development, with sanction planned for later this year. Along with our Big Bend discovery, we now have two major projects in the deepwater Gulf of Mexico targeting first production at the end of 2015. These developments represent significant value to our overall portfolio.”

Noble Energy plans to move the drilling rig to Troubadour, a low-risk amplitude prospect offsetting the Big Bend discovery, over the next several weeks. The well is expected to reach total depth late in the third quarter.

Noble Energy operates Gunflint with a 31.14 percent working interest. Other partners in the project are Ecopetrol America Inc. with 31.50 percent, Marathon Oil Company with 18.23 percent and Samson Offshore, LLC with 19.13 percent.


%d bloggers like this: