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The Money World Is Losing Faith In The Illusion Of Control

by Howard Kunstler via Kunstler.com,

The rot moves from the margins to the center, but the disease moves from the center to the margins. That is what has happened in the realm of money in recent weeks due to the sustained mispricing of the cost of credit by central banks, led by the US Federal Reserve. Along the way, that outfit has managed to misprice just about everything else  — stocks, houses, exotic securities, food commodities, precious metals, fine art. Oil is mispriced as well, on the low side, since oil production only gets more expensive and complex these days while it depends more on mispriced borrowed money. That situation will be corrected by scarcity, as oil companies discover that real capital is unavailable. And then the oil will become scarce. The “capital” circulating around the globe now is a squishy, gelatinous substance called “liquidity.” All it does is gum up markets. But eventually things do get unstuck.

Meanwhile, the rot of epic mispricing expresses itself in collapsing currencies and the economies they are supposed to represent: India, Turkey, Argentina, Hungary so far. Italy, Spain, and Greece would be in that club if they had currencies of their own. For now, they just do without driving their cars and burn furniture to stay warm this winter. Automobile use in Italy is back to 1970s levels of annual miles-driven. That’s quite a drop.

Before too long, the people will be out in the streets engaging with the riot police, as in Ukraine. This is long overdue, of course, and probably cannot be explained rationally since extreme changes in public sentiment are subject to murmurations, the same unseen forces that direct flocks of birds and schools of fish that all at once suddenly turn in a new direction without any detectable communication.

Who can otherwise explain the amazing placidity of the sore beset American public, beyond the standard trope about bread, circuses, and superbowls? Last night they were insulted with TV commercials hawking Maserati cars. Behold, you miserable nation of overfed SNAP card swipers, the fruits of wealth and celebrity! Savor your unworthiness while you await the imminent spectacles of the Sochi Olympics and Oscar Night! Things at the margins may yet interrupt the trance at the center. My guess is that true wickedness brews unseen in the hidden, unregulated markets of currency and interest rate swaps.

The big banks are so deep in this derivative ca-ca that eyeballs are turning brown in the upper level executive suites. Notable bankers are even jumping out of windows, hanging themselves in back rooms, and blowing their brains out in roadside ditches. Is it not strange that there are no reports on the contents of their suicide notes, if they troubled to leave one? (And is it not unlikely that they would all exit the scene without a word of explanation?) One of these, William Broeksmit, a risk manager for Deutsche Bank, was reportedly engaged in “unwinding positions” for that that outfit, which holds over $70 trillion in swap paper. For scale, compare that number with Germany’s gross domestic product of about $3.4 trillion and you could get a glimmer of the mischief in motion out there. Did poor Mr. Broeksmit despair of his task?

Physicist Stephen Hawking declared last week that black holes are not exactly what people thought they were. Stuff does leak back out of them. This will soon be proven in the unwinding derivatives trades when most of the putative wealth associated with swaps and such disappears across the event horizon of bad faith, and little dribbles of their prior existence leak back out in bankruptcy proceedings and political upheaval.

The event horizon of bad faith is the exact point where the credulous folk of this modern age, from high to low, discover that their central banks only pretend to be regulating agencies, that they ride a juggernaut of which nobody is really in control. The illusion of control has been the governing myth since the Lehman moment in 2008. We needed desperately to believe that the authorities had our backs. They don’t even have their own fronts.

Is the money world at that threshold right now? One thing seems clear: nobody is able to turn back the plummeting currencies. They go where they will and their failures must be infectious as the greater engine of world trade seizes up. Who will write the letters of credit that make international commerce possible? Who will trust whom? When do people seriously start to starve and reach for the pitchforks? When does the action move from Kiev to London, New York, Frankfurt, and Paris?

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Oil Industry Starts to Squeeze Costs, Wages

Thursday, January 30, 2014
by  Reuters – John Kemp

LONDON, Jan 30 (Reuters) – Cutting the cost of everything from salaries and steel pipes to seismic surveys and drilling equipment is the central challenge for the oil and gas industry over the next five years.

The tremendous increase in exploration and production activity around the world over the last ten years has strained the global supply chain and been accompanied by a predictable increase in operating and capital costs.

When oil and gas prices were rising strongly, petroleum producers and their contractors could afford to absorb cost increases.

But as oil and gas production have moved back into line with demand, and prices have stabilized, the focus is switching once again to cost control.

“Operational excellence,” a euphemism for doing more with less, is back in fashion and set to dominate industry thinking for the rest of the decade.

Spending Discipline

Paal Kibsgaard, chief executive of Schlumberger, one of the largest service companies, has been emphasising “smart fracking” and other ways to raise output and cut costs for two years.

Speaking as long ago as March 2012, Kibsgaard warned: “In the past ten years, exploration and production spend has grown fourfold in nominal terms, while oil production is up only 11 percent.”

“In this environment, we believe our customers will favour working with companies that can help them increase production and recovery, reduce costs, and manage risks,” he added.

Schlumberger’s website and those of its main competitors Halliburton and Baker Hughes all prominently feature technologies and processes intended to cut costs, such as dual-fuel diesel-natural gas drilling and pumping engines.

It is just a small example of profound industry shift from an emphasis on increasing production to controlling spending.

Issuing a shocking profit warning on January 17, Royal Dutch Shell ‘s new chief executive pledged to focus on “achieving better capital efficiency and on continuing to strengthen our operational performance and project delivery.”

On Thursday, the company cut its capital budget for 2014, and announced it was suspending its controversial and expensive Arctic drilling programme.

Shell is catching up with peers like BP and Chevron , as well as perennially tight-fisted Exxon, in promising to stick to a tighter spending regime and return more value to shareholders .

The problem is not unique to oil and gas producers. Miners like BHP Billiton, Rio Tinto and Anglo American have all axed projects and pledged to tighten capital discipline after costs spiralled out of control.

Megaproject Madness

The worst over-runs have been on so-called megaprojects – investments costing over $1 billion, sometimes much more. In fact, the bigger project, the worse the cost overruns and delays have tended to be.

Pearl, Shell’s enormous gas to liquids project in Qatar, is now regarded as a success, but was seriously delayed and went wildly over-budget.

Other megaprojects like Chevron’s Gorgon LNG in Australia and the Caspian oil field Kashagan – which is being developed by an industry consortium including ENI, Shell, Total, Exxon and Conoco – have been similarly late and bust their original cost estimates.

It is convenient, but wrong, to blame poor project management for all the days and cost overruns. Some decisions have been flawed, but on projects of this size and complexity, at least some errors are to be expected.

Megaproject managers in 2013 were not, on the whole, worse than in 2003. Unfortunately, the economic and financial environment has become much less forgiving. When projects start to go wrong it has proved much harder to limit the delays and damage to the budget.

By their nature, megaprojects are so big they strain the global construction and engineering supply chain and pool of skilled labour. Megaprojects create their own adverse “weather,” pushing up the cost of specialist labour and materials worldwide.

Attempting to complete even one or two megaprojects with similar characteristics at the same time can strain the global supply chain to the limit. Attempting to complete several simultaneously is a recipe for severe cost escalation and delays. The multi-commodity boom over the last decade created a “perfect storm” for the megaproject industry.

While there is not an exact overlap, massive offshore oil fields like Kashagan, LNG facilities like Gorgon, floating LNG platforms like Prelude (destined for Australia), gas to liquids plants and even simple onshore shale plays like North Dakota’s Bakken, are all competing for the same limited pool of skilled engineers, construction workers and speciality steels.

The result has been a staggering increase in costs and wages. And once a project falls behind, there is no slack in the system to hire extra workers or procure additional or replacement components to get it back on track.

Supply Chain Responds

Rampant inflation and delays have been worst on megaprojects because they require a much higher proportion of very specialist components and the supply chain is least-elastic.

But even simpler projects like shale oil and gas have been plagued by a rapid rise in costs as they stretch the availability of drillers, rigs and pressure pumping equipment, as well as fracking sand, fresh water and guar gum.

Between the end of 2003 and the end of 2013, the number of employees engaged in oil and gas extraction in the United States increased by 70 percent, from 117,000 to 201,000, according to the U.S. Bureau of Labor Statistics.

Soaring demand for specialised workers has produced an entirely predictable surge in wages.

Employees in North Dakota’s oil, gas and pipeline sectors were taking home an average monthly salary of $9,000 in the fourth quarter of 2012, and staff at support firms were making an average of more than $8,000, according to the latest data from the U.S. Census Bureau.

Their colleagues in Texas were doing even better: average salaries in the oil and gas extraction industry were over $15,000 per month, and $11,000 in pipeline transportation.

That made them some of the best-paid employees in the United States. Only financial services employees in New York ($28,000), Connecticut ($25,000), California ($17,000) and a few other states were routinely making more.

Rising wages and other prices were the only means to ration scarce workers and raw materials. But they were also the only way to attract more workers and supplies into the industry.

Extreme Cycles

It takes a long time to train new drillers, petroleum engineers and construction specialists, and give them the experience needed before they can assume positions as experts and team leaders.

Similarly, the expansion of specialist construction facilities and manufacturing firms for items like oil country tubular goods takes years; and companies will only expand or enter the industry if they are convinced the upturn in demand will be durable rather than fleeting.

While the boom in oil and gas prices dates from around 2003 or 2004, the big expansion of exploration and production spending started much later, around 2006 or even 2007, and it has only filtered down to the labour pool and the rest of the supply chain much more slowly.

It is the long delay between an increase in demand for oil and gas, an increase in production and exploration activity, and an expansion of the whole supply chain, which explain the deep cyclicality of the petroleum industry and mining.

Extreme cyclicality is hard-wired into oil, gas and mining markets. Companies like Shell which have tried to ride through the cycle by ignoring short-term price and cost changes to focus on the long term have eventually been compelled by their investors to fall into line.

In the next stage of the cycle, oil and gas prices are set to remain relatively high but are unlikely to rise much further. For exploration and production companies, increasing shareholder value therefore means increasing efficiency and bearing down on costs, including compensation and payments to suppliers and contractors.

For the supply chain and oil-industry workers, capacity and the availability of skilled labour will continue to expand, while demand is set to stabilise or taper off. Major oil companies and miners have already cancelled some projects. Costs, wages and employment will fall, or at least start rising much more slowly.

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Austin, TX :: BP, UT Team Up in O&G Research Projects

BP announced it will commit $4 million to launch a new strategic partnership with The University of Texas at Austin to support several leading-edge oil and gas industry research projects, with the potential for increased contributions as new studies are identified in the future.

The unique collaboration between the two institutions, which highlights BP’s ongoing commitment to higher education and research, aims to develop real-world solutions to a number of technical challenges facing the global oil and gas industry, both onshore and offshore.

One initial area of focus is related to Project 20K™, a multi-year initiative announced by BP in early 2012 that seeks to develop next-generation systems and tools to help unlock the next frontier of deepwater oil and gas resources, currently beyond the reach of today’s technology. Accessing these resources is a key part of BP’s commitment to U.S. energy security.

The University of Texas’ Department of Electrical and Computer Engineering will work with the Project 20K™ team to study the impact of “human factors” on the drilling process and the potential for new systems that can enhance safety and efficiency. A second area of activity will be to develop a reliability assessment process for BP’s project team to use in quantifying the “system-level reliability” of Project 20K™ concepts.

Other joint research projects include one that seeks to improve recoveries from shale gas and oil formations through a deep investigation of fracturing fluids’ impact on well productivity. Another focuses on enhancing early detection of “kicks” – the sudden influx of hydrocarbons into a well – by using real-time well data and predictive models to better inform operational decisions, in support of BP’s commitment to safe and reliable operations.

“This is not just theoretical research,” said James Dupree, BP’s Chief Operating Officer, Reservoir Development & Technology. “Under this partnership, we are tackling real-world challenges that, if better understood, could have far-reaching impacts not only on BP but on the future of global energy development.”

Administered by a joint governance board, the program has established a rigorous process for selecting research projects that play to the university’s world-class strengths in engineering and geosciences as well as meet BP’s strategic business needs.

BP is funding research in the Cockrell School’s Departments of Mechanical Engineering, Electrical and Computer Engineering and Petroleum and Geosystems Engineering.

“This partnership allows our faculty and graduate students to solve challenging, relevant problems in global energy development, to work collaboratively with leading scientists and engineers from BP, and to see how their solutions are implemented in a real-world setting,” said John Ekerdt, associate dean of the Cockrell School of Engineering. “We look forward to the new interdisciplinary opportunities our researchers will have to develop technologies that will have a far-reaching societal benefit.”

While the agreement is initially focused on several specific research projects, the intent is to establish a long-term partnership between BP and the University of Texas that is beneficial to both and that could later result in increased funding. Successes in early projects will help build the basis for future collaboration, with the ultimate goal of taking the research and technologies developed through the program from the lab and into the field.

Press Release, November 01, 2013

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The Costs of War in Syria

By Ryan McMaken
Thursday, September 5th, 2013

As Rothbard pointed out, war and militarism are socialism writ large, and not surprisingly, war is very expensive to the taxpayers, and especially to those who are the targets of military intervention.

There is presently a debate in Congress and in the media about how expensive the war in Syria will be. In the American policy debate The expenses are only calculated in estimated monetary terms, and so we know that the debate will of course ignore  all damage done to the Syrians themselves and to global markets, which are always damaged and stunted by wars.

Nevertheless, even the very tame and limited argument over the costs to the U.S. treasury will be based mostly on conjecture and dishonest assessments of the true cost.

We might get some glimpses of some of the honest estimates as the debate rages between the bureaucrats and the politicians, although even those are still nothing more than estimates.  The bureaucrats (i.e. the Pentagon) will use the drive to war in Syria as an opportunity to demand that more taxpayer money flow into their coffers. We have seen this already with former Defense Secretary Leon Panetta’s claim that the tiny cuts imposed by sequestration “are weakening the United States’ ability to respond effectively to a major crisis in the world.”  It will be in the Defense Department’s interest to high-ball the costs of the war.

Nevertheless, even the Defense’ Department’s claims of costs for the Syria war will likely be well below the true cost by the time the public hears them, for the Department will be restrained by the Obama Administration’s competing interest to make the war appear as cheap as possible. Fearing resistance from some taxpayers, the Administration will naturally wish to have the war appear cheap, easy, and no big deal, as regards to cost.

Indeed, John Kerry was claiming yesterday that unnamed “Arab countries” have offered to pay for the war. This claim by the Obama Administration should be seen as being on more or less the same levels as the Bush Administration’s claim in 2003 that the Iraq war and the reconstruction of the country would be paid out of Iraqi oil revenues.

Those who remember the debate of Iraq War costs a decade ago will also recall the Bush Administration’s outrage over General Eric Shinseki’s (correct) estimate that hundreds of thousands of troops would be necessary to restore peace to Iraq in a reasonable amount of time. The Administration claimed only a fraction of that number, and thus, only a fraction of the funds, would be necessary.

So, politicians want a war to appear cheap, at least up front, while the bureaucrats want bigger budgets. Once the war starts, though, all bets are off, and any political or legal authorization given to the administration to wage war will be a de facto blank check for future unlimited outlays for occupation and conflict on an unlimited timeline. We’ve already seen this in both Afghanistan and Iraq, and while the two countries descended into chaos, the claim was made that since the U.S. regime had “broken” Iraq and Afghanistan, the taxpayers were now on the hook to finance the “fixing” of the broken countries.

The regime knows that all it needs to do is start a war, and the money will begin to flow indefinitely. Thanks to Robert Higgs’s Crisis and Leviathan, we know that war is generally a winning proposition for states, for it leads to greater revenues and more control of the domestic population, continually ratcheted up by new wars. Rothbard noted in  his essay “War, Peace, and the State” that while wars can lead to the downfall of states, they upside is often enormous for them, as wars secure vast new powers for the regime both domestically and internationally. And since Syria poses no threat to the U.S. military or to U.S. territory, the prospects are all excellent for the politicians, bureaucrats, government contractors and intellectuals who all stand to get rich off the latest conflict.

The taxpayers will of course fare less well, whether in the form of a far greater tax burden or by their misfortune in holding a currency ever more de-valued by the need to deficit-finance endless war.

For the government class though, times are good, as long as enough of the population can be neutralized or even convinced to support the latest conflict. Thanks to what Hans-Hermann Hoppe calls “the myth of national defense,” wars are among the easiest big government programs to sell to the citizenry, for so few are willing to entertain possibilities outside the status quo of state monopolies for the provision of defense.

And in those cases where convincing the voters might prove more challenging, the state can always goad foreign nations into making an aggressive move than can lead to war, or the state may rely on a small army of intellectuals to provide the propaganda necessary to sweep all opposition aside.

The cost to Americans in the form of higher energy prices, lost trade opportunities, and other hidden costs will be immense, but even the cost in dollars to the taxpayers when calculated in terms of the true costs of empire, cannot be predicted.

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Gulf of Mexico: Stone Energy Hires Ensco Semi

Stone Energy  has contracted an ENSCO 8500 series dynamically positioned deep water drilling rig for Stone’s Cardona oil development program at Mississippi Canyon 29.

Drilling on the first Cardona well is expected to commence during the second half of 2013 followed by the drilling of the Cardona South well. Stone plans to tie back both wells to the 100% owned Pompano platform with production projected for late 2014. Stone holds a 65% working interest in the Cardona wells and will be the operator.

Chairman, President and CEO David Welch stated, “The signing of the Ensco contract allows us to move forward to more fully develop the reserves around the Pompano platform. These Stone-operated deep water wells allow us to be in control of the planning and timing of the Cardona project. After years of preparation, we look forward to progressing our deep water development and exploration efforts.”

Separately, the ENSCO 81 jack-up rig is expected to begin drilling on a three to four well conventional shelf/deep gas drilling program in May 2013. Stone expects to drill the Hammerlock oil prospect located on South Timbalier 100, followed by the Taildancer oil prospect located on Ship Shoal 113. The remaining one or two wells will follow Taildancer. Also in May 2013, the Parker 50B inland barge rig is expected to spud an infield oil well prospect in the Stone-operated Clovelly field. Stone holds a 94% working interest in Hammerlock and a 100% working interest in Taildancer and Clovelly.

At the La Cantera liquids-rich deep gas field, the third well was successfully drilled to 18,000 ft and is currently in completion operations with first production expected in June 2013. Combined with the first two wells, gross production from this field is projected at over 100 MMcfe per day (over 25 MMcfe per day net) when the third well commences production. Stone holds a 34.6% non-operated working interest in the field.

Drilling operations at the deep water Malachite prospect located on Mississippi Canyon 258 are complete. The well has been logged and marginal hydrocarbons were found in several sands. The partners have decided not to proceed with the project and the well is currently being plugged and abandoned. Stone holds a 40% non-operated working interest in the prospect and the net well cost is estimated at approximately $22 million.

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