Mark Latham Commodity Equity Intelligence Service

Friday 6th May 2016
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    India eyes cleanup of bad debt mountain as wary state banks hesitate

    India is considering setting up an independent panel to help state-owned banks negotiate settlements with big businesses on bad loans, in order to shield bankers from a populist backlash they say is hobbling efforts to clean up their balance sheets.

    India's $121 billion troubled debt pile, over $100 billion of which is on the books of state-owned banks, has come under close scrutiny from prosecutors, the media and politicians. Some have blamed banks for going too easy on corporate tycoons, and do not want taxpayers propping up the struggling banking sector.

    The proposal, being examined by the government and in its early stages, would give the panel power to define the "haircut" a bank should face on a loan gone sour, protecting bankers from critics who want failed Indian firms to pay back in full, two finance ministry and two central bank officials said.

    Bad debt has hampered banks' ability to lend, threatening to throttle a nascent economic recovery.

    Prime Minister Narendra Modi has made repairing bank balance sheets his administration's "top-most priority," a senior government official said.

    "Banks have been very reluctant to take a haircut where they face newspaper criticism," said a second senior official, who is familiar with discussions on the panel. He declined to be named because he was not authorised to speak to the media.

    The second official added that the proposal had run into hurdles already, however, amid questions over how it would fit into India's existing legal framework.

    A finance ministry spokesman declined to comment. The Reserve Bank of India (RBI) did not immediately respond to requests for comment on the proposal.

    Fear of bad headlines was one reason why state-run banks declined to consider embattled tycoon Vijay Mallya's offer to pay up to $900 million in tranches to settle about $1.4 billion his defunct Kingfisher Airlines owed, two banking sources said.

    Mallya now also faces a money laundering investigation.

    Mallya told the Financial Times late last month that he wanted a "reasonable" settlement that he could afford and banks could justify. He has denied any wrongdoing.

    Bad loans have piled up as subdued consumer demand hits corporate earnings, making it harder for big businesses to repay loans.

    RBI Governor Raghuram Rajan has set a deadline of March 2017 for banks to clean up their books, and the government said it would inject $11 billion in state banks by March 2019 to help them repair their balance sheets.

    India Ratings and Research, a local affiliate of Fitch, has said the government would have to cough up as much as $45 billion if the lenders failed to raise funds from markets to address expected future capital shortfalls.
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    China Southern Power Grid Jan-Apr power sales up 2pct

    China Southern Power Grid, a state-owned company transmits and distributes electrical power in China's five southern provinces, saw its power sales standing at 257.8 TWh during the first four months this year, up 2% year on year, according to China’s National Development and Reform Commission.

    Of this, power consumption of Guangdong and Hainan rose 4.6% and 4.4% compared with the same period last year, respectively, while that of Guangxi declined 0.8%, Yunnan dropped 0.6%, and Guizhou fell 3.1%.

    In April, sales of the company to the five provinces reached 69.3 TWh, down 0.8% on the year, mainly due to rainy weather in southern China and low temperature in the eastern coast.

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    Top ETF house bulls commodities and emerging.

    Emerging-market stocks and bonds have only started a rally that may last until 2018 as a new bull market takes hold in commodities, according to the best-performing exchange-traded fund focused on developing nations.

    Invesco PowerShares Capital Management LLC studied data since 1973 to show that commodities typically go through a boom-and-bust cycle every seven years, with the greatest gains ensuing in the first two. The latest round may have started in January and emerging markets will benefit most due to their reliance on exporting raw materials like oil, precious metals and agricultural goods, the Illinois-based asset manager said.

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    Oil and Gas

    Shift in Saudi oil thinking deepens OPEC split

    As OPEC officials gathered this week to formulate a long-term strategy, few in the room expected the discussions would end without a clash. But even the most jaded delegates got more than they had bargained with.

    "OPEC is dead," declared one frustrated official, according to two sources who were present or briefed about the Vienna meeting.

    This was far from the first time that OPEC's demise has been proclaimed in its 56-year history, and the oil exporters' group itself may yet enjoy a long life in the era of cheap crude.

    Saudi Arabia, OPEC's most powerful member, still maintains that collective action by all producers is the best solution for an oil market that has dived since mid-2014.

    But events at Monday's meeting of OPEC governors suggest that if Saudi Arabia gets its way, then one of the group's central strategies - of managing global oil prices by regulating supply - will indeed go to the grave.

    In a major shift in thinking, Riyadh now believes that targetting prices has become pointless as the weak global market reflects structural changes rather than any temporary trend, according to sources familiar with its views.

    OPEC is already split over how to respond to cheap oil. Last month tensions between Saudi Arabia and its arch-rival Iran ruined the first deal in 15 years to freeze crude output and help to lift global prices.

    These resurfaced at the long-term strategy meeting of the OPEC governors, officials who report to their countries' oil ministers.

    According to the sources, it was a delegate from a non-Gulf Arab country who pronounced OPEC dead in remarks directed at the Saudi representative as they argued over whether the group should keep targeting prices.

    Iran, represented by its governor Hossein Kazempour Ardebili, has been arguing that this is precisely what OPEC was created for and hence "effective production management" should be one of its top long-term goals.

    But Saudi governor Mohammed al-Madi said he believed the world has changed so much in the past few years that it has become a futile exercise to try to do so, sources say.

    "OPEC should recognise the fact that the market has gone through a structural change, as is evident by the market becoming more competitive rather than monopolistic," al-Madi told his counterparts inside the meeting, according to sources familiar with the discussions.

    "The market has evolved since the 2010-2014 period of high prices and the challenge for OPEC now, as well as for non-OPEC (producers), is to come to grips with recent market developments," al-Madi said, according to the sources.

    Dispensing with price targets represents a massive change in Saudi thinking. This is now being driven largely by 31-year-old Deputy Crown Prince Mohammed bin Salman, who took over as the ultimate decision maker of the country's energy and economic policies last year.

    When oil was viewed as scarce, the kingdom thought it had to maximise its long-term revenues even if that meant pumping fewer barrels and yielding market share to rival producers, according to several sources familiar with the Saudi thinking.

    With the importance of oil declining, Riyadh has decided it is wiser to prioritise market share, the sources say. It believes it will be better off producing more at today's low prices than reducing output, only to sell the oil for even less in the future as global demand ebbs.

    On top of this, Riyadh has pressing short-term needs including tackling a budget deficit which hit 367 billion riyals ($97.9 billion) or 15 percent of gross domestic product in 2015.

    "The oil industry is, relatively speaking, not a growth industry any more," said one of the sources familiar with the Saudi views inside the OPEC governors' meeting.

    In the past, low oil prices used to push global demand much higher but today's rising efficiency of motor vehicles, new technology and environmental policies have put a lid on growth.

    Despite record low prices in the past year, demand is not expected to grow by more than 1 million barrels per day in 2016, just one percent of global demand.

    One thing is guaranteed: the kingdom will not go back to the old pattern of cutting output any time soon to support prices for the benefit of all producers, Saudi sources say.

    "The bottom line is that there will be no free riders any more," al-Madi said at Monday's meeting. "Some OPEC members should 'walk the talk' first," he told his colleagues.

    Even Riyadh's rivals doubt it will perform any U-turn. "Saudi Arabia doesn't give a damn about OPEC any more. They are after U.S. shale, Canadian oil sands and Russia," a non-Gulf OPEC source said.
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    Saudis Said to Boost Oil Pricing for Asia by Most in 14 Months

    Saudi Arabia was said to raise its pricing for June oil sales to Asia by the most since April 2015, in a sign that the world’s biggest exporter is expecting demand to recover as the global crude market rebalances.

    State-owned Saudi Arabian Oil Co. increased its official selling price for Arab Light crude to Asia by $1.10 a barrel to 25 cents more than regional benchmarks Oman and Dubai, said people with knowledge of the matter who asked not to be identified because the information is confidential. The company, known as Saudi Aramco, was predicted to raise its pricing for the grade by 65 cents a barrel, according to the median estimate in a Bloomberg survey of five refiners and traders.

    The Middle East producer is increasing the cost of its supplies to the largest oil-consuming region amid unplanned outages and disruptions that have helped curb a global oversupply and as signs of demand emerge. Benchmark prices have rallied more than 60 percent since mid-February, rebounding from the biggest crash in a generation after a global glut prompted by the U.S. shale boom led to an industry downturn.

    Arab Light’s price to Asia for June is the highest since September 2015, and it’s only the third time the grade is being sold at a premium to the benchmarks since Saudi Arabia in November 2014 launched OPEC on its market strategy. The group continued to pump supplies even as prices cratered, forcing higher-cost production elsewhere to shut down.

    “Refinery demand is expected to recover,” said Ehsan Ul-Haq, a senior analyst at industry consultant KBC Energy Economics in London. “Cargoes loaded in June will arrive in Asia in July, when demand will return after the seasonal turnaround period. Saudi Arabia may also use more crude at home in the summer, when electricity usage typically rises.”

    Aramco will sell Arab Medium for June to Asia at $1.30 a barrel below benchmark prices, and Arab Heavy at a discount of $2.75 a barrel. The company also raised the premium for Arab Super Light crude to Asia by $1 a barrel to $3.95 a barrel over benchmarks, and Arab Extra Light by 80 cents a barrel to $2.60 a barrel.

    The Organization of Petroleum Exporting Countries, of which Saudi Arabia is the largest producer, abandoned its production target at its most-recent meeting in December. The group has pumped more than the previous 30 million-barrel-a-day target since June 2014. Saudi Arabia produced 10.27 million barrels a day in April, according to data compiled by Bloomberg. OPEC is scheduled to meet June 2 in Vienna.
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    New technology offers fresh bounty from existing fields, BP says

    Oil producers can expect to pump far more barrels from existing oil and gas fields than from fields yet to be discovered, two of BP plc’s energy analysts said Wednesday.

    BP, the London-based supermajor, estimates that the world will need about 2.5 trillion barrels of oil equivalent to meet its energy needs through 2050. About 4.8 trillion in reserves can technically be recovered using today’s technology and another 2.0 trillion can be unlocked through enhanced recovery techniques, such as flooding wells older with water to drive more oil to the surface. Not all of those barrels will be tapped.

    “If you apply the best technogly even in just conventional, giant fields than you can add lot of barrels over the next 20 years,” said David Eyton, group head of technology at BP.

    The shift reflects the steady march of technology that has allowed producers to recover a greater percentage of oil from discovered reservoirs, as well as the addition of vast new reserves over the past decades from onshore shale basins.

    Rrecoverable oil and gas reserves from already discovered fields vastly outnumber the roughly 700 billion additional barrels of oil and gas equivalent BP expects will be discovered through 2050.

    The largest addition of extra reserves has already come in the past decade, when oil drillers figured out how to unlock the oil and gas locked away in shale by pumping water and sand into the ground at high pressure. The discovery has had producers examining shale reserves all over the world, and added a huge amount of on-paper barrels that could be pulled to the surface.

    But shale oil has challenges too. The complex wells are often more expensive than more simple conventional ones. And while shale rocks exist all over the globe, the fracturing process has only been widely used in the U.S., and even there low prices have reduced activity to only a handful of the most productive basins. Producers are only currently able to pull a small amount of total oil and gas in the rock to the surface.

    “All the shale oil and all the shale gas around the world is now potentially exploitable,” Eyton said. “So the amount of oil and gas you can go for has jumped hugely. But the recoveries from it are very low.”

    The high cost of both unconventional reserves and exploring for new fields means that producers have been more willing to devote resources to making existing fields more productive. BP plc itself produces about 10 percent of the light oil pumped through enhanced oil recovery, or methods of squeezing more crude out of older oil wells.

    The company said it’s expecting those techniques to get better as time goes on. BP said it’s experimenting with high-tech chemical solutions that can be pumped into wells to drive more oil to the surface, as well as advanced computer models that help the company decide how to drill wells that will bring the most oil out of a reservoir.

    Ultimately, that could mean that companies hungry for oil could find it a better deal to go back to their old fields than to go searching the globe for new ones, Eyton said. Enhanced recovery is “beginning to challenge exploration as a lever on supply to the world’s consumption,” he said.

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    Egypt to receive first LNG shipment from Rosneft in May

    Egypt will receive the first of five agreed shipments of liquefied natural gas (LNG) from Russia's Rosneft this month, an official at the state gas board EGAS told Reuters on Thursday.

    Last year Egypt and Rosneft signed a memorandum of understanding for a slew of petroleum products as well as 24 LNG cargoes. Only five of the 24 initially agreed cargoes were later inked into a final deal.

    "We're receiving the first shipments of LNG from Rosneft this month out of the five shipments that were agreed upon," said the EGAS official, declining to provide the value of the shipment or its size.

    Once an energy exporter, Egypt has turned into a net importer because of declining oil and gas production and increasing consumption. It is trying to speed up production at recent discoveries to fill its energy gap as soon as possible.

    Rosneft, Russia's biggest oil producer, does not produce its own LNG yet but plans to launch production jointly with Exxon Mobil after 2018.
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    Israel Minister Sees Solutions to Gas Impasse, Turkey Rift

    Israel will soon submit to Noble Energy Inc. and Delek Group Ltd. a proposal meant to unblock stalled development of the Leviathan natural gas field and allow exports to Egypt and Turkey, Energy Minister Yuval Steinitz said.

    The proposal would be a “softer” version of the government’s offer to promise the energy explorers regulatory stability for 10 years, which Israel’s highest court struck down in March, Steinitz said Wednesday in an interview in his Jerusalem office.

    “We are seeking to reach a solution soon, in a matter of weeks, no more than a couple of months,” he said. “I think we are very close and I think if both sides show some flexibility here, we can move forward.” He declined to go into details.

    The absence of a regulatory framework has held up the development of Leviathan, Israel’s largest gas reserve, discovered in 2010, and hindered production at the smaller Tamar field. It also has blocked export deals and antagonized investors, making it harder for Texas-based Noble and units of Israel’s Delek to secure financing at a time when energy prices have tumbled.

    Delek Group gained 1.3 percent at 4:55 p.m. in Tel Aviv. A company spokeswoman didn’t immediately return a request for comment and a Noble spokeswoman declined to comment on government discussions.

    Exceeded Authority

    Steinitz is leading a team of government officials trying to work around the court’s objection to the so-called stability clause, which it said exceeded the government’s authority. The government proposal that’s shaping up would provide Noble and Delek with some measure of stability, but not as much as the original commitment, Steinitz indicated.

    “We will probably see some kind of softer stability commitment, but still significant,” he said. “I want to give them something which is softer but still substantial, which according to our experts has a reasonable chance not to be rejected by the court once again.”

    Last month, Steinitz said the gas explorers may end up with a better deal as the government weighed incentives -- including debt guarantees and financial compensation -- for any damages resulting from regulatory changes. Asked on Wednesday whether those options were still on the table, he said he didn’t want to go into specifics.

    Government legal advisers think such offers would be struck down by the court, according to a Finance Ministry official who wasn’t authorized to comment on record and spoke on condition of anonymity.
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    LNG Contracts With No End in Sight Spur Buyers to Renegotiate

    For LNG buyers, 2040 is beginning to feel even further away.

    Just a few years ago, faced with limited supply and relentless demand growth, liquefied natural gas buyers were happy to lock in contracts that ran through nearly the middle of the century, often paying prices linked to the cost of oil. Now, as the market moves deeper into oversupply, being tied to a producer for the next two decades is shifting from a blessing to a curse.

    Less than 15 percent of long-term LNG supply contracts will expire in the next five years, according to data compiled by Bloomberg. Meanwhile, new projects in Australia and the U.S. are saturating the world with LNG, depressing spot prices 33 percent this year in Asia’s energy trading hub of Singapore, even as oil has risen about 20 percent. That’s giving buyers the incentive to try to renegotiate their deals with suppliers, according to analysts at Citigroup Inc. and Energy Aspects Ltd.

    “Serious tensions will be seen in the market when oil starts transitioning to higher levels, driving contracted gas prices upwards,” Trevor Sikorski, an analyst with Energy Aspects in London, said by e-mail. “At the same time, the LNG spot market should stay low -- and that wider gap between the two prices will mean a number of buyers unhappy with that spread and this will drive calls for renegotiation.”

    Buyers Emboldened

    Petronet LNG Ltd. in December renegotiated its deal with Qatar’s RasGas Co., resulting in a drop by more than half of the price the Indian importer was paying. China National Petroleum Corp. wants new prices in its deal with Qatar, Chairman Wang Yilin said in March. Cnooc Ltd. Vice President Li Hui said last month the company is negotiating within its existing contract with Royal Dutch Shell Plc’s BG Group unit for 8.6 million tons of LNG a year.

    Petronet’s negotiations allowed it to drop the price it’s paying for LNG to less than $5 per million British thermal unit, Oil Minister Dharmendra Pradhan said last week. The price was about $13 last year. In return, Petronet agreed to increase it’s purchases from Qatar.

    “For India, achieving a low LNG import price at less than $5 per million Btu, based on prevailing oil prices through contract renegotiation, should embolden other parties to press for similar or even better terms,” Citigroup analysts including Ed Morse said in a research note Thursday. “Indeed, Asian buyers appear to be waiting for LNG sellers to acquiesce amid the looming oversupply.”

    Breaking the Oil Link

    About two-thirds of 160 long-term contracts with known commercial terms are linked to oil prices, according to data compiled by Bloomberg. That includes deals signed in 2009 in which Osaka Gas Co. Ltd and Chubu Electric Power Co. Inc. agreed to pay Chevron Corp. for LNG from the Gorgon project in northwest Australia based on Japanese crude import costs through 2040.

    Buyers will try to change the basis of their deals from an oil-based index to a natural gas index such as Henry Hub in the U.S. to protect against an expected divergence in oil and gas prices, Sikorski said. The crash in energy prices has made other hedging options more affordable, said Melissa Stark, energy managing director and global LNG lead at Accenture. Importers can invest in midstream assets, like shipping and storage, or even buy stakes in U.S. shale projects and fields.

    “There are more options for buyers,” Stark said by e-mail. “But with these options come more complexity, the need for trading and risk management capability.”

    As some long-term contracts end, buyers will be looking to enter deals that are shorter in duration and smaller in volume, Gautam Sudhakar, IHS Inc.’s director of global LNG, said by e-mail. Projects that supply LNG for these expiring contracts are typically older and have paid off debts, so they will be able to add supply at competitive prices to the spot and short-term markets, he said.

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    Occidental Petroleum Posts Wider-than-expected Loss; Ups Production Growth View

    Occidental Petroleum Corp.reported Thursday that its first-quarter income was $78 million or $0.10 per share, compared to loss of $218 million or $0.28 per share last year.

    Core results for the first quarter of 2016 were a loss of $426 million or $0.56 per share, compared to profit of $31 million or $0.04 per share a year ago.

    On average, 23 analysts polled by Thomson Reuters expected loss of $0.40 per share for the quarter. Analysts' estimates typically exclude special items.

    Total oil and gas results reflected a loss of $388 million, compared to loss of $22 million last year.

    Total net sales declined to $2.28 billion from last year's $3.10 billion. Analysts were looking for revenues of $2.35 billion.

    Looking ahead, for fiscal 2016, the company production growth outlook increased to 4 to 6 percent with the same capital budget of $3.0 billion.

    Previously, production growth was expected to be 2 to 4 percent from ongoing operations.
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    Canadian Natural Resources reports smaller quarterly loss

    Canadian Natural Resources Ltd., the nation’s largest heavy-oil producer, reported a narrower first-quarter loss as production volumes met forecasts and costs dropped.

    The net loss shrank to C$105 million ($81.9 million), or 10 cents a share, from C$252 million, or 23 cents, a year earlier, the Calgary-based company said Thursday in a statement. Excluding one-time items, the per-share loss from operations was 50 cents, beating the 58-cent loss expected by analysts, according to the average of 15 estimates compiled by Bloomberg.

    Canadian Natural has lowered costs, slowed drilling and reduced salaries as it seeks to avoid job cuts in the slump, and remains focused on completing expansions of the Horizon oil-sands mining project this year and next. The company turned off some unprofitable natural-gas supplies in the first quarter and reduced heavy-oil volumes as it conducted repairs at its Kirby and Primrose East projects.

    “Along with a cost-focused culture and track record of solid execution, one of the things we like about CNQ is its upstream growth and emerging free cash flow generation once its Horizon oil-sands expansion bears fruit in late 2017,” Greg Pardy, an analyst at RBC Dominion Securities in Toronto, wrote in an April 6 note. “CNQ’s most important potential catalyst revolves around operating performance at its Horizon oil-sands project.”

    Production fell to the equivalent of 844,531 barrels a day in the quarter from 898,053 barrels a day a year earlier, according to the statement. West Texas Intermediate crude averaged $33.63 a barrel, down 31 percent from the same period last year.
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    Chesapeake surges after Q1 earnings come in line; firm reports assets sale

    Chesapeake Energy Corp. on Thursday said its first-quarter loss narrowed as the embattled energy producer posted a smaller asset write-down than a year earlier as the result of low oil and gas prices.

    Chesapeake also reached a deal to sell acreage in the Anadarko Basin Stack play to Newfield Exploration Co. for $470 million, part of Chesapeake’s broader efforts to improve its balance sheet and ride out the commodities downturn.

    Shares rose 12% to $6.33 in recent premarket trading. The U.S. shale driller in February said was is aiming to raise as much a $1 billion this year by selling noncore assets.

    Chief Executive Doug Lawler said the deal with Newfield “accelerates value from a portion of our undeveloped acreage that currently generates very little cash flow, giving us the ability to enhance current liquidity.”

    ”This transaction contributes substantially to achieving our previously announced target of an incremental $500 million to $1 billion of asset sales by year-end,” Mr. Lawler said. “We anticipate subsequent divestitures during the second and third quarters.”

    Over all, Chesapeake Energy reported a first-quarter loss of $964 million, or $1.44 a share, compared with a year-earlier loss of $3.74 billion, or $5.72 a share. Excluding the asset write-down and other one-time items, the adjusted per-share loss was 10 cents. Revenue fell 39% to $1.95 billion.

    Analysts polled by Thomson Reuters expected a loss of 10 cents a share on revenue of $2.55 billion.

    The Oklahoma City company was co-founded in 1989 by the lateAubrey McClendon, who died in a car crash in March, a day after he was indicted on a charge of conspiring to rig bids on oil and gas leases in Oklahoma. A pioneer the shale energy boom, Mr. McClendon’s extreme risk-taking had caused him personal and professional financial hardships that spurred activist investors, including Carl Icahn, to oust him as Chesapeake’s chief executive in 2013.
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    Apache's surprise savings signal U.S. drillers not done with cuts

    Apache Corp's cost savings in the first three months of 2016 exceeded its own expectations and are likely to continue even if oilfield services costs rise, executives of the Houston-based oil and gas producer said on Thursday.

    The cost cuts mean the company could achieve its goal of cash flow neutrality for 2016 with oil prices at $35 per barrel and natural gas prices at $2.35 per million British thermal units, Chief Executive John Christmann told investors on a conference call to discuss first quarter results.

    The surprise savings come despite concerns that U.S. shale companies might have hit a wall in cost or productivity improvements, and are the latest sign that cost reductions could allow U.S. shale producers to keep drilling and pumping even if prices fail to recover significantly from a nearly two-year rout.

    "Six quarters into the downturn, we are still achieving significant quarter on quarter cost improvements," Christmann said, noting that well cost reduction efforts "continued to exceed our expectations."

    He said these cost reductions "are more than belt-tightening efforts in response to the downturn."

    U.S. oil prices have fallen 60 percent since mid-2014 amid a global glut, but have rebounded since falling to nearly $26 per barrel in February, ending Thursday at about $44 a barrel. Natural gas futures settled at $2.08.

    Christmann acknowledged skepticism around the sustainability of the company's cost-cutting hopes, particularly if demand for oilfield services rebounds, but said Apache's structural changes would help its bottom line "regardless of where oil prices and service costs go in the future."

    Overall, the company's well costs in key North American onshore plays were 45 percent below 2014 levels, with oilfield with service cost savings making up half the decline and design and efficiency savings making up the other half.

    Chief Financial Officer Steve Riney noted that capital costs in North American regions for the quarter were lower than the company had budgeted for, led by savings in the Permian basin.

    Some steps that helped Apache save costs in the Permian included modifying fracture intensity and optimizing fluid levels.
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    Cimarex Permian.

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    Rice Energy 1Q16: Prod. Up 53%; Drilled 19 New Wells; Lost $21M

    Rice Energy, one of the newest and brightest drillers in the Marcellus/Utica, released their first quarter 2016 update yesterday. 

    The company reports production averaged 675 million cubic feet equivalent per day (Mmcfe/d) during 1Q16, a 53% increase over 1Q15 (and up 8% from 4Q15). 

    On the financial side the company lost $21 million during 1Q16, versus making $152,000 in 1Q15. Pretty mild compared to most. 

    During 1Q16 Rice drilled 11 new Marcellus wells and 8 new Utica wells. Good to see someone is still drilling!
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    Eclipse Res. 1Q16: Drills Longest Shale Well Ever! “Purple Hayes”

    Eclipse Resources released their first quarter 2016 update yesterday.

    Although Eclipse, a Marcellus/Utica pure play driller headquartered in State College, PA (but drilling mostly in Ohio), has curtailed or shut-in some of it’s production given low prices for gas, they still posted an impressive 26% increase in production in 1Q16 over 1Q15.

    While we’ve heard of Prince and his “Purple Rain,” we hadn’t heard of Eclipse’s “Purpose Hayes”–which is a Utica well with an underground lateral reaching out 18,500 feet–3.5 miles!

    During 1Q16 Eclipse drilled their Purple Hayes well in under 18 days. Amazing! Even more amazing–the well was completed with 124 frac stages. It is believed to be the longest onshore later well ever drilled. Kudos to Eclipse!

    On the downside, the company lost $41 million in 1Q16…
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    Alternative Energy

    EFG-Hermes to more than double renewable energy investments it manages

    Egypt's EFG-Hermes is planning to increase the investments it manages in renewable energy to 1.5-2 billion euros in the next two years from 730 million currently, said Bakr Abdel-Wahab, its managing director of infrastructure private equity.

    EFG-Hermes, one of the Middle East's largest investment banks, has a renewable energy portfolio concentrated in Europe, but Abdel-Wahab said the firm was seeking to manage investments in the sector in Egypt within the next two years.

    "We have spoken to Egyptian and foreign companies working in the local market which have projects that need capital. We will provide them with the capital and help them to manage," he told Reuters in an interview.

    "We are initially targeting projects of around 500 megawatts of solar and wind energy in Egypt", he added.

    Last month, EFG-Hermes's Vortex business signed an agreement with EDP Renewables Europe SL to acquire a 49 percent equity shareholding and outstanding shareholder loans in a portfolio of onshore wind assets in Spain, Portugal, Belgium and France for a total of 550 million euros ($629 million).

    Abdel-Wahab said Vortex may acquire shares in other companies in Europe this year and had submitted letters of intent to two companies.

    "We aim to increase the investments managed by EFG-Hermes in renewable energy to 1.5-2 billion euros ($1.7-2.3 billion) within the next two years to 2018," Abdel-Wahab said, adding the firm also planned to increase its production capacity to 1,000 megawatts of wind and solar energy from 460 megawatts currently.

    Abdel-Wahab said EFG-Hermes was planning on expanding to manage renewable energy investments in other markets as well, including the United States and eastern Europe.
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    Exxon, fighting climate change charges, plans fuel cell venture

    Exxon Mobil Corp, which has been fighting accusations it misled investors and the public for years about the risks of climate change, said on Thursday it will expand a research project with FuelCell Energy Inc that aims to cut the cost of collecting carbon emissions from power plants.

    The companies hope to use fuel cells, rather than exhaust scrubbers, the industry standard, to capture emissions from natural gas-fired plants and at the same time generate electricity. Scrubbers typically consume power as they filter carbon.

    Exxon has announced several alternative energy projects in recent years. The company says the projects have nothing to do with recent public outcry over its climate change disclosures, but are part of research into carbon sequestration and alternative fuels.

    Exxon, the largest natural gas producer in the United States, and FuelCell Energy declined to provide financial details of the project.

    A fuel cell generates power from gas, hydrogen or other fuels and converts it to electricity.

    Exxon investors and attorneys general around the United States have alleged the oil giant withheld internal studies on carbon emissions and global temperature change for decades.

    Exxon has repeatedly denied the allegations. Vijay Swarup, Exxon's vice president for research and development, said the FuelCell Energy joint venture is not a reaction to public pressure.

    "This is one component of a research portfolio that has been in place for several years," Swarup said.

    FuelCell Energy, whose market value is less than 1 percent of Exxon's, said it will provide 15 to 20 scientists for the project, which will take place at the company's Danbury, Conn., headquarters.

    Exxon said it would devote as many of its scientists as needed. Executives declined to provide a specific number.

    Both companies will share patents on any developed technology.

    FuelCell Energy, whose second-largest shareholder is utility NRG Energy Inc, makes small-scale power plants across the United States. Exxon contacted the company in 2011 to begin research, said Chip Bottone, FuelCell Energy's chief executive.

    "It's critical that we have someone like Exxon, with their expertise, to create this market opportunity," said Bottone.

    Exxon, which last week reported its smallest quarterly profit since 1999, sponsors other carbon and alternative energy projects.

    Last year, Exxon gave $1 million to the Colorado School of Mines to study algal biofuels. In January, Exxon said it would partner with the Renewable Energy Group to find ways cellulosic sugars can be used to make biodiesel.
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    Adani’s big boost to solar means no financial capacity for new coal mines

    Given Adani is part way into a new US$5-10 billion solar investment program – and given the plunging cost of solar in last week’s auction in the Middle East, Adani appears to have no capacity to concurrently undertake the high risk A$10bn Carmichael coal proposal.

    Adani Enterprises this week reported its 2015/16 financial year to March 2016 result.[i] Net profit was US$158m. Results are not comparable to the previous year given the deconsolidation of Adani Power, Adani Transmission and Adani Ports, which halved the book value of shareholders equity to US$2.0 billion.

    Adani Enterprises remains relatively heavily geared, with net debt of US$2.6bn representing 1.3x book value of shareholders equity (and double the market value of equity of just US$1.3bn).

    The earnings before interest and tax (EBIT) relative to net interest is a relatively skinny 1.8x (albeit better than Adani Power at just 1.1x).

    Given Adani is part way into a new US$5-10bn solar investment program. Going ahead full steam on solar (in our view) leaves AEL absolutely no financial capacity to concurrently undertake the high risk A$10bn Carmichael coal proposal.

    Adani Enterprises massively stepped up its a new renewable energy division over FY2016. In June 2016 Adani Enterprises will fully commission its new 648MW solar project in Tamil Nadu (60% complete to-date) – which on commissioning will be the largest solar project in the world (to-date).

    Adani Enterprises reports it has established a further 700MW solar and wind project pipeline over the last 12 months. Additionally, Adani has recently signed a joint venture with the Rajasthan government to develop a 10,000MW solar park. Adani Enterprises has also started construction of a greenfield 1.2GW solar module manufacturing facility in Gujarat, due for completion by March 2017.

    IEEFA would reference the world record low US$30/MWh (US$3c/kWh or Rs2.00/kWh) solar tariff announced in Dubai this week, down almost 50% year-on-year (yoy).[ii] This landmark transaction is below the cost of even new domestic coal-fired power generation anywhere in the world even before considering internalizing any price on carbon emissions or water wastage.

    While India is currently some way behind Dubai given solar PPAs in India are currently Rs4.34-5.00/kWh,[iii] the double digit annual solar cost reductions expected through to 2020 will soon rectify this. New solar in India is already lower cost that new imported coal fired power generation in India.

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    Beijing Pulls Cork on Pork Stockpile

    China’s capital city will release some of its frozen-pork reserves into the market for the first time, in a bid to contain inflation and satisfy surging demand.

    More than 3 million kilograms (6.1 million pounds) of frozen pork, which the government stockpiled for this purpose, will be released to more than 100 supermarkets in Beijing from May 5 to July 4, according to a statement issued by the city’s Municipal Commission of Commerce.

    The agency also encouraged the city’s slaughterhouses to increase supply, saying those that comply will receive a government subsidy.

    Pork prices in China have risen about 50% over the past year, fueling worries of sustained inflation and prompting the Beijing government to tap its reserves. The average price of pork for the week ended April 24 reached 26.24 yuan ($4.04) a kilogram, rising for the sixth straight week, according to China’s Ministry of Agriculture.

    The sharp increase in prices was due to a shortage of pigs in China, as lower profits before the recent run-up had prompted many farmers to give up on raising the animals, while others were forced out by tougher environmental rules. In addition, an outbreak of disease earlier this year wiped out many of China’s piglets.

    High pork prices were felt in the latest inflation data out of China.Consumer prices were up 2.3% in March from a year earlier, matching February’s level. The food-price component of the index rose 7.6% in March, led by higher pork and vegetable prices.

    Pork continues to hold a significant weighting—about 3%, according to Rabobank—in the price of the basket of goods and services that is used to calculate the consumer-price index.

    The Beijing government’s measure marks the first time it has released pork into the market since it created the stockpile in 1992 as a way to stabilize prices for key goods.
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    Base Metals

    Copper to reach $2.50/lb by 2017: Wood Mackenzie

    Copper prices are likely to remain steady at current levels around $2.20/lb in the near term, but rise to $2.50/lb by 2017 on the back of electricity infrastructure growth in China and other developing nations, plus non-residential building construction globally, Wood Mackenzie senior researcher Nick Pickens said Thursday.

    "We're looking at grid spending as being the driver of growth," Pickens said in a presentation at the American Copper Council Spring Meeting.

    "Despite the fall we've seen in 2016, much like we saw in 2015, the actual investment -- because of the lower prices -- flowed through to higher volumes. So we think that the electrical network will be the strongest end-user sector this year, with growth of around 7%," Pickens said.

    Though residential construction has weakened, non-residential construction, which includes office buildings, hotels, shopping centers and hospitals is "going to be a key source of [demand] growth over the next five years," Pickens said.

    Non-residential construction growth is expected to level off and begin easing in 2020 as developing nation non-residential units reach the same per capita levels seen in the developed world, he added.

    Other end-user sectors expected to increase their copper demand include hybrid-electric vehicles, which use nearly 63 times more copper than a conventional vehicle.

    Looking forward, Pickens said China will be significant part of refined copper demand growth over the next 20 years, with Chinese demand expected to grow at 1.1%/year over that period. Global copper demand growth is expected to be 1.3%/year over that period.

    Mine supply is likely to begin moving into a deficit in 2021, but prices will need to rise to around $3.30/lb for additional mine projects to come online to meet that demand.

    Wood MacKenzie expects mine supply to total just above 19 million mt this year, but rise to more than 21 million mt by 2019, Pickens said.
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    Oyu Tolgoi underground development approved

    Mining major Rio Tinto and its joint venture partners in the Oyu Tolgoi copper-gold mine, in Mongolia, have approved the development of an underground operation. The development of the underground mine was slated to start in mid-2016 and would require a capital investment of $5.3-billion. First production from the underground mine was expected in 2020. 

    Rio’s deputy CEO Jean-Sébastien Jacques said that the investment would transform the Oyu Tolgloi operation into one of the most significant copper mines globally, unlocking 80% of its value. “Long-term copper fundamentals remain strong and production from the Oyu Tolgoi underground will commence at a time when copper markets are expected to face a structural deficit. 

    In line with Rio’s other tier one assets, Oyu Tolgoi offers opportunities for further expansions, leveraging existing infrastructure and supply chains, and will provide attractive returns for all shareholders and Mongolia more broadly, for decades to come.” 

    The Oyu Tolgoi mine is jointly owned by Rio, the government of Mongolia and Turquoise Hill Resources. The openpit operation has been producing since 2013, and to date, more than 440 000 t of copper has been sold from the operation. 

    Oyu Tolgoi was expected to produce an average 560 000 t/y of copper between 2025 and 2030. The project currently has a workforce of around 3 000 and has paid more than $1.4-billion in taxes, fees and other payments to the government of Mongolia. 

    Mongolian PM Chimediin Saikhanbileg said on Friday that the significant investment into the underground operation at Ouy Tolgoi demonstrated the confidence of all the partners in both the mine and the country. “It also demonstrates the attractiveness of Mongolia as a place to do business and invest, which will be a catalyst for future investments that will strengthen Mongolia’s economy.” 

    The decision to start underground mining at Ouy Tolgoi followed a December signing of a $4.4-billion project financing agreement with a number of financial institutions and export credit agencies in the US, Canada and Australia. Meanwhile, 

    Rio has reduced its near-term maturing gross debt by $1.5-billion after accepting a total of $141-million of debt under its Dutch Auction offer and a further $1.35-billion under its any and all offer.
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    Biggest undeveloped copper deposit in Australia gets greenlight

    OZ Minerals Ltd. aims to begin output from the Australia’s  biggest undeveloped copper deposit by 2019 under a revised A$975 million ($729 million) construction plan, another signal that the metal is the hottest play in a burgeoning mining industry rebound.

    The Carrapateena project in South Australia will have annual production of about 67,000 metric tons of copper and 76,000 ounces of gold over its first three full years, Australia’s third-largest copper producer said in a statement Friday. The proposal replaces plans for a smaller-scale development outlined in February.

    Copper demand may catch up with supply next year and a deficit will then widen on a lack of new mines, according to Freeport-McMoRan Inc., the largest publicly traded producer. Companies and project financiers are growing increasingly confident about the metal’s outlook, Gavin Wendt, Sydney-based founding director at MineLife Pty, said by phone.

    Carrapateena’s development plan compares with the initial proposal for a larger scale mine, which had an estimated cost in 2014 of as much as A$3 billion. OZ Minerals will fund the new option from existing cash and cash flow, the producer said in the statement.
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    Steel, Iron Ore and Coal

    China vows stronger action against illegal coal mining

    China will take stronger action against illegal coal projects as it tries to tackle a massive capacity glut in the sector, the country's state planning agency said, after ordering the closure of 38 projects.

    The National Development and Reform Commission (NDRC) had ordered the immediate closure of the projects for breaching industry policies, it said in a notice posted on its website ( on Friday.

    "Recent results of a special inspection of illegal coal mine construction showed that there are still a small number of illegal projects under construction or in operation, and (we) must pursue rectification work with a more resolute attitude, stronger measures and stricter punishments," it said.

    It said it would set up special inspection teams to tackle illegal coal production and, together with media outlets, would also make unannounced visits to coal mine regions.

    The NDRC has been holding regular meetings on cutting excess coal capacity in sector hit by an economic slowdown and with a concerted campaign by the state government to switch to cleaner sources of energy.

    Loss-making coal firms have been forced to cut salaries and lay off workers, and the energy regulator said in February that it expected more than 1,000 mines to be shut down this year alone.

    According to the China National Coal Association, the country has enough mines in operation to produce as much as 5.7 billion tonnes of coal a year. Production in 2015 stood at 3.68 billion tonnes, down 3.5 percent from the previous year.

    China said in February that it aims to shut 500 million tonnes of surplus coal capacity in the coming three to five years, and it also pledged to ban all new mine construction for the next three years.

    It has also cut the statutory working hours for miners to help control supplies.
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    Indian utilities may import 48 mln T coal this FY, CEA

    Indian power utilities that have plants based on imported thermal coal are likely to import around 48 million tonnes of coal in the fiscal year 2016-17 ending March 31 next year, Platts reported, citing an official from the Central Electricity Authority.

    The CEA has not assigned any imported coal quantities to power utilities that used to import coal for blending with domestic coal this fiscal year, because of adequate availability of domestic coal along with sufficient inventories at power plants, the official said.

    In FY 2015-16, power utilities had imported around 37 million tonnes for blending purpose while 43 million tonnes was imported by those plants that use only imported coal.

    If the need arises and imported coal prices are found to be cheaper than domestic coal, some utilities may import for blending but the quantity would be a lot lower compared with last fiscal year, the CEA official was cited as saying.

    Coastal power plants, however, will import 48 million tonnes of coal, as imports are more economically viable for them compared with domestic supply, he said.

    India presently has sufficient supply of coal, with stocks at state-run Coal India Limited's mines are at around 55 million tonnes, the official said.

    The official doesn't expect India’s power demand to go up this year, and said forecast of an above-normal monsoon season will boost hydro power. He expected the country's electricity demand would be easily met.

    While coal output by CIL has risen 8.5% last fiscal year, power generation has gone up by 5.5% of which 7.6% is coal-based, according to CEA data.

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    Brazil judge approves Samarco dam burst settlement with government

    A Brazilian judge on Thursday ratified the settlement Samarco and its owners, BHP Billiton and Vale SA, signed with Brazil's government in March to cover damages for a deadly dam spill last year, Vale said in a statement.

    The move potentially saps some of the energy from a separate $44 billion lawsuit filed by federal prosecutors on Tuesday who criticized the settlement as insufficient.

    The agreement will see Samarco, BHP and Vale pay a government-estimated 20 billion reais ($5.6 billion) over 15 years to cover and repair damages. Vale, however, has outlined it expects to pay less than that due to the way the deal is structured, calculating future payments depending on how much work remains to be done.

    "It's a very important step because you remove any uncertainty about the agreement's validity," said Marilene Ramos, President of Brazil's federal environment agency Ibama which formed part of the settlement.

    "The programs outlined in the agreement can now be implemented by the companies," Ramos added, referring to the environmental reparation plan which includes work on sewage, landfill, reforestation and water treatment.

    The settlement has been strongly criticized by federal prosecutors who called it little more than a "letter of intent" in their lawsuit. "It is absolutely insufficient," said Jorge Munhós de Souza, one of the prosecutors working on the case.

    Samarco Chief Executive Roberto Carvalho told Reuters the settlement and the lawsuit filed by prosecutors covers the same ground.

    "The agreement ratified today already carries all the socio-economic and environmental reparations which this other lawsuit proposes," Carvalho said.

    He reiterated that he expects the Samarco mine, closed after the disaster, to restart later this year, and that a return to production is vital for the company to afford the terms of the agreement. The settlement specifies that if Samarco cannot meet its obligations, the cost of doing so falls to Vale and BHP.

    BHP said on Friday progress was being made to rebuild the communities worst-hit by the massive spill, and more than 5,2000 people affected in Mariana, Barra Longa and Rio Doce had received emergency support cards.
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    Iron ore price drops below $60

    On Thursday the Northern China benchmark iron ore price fell 2.5% to $59.50 per dry metric tonne (62% Fe CFR Tianjin port) according to data supplied by The Steel Index bringing losses so far this week to 8.7% as commodity investment fever among Chinese speculators begin to cool.

    Two weeks ago iron ore hit a 16-month high following an 11% jump over just two trading days amid frenzied trading on the Dalian Commodities Exchange where the world's most active iron ore price futures are traded.

    "Some people can see a bit of an uptick, and I don’t know whether it's hope. You have to look at fundamentals"

    On Tuesday, Dalian iron ore futures closed 5.3% lower at 412.50 yuan or $63.35 a tonne after earlier in the day triggering so-called circuit breakers  to curb excessive price movement for the umpteenth time in recent weeks. Volume on the day was a robust 217 million tonnes worth $7 billion, but things have quietened down from torrid levels in March and April when one billion tonnes in a single day was recorded.

    The more subdued trading is the result of a clampdown on rogue traders, higher margin requirements and trading fees, but volumes are up five-fold compared to last year.

    Speaking to reporters in Australia on Thursday outgoing Rio Tinto CEO Sam Walsh, who for years headed up the Melbourne-based miners iron ore division, said the huge quantities of iron ore being traded in Dalian were impacting “people’s view of iron ore pricing” reports the FT:

    “Iron ore bounced up to $70 a tonne and I said I didn’t expect it to stay there … guess what — today it’s down at $60. Some people can see a bit of an uptick, and I don’t [know] whether it's hope. You have to look at fundamentals.”

    Bloomberg reports Rio on Wednesday re-iterated the company's commitment to produce 360 million tonnes on annual basis and Walsh repeated his warnings about oversupply in the market:

    “There is additional supply coming on, Vale are bringing on more supply, Roy Hill is bringing on more supply, FMG seems to be increasing their volumes. Those will have an impact on supply and demand.”

    The giant mine with annual capacity of more than 90 million tonnes is 85% complete and is expected to start shipping in the second half of 2016

    The big three – Vale, Rio Tinto and BHP Billiton – last month lowered future production guidance, but the aggregate 35 million tonnes in possible lost production hardly changes the supply picture and the giants would still hit actual annual output records even at these lowered levels.

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