Mark Latham Commodity Equity Intelligence Service

Wednesday 15th February 2017
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    Naptha up, and Bond Proxies over-owned. Real yields too low. Trump/Brexit= Growth. Big stuff.

    The benchmark CFR Japan naphtha price hit a 19-month high on Monday at $528.625/mt, amid growing demand from the petrochemical sector on the back of stronger margins, S&P Global Platts data showed.

    The marker was last higher at $543.375/mt on July 6, 2015.

    Over the last two weeks, a slew of spot buy tenders emerged in the Asian naphtha market for second-half March delivery cargoes.

    Japanese trader Idemitsu, Taiwan's Formosa Petrochemical, South Korea's Hanwha Total and LG Chem, and China's Unipec, had issued the tenders, mainly seeking light-grade naphtha.

    Formosa last Thursday bought 150,000 mt of open-spec naphtha, with a minimum paraffin content of 70%, for H2 March delivery into Mailiao, despite planned maintenance at its residue fluid catalytic cracker from March to April.

    The company has scheduled a turnaround at one of its two RFCCs, each with the capacity to produce 350,000 mt/year of propylene, from March 10 to April 17 while its olefins conversion unit will be taken offline from March 10 to April 26, Platts previously reported.

    Hanwha Total secured an open-spec naphtha cargo Monday for the same laycan for delivery into Daesan.

    LPG, the alternative feedstock to naphtha, has gained strength recently due to limited supplies, market sources said. This has resulted in naphtha being the preferred feedstock for petrochemical production.


    The CFR Northeast Asia ethylene-CFR Japan naphtha spread widened to the highest level in nearly five months at $778/mt last Friday, before dipping to $771.375/mt Monday.

    Asia's ethylene market has been gaining strength since the middle of January, driven by strong spot demand -- especially from China.

    A few heavy full-range naphtha cargoes, which are typically used for gasoline blending, were also diverted to the petrochemical pool due to better premiums, sources said.

    "Heavy full-range naphtha was partly [diverted] to the petrochemical [sector], as it is oversupplied. Open-spec naphtha has more value than heavy full-range naphtha [these days]," a South Korea-based naphtha trader said.

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    China to launch a new round of air quality inspections

    A new round of air quality inspections will run in China from Feb. 15 to March 15, the Ministry of Environmental Protection said Tuesday.

    Eighteen groups consisting of over 260 inspectors will be dispatched to 18 cities in north China including Beijing, Tianjin and Taiyuan, according to the ministry.

    China has attached great importance to environmental protection in recent years as environmental degradation threatens people's health and undermines the country's long-term growth.

    In inspections last year, the ministry said 720 people were detained and 6,454 held accountable for environment-related offences.

    Moreover, last year, 4.05 million high-emission vehicles were taken off the country's roads.

    Partly due to such efforts, Chinese cities reported less PM2.5 pollution in 2016, with the average density of PM2.5 in 338 cities falling by 6 percent.

    China is aiming for a 10 percent reduction in air emissions from 2012 levels by 2017 in cities at the prefecture level and above. Meanwhile, the PM 2.5 density in Beijing, Tianjin and Hebei Province should drop 25 percent.
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    Fearing pollution, north China residents protest plant despite government warning

    Fearing pollution, hundreds of residents in a northeastern Chinese city on Tuesday protested the building of an aluminum processing plant, ignoring warnings from authorities against disturbing social order.

    Urban Chinese residents, angry about environmental degradation and hazardous smog, have become increasingly concerned about living near polluting factories, occasionally protesting against new projects.

    Tens of thousands of "mass incidents" - the usual euphemism for protests - take place each year in China, triggered by corruption, pollution, illegal land grabs and other grievances.

    In Daqing, residents took part in a protest against the planned building of an aluminum plant by a subsidiary of Zhongwang Holdings Ltd.

    Photos and videos of a large crowd gathering in the car park outside the city government were circulated on Weibo on Tuesday, along with a hashtag asking Zhongwang to "please leave Daqing".

    Protesters shown in the photos held signs saying "Reject pollution, resist Zhongwang" and "Protect our homes".

    Reuters could not independently verify the accuracy of the pictures. Two eyewitnesses confirmed the protests had taken place.

    "There are about 800 to 1,000 people protesting still against the aluminum plant," said one eyewitness who gave his family name as Zhang, speaking by telephone from Daqing.

    The protests took place despite a call by city officials for residents to "rationally" convey demands, warning that "illegal gatherings, defamation, rumors and other acts that disrupt social order" would be dealt by law.

    "Everyone please be assured, if Daqing Zhongwang Aluminum's project does not pass muster on environmental issues, then it absolutely will not advance further," the city government said in a post late Monday on its official microblog.

    Public concern about pollution from the plant would be met with a "scientific" assessment of the plant's environmental impact, the post said.

    A spokeswoman for Zhongwang Holdings said the company was surprised by the protests and did not know why local residents were opposing the project now.

    The company bought the land five years ago but building has not yet started, with a feasibility study still underway.

    "We're still having internal discussions on the next step and will keep an open dialogue with the government and people there," she said, adding environmental protection was a "priority" for the company.

    The protests come as the company, one of the world's top aluminum fabricators, is embroiled in a dispute over U.S. import duties and subsidiary Zhongwang International Group Ltd pursues a $2.3 billion takeover of U.S. aluminum products maker Aleris Corp.

    U.S. lawmakers have called on regulators to reject the takeover.

    The Daqing city government in frigid Heilongjiang province did not answer calls seeking comment. An official reached by telephone at the Daqing police declined to comment.

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    Oil and Gas

    Libyan oil output falls to 691,000 b/d

    Libyan oil output falls to 691,000 b/d, NOC's Sanalla tells PlattsOil on maintenance work at fields in Sirte Basin

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    Russia cuts extraction tax?

    Siberian Oil Giant That Bankrolled USSR May Gush Cash Again (1)
    2017-02-15 07:50:47.444 GMT

    By Stephen Bierman and Andrey Biryukov
    (Bloomberg) -- Russia’s largest oil field, so far past its
    prime that it now pumps almost 20 times more water than crude,
    could be on the verge of gushing profits again for Rosneft PJSC.
    Samotlor, the 25 billion-barrel giant that bankrolled the
    Soviet Union for decades, would be the biggest beneficiary of
    proposals to encourage investment in some of Russia’s oldest and
    largest reservoirs, where output is plunging. One idea being
    debated -- cutting the extraction tax in half for fields
    producing a lot of water with the oil -- could add as much as 90
    billion rubles ($1.59 billion) a year to Rosneft’s earnings,
    said Alexander Kornilov, an analyst at Aton LLC in Moscow.
    “It is a super giant field even today after almost 50 years
    of production, the elephant of elephant fields,” said Ildar
    Davletshin, an analyst at Renaissance Capital Ltd. “There is
    still a lot of oil left,” but production is costly because it
    takes 95 barrels of water to get 5 barrels of crude out of the
    ground, he said.
    Samotlor changed the course of the Russian oil industry
    when it started production in 1969, moving its center of gravity
    to the swampy West Siberian plain from the Volga-Urals region.
    The field will never return to the glory days when it pumped a
    quarter of Soviet crude and funded foreign campaigns like the
    war in Afghanistan, but it still contains billions of barrels of
    Tax support for this and other aging reservoirs could help
    maintain near-record output from Russia -- the world’s second-
    largest oil producer. It would also further cement the dominance
    of state-run giant Rosneft over the oil and gas industry, which
    provides about 40 percent of government revenue.

    Helping Hand

    Russian ministries are still considering the viability of a
    proposal to reduce the tax on deposits that hold more than 150
    million tons of resources, but the oil they produce has a water
    content of more than 90 percent, according to a government
    official who asked not to be identified because the information
    isn’t public. Right now, all the fields that meet these criteria
    belong to Rosneft, said another person.
    Rosneft’s press service declined to comment on the
    potential tax change. Aliya Samigullina, the aide of deputy
    prime-minister Arkady Dvorkovich, who is in charge of oil and
    gas sector regulation, also declined to comment.
    Russian Prime Minister Dmitry Medvedev said in a Dec. 15
    television interview that tax changes could be used to help out
    Rosneft. At the time, the government was in the process of
    selling an almost 20 percent stake in the company to commodities
    giant Glencore Plc and Qatar’s sovereign wealth fund. The deal
    was seen as a major vote of confidence in the Russian economy.
    “If the proposed tax breaks are meant to benefit mainly
    Samotlor, then it is yet another sign that policies are designed
    to favor politically-connected companies” such as Rosneft, said
    Edward Chow, a senior fellow at the Washington-based Center for
    Strategic and International Studies.

    Swiss Cheese

    While the Kremlin may be going out of its way to assist
    Rosneft today, the state’s relationship with Samotlor decades
    ago created many of the problems it faces today.
    As oil prices plunged in the 1980s, Soviet engineers pushed
    the field above 3 million barrels a day, said James Henderson,
    an oil analyst at the Oxford Institute for Energy Studies. Today
    that would beat the United Arab Emirates, the fourth-largest
    producer in OPEC.
    “At its peak, the field was a vital revenue producer for
    the Soviet Union,” Henderson said.
    Samotlor’s importance led to its eventual downfall.
    Injections of water to boost recovery exceeded the pressure the
    reservoir could withstand and blasted cracks into the Swiss-
    cheese-like rock, according to “Oil of Russia,” a 2011 book
    written by Vagit Alekperov, the billionaire chief executive
    officer of Lukoil PJSC, the country’s second-largest producer.
    Instead of sweeping oil through porous traps in the rock,
    the fluids injected into the reservoir migrated into those
    channels. Samotlor was pumping water in circles and there was no
    way to fix the problem. The collapse of the Soviet Union in 1992
    accelerated the decline and production crashed to about 300,000
    barrels a day by 1996, according to Rosneft’s website.

    Renaissance Era

    As the Soviet system gave way to a chaotic market economy,
    the field passed into the hands of a tough set of new Russian
    entrepreneurs -- Mikhail Fridman, German Khan, Viktor Vekselberg
    and Len Blavatnik.
    They formed a partnership with BP Plc that applied
    contemporary methods to enhance recovery of crude and the field
    experienced a renaissance. Production rose as high as 600,000
    barrels a day in 2009, according to Henderson. Rosneft bought
    the entrepreneurs’ joint venture, TNK-BP, for about $55 billion
    in 2013.
    That deal transformed Rosneft into the world’s biggest
    listed oil producer. Igor Sechin, CEO and close ally of
    President Vladimir Putin, further cemented the company’s
    position last year by taking over Bashneft PJSC, a regional oil
    producer. The company now pumps about 4.2 million barrels a day
    of oil, beating Samotlor’s peak.
    Samotlor’s output fell 4.7 percent in 2015 to about 425,000
    barrels a day, according to Rosneft’s website. It declined by
    another 4.1 percent over the first nine months of 2016, compared
    with the same period a year earlier.
    Cutting the extraction tax in half would give Rosneft a
    greater incentive to boost Samotlor’s output. If a lower rate
    had been applied last month, the company would have retained $28
    for each barrel pumped compared with about $18 under the
    existing regime, according to calculations by Aton.
    “Investment to manage the decline rate could be boosted
    with government support via tax cuts,” said Henderson of Oxford
    Energy. “The field will remain a key part of Russia’s West
    Siberian production for many more years.”
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    Nigeria to offer work for illegal refiners in quest for peace

    Nigeria needs to offer work to people who make a living from illegally refining oil in the Niger Delta in order to achieve peace there, the African oil-producing nation's Vice President Yemi Osinbajo said on Tuesday.

    The government has been holding talks with militants to end attacks on oil pipelines which cut the country's output by 700,000 barrels a day for several months last year.

    But a military crackdown on thousands of illegal refineries in the southern swamps, which process crude oil stolen from oil majors and state oil firm NNPC, has raised tensions again.

    Illicit refineries process stolen crude in makeshift, blackened structures of pipes and metal tanks hidden in oil-soaked clearings deep in the Niger Delta's thick bush land.

    "Our approach to that is that we must engage them (illegal refiners) by establishing modular refineries so that they can participate in legal refineries," Osinbajo said during a visit to Rivers state, part of the Delta region.

    "We have recognised that young men must be properly engaged," he said, without giving details.

    He also said the government would make more provisions for an amnesty scheme for former militants who laid down arms in 2009 in exchange for cash stipends and job training.

    Illegal refining is one of the few businesses flourishing in an otherwise desolate region, as petrol is scarce in Nigeria due to the country's derelict state refineries.

    Authorities had originally cut the budget for cash payments to militants to end corruption but later resumed payments to stop surging pipeline attacks crippling vital oil revenues.

    "We have make more provisions for amnesty and provisions for social intervention," Osinbajo told residents of Port Harcourt, the region's major city. He has been visiting the Niger Delta since last month to calm tensions.

    The militants and residents who sympathise with them say they want a greater share of Nigeria's oil wealth to go to the impoverished region.

    Crude sales make up about 70 percent of government revenue and the attacks have deepened an economic crisis brought on by low global oil prices.

    Nigeria last put its crude output at between 1.7 million bpd and 1.8 million bpd, down from the 2.2 million bpd at the start of 2016.

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    ‏Barrel count in Singapore on the 14th...

    Barrel count in Singapore on the 14th...
    Dec: 46.3 million (record intake in China)
    Jan: 36.7 million
    Feb: 56.8 million

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    Origin Energy to take A$1.9 bln charge on LNG, exploration assets

    Origin Energy to take A$1.9 bln charge on LNG, exploration assets

    Origin Energy warned on Tuesday it will book a A$1.89 billion ($1.45 billion) charge in its half-year results, mostly against the value of its stake in the Australia Pacific liquefied natural gas project.

    At the same time it tweaked up its forecast for underlying earnings before interest, tax, depreciation and amortisation (EBITDA), raising the bottom end to A$2.45 billion but keeping the high end of the forecast range at A$2.62 billion.

    It had previously forecast a 45-60 percent increase in underlying EBITDA from continuing operations for the year to June 2017, which implied a range of A$2.37 billion to A$2.62 billion.

    Origin's shares jumped as much as 2.3 percent to a 17-month high following the announcement, outpacing a 0.8 percent gain in the broader market.

    APLNG, operated by ConocoPhillips, was not immediately available to comment on the full impairment on the project in Queensland, one of three coal seam gas-to-LNG plants which opened over the past two years amid a sharp slump in global oil and gas prices.

    Origin has a 37.5 percent stake in the project.
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    Alfa to sell oil assets in Eagle Ford, Peru, pauses energy spend

    Mexican conglomerate Alfa said on Tuesday it will sell its energy projects in the Eagle Ford shale in Texas, as well as its energy assets in Peru, while also stalling all energy investments due to lingering low oil prices.

    Alfa's Chief Financial Officer Ramon Leal said at a press conference the company was also looking at selling certain oil service contracts in Mexico.

    "We're focusing our resources in our core businesses and putting a permanent pause on our energy investments," Leal said, adding that he did not see oil prices rising any time soon.

    Last year, Alfa said its energy services unit Newpek suspended some exploration and drilling projects in the United States in the face of the persistent fall in petroleum prices.

    Alfa holds mineral rights in southeast Texas - in the Eagle Ford, Edwards and Wilcox fields - as well as in Oklahoma, Kansas and Colorado. Newpek, which reports on Wednesday, also works in mature oil fields in the eastern Mexican state of Veracruz.

    Earlier on Tuesday, Alfa reported a loss of 889.7 million pesos ($43 million) in the fourth quarter of 2016, hurt by a weak peso and lower operating results.

    The company, which operates petrochemical, car parts and refrigerated food businesses, reported a profit of 162 million pesos in the fourth quarter of 2015.

    Alfa posted revenue of 76.7 billion pesos for the quarter, an increase of 18 percent from the same period a year prior.

    But the performance of its Axtel telecoms business was negatively impacted by the weakness of the peso against the dollar, in addition to cuts in government spending that resulted in fewer projects.

    The peso has been hit by repeated threats by U.S. President Donald Trump to scrap the North American Free Trade Agreement (NAFTA), raising the risk of a major economic shock for Mexico.

    Even so, Alfa said car parts unit Nemak's consolidated earnings before interest, tax, depreciation and amortization (EBITDA) performed well during the quarter, and reached an annual record in 2016, due to solid auto demand in North America and Europe.

    Alfa also said a strong dollar benefited Nemak's sales in the fourth quarter.

    Shares in Alfa closed down 0.67 percent at 26.61 pesos per share before the company reported.
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    InterOil shareholders in favour of ExxonMobil bid

    InterOil said its shareholders approved the proposed $2.5 billion takeover by the US-based energy giant ExxonMobil at a special meeting held on Wednesday.

    According to the company’s statement, 91 percent of the votes cast were in favour of the proposed transaction an even greater percentage than the 80 percent that previously voted to approve the original transaction at a special meeting on September 21, 2016.

    The company noted that the court hearing in which InterOil is seeking a final order with respect to the amended and restated plan or arrangements is scheduled for February 20, 2017.

    Upon conclusion of the transaction, ExxonMobil would gain access to InterOil’s resource base, which includes interests in six licenses in Papua New Guinea covering about four million acres. These licenses include the Elk-Antelope field which is the anchor field for the proposed Papua LNG project.
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    Myanmar LNG import tender could launch by end April amid wide interest: law firm

    Myanmar's official LNG import tender could be launched by the end of April, with 8-10 submitters of Expressions of Interest or EOIs potentially selected to receive the tender, Yangon-headquartered legal firm VDB Loi said last Friday.

    The tender could take a year to be awarded, according to the presentation by VDB Loi in Singapore.

    A local partner was not required and LNG imports could begin in 2020, according to VDB Loi Senior Partner Edwin Vanderbruggen.

    In a call with S&P Global Platts Monday, Vanderbruggen said Myanmar's government was also considering further liberalising the country's electricity market and, in particular, allowing 100% foreign ownership of the country's transmission and distribution networks.

    Over 100 EOIs were submitted by the October 28, 2016, deadline to supply LNG to Myanmar, according to VDB Loi.

    Myanmar's Ministry of Electricity and Energy or MOEE LNG Business Sector Implementation and Development Central Committee has authority over the tender process.

    VDB Loi also listed four possible sites for the FSRU to be located, involving an FSRU either moored or at a jetty, on Kalgauk Island, Kyauk Phyu or Ngayok Bay.

    In November 2016, a World Bank workshop featured an FSRU in Myanmar with a 500 MMcf/day regas capacity.

    There will likely be a separate tender issued for a gas-fired power project in Myanmar.

    Platts Analytics expects Myanmar could begin importing LNG in the early 2020s.
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    China Gas to benefit as coal to gas switch brings on millions of new users in northern areas

    China Gas, one of the country’s largest natural gas distributors, expects its annual sales to reach 30 billion cubic metres in five years, thanks to the government’s effort to replace coal with natural gas consumption in northern China in a bid to improve air quality.

    China Gas has targeted annual sales of 11 billion cubic metres for the financial year ended March 31, 2017.

    Kevin Zhu Weiwei, vice president at China Gas, told reporters on Tuesday in Hong Kong that converting from coal to gas will add 40 million to 50 million natural gas users to the potential customer base in northern China.

    The company is seeking to win 10 to 20 per cent of these users into its network and has been in talks with provincial government in northern regions.

    Frank Li Yuntao, general manager of capital market at China Gas, said the company has raised its target for newly connected residential households from 22 million to 24 million for the financial year 2017, and expects 150,000 households of them to come from coal-to-gas projects.

    It has also been in talks with officials in Beijing, Tianjin, Hebei, Henan, Shanxi and Shandong which plan to fully replace coal with cleaner energy in rural areas.

    China Gas is confident to achieve 13 per cent year-on-year sales growth in 2017, Zhu said, noting that its sales growth in recent months rose 15 per cent year on year.

    The company in November lowered its annual sales growth target from 20 per cent to 13 per cent after posting a 6.9 per cent fall in interim revenue for the six months ended September 30, 2016, partly due to the prolonged completion time for the HK$1.53 billion acquisition of 10 distribution projects from its largest shareholder Beijing Enterprises.

    Zhu said that the transaction, initially expected to close at the end of 2016, is in the “final process”.

    China’s natural gas consumption in 2017 is likely to post a double-digit growth from 2016, thanks to the coal-to-gas conversion, Zhu said.

    China’s total natural gas consumption rose 6.6 per cent in 2016 on year to 205.8 billion cubic metres, up from 5.7 per cent annual growth in 2015, according to regulator National Development and Reform Commission.

    The Chinese government has promised subsidies to rural areas for at least three years to offset the higher costs of using gas over coal for heating boilers.

    The conversions have become increasingly important to drive volume growth for gas distributors in China, Deutsche Bank wrote in a research report in November.

    “The conversion mainly involves industrial furnaces and heating boilers, both are more policy driven than economic driven, but the former is more related to industrial activities and the latter is used for winter heating and relies more on the subsidy,” the report said.

    Pressure to make the switch comes as China’s northern cities have suffered from severe smog problems this winter. The report also noted that opportunities also lie in China’s more affluent eastern provinces, as the governments can afford subsidies to make the gas upgrade.
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    Daffy DUCs - Higher Prices But More DUCs? What's Going On With The DUC Count?

    The latest Drilling Productivity Report from the EIA, released yesterday (February 13, 2017), shows that while the combined rig count in the seven major U.S. shale plays rose about 25% in the fourth quarter of 2016 versus the previous quarter, and the number of wells drilled was up 29%, well completions were up a paltry 1%, leading to an increase in the inventory of drilled-but-uncompleted wells (DUCs). Completions accelerated a bit in January 2017, but DUCs still continued to rise. That certainly seems counterintuitive.  With crude oil prices stable in the low $50’s over the past few months you might think that producers would be pulling DUCs out of inventory, and in fact there have been statements to that effect in several producer investor calls. This is not just an exercise in energy fundamentals numerology. If the DUC inventory is increasing, then production will not be ramping up as fast as the growing rig count would imply. But what if, as some early signs indicate, the historical relationships are out of whack and the DUC inventory isn’t growing but rather declining? In that case, forecast models could be understating the outlook for production growth, and the market could be in for a more rapid and steeper rebound in oil and gas production than many expect. In today’s blog, we delve into the DUC inventory data and its potential upside risk to production forecasts.

    Two years ago, the U.S. oil and gas market and its industry analysts were on high alert for the first signs of declining oil and natural gas supply as oil prices collapsed and rig counts plunged. Now, in recent months, spot oil prices have turned more supportive, rig counts have climbed and many industry models are trained on identifying the opposite trend—the trajectory of rising production in 2017. Predicting how quickly production will ramp up, however, is a tricky business in that it requires knowing not only how prolific producers are in drilling and completing wells but also how producers are using their existing inventory of drilled-but-uncompleted wells (DUCs) to pace production volumes. The EIA, the industry benchmark for tracking production, has in recent years developed a robust methodology for going beyond the rig count to estimate and forecast production. It does so by accounting not only for decline rates of existing wells but also efficiency gains demonstrated by new drilling activity for each of the seven major U.S. shale plays (see Every Rig You Take). And more recently, the EIA added another key dataset: the estimated inventory of DUCs for each of the seven plays, including the number of wells drilled versus completed each month since December 2013 (see DUC, DUC Produce).


    Understanding the DUC inventory trend is critical to forecasting production because it reflects the ability of producers to respond in relatively short order to market fundamentals such as price and demand without a single rig addition. As we noted in “DUC, DUC Produce,” at any given time, there is always a substantial base inventory of DUCs in the market due to the normal delay between drilling and completion activities. But increases or decreases in the DUC inventory can speed or slow the rate of production growth (or decline) in the short- or mid-term.  When crude oil prices crashed in 2014 through early 2016, we saw an increase in DUCs as producers continued to drill, but deferred completing wells due to economics, contractual commitments and other factors.  It was generally expected that as prices increased, many producers would start competing those previously drilled wells (i.e., taking DUCs out of inventory) to start generating cash from their drilling investment.  But as shown in Figure 1, (according to EIA’s DUC inventory and Drilling Productivity Report data) that was not the case, particularly in the most prolific of plays – the Permian. Since June 2016, more than 500 DUCs have been added to inventory, far out of proportion to the increase in the total Permian rig count. 

    Figure 1; Source: EIA Drilling Productivity Report

    As rigs and drilling activity have been slower to return to the other shale regions, the DUC inventories in nearly all of the other shale regions are gradually declining. The only other exception to that besides Permian is the Niobrara, which has seen a slight uptick in DUCs. But the DUC additions in the Permian along have far outweighed any declines in the other regions. Figure 2 below summarizes the net rig and wells counts for all seven major U.S. shale plays covered in the Drilling Productivity Report (DPR):  Bakken, Eagle Ford, Haynesville, Marcellus, Niobrara, Permian and Utica. Overall, as rigs were added over the past several months across all the regions, producers were drilling wells at a much faster pace than they were completing them, resulting in a net increase in the inventory of DUC wells. That’s a shift from earlier in 2016, when overall well completions were exceeding drilled wells, and the total U.S. shale DUC inventory was being worked off. 

    Figure 2; Source: EIA Drilling Productivity Report

    From third quarter 2016 to fourth quarter 2016, the total rig count across the DPR’s seven shale regions (yellow line in Figure 1) rose by 79 (24%) to an average of about 400 rigs. As of January 2017, the rig count was up another 91 (22%) to 498. More than half of these were added in the Permian alone. As you would expect from the rig additions, the total number of wells drilled across the shale regions (gray bars) also rose substantially in the EIA data, up about 430 (29%) from about 1,500 in third quarter of 2016 to about 1,950 in fourth quarter 2016. But of those drilled wells, EIA estimates that fewer and fewer were being completed to production. Thus, the number of wells completed (blue bars) rose considerably slower over that period, up a meager 23 (1%) to about 1,700 in fourth quarter 2016, from about 1,675 in third quarter of 2016. The resulting increase in the DUC inventory (1,950 drilled minus 1,700 completed) was about 250 (5%) from third to fourth quarter of 2016,

    The latest EIA report added January 2017 estimates, which show that the proportion of drilled to completion wells improved last month but that the DUC inventory continued to grow. In January, EIA estimates that 760 wells were drilled, up 32 (4%) from 728 in December 2016, and completions rose by 119 (22%) from 549 to 668 quarter-on-quarter, effectively increasing the DUC inventory by 92 wells (760 drilled minus 668 completed) to a total of 5,381 DUCs across the shale regions.

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    Apache reveals new Alpine High results, disappoints analysts

    Shares of Apache Corp. fell in early trading on Tuesday after releasing well results from its new West Texas discovery, Alpine High, which some analysts viewed as disappointing.

    The Houston-based company announced in September the new oil field, which stretches largely across the bottom of Reeves County, near Balmorhea State Park. Apache estimated Alpine High contained at least 15 billion barrels of oil and gas, one of the largest discoveries in recent years. Analysts, however, were skeptical: Several other companies had tried drilling in the region and found little oil.

    On Tuesday, Apache chief executive John Christmann revealed new Alpine High details at the annual Credit Suisse Energy Summit in Vail, Colo. The company has confirmed oil and gas in five geologic formations, each with multiple targets. They’ve drilled new well locations that stretch south and west into Pecos County. And the reservoirs are “over-pressured,” the Christmann said, meaning they will more easily produce oil and gas.

    But analysts pointed out that initial production in the new wells was not as strong as in earlier wells.

    “Overall, we would not be surprised to see shares come under some pressure following the news,” said analysts at the Minneapolis investment bank Piper Jaffray.

    Still, they acknowledged, results may well improve as Apache fine-tunes drilling and completions.
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    Devon Energy beats profit estimates as cost cuts pay off

    Devon Energy Corp reported a bigger-than-expected quarterly profit, as the U.S. oil producer benefited from its cost-cutting initiatives.

    Devon, like other oil and gas companies, has been keeping a tight leash on costs since a slide in global crude oil prices started in mid-2014.

    The company said on Tuesday total operating expenses fell 67.4 percent to $2.71 billion in the fourth quarter ended Dec. 31.

    Total cost savings exceeded $1 billion in 2016, the company said.

    Devon has also sold its non-core assets, completing a $3.2 billion divestiture program in October.

    The shift to higher-margin production helped make oil the largest component of the company's product mix in the fourth quarter.

    The company said it expected 2017 production at between 539,000-561,000 barrels of oil equivalent per day (boe/d).

    Total production was 611,000 boe/d in 2016.

    Devon said it expected to spend $2.3 billion-$2.7 billion this year. The company spent $3.11 billion in 2016.

    Net earnings attributable to Devon was $331 million, or 63 cents per share, for the three months ended Dec. 31, compared with a loss of $4.53 billion, or $11.12 per share, a year earlier.

    The year-ago quarter included a non-cash, asset impairment charge of $5.34 billion.

    On an adjusted basis, the Oklahoma-based company earned 25 cents per share, while analysts on average had expected 21 cents, according to Thomson Reuters I/B/E/S.

    Total revenue rose 16 percent to $3.35 billion.

    Total production, net of royalties, fell 21 percent to 537,000 boe/d in the quarter.

    Up to Tuesday's close, shares had more than doubled in the past 12 months.
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    Chesapeake Energy Corporation Provides 2017 Guidance And Operational Update

    Chesapeake Energy Corporation today announced additional details of its 2017 guidance outlook. Highlights include:

    -Projected total capital expenditures guidance of $1.9 – $2.5 billion, including capitalized interest
    -Projected total company production guidance ranging from a decline of 3% to growth of 2%, adjusted for asset sales
    - Exit rate oil production projected to grow by 10% in 2017, while exit rate gas production projected to remain relatively flat, adjusted for asset sales
    - Plan to operate an average of approximately 17 drilling rigs, compared to 10 rigs in 2016

    Doug Lawler, Chesapeake’s Chief Executive Officer, commented, “The execution of our 2017 capital program will position Chesapeake for significant production and earnings growth and cash flow neutrality in 2018. As noted during our October 2016 Analyst Day, our 2017 capital program is driven by improved capital efficiencies and profitability from our significant portfolio of high rate of return drilling opportunities. We will maintain our financial and operational flexibility with a relentless focus on driving differential performance.  We look forward to building on our progress, both financially and operationally, in 2017 and beyond.”

    2017 Capital Program and Production Outlook

    Chesapeake is budgeting planned total capital expenditures (including capitalized interest) in the range of $1.9 – $2.5 billion in 2017, compared to total capital expenditures of approximately $1.65 – $1.75 billion in 2016, excluding 2016 proved property acquisitions and the repurchase of volumetric production payment (VPP) transactions. The company is narrowing its range of projected capital as it gains confidence in market conditions supporting a return to projected production growth in the second half of the year. The company is targeting total production of 194 – 205 million barrels of oil equivalent (mmboe) in 2017, or average daily production of 532 – 562 thousand barrels of oil equivalent (mboe), representing a decline of 3% to modest growth of 2% compared to 2016, after adjusting for asset sales. Of the 2017 projected total production, approximately 33 – 35 mmboe is estimated to be crude oil, 18 – 20 mmboe is estimated to be natural gas liquids and 860 – 900 billion cubic feet is estimated to be natural gas.

    Chesapeake plans to operate an average of approximately 17 rigs in 2017, an increase from an average of 10 rigs in 2016. The company intends to spud and place on production approximately 400 and 450 gross operated wells in 2017, respectively, compared to 213 and 428 wells in 2016, respectively. A complete summary of the company’s guidance for 2017 is attached to this release.

    Operations Update

    Lawler continued, “We have a number of operational results we are looking forward to in 2017, including our return to the Powder River Basin (PRB) and our first results from the Turner formation in the 2017 second quarter, along with additional results from the Sussex and Niobrara and a Mowry test later in the year. In total, we plan to place approximately 30 wells on production in the PRB in 2017. In the Mid-Continent area, we plan to place approximately 100 wells on production during 2017, with roughly 60 of those wells planned from the Oswego formation. The Mid-Continent is expected to provide oil growth in 2017 through development drilling in the Oswego and our exploitation of ‘the Wedge play.’ Finally, we plan to operate approximately six rigs and place approximately 165 wells on production in the Eagle Ford Shale in South Texas. Several new tests are planned in the Eagle Ford, which include more than 10 extra-long lateral wells reaching approximately 15,000 feet and we also plan to test the Upper Eagle Ford and Austin Chalk formations. Our increased activity in the Eagle Ford, Oklahoma and the PRB is expected to result in oil growth of approximately 10% from year-end 2016 to year-end 2017, with continued growth in our oil volumes projected to be over 20% by year-end 2018.
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    Alternative Energy

    California demand for wind power energises transmission firms

    A firm controlled by Philip Anschutz, the billionaire entertainment and pro sports magnate, will soon build the largest wind farm in the United States to serve utilities in California, where officials have set ambitious green power goals.

    The $5 billion project, however, will be constructed 700 miles away in Wyoming, a state better known for coal mines and oil fields.

    The vast distance between the two states provides a different Anschutz-owned firm with another big opportunity: a $3 billion project building transmission lines to deliver the power - one of a dozen similar power-line projects by other companies across the West.

    In all, about 5,700 miles of transmission lines are in development with the goal of delivering renewable energy to California from other states, according to the Western Interstate Energy Board.

    Such investments are an outgrowth of an emerging paradox of California's well-known political bent toward aggressive environmentalism. Green power advocates and state officials want more wind power - but California conservationists increasingly oppose more wind farms as an environmental blight on the state's pristine desert landscape.

    Those conflicts are pushing wind farm development to other states, creating new opportunities for wind power and transmission firms to deliver electricity to California's nearly 40 million residents.

    "It's the right project, in the right place, at the right time," said Bill Miller, chief executive of the two Anschutz-owned companies - Power Company of Wyoming LLC and TransWest Express LLC.

    Though wind power is surging nationally, the future of wind farms in California suffered a major blow last year when regulators completed an eight-year process designed in part to identify locations for new renewable energy projects.

    The U.S. Bureau of Land Management, the California Energy Commission and state and federal wildlife agencies sought to balance green power development with preservation of scenic vistas, Native American tribal lands and critical habitats for threatened species such as the desert tortoise and the Mohave ground squirrel.

    But the solar and wind power industries have argued that the resulting plan unfairly favors land conservation over projects needed to wean California off fossil fuels and combat climate change.

    The California Wind Energy Association estimates that only 2 GW of additional wind power can be developed here, a figure its executive director, Nancy Rader, called "a stretch." California will need about 15 GW to meet its goal of deriving half of its power from renewable sources by 2030 - and far more if the state succeeds in a separate effort to promote electric vehicle adoption, according to state estimates.
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    US' SPP sets record 52.1% wind penetration Sunday

    Southwest Power Pool in the US set a new wind penetration record of 52.1% early Sunday morning, it said, which it believes is the first time a North American RTO served more than 50% of its load at a given time with wind energy.

    SPP said that the record was set at 5:30 am EST Sunday (1030 GMT). Total load at the time was 21,919 MW, of which wind made up 11,419 MW, according to SPP.

    In the real-time market, the five-minute SPP North Hub real-time locational marginal price fell to $17.90/MWh at 5:30 am EST, while SPP South Hub LMP dropped to $18.18/MWh.

    Last Thursday, SPP set a new wind peak generation record of 13,342 MW at 10:34 pm EST, surpassing the previous record of 12,336 MW on December 30 by more than 1,000 MW.
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    Toyota to recall all 2,800 Mirai fuel cell cars on the road

    Toyota Motor Corp said on Wednesday it was recalling all of the roughly 2,800 zero-emission Mirai cars on the road due to problems with the output voltage generated by their fuel cell system.

    Toyota said that under unique driving conditions, such as if the accelerator pedal is depressed to the wide open throttle position after driving on a long descent while using cruise control, there was a possibility the output voltage generated by the fuel cell boost converter could exceed the maximum voltage.

    To date, Toyota has sold about 2,840 Mirai cars in Japan, the United States and some markets in Europe, as well as the United Arab Emirates.

    Toyota dealers will update the fuel cell system software at no cost to the customer, it said. The process will take about half an hour, it said.

    Toyota first began selling the hydrogen-fueled Mirai in December 2014 in Japan, its home market, in a bid to lead the industry in the nascent technology. Toyota has promoted fuel cell vehicles as the most sensible next-generation option to hybrids, although a lack of hydrogen fuelling stations remains a major hurdle for mass consumption.
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    Cheap solar ambulances to speed into service in rural Bangladesh

    An inexpensive, solar-powered ambulance that can fit down narrow laneways is set to hit the road in rural Bangladesh this year, its manufacturers say.

    The three-wheeled van, as well-equipped as ambulances used in Bangladesh’s cities, runs entirely on solar power – including solar battery power at night – and can be used in rural areas with no grid electricity, according to the developers.

    A Bangladeshi university, a government organization and a local vehicle manufacturer who are collaborating on the vehicle say it should for the first time bring ambulance service to rural areas without it.

    The vehicle is in the field testing stage and there are plans to launch it by the end of 2017.

    In many rural areas, emergency patients are often taken to hospital in hand-pulled rickshaw vans. But the new, small three-wheeler ambulance will fit along narrow roads in rural areas where it is difficult for larger ambulances to run.

    Zahidul Islam, a farmer in Saturia in Manikgonj district, said that when his first child was born his wife had a difficult delivery and was taken to the nearby clinic in a hand-pulled rickshaw – a trip that took too much time.

    “If I had taken her to hospital a little earlier, she would have had fewer complications,” he said. But larger vehicles could not reach his house, he said.

    He believes that faster, smaller ambulances would be helpful for rural people.


    Kamal Hossain, a driver who has tested a prototype of the ambulance, said that it was safe and comfortable to drive on both smooth and rough surfaces, and went at a good speed.

    A.K.M. Abdul Malek Azad, the project’s team leader and a professor at BRAC University in Dhaka, said that most rural community health clinics cannot afford conventional ambulance services, but that the new ambulance would be cheap to buy and to run.

    “I thought a low-cost ambulance service would be a good idea for these rural clinics. And by using solar power we can reduce operational costs and save the environment,” he said.

    The ambulance is expected to cost $1,900 to $2,500, a fraction of the price of conventional ambulances, which can cost at least $30,000 in Bangladesh.

    BRAC University’s Control and Applications Research Center is running the project in association with vehicle manufacturer Beevatech. Financing comes from the World Bank through Bangladesh’s Infrastructure Development Company Limited, with seed funding from the U.S. Institute of Electrical and Electronics Engineers.


    Azad said that, as far as he is aware, there is no equivalent elsewhere in the world of the solar-powered three-wheeler ambulance his team is developing. The inspiration for it came from solar racing cars in Australia.

    “I thought if researchers can develop a solar racing car, there is potential to develop a solar ambulance,” he said. A vehicle that would not be reliant for power on Bangladesh’s overburned national power grid would be a bonus, he explained.

    The new ambulance can accommodate three people. It has a maximum speed of 15-20 km per hour (9-12 mph), and a range of up to 50 km (30 miles).

    By day it is powered by four 100-watt solar panels on the roof. At night it runs on four 12-volt batteries, which are charged from the solar panels.

    “The last layer of the development includes installation of a battery charging station (at a hospital or other site close by) that is completely fueled by a solar canopy,” Azad said. “This step is taken to ensure complete independence of these electrically assisted rickshaws from the national grid.”

    The ambulance’s battery can recharge in three to four hours, he said.

    Azad said his team has built and tested five prototypes over the past year. The new ambulances are expected to hit the roads at the end of 2017.

    He expects that buyers will include community clinics across the country run by the BRAC non-governmental organization. Azad says officials of the BRAC Health and Nutrition Program have assured the team they will consider using the vehicles in their clinics.

    Dr. Shahana Nazneen of the BRAC Health and Nutrition Population Program said that the vehicles are cost-effective and should be affordable for rural hospitals.

    Habibur Rahman Khan, an additional secretary at the Health Ministry in charge of hospitals, agreed that the low-cost ambulance would help the ministry boost health facilities in rural areas.

    “We will certainly consider purchasing (them) for rural hospitals,” he said.
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    China to build inland, floating nuclear plants by 2020, official

    China has already decided where its inland nuclear reactors will be built and that construction is likely to start in the next four years, Wang Yiren, vice director of the State Administration of Science, Technology and Industry for National Defence, said in an interview with China National Radio published on February 13.

    There are around 400 nuclear power stations in the world, most of which are inland and therefore not usually affected by tsunamis, typhoons or other extreme coastal weather events. "If it is safe to build nuclear power plants in coastal areas, then it is also not a problem to build them inland," stressed Wang.

    China halted all its nuclear power construction projects after the 2011 Fukushima nuclear disaster, but began construction work on several projects in eastern coastal areas in 2015. Although the resumption of the inland nuclear power projects has yet to be officially announced, at least 10 provinces have already proposed developing their own nuclear power industries.

    Three inland nuclear reactors have already obtained approval from the National Development and Reform Commission and are waiting for construction work to begin, including the Taohuajiang nuclear power plant in central China's Hunan province, the Xianning nuclear power plant in central Hubei and the Pengze nuclear power plant in eastern Jiangxi.

    According to the 13th Five-Year Plan, China's nuclear power capacity should reach 58 GW by 2020. The total capacity of the plants currently under construction will be 30 GW.

    Moreover, Wang revealed that China will also develop floating nuclear power stations during the 13th Five-Year Plan and has already organized experts to conduct investigations into how this will be accomplished.

    Floating power stations will aim to promote the exploitation of oil and gas resources and provide a safe and efficient power supply to remote islands in the South China Sea, said Wang.
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    Vale resumes search for Cubatão fertiliser assets buyer - sources

    After Norway's Yara pulled out as a potential bidder, Vale SA has resumed searching for a buyer for four fertiliser plants that were not included in a $2.5 billion sale to Mosaic Co, according to three people with direct knowledge of the matter.

    A reworked sale process for plants located in the southeastern city of Cubatão was launched in recent days, in the wake of Yara International ASA's November decision to withdraw, the people said. Talks between Yara (YAR.OL) and Vale had taken place for several months, said the first person.

    The assets include four plants producing phosphate-based, ammonia and nitrogen byproducts, the people said. Rio de Janeiro-based Vale has put a series of non-core assets on the block over the last 18 months to meet a $10 billion debt-reduction goal set by Chief Executive Officer Murilo Ferreira.

    A spokeswoman for Vale's fertilizers division said in an emailed statement to Reuters that the company "remains in talks to sell the Cubatão assets." Norway's Yara declined to comment.

    The people spoke under the condition of anonymity since the process remains under way.

    Vale preferred shares, its most widely traded class of stock, fell 3.4 percent on Tuesday to 33.23 reais, paring back their gain to 40 percent this year.


    The ammonia and nitrogen production facilities were carved out from the fertilizer assets that Vale sold to Mosaic in December.

    The debt-reduction plan is aimed at helping insulate the world's largest iron ore producer from declining commodity prices. Still, as iron prices recovered late last year, Vale has had room to rethink the pace of an asset sale plan.

    News of Yara's retreat comes in the wake of Vale's Feb. 6 announcement that it would book a $1.2 billion impairment related to the fertilizer unit sale to Mosaic. The company did not specify the reasons for the impairment in the announcement.

    Analysts at Itaú BBA estimated in December that the fertilizer assets in the Cubatão complex could be valued from $400 million to $600 million.

    The Cubatão compound was built in the 1970s and acquired by Vale in 2010. The ammonia plant caught fire and was forced to halt production earlier this year.
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    Precious Metals

    Investor darling Northern Dynasty shares plunge 40% after short-seller calls it ‘worthless’


    Shares in Vancouver-based Northern Dynasty Minerals, a recent investor darling, plunged as much as 40 per cent Tuesday after a short-seller’s report said its copper-gold project is “worthless.” 

    It had been a hot stock, rising more than 300 per cent since the U.S.  presidential election in November on assumptions President Donald Trump would loosen environmental regulations that have held back its Pebble project in Alaska. 

    “Mining it would require so much upfront investment that it would actually destroy value,” Kerrisdale Capital Management said in a report Tuesday. It also accused the company of hiding a negative project assessment conducted by former partners.

    “All this enthusiasm is misplaced. We believe Northern Dynasty is worthless,” the report said.

    Environmentalists, indigenous people and fisherman have fought the mine’s development and the Environmental Protection Agency halted the project in 2014. 

    “Frenzied investor enthusiasm over the benefits that Trump presidency will bring to the Pebble project overlooks the ineradicable threat of veto from either the Alaskan government or future Democratic White House,” the report said.

    “Though the legal and regulatory problems that will continue to plague the Pebble project even under a Trump presidency are enormous, the project’s Achilles’ heel is more fundamental: economics.”

    The company called the report “a short and distort campaign” and said it would respond to the allegations by the end of the week, promising it would “expose the many inaccuracies and outright misstatements” in the report. 

    “Kerrisdale cites no technical or scientific studies whatsoever and relies on many unnamed persons who were purported to have been involved with the project several years ago,” the company said in its brief statement. 

    Shares in the company gained some ground after the company issued it’s response, trading down 16 per cent at $3.47 in afternoon trading on the Toronto Stock Exchange.

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    Base Metals

    New labour laws in Chile embolden striking miners

    Workers at the world's largest copper mine in Chile are digging in for a long strike, emboldened by new labour laws that are likely to result in tough wage negotiations in the industry in 2017 in one of Latin America's most free-market economies.

    The 2,500-member union at BHP Billiton's Escondida mine has been on strike since Thursday. Labour leaders say they are far from reaching an agreement, and BHP has already said it will not be able to fulfill copper delivery contracts.

    The stoppage at Escondida, combined with export issues at Freeport-McMoRan Inc's Grasberg copper mine in Indonesia, the world's second-largest, have sent prices for the metal to 20-month highs amid supply concerns.

    Workers at mines representing around 12 percent of global output are due to renegotiate contracts in Chile in 2017, with any stoppage likely to affect volatile copper prices.

    Escondida's labour relations have long been fractious, and strikes paralyzed the mine in 2011 and 2006, when previous collective labour contracts were renegotiated.

    This time, negotiations stalled in part because of a freshly minted labor code that aims to return power lost by unions decades ago, people with knowledge of the talks told Reuters.

    The law does not take effect until April, but its provisions and language have influenced the union's negotiating position.

    Last year, the center-left government of President Michelle Bachelet passed the sweeping, complex reform to strengthen the hand of organised labour, which government supporters say never recovered from suppression under the 1973-1990 dictatorship of Augusto Pinochet.

    Union sources say workers broke off wage talks with Escondida in part because they believed the company was using underhanded tactics to dilute the impact of that reform.

    BHP declined to comment on ongoing negotiations.

    But one legal source with knowledge of BHP's negotiating strategy said the reform had effectively narrowed the pay and benefit proposals the company could successfully take to the union.

    The situation at Escondida bodes ill for other mining companies ahead of wage talks expected elsewhere in Chile this year. Anglo American Plc and Glencore Plc's Collahuasi mine and Barrick Gold Corp and Antofogasta Plc's Zaldivar mine are among those on that list.

    Those two mines account for about a half-million tonnes per year of copper output and more than 2 percent of global supply.

    Labour leaders at both deposits said they had good relationships with management. They added, however, they would use the powers granted them in the reform in the coming negotiations.

    "It brings some rather powerful tools to the workers' movement," said Raul Torres, president of Zaldivar's main union.

    An Antofagasta spokeswoman said the company was already working with unions to define what activities a company can perform during a legal strike under the reform. Collahuasi did not immediately respond to a request for comment.

    Escondida, majority-controlled by BHP with minority participations by Rio Tinto and Japanese companies including Mitsubishi Corp, produced about 5 percent of the world's copper alone last year.


    At Escondida, a principal point of contention between the company and workers is a proposal by BHP to offer new workers fewer benefits than those awarded to labourers already at the mine, the union said. The union says this is a BHP ploy to undermine a provision in the new labor code.

    Under that provision, known as the minimum-floor rule, a company will not be permitted during wage talks to offer workers benefits weaker than those afforded in the previous contract.

    If junior workers have fewer benefits than their colleagues, that could lower the negotiating floor for the next round of wage talks, years down the road, union leaders say.

    "It's very probable that the company intends to lower benefits (for new workers) so that the next negotiation starts with what that established," union spokesman Carlos Allendes said.

    "(For us) that's the last straw, the last thrashes of a drowning man."

    Other aspects of the law, such as provisions that give unions greater powers over nonunionised workers, were also affecting negotiations, the legal source said, and workers were adopting the language of the new rules.

    "The words that were put into the labour reform have become the words of the union," added the source, who spoke on condition of anonymity due to the sensitivity of the talks.

    Workers have also said that if the strike stretches into April, when the reform goes into effect, they would need to examine what additional demands to make, if any.

    However, under Chilean law, the negotiation would largely continue under the old regulations, so the concrete benefits of holding out until the reform takes effect would be limited, lawyers say.

    The labour reform passed Congress last April after a bruising battle that opened up divisions within the governing coalition. But a constitutional court struck down several sections of the legislation, leaving lawyers uncertain about how much of the reform can be implemented.

    A government representative was not immediately available to comment for this story, but proponents of the law say more workers' protections are needed to battle Chile's biting inequality.

    Industry analysts are watching negotiations at Escondida and elsewhere for a sense of how the reform will play out throughout Chile's economy.

    "In some respects, this strike is a kind of transition between the old system and the new," said Juan Carlos Guajardo, president of Chilean copper consultancy Plusmining.

    Attached Files
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    Road to Las Bambas copper mine clear after Peru protest ends

    MMG has been transporting copperconcentrates from its Las Bambas mine, in Peru, since late on Friday, when residents of a nearby town called off protests that had blocked the road used by the company, a representative of the ombudsman's office said.

    The five-day protest in Challhuahuacho ended after the government suspended civil liberties with an emergency decree and set dates to start building a sewage system and hospital that had been promised to the town, said Artemio Solano of the ombudsman's office in the region of Apurimac.

    Protests near Las Bambas last year had blocked roads used by the mine and suspended its copper shipments from the portof Matarani.

    The flare-up last week threatened to further constrain global supplies of copper as Chile's Escondida, the world's biggest copper mine, halted output amid a strike and Indonesia's Grasberg, the second biggest, dealt with an export ban.

    There are often conflicts over mining in Peru, the world's second biggest copper producer, especially in far-flung regions where basic services such as running water and paved roads are scant.

    Four protesters from towns near Las Bambas have been killed in clashes with police over the past two years.

    Las Bambas produced some 300 000 t of copper in the first 11 months of 2016, according to the energy and mines ministry.
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    China's 2016 zinc conc deficit widens to 448,000 mt on environment monitoring

    China's zinc concentrate deficit in 2016 is estimated at 448,000 mt, widening from 9,000 mt in 2015, key Chinese zinc producer Tongling Nonferrous Metals Group's subsidiary Tongguan Jinyuan said in its commodity report issued Tuesday.

    Tongguan Jinyuan said that due to the cold winter back in the first quarter of last year, zinc mines in North China suspended production, thereby limiting domestic mined zinc output in Q1.

    It noted that due to environment monitoring in China, domestic zinc mines' output growth last year was less than expected, as against high Chinese smelters' operation rates, resulting in a continual fall in domestic zinc concentrate stocks.

    The Tongling subsidiary said that increased stringency of environment protection rules in the first half of 2016 caused suspension of operations at zinc and lead mines in Huayuan county, south-central China's Hunan province -- a key Chinese zinc production base -- which affected around 150,000-200,000 mt/year of mined zinc capacity last year.

    Also, some zinc mines that had planned to start commissioning during 2016 have delayed operations, thus limiting China's mined zinc output last year, it said.

    China's zinc concentrate demand in 2016 was estimated to have been 5.798 million mt, up 43,000 mt year on year, while its zinc concentrate output last year was 4.4 million mt, up 150,000 mt year on year, the Tongguan Jinyuan figures showed. Tongguan Jinyuan has forecast China's national zinc concentrate output to rise 200,000 mt year on year to 4.6 million mt in 2017.

    The higher volume is attributed to new mines' output in the Inner Mongolia Autonomous Region, Gansu province in Northwest China, as well as in southwestern China's Sichuan province.

    China's net zinc concentrate imports for 2017 have been forecast to be 900,000 mt, down 50,000 mt year on year.

    Several factors motivated Chinese zinc smelters' operations last year, supporting demand for domestic concentrate, the Tongling subsidiary said.

    It noted that prices of domestic refined zinc have risen greatly since Q4 2016, prices of silver -- a byproduct of zinc mining -- have surged, and that Chinese smelters who source domestic zinc concentrates could be given 20% of the zinc prices, if they were over Yuan 15,000/mt, all supported demand for concentrate.

    Meanwhile, the front-month zinc futures closed at Yuan 20,700/mt ($3,011/mt) on the Shanghai Futures Exchange on December 30, 2016, compared with Yuan 13,320/mt on December 31, 2015.

    SHFE's weekly deliverable zinc stocks totaled 152,824 mt on December 30, 2016, compared with 200,428 mt on December 31, 2015.

    On-warrant inventories stood at 82,785 mt on December 30, 2016, compared with 79,877 mt on December 31, 2015.

    Deliverable stocks are the amount of metal available in the warehouse. On-warrant stocks are the amount of metal which are good for delivery.

    Attached Files
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    Malaysia's shooting-star bauxite industry faces burn up

    Already under fire for widespread environmental damage, Malaysia's once lucrative bauxite mining industry is facing a likely death knell from neighbouring Indonesia's move to allow a resumption of exports.

    This time last year, Malaysia was the world's biggest supplier of the aluminium-making raw material to top buyer China, but its exports tumbled after government action aimed at reining in the little regulated industry.

    The latest move could spell the end for a sector that only sprang to life in late 2014 after Indonesia banned ore exports, and illustrates the risks facing miners across Southeast Asia from increasingly uncertain government policy.

    Copper giant Freeport-McMoRan Inc warned last week it could slash output from Indonesia amid a long-running dispute with the government, while the Philippines has ordered the closure of more than half the country's mines on environmental grounds.

    "Policy risk is huge in mining right now," said Daniel Morgan, mining analyst at UBS in Sydney. "In supplier policy, you've got changes to Indonesia's mining policy, the Philippines and Malaysia."

    A host of mining operations sprang up along Malaysia's bauxite-rich east coast to fill a supply gap after Indonesia in 2014 barred exports of mineral ores in a bid to push miners to build smelters.

    In 2015, Malaysia shipped more than 20 million tonnes to China, well ahead of nearest rival Australia and up nearly 700 percent on the previous year. In 2013, it shipped just 162,000 tonnes.

    But the dramatic rise came at a cost as largely unregulated miners failed to secure stockpiles of bauxite. The run-off from monsoon rains turned rivers and coastal seas red, contaminating water sources and leading to a public outcry.

    The government imposed a mining moratorium in early 2016, and shipments to China from existing stockpiles fell to 165,587 tonnes in December, with little indication the government is set to change its mind.

    Malaysia's natural resources and environment ministry said any decision to lift the moratorium would be based on how well miners follow regulations to preserve the environment rather than economic gain.

    Recent rains in Kuantan have caused some bauxite runoffs from existing stockpiles, minister Wan Junaidi Tuanku Jaafar told Reuters.

    "The heavy rains proved that the mitigation was not adequate. Now by having this before me, I am not yet prepared to allow them to start the operations," he said, declining further comment on the topic.

    Indonesia introduced new rules last month that will allow exports of nickel ore and bauxite and concentrates of other minerals in a sweeping policy shift, but did not specify when it would resume exports.

    The announcement could be the final nail in the coffin for Malaysia's industry, as its miners expect China to switch to Indonesia's better quality and cheaper ore, due to lower production costs.

    "Indonesian bauxite miners kept a lot of stockpiles ... They can sell cheap," said a miner from local company based in Kuantan, a key bauxite mining area in the state of Pahang.

    "If the volume coming out of Indonesia is over 10 million tonnes, Malaysia has to say goodbye."

    Unlike recent ructions in nickel supply from Indonesia and the Philippines that pushed up prices, Malaysia's near exit from bauxite has had little impact on the supply chain as new suppliers emerged, particularly in Guinea in West Africa.

    "Some of these commodities are pretty plentiful, like bauxite for instance," noted UBS's Morgan. "When we talk to aluminum companies in China, we haven't detected that they're worried about a bauxite shortage."

    The greater effect may be on Malaysia's export-based economy where bauxite surged to become a key mineral shipped to China, its largest trading partner. At a bauxite price of $50 a tonne, Malaysia's 2015 exports were worth over $1 billion.

    The scandal-tainted Prime Minister Najib Razak's government is pushing to boost revenue as he prepares for a tough election that has to be called by end-2018.

    "There will be less export income," said Ooi Kee Beng, deputy director of Singapore based research centre ISEAS-Yusof Ishak Institute. "The loss of jobs at a time when common people are facing economic difficulties will have political impact that is unwelcomed by the government."

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    Steel, Iron Ore and Coal

    Coking coal resumes sharp decline

    After a pause last week (and even a small move higher) following 12 weeks of non-stop selling, the rout on coking coal markets resumed on Tuesday. The steelmaking raw material fell 4.7% to $154.80 on the day, the lowest since early September.

    Met coal is down more than $150 below its multi-year high of $308.80 per tonne (Australia free-on-board premium hard coking coal tracked by the Steel Index) hit in November despite customs data showing a huge jump in Chinese imports.

    China forges more steel than the rest of the world combined and the country last year imported 59.2 million tonnes of coking coal, an increase of nearly 24% over 2015.

    However, as TSI points out in its latest review of the market Mongolia accounted for 23.6 million tonnes of  total imports as imports from Canada and Russia declined by 9.3% and 19.4% respectively while the US exported no coking coal to China.

    At the height of the price rally Mongolian coking coal went for as little as 75% below the spot price

    Mongolia increased production by 85% last year. With domestic output curtailed by Beijing, so feverish was Chinese demand that Mongolian trucks carrying steam and met coal created the world's longest traffic jam on the border between the two countries.

    But it's not the volume of Mongolian exports that should worry producers in Australia and elsewhere, but price. As a captive supplier (and due to a deal struck by Ulaanbaatar to use coal exports to pay down debts owed to Aluminum Corporation of China, or Chalco) land-locked Mongolia sells its coal for much less than the seaborne price.

    At the height of the price boom in November Mongolian coking coal went for as little as 75% below the spot price (thermal coal sold for less than a third of Australian benchmarks) and nowhere near the benchmark contract prices for the Q1 2017 settled between Australian miners and Japanese steelmakers at $285 a tonne.

    Another low cost supplier to China, North Korea may also impact the price this year. Under UN sanctions the dictatorship's export of coking coal  – all of which goes to China –would be limited to 7.5 million tonnes this year, down nearly two thirds from the 2016 tally. But Beijing has in the past ignored some UN sanctions on the basis that it would hurt the civilian population of North Korea.

    Despite the pullback metallurgical coal is still trading at more than double multi-year lows reached this time last year. Coking coal averaged $143 a tonne in 2016 (about the same as it did in 2013). Consensus forecast is for the price to average about the same in 2017.
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    Russia Jan coal output and exports climb YoY

    Coal-rich Russia produced 33.77 million tonnes of coal in January, a year-on-year rise of 4.72%, showed data from the Energy Ministry of Russian Federation.

    That was the first increase after a fourth straight monthly drop, but it fell 3.93% from December last year.

    In January, its coal exports stood at 14.17 million tonnes, rising 16.01% from the year-ago level but edging down 0.46% from December.

    In 2016, coal output and exports of Russia totalled 384 million and 164 million tonnes, up 3.27% and 8.03% year on year, respectively.
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    Capesize TCE falls below $1,000/day on Australia-China iron ore route

    A build-up of tonnage, coupled with a dip in the cargo volumes, has sharply brought down the time charter equivalent (TCE) or the expected daily returns to a Capesize shipowner below the $1,000/day mark on Monday for vessels plying the key Australia to China iron ore route.

    The Capesize daily returns fell to a three-digit level of $488/day on the Port Hedland, Western Australia, to Qingdao, China route on Monday for the first time since S&P Global Platts started publishing TCE assessments from January 3.

    The TCE rate on this route is calculated basis Shanghai bunker prices published by Platts, which was assessed at $357/mt for 380 CST grade on Monday.

    Currently, the TCE on this route has fallen by close to 90% compared with $4,657/day assessed on February 1.

    Over the same period, the voyage charter freight rate on the Port Hedland to Qingdao route, which is also known as PC5, fell by 17.17% to $4.10/wet mt from $4.95/wmt, while the Shanghai bunker price for 380 CST dropped by only 1.5%.

    A few sources said that a slightly better TCE return could be obtained if the ships deviated to Singapore for bunkering before heading to Western Australia.

    "Not many participants expected the market to weaken further," a shipbroker tracking the Capesize market said.

    The fall in the returns to the Capesize shipowners have happened in the midst of surging seaborne iron ore prices, which went past the $90/dry mt mark on Monday with the Platts 62% Fe Iron Ore Index assessed at $93.05/dmt CFR North China.

    "It's just a simple situation. [There is] ample supply versus weak demand," said a second shipbroker, adding the situation may cause the market to struggle for a few more weeks.

    According to a source with a shipowning company, the tonnage supply was building up in the Pacific market as many of the ships did not get fixed last week as fewer cargoes originated from Western Australia due to the expected threat of Tropical system 15u storm.

    The Platts TCE assessments are derived from voyage charter freight rates, which are largely considered as a leveling factor for the shipping market.

    The calculation factors in the vessel size, port cost, bunker consumption/cost and vessel speed.

    The dry bulk shipping market tracks earnings in $/day and looks at TCE index to compare against time charter and voyage charter rates as well as a tool to hedge freight risk.

    Attached Files
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    Key Vale partners want to keep CEO to stem political pressure – Valor

    Vale's top non-government shareholders want CEO Murilo Ferreirain the job for another two years to stem pressure from Brazilian politicians to appoint an ally at the helm of the world's No 1 iron-oreproducer, newspaper Valor Econômico said on Monday.

    Valor, which cited unnamed people familiar with the matter, said some members of Vale's controlling bloc were considering voting for the renewal of Ferreira's term when it expires next quarter. Bradespar and Japan's Mitsui & Co are the private-sector members of the bloc.

    Valor said members of President Michel Temer's PMDB party and Senator Aecio Neves of the PSDB party from the mineral-rich Minas Gerais state, where Vale is based, were vying to influence the selection of the new CEO. Such disputes have gone on for months, Valor said.

    In January, Reuters reported that shareholders led by Bradespar and pension fund Previ Caixa de Previdência could propose Ferreira stay on for at least another year as part of discussions over a new shareholder accord. His term expires midway through the second quarter.

    Vale's media representatives declined to comment on the Valor report. Representatives for Neves, Andrade and Temer did not immediately respond to requests for comment.

    Preferred shares, the company's most widely traded class of stock, rallied 4.6% to 32.65 reais, on top of Friday's 6.6% jump, as iron-ore prices soared and on optimism that shareholders will seek to block a political appointee as CEO. The stock is up 40% this year.

    The reported tension over the Vale job is the latest sign of strain between the two biggest parties in Temer's coalition. The PSDB and some in Temer's PMDB have butted heads over a string of ministry posts and may run rival candidates in the 2018 presidential election.

    Vale was partly privatised in 1997, although the government continues to wield influence over it through the investment holding company of state development bank BNDES and state-controlled pension funds. Bradespar, the funds, Mitsui and BNDESPar are all members of Valepar, which has control of the company.
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    Kumba applying exploration-to-beneficiation technology

    South Africa’s biggest iron-ore miningcompany Kumba Iron Ore intends maximising the return potential of its assets through productivity initiatives, accompanied by ongoing robust cost management.

    It intends ensuring disciplined capital allocation, prioritising the reinstatement of dividend payments and progressing its project pipeline.

    “I intend to lead the business towards greater technology adoption, as technology will play a very meaningful role in our future,” said new CEO Themba Mkhwanazi.

    He views increasing the productivity of the company’s assets as a powerful driver of financial returns at low risk.

    His aim is to deliver free cash flow that is not dependent on a recovery in the iron-ore price, which was up at $93.05/t on Tuesday but expected to drop back down into the $60/t to $50/t price range.

    Planned are steps to generate value at every opportunity, from mine through to market and reviewing every aspect of the value chain as a means of offsetting mine cost inflation.

    “We aim to achieve a 20% improvement in miningproductivity through optimising shift changes, increasing labour availability and improving mine infrastructure,” Mkhwanazi said at Tuesday’s results presentation attended by Creamer Media’s Mining Weekly Online.

    Plant maintenance is being prioritised, buffer stockpiles built and third-party ore sources used to support production.

    Plans have been drawn up to increase plant yields and improve the ratio between lump ore and fine ore.

    Steps are being taken to opportunistically engage in productblending to enhance grades and thus prices fetched.

    In the 12 months to December 31, Kumba realised increasing value for its premium lumpy product in a rising iron-ore price scenario and at the same time cut controllable costs by 34%, which resulted in strong cash flow generation pushing the company’s net cash position to R6.2-billion.

    The Sishen and Kolomela opencast mines, which both exceeded guidance, produced a combined total 41.5-million tonnes iron-ore and reduced the average cash breakeven price to $29/tonne against an average realised price of $64/tonne free on board – up 18% on last year.
    The strong balance sheet is now supporting a conservative capital structure in the face of an expected moderation in prices and technological steps to increase productivity.

    It is also committed to realising better prices through better negotiations, understanding customer needs and improved two-way communication between marketing and operations.

    Ongoing discussions are under way with suppliers to freeze escalation and steps are being taken to increase third-party volumes, which are expected to be between one-million tonnes and two-million tonnes this year, to mitigate against take-or-pay rail penalties.

    Efficiency improvement spinoff is also expected through the integration of technologies, especially at Kolomela where advanced process control in the plant has contributed to increase plant throughput as well as a 2% rise in the lump-to-fine ratio.

    This is cited as the reason why Kolomela has been able to lift its output to 13-million tonnes without having to spend capital on expansion and the same is now being repeated at Sishen.

    “To achieve these ends, technology will play a major role,” Mkhwanazi reiterated.

    In the 12 months to December 31, Kumba beat production guidance, slashed costs and pumped cash in what was a successful year marred by two fatalities.

    Controlling shareholder Anglo American said in a separate statement that it would report underlying Kumba earnings of $438-million for the year, which would take into account certain adjustments on Kumba’s reported headline earnings of R8.7-billion.

    But there is still no resumption of dividend payouts as the board has deemed it more prudent to use the cash to remain ungeared.

    This year will also see the company having to appointing a new CFO following the resignation of Frikkie Kotzee after five years of service.

    Despite the company’s triumph in challenging and volatile iron-ore markets, controlling shareholder Anglo American is still intent on disposing of the restructured company. Which has settled its tax dispute with South African Revenue Services and had the residual Sishen mining right returned to it by the Department of Mineral Resources.

    “We can now focus on the business,” Mkhwanazi told MiningWeekly Online in a media call.
    The strong balance sheet is now supporting a conservative capital structure in the face of an expected lowering of prices and technological steps to increase productivity.

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