China's Shrunken Thirst for Oil - Business Week
Even China's enormous thirst for energy appears to have its limits. Evidence has mounted across Asia in recent days that oil prices have finally grown too rich for China, which accounted for more than 40% of total growth in world demand in 2004 and is expected to feed even more explosive demand this year. But on July 18, OPEC cut 150,000 barrels a day from its forecast for oil-demand growth this year, citing China's weakening appetite for crude. Consumption of crude and refined products in China is widely felt to have been a key factor behind record-beating crude-oil futures prices in 2004 and so far in 2005. But traders, analysts, and industry sources around Asia contacted by Platts Global Alert say the latest spike in crude futures, to an all-time nominal high of $62.10 for the benchmark West Texas Intermediate grade on July 7, seems to have burst China's demand bubble. (Platts, like BusinessWeek and Standard & Poor's, is a unit of The McGraw-Hill Companies (MHP ).) According to sources in China, the lurch higher in crude futures for much of early July created substantial pain at almost every level in the Middle Kingdom's oil sector by dragging Asian crude benchmarks higher as well. Fundamentally, sources say the reluctance of China's government to allow significant increases for domestic "guidance prices" for important retail products like diesel and gasoline has pushed the country's state-owned and independent refiners to the breaking point. The disparity between high Asian benchmark crude-oil prices and closely controlled prices for the products that are refined from that crude oil have forced significant cuts in production runs at refineries and have eaten into Chinese crude demand. Moreover, artificially low domestic retail prices have also turned China into an exporter of products that are usually in tight supply. Its major trading companies, China Oil and Unipec, have been exporting significant extra volumes of "gasoil" (heating oil and diesel fuel) in recent weeks, a product that China ordinarily imports in volume. In other refined-product markets where China normally falls short on domestic production, importers have stopped buying foreign products altogether. Meanwhile, domestic resale values in China for other hydrocarbons -- fuel oil, propane, and butane -- have run below import prices for large chunks of 2005, a phenomenon referred to in China as dao gua. During spells of dao gua, fuel oil and liquefied petroleum gas importers normally put product into stock. Stocks are now so high in some ports that importers have stopped buying altogether for weeks on end -- causing a second major dent in China's apparent oil demand, on top of diminished crude-oil runs. The phenomenon has spilled over into international estimates of Chinese demand, which recently took a very bearish turn for the oil markets. In its latest monthly oil report, the International Energy Agency (IEA) estimated that Chinese demand had weakened "considerably" because of the country's policies for oil products and electricity. Low electricity tariffs have put oil-fired power stations in Southern and Eastern China into the same boat as some of the refiners -- to stop generation or face selling electricity at a loss. The IEA report said net oil-product imports appeared to have fallen to just 150,000 barrels per day, well below the 730,000-barrel rate for May, 2004. Maybe most tellingly, the IEA's analysis showed that China's apparent demand for crude oil and refined products for the entire second quarter of 2005 ran at an estimated 6.47 million barrels per day -- down 60,000 barrels (or almost 1%) from the second quarter of 2004. A drop in second-quarter demand would be dramatic news, if final numbers show the same fall. A senior source with one of China's major state-owned refiners, on condition of anonymity, told Platts that China's twin refining giants, Sinopec (SNP ) and PetroChina (PTR ), have been engaged in intensive cost-cutting measures for more than a year to ease the pain of razor-thin refining and resale margins effectively imposed by the government. Those cost-cutting actions have, coincidentally, often doubled as energy-efficiency measures, and have included limitations on air-conditioning usage and lighting in industrial and office space. "We hope that the government will let us escape this pain, at least for a while," said the source, when asked if Chinese industrial-regulatory authorities were likely to allow continued run cuts if domestic supplies of gasoline or diesel start to be low. In fact, one of the oddities of China's oil economy in 2005 is that domestic gasoline and diesel suppliers have complained of tight supplies in China's major Southern gasoline and diesel markets this year, even as refineries have cut runs or shut down entirely. Sinopec, which accounts for 55% of China's 5.8 million barrels per day of refining capacity, is said to have decreased runs by as much as 400,000 barrels daily below normal operating rates of about 2.9 million barrels per day. PetroChina, which operates more refineries than Sinopec over a wider geographic area, accounts for less overall capacity, with just 38% of China's refining capacity. It's understood to be operating at 140,000 barrels per day below typical run rates of about 2 million barrels per day. Strong anecdotal evidence now exists of widespread power disruptions and major energy-saving initiatives, including a notable switch to smaller cars. Gideon Lo, a Hong Kong-based analyst with DBS Vickers, says the spike in fuel-oil prices this year has forced some large fuel-oil-powered plant operators to reconfigure to burn coal. If China is to hit earlier forecasts for 6.5% growth in oil demand this year, he says, second-half demand would have to rise by more than 6%. This is quite unlikely, according to Lo, especially since it was already at a high level in second-half 2004. Industry sources now believe that China's dominant refiners will be allowed to operating at reduced rates, drawing down instead on commercial stocks and enforcing energy-savings measures among customers, until the Chinese government gives the green light for the yuan's revaluation. Such a move, which could see the Chinese currency gain as much as 10% in value against the U.S. dollar, would make crude oil cheaper to buy for Chinese refiners and restore much of their lost margins. China has fiercely resisted calls from the U.S. and Europe for a firm timetable for revaluing its currency. Western nations believe the cheap yuan has given Chinese exporters an unfair advantage in textiles and manufactured goods, driving some Western industrial groups to the brink of bankruptcy. A prompt revaluation would certainly take the edge off tense Sino-U.S. relations, which are currently frosty after the negative U.S. political reaction to the bid by China's CNOOC (CEO ) for U.S. oil and gas outfit Unocal (UCL ). Oil-market sources in Asia believe that China will allow a controlled revaluation of the yuan soon, possibly within months. A 10% appreciation would boost margins for Chinese refiners in a single step, by reducing the yuan value of imported crude oil while leaving domestic refined-product prices -- already priced in yuan -- unchanged. Where does Chinese oil demand go from here? Predictions by industry experts are at odds. In its June oil report, the IEA said it expected a recovery in second-half 2005. For next year, the IEA expects Chinese apparent demand to grow by 490,000 barrels per day, or 7.2%. But others aren't so sanguine. In a widely reported analysis in mid-July, Hong Kong-based economist Andy Xie of Morgan Stanley (MWD) said he believed the current "oil bubble" would burst "as the weak economic data and oil-demand data pour in from Asia." Xie's report sounded an ominous note for oil bulls: "At some point, the market will abandon the fiction of endless Asian or Chinese demand."
Click here to read more 
Contents

Oil compCosts climb as hurricanes come fast and more furious - Financial Times
Kristie Crump lives more than 400km inland from where Hurricane Dennis struck the US Gulf coast last week. But her house in a leafy Atlanta suburb did not escape the storm's wrath. Ms Crump's garage and basement were flooded with one metre of water as Dennis dumped rainfall of biblical proportions across much of the US south-east. Among the possessions destroyed: a box containing all the books Ms Crump, 46, was read by her mother as a child. "I was keeping them so I could read them to my grandchildren," she says. Experiences such as Ms Crump's and worse have become all too common in the US south-east, Central America and the Caribbean. Storm frequency has been increasing for the past decade, culminating in the four powerful hurricanes that battered Florida last autumn. This year's tropical storm season, from June until November, looks set to be another busy one, with a record five named storms in its first six weeks. Until Dennis, the US had not been hit by a hurricane in July since 1916. And even before Dennis had dissipated a more powerful hurricane - defined as a tropical storm with sustained winds of at least 74mph (118km/h) - was gathering force behind it. Hurricane Emily, the strongest ever recorded in July, is expected to make landfall along Mexico's Gulf coast today after grazing the Yucatan peninsula at the weekend. William Gray, a meteorologist at Colorado State University and the doyen of storm forecasters, predicts eight hurricanes this year, compared with an annual average of 5.9. In addition to causing misery to people such as Ms Crump, increased hurricane activity exacts a heavy economic toll. Each hurricane that makes landfall in the US costs insurers an average $3bn (€2.5bn, £1.7bn), according to the Tropical Storm Risk Insurance Consortium. Initial estimates put the cost of Dennis at $5bn and last year's four Florida hurricanes cost about $25bn. Goldman Sachs warned last week that the insurance industry's earnings would become volatile if the trend towards more frequent and powerful storms continued. While insurers absorb much of the costs, the impact of damaged infrastructure, lost working hours and reduced consumption affects the entire economy of storm-struck areas. Southern Company, the largest electricity provider in the US south-east, says Dennis left more than 500,000 customers without electricity, including offices, factories and retailers. More than 1m were cut off by Hurricane Ivan, the biggest of last year's storms. Perhaps the greatest economic threat posed by hurricanes is to the oil and gas rigs of the Gulf of Mexico, which account for a quarter of US energy output. Most platforms were evacuated ahead of Dennis's arrival, causing the loss of about 5m barrels of crude oil production. It remains unclear whether the partial collapse last week of BP's new $1bn Thunder Horse platform, 150 miles off New Orleans, was caused by Dennis. But its location in the hurricane's path highlighted how exposed the energy industry is to storms. With so much at stake, there is intense interest in - but little agreement on - the causes of increased hurricane activity. Some experts blame global warming, which they say is responsible for the rising ocean temperatures that have created ideal conditions for tropical storms. Michael Oppenheimer, professor of geosciences and international affairs at Princeton University, told a seminar that last year's hurricanes were a "sign of things to come", adding: "The warming ocean surface will supply more and more heat to future hurricanes, causing their winds to strengthen and their destructive power to increase". However, many scientists insist the hurricane glut is part of a natural cycle that alternates between stormy and calm eras, each lasting decades. Previous active periods included the 1880s-90s and the 1930s-50s, before humans started polluting the atmosphere on a large scale. Chris Landsea, a US government scientist, resigned from the UN Intergovernmental Panel on Climate Change in January in protest at the linking of hurricanes to global warming. He said the connection was "far outside current scientific understanding" and might damage the credibility of climate-change science. Whatever the cause, most experts agree this latest stormy period is likely to persist for the foreseeable future. Insurers are already citing the trend as justification for increased premiums. The Association of British Insurers recently claimed the worldwide cost of storms could rise by as much as two-thirds by 2080. "The prospect of more disasters means a basis for charging higher rates," writes Roger Pielke, director of the centre for science and technology policy research at the University of Colorado. Back in Atlanta, Ms Crump will not be adding to the insurance industry's losses, as she was not covered for flood damage. The water has receded but she is reluctant to put furniture back in her basement for fear of another storm.
Click here to read more
Contents

Asia seeks alternatives to oil power - Manila Bulletin
Geologists and petroleum engineers around the world have warned about an impending oil global crisis. Asia, like the rest of the world is scouring the globe for alternatives to oil power as prices soar. The continent has come to terms with the certainty of a world beyond oil and alternative sources of energy from bananas to wind farms, alcohol, and the sun have taken on a new urgency. South Korea and Japan have initiated major actions to move away from traditional power sources but the amount of alternative energy they have produced is minimal. In Japan where almost all oil is imported, oil has been replaced mainly by nuclear energy, natural gas, and new energy sources such as solar and wind power. Korea has focused on the production of energy from city and industrial wastes, which makes up 90 percent of the alternative energy which is used in 31 cities and more than 500 factories. Other sources of energy for South Korea are biomass and solar energy. The Philippines has long been using geothermal energy. It now has the largest wind farm in Southeast Asia; wind is being tapped for energy on a sparsely populated stretch of coastline in the north. The Philippine government is also encouraging Filipino motorists to mix diesel with coconut oil for vehicles using diesel engines. In China, one of the world’s top consumers of oil, geologists and engineers struggle to coax crude oil from frozen prairies at the Daquing oilfields near the Russian border but it is also developing its natural gas reserves. Other countries in Asia are tapping into their energy sources and reaching out to multinationals to help them in production technologies. With oil supplies expected to remain tight in the coming years, we simply have to balance our demand for energy with the world’s rapidly shrinking resources. By acting now, we can control the future instead of letting the future control us.
Click here to read more
Contents

An energy answer in our own backyard - Houston Chronicle
Every day, every American burns 20 pounds of coal. That's right, 20 pounds of the sooty, black lumps pulled from the depths of the Earth. It's a striking fact that gets lost amid worries about Middle Eastern oil dependence, high prices at the pump and plateauing natural gas supplies in the U.S. But half of this country's electricity is still generated from coal. That means every time a television gets turned on or an air conditioner thermostat gets adjusted, a coal-burning power plant has to generate that much more power. It's also why Corby Robertson, grandson of legendary Texas wildcatter Hugh Roy Cullen, has plowed his part of that famed oil fortune into the dirty fossil fuel that was supposed to be replaced by natural gas and nuclear power long ago. "I can tell you that if we don't burn coal, you can turn off the lights," Robertson said. Today, Robertson is chairman of Natural Resource Partners, a Houston-based master limited partnership with a market capitalization of $1.6 billion. Since debuting on the New York Stock Exchange in 2002, the partnership's shares — called units — have more than tripled to a recent $63. Quarterly distributions, akin to dividends, have increased in eight of the last nine quarters — up 62 percent since going public in 2002.Robertson, now 58, was 15 when he started to spend time at the family business, Quintana Petroleum, poring over oil prospects with a team of engineers as they evaluated deals. Even back in the 1960s, the Cullen heir saw a coal future for this country. In 1969, when Robertson was a freshly minted graduate of the University of Texas, his father, married to Cullen's daughter Wilhelmina, sent him to scout coal-producing properties in Appalachia. "My dad saw the difficulty of increasing production in the United States as far back as the late '60s. Even then, we were becoming increasingly dependent on foreign sources, in particular Saudi Arabia," Robertson said. "He pretty well foresaw the problems and was adamantly in favor of increasing domestic energy supplies." Environmentally friendly or not, coal is one resource the United States has in spades. The U.S. Department of Energy estimates there's enough coal in the U.S. to last another 250 years. "People may have that reaction," Robertson said of coal's filthy reputation. "You have to step back and ask how the world is going to get all the energy it needs from ... very rapidly depleting assets. ... If we quit drilling, our reserves are up in a heartbeat," he said, snapping his fingers. Robertson's first foray into coal mining was a 12,500-acre Kentucky purchase called the Preece property. He found that operating mines took a different set of skills than operating oil and gas fields. Within three months, the miners had gone on strike, but the labor dispute turned out to be a mercy.At the time, it cost Robertson $7 per ton to mine for coal, but market conditions forced him to sell it at a loss for just $5.80 per ton. "It was quite a humbling experience," he said. The Preece project got Robertson thinking about all the other fights he could face down the road — from union bosses to environmentalists — and decided not to dirty his hands as a mine operator. Instead, Robertson owns the coal-producing properties and leases them to more experienced coal companies like Arch and Peabody, collecting royalties from the comfort of Cullen Center, the downtown Houston office complex his family built. "We don't have any of the labor expense, any of the environmental expense, we don't have any of the capital expenditures, we don't have any marketing," Robertson said. "There are minimum royalties paid to us. Annual minimums. Minimums per ton. Then there are percentage royalties. We just get paid." And pay off it has. Last year, royalties of $111 million provided Natural Resource Partners with a profit margin of more than 50 percent. Over the years, Robertson has furiously amassed coal properties from Alabama to Montana, shedding the Tom O'Connor and Garden City oil fields his grandfather discovered along the way. He bought CSX Coal Properties for $122 million in 1986 and paid $80 million to Burlington Resources in 1992 for its 20 million tons of coal in the Western U.S. Last month, Natural Resource Partners, a combination of select properties of WPP Group and Arch Coal that went public in 2002, said it was buying interests in 144 million tons of coal in the Illinois Basin for $105 million from Steelhead Development Co., bringing its reserves to 1.8 billion tons. Much of Robertson's Western coal reserves are in another private partnership, Great Northern Properties. With 20 billion tons of coal, its reserves are second only to the federal government's. When those properties start to produce, Robertson said they could be sold to Natural Resource Partners. That's exactly the kind of cozy management deal critics of master limited partnerships say is a conflict of interest and a downside to the investment vehicle. Robertson said Natural Resource Partners' board and conflict committee would oversee the process to ensure any deal is fair for unit-holders. David Khani, an analyst with Friedman Billings Ramsey & Co., doesn't seem too worried. He sees only an upside and puts a $72 price target on Natural Resource Partners units, which he doesn't own. "The real kicker has been the fact that 30 percent of their production is tied to metallurgical coal," he said, referring to the type of coal that is used for making steel. "The price has tripled in the last year and a half." Even steam coal, used to generate electricity, has seen its price double recently. While some investors worry that an economic slowdown could put a damper on coal demand, Khani thinks Natural Resource Partners is well-positioned for the long term. That's because coal, despite its environmental detractors, isn't going away anytime soon. According to the Energy Department, coal-fired electricity increased 70 percent between 1980 and 2002. It's projected to jump another 47 percent by 2025. "They're conservative. They're valued on their dividend, but they're only paying out 70 percent of what they're generating," Khani said. "They're building up cash to make acquisitions over time, which fights potential declines and has less financing risk."
Click here to read more
Contents

Back to the top of the page