Author: Joe Weisenthal

The Russian gas giant this week said it will allow up to 15% of its gas sales to Europe to be sold at spot gas prices on the continent.

This is a big shift for Gazprom. Previously, the major insisted on selling gas to European users under long-term contracts. With gas prices linked to prevailing oil prices.

It’s long been usual practice in Europe to sell gas using an oil-linked price structure. Decades ago, when gas was just coming into widespread use, players in the industry decided that the fuel should be priced according to value of the other fuels it was displacing. If users were switching from oil to gas, the gas should cost roughly as much as the unused oil, on an energy-content basis.

This cost structure prevailed in Europe for a long time. But shale gas seems to have cut the legs out from under oily gas prices.

With America now producing above and beyond expectations thanks to shale gas development, gas exporters globally are scrambling to find markets. The world built liquefied natural gas plants thinking the U.S. would be the “market of last resort”.

But America is awash in its own production, and the high American prices that exporters were hoping for have vanished. Meaning that today there is a fleet of LNG ships looking for a home for their product.

This flood of global gas supply has depressed spot gas prices globally. To the point where the traditional 6 to 1 oil to gas price ratio has become more like 15 to 1. Gas is very cheap compared to crude.

The result being that European gas users would rather buy cheap LNG than pay high rates for oil-linked gas piped in by Gazprom.

Gazprom resisted re-pricing its gas for some time. But this week’s announcement suggests the company has finally capitulated. They are willing to sell some of their gas at lower, spot prices. Otherwise they will be largely priced out of the European market.

The interesting thing will be the knock-on effects of Gazprom’s decision. Suddenly, a lot of Russian gas is price-competitive with LNG. Meaning that fewer LNG shipments will be ordered to the continent.

The question is: where will these boats go? They may end up headed back to America. Asian gas buyers are busy sewing up contracts with new LNG developments in Australia. If Europe and Asia are out, the U.S. is the only game in town.

A spate of new LNG landings in the U.S. would have a downward effect on North American gas prices. At a time when prices in many parts of America are already falling below $5 per mcf. Just this week, gas major EnCana said it expects North American prices to remain in the $6 range for the foreseeable future.

This is progress. The gas industry did a great job over the last several years of developing new supply globally. Now we just have to find a place to put it all.

Dave Forest
[email protected] www.piercepoints.com
Copyright 2009 Resource Publishers Inc.

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See Also:

• Gazprom Thinks It Will Steal 10% Of The U.S. Gas Market Since The American Shale Gas Revolution Will Fail
• Gazprom’s Export Dreams Shattered As America Blows Past Russia To Become The Saudi Arabia Of Natural Gas
• The AMAZING Corporate Anthem Of Russian Gas Giant Gazprom

It looks like the manufacturing problems at Toyota are set to whack the company’s flagship and forward-thinking line, the Prius.

According to CNN, the company will recall the entire 2010 line. Though problems have been known for some time, the company had not yet decided what, exactly, it intended to do.

If you’re unsure how Toyota got to this situation, see our complete guide to Toyota’s self-destruction >

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• A Quick Guide To Destroying $21 Billion Of Shareholder Value, And Decades Of Reputation
• Apple Founder Woz: My Toyota Prius Accelerates To 97 MPH On Its Own, Scares The Hell Out Of Me
• Toyota Stays With Nickel For The Prius

If you figure a giant oil multinational is a good proxy for the global economy, then Shell’s latest report won’t be too comforting.

The company reported a Q4 profit of $1.96 billion, but the company’s refining business is still getting killed on weak end-customer gasoline demand.

And so it intends to cut another $1 billion out of its expenses, and slash another 1,000 jobs in the new year.

If you want to see a chart that really explains what’s going on, this one we posted yesterday from Schork tells the story.

We’re just not headed to old gas consumption highs.

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• Oil Traders Blind To The Fact That America Is Kicking Its Oil Habit Fast
• Forget Becoming An Oil Power, Iraq Is Actually A Toxic Nuclear Wasteland
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Interesting move on the part of China, presumably intended to guarantee close cooperation between it and Iraq going forward.

With Iraq potentially set to be the new Saudi Arabia — and China having an amazing thirst for oil — this move makes sense.

—

AP: Iraq says China has agreed to write off 80 percent of its Saddam Hussein-era debt.

A statement posted on the Iraqi Finance Ministry Web site on Tuesday put Iraq’s debt to China at $8.5 billion.

The statement says the promise followed a meeting between China’s ambassador to Iraq and Iraq’s Finance Minister Bayan Jabr. It says the write-off “will enhance economic cooperation between the two friendly countries.”

The deal could further push Chinese business interests in Iraq. The China National Petroleum Corp. has secured two lucrative oil deals that reflects China’s drive to seek new energy sources for its growing economy.

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• Iraq Gunning To Blow Away Saudi Arabia’s Oil Leadership Within Seven Years
• Exxon Locks-In Iraq Deal To Produce 20% Of Saudi Arabia Out Of A Single Reserve
• Shell, Petronas Ink Mammoth Deal For 1.8 Million Barrel-Per-Day Iraqi Oil Field

The latest edition of The China Analyst hits on the hot topic of rare earth metals, and includes an excellent interview with Chinese professor Fu Zhongde, a scientist deeply involved in the country’s advancement of this industry. (via MineWeb)

Will the Chinese government encourage domestic rare earths companies to ‘go global’?

I am afraid the government will not do so. If, on the one hand, the Chinese government regulates the industry and limits rare earth exports, while on the other hand encouraging REE companies to go global, it would be contradictory and unfair. I do not think the government will do this.

What is currently the status of Chinese rare earth processing technology compared to the rest of the world? How advanced is it exactly? Will China require technological assistance from overseas?

Rare earth processing technology in China is highly advanced and can be regarded as filling an important gap in the world. China can supply REE products as pure as 99.9999%, while for example French companies can only produce 99.999% pure products and Japanese firms generally produce 99.9% purity products. In addition to the purity, Chinese technology now uses low energy consumption, creates no pollution, and utilises a zero discharge process. So in terms of rare earths processing technology, China definitely leads the world and is certainly very competitive. I can attest to that myself, being the owner of a few patents in the field of ion exchange technology.    

The full interview and more is found in the report below.  

TheChinaAnalyst_Jan2010 –

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See Also:

• Why Investors Are Crazy For Rare-Earth Metals, And The Exporting Countries That Have The World By Its Balls
• The Dark Side Of Our Insatiable Thirst For Rare Earth Metals
• Jack Lifton: We’re About To Be At The Mercy Of China When It Comes To Rare Earth Metals

Four years ago, Ukrainians took to the streets to support an ostensibly open democratic movement dubbed the “Orange Revolution.”

But the country has stagnated since then, and today voters offically took steps to turn back the clock, as former loser Victor Yanukovich won the first round of the country’s national election.

Yanukovich is Putin’s preferred candidate, and his election would take the country much closer to Moscow — perhaps an appealing prospect for a country that lives in fear of freezing winters, and the threat of Russians shutting off national gas.

But his election is no sure thing.

Current prime minister Yulia Tymoshenko (pictured) won the second place in the election, and when all the voters go to the polls to select between just two candidates (in the next round) she could easily pull ahead.

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• The IMF Won’t Bail Out Ukraine, As Government Finances Deteriorate Beyond Repair
• Ignore The Flu And The Russia Problem, And Keep Gambling On The Ukraine
• Russia-Georgia Conflict Is Just The Beginning: Watch What Happens To Energy Prices When Russia Targets Ukraine

China, a voracious consumer of coal, switched from being an exporter to importer of the stuff in 2009, fresh data from the government shows.

According to SeaTrade Asia Online, the company imported 89.11 million tonnes only through the first 11 months of the year, and that this number will be pushed much higher when December data is included.

Meanwhile, China is in a deep freeze just like the US and Europe, and multiple provinces are insisting on energy rationing.

This gives you a nice sense of how rapidly domestic consumption is growing. The country has flipped its position on coal — so long energy independence, how quaint! — and is rationing.

Expect lots and lots more commodities hoarding to come.

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• China Tanks 3.1% As Investors Fear That The Bubble’s Been Pricked
• $123,000,000,000,000*

Some interesting commentary this morning from the International Energy Agency, which released its latest oil market outlook.

While the organization sees global aggregate demand basically unchanged from its last forecast, it’s reducing its estimates for OECD demand, despite the harsh winter and attendant demand for heating oil.

Forecast  global  oil  demand  remains  virtually  unchanged  for  both  2009  and  2010,  as  weaker preliminary  data  for  the  OECD  offset  more  buoyant  readings  in  non‐OECD  countries. Global oil demand is expected to average 84.9 mb/d in 2009 (‐1.5% or ‐1.3 mb/d year‐on‐year) and 86.3 mb/d in 
2010 (+1.7% or +1.4 mb/d versus the previous year). Growth continues to be driven by non‐OECD 
countries, most notably in Asia. Oil demand recovery in the OECD is likely to remain sluggish, despite a 
bout of recent cold weather. 
 
• The OECD oil demand projection is adjusted down by 50 kb/d on average in both 2009 and 2010 
given weaker‐than‐expected preliminary data for Europe and North America. The fall in oil demand in 
2009 is estimated at 4.4% year‐on‐year (‐2.1 mb/d), with demand averaging 45.5 mb/d and remaining 
flat in 2010. However, the forecast faces downside risks for this year, with the largest OECD economies 
(the US, Japan and Germany) featuring a sluggish recovery and persistently weak oil demand. 

Naturally, the picture is a bit better in the non-OECD developing world, yet even there it’s not all roses. A big part of the expected growth is owed to expected continuing Chinese stimulus.

Forecast non‐OECD oil demand has been revised up by roughly 70 kb/d for both 2009 and 2010, 
largely due to higher‐than‐expected Chinese data. Assuming that the impact of China’s government 
stimulus programme continues to be felt during most of this year, non‐OECD demand is expected to 
reach 40.9 mb/d (+3.7% or +1.4 mb/d on a yearly basis), after growing by 2.0% (+0.8 mb/d) in 2009. 

And here’s what they say on the subject of the cold snap:

The cold wave that hit the northern hemisphere in the past few weeks has led many observers to 
predict a surge in oil demand, driven by heating and power generation needs, and an erosion of OECD 
distillate stocks. However, such reasoning overlooks the fact that the already relatively small share of 
oil for heating and power generation is shrinking in the OECD, as oil is gradually replaced by other 
energy sources, most notably natural gas. Moreover, it remains to be seen whether this winter overall 
will be much colder on average than last year’s, which was particularly cold. As such, it would be 
premature  to  boost  our  1Q10  forecast,  which  assumes  similar  weather  conditions  to  those  that prevailed last year. 

The following chart gives a nice look at how different global demand growth across the world looks.

 

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• Oil Discovery Under Shallow Gulf Waters Estimated To Be Biggest In Decades
• ExxonMobil Just Struck It Rich In Texas
• John Kilduff: Oil To $100 In The Next Six Months

Detroit is back!

At least that’s the message this week, at the Detroit Auto Show.

GM is re-opening factories and repaying some bailout money. Ford is on a roll, making money and winning awards, and Chrysler is, well, Chrysler.

In Detroit this year, they had it all: dancers, foreign automakers, hybrids, and of course, politicians!

Check out the scene here — >

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• Jim Chanos: We’re Shorting Autos, China, And Commodities But Not Financials
• Detroit’s Unemployment Nears 50%
• GM China Sees Record Sales In 2009

For now the world is still obsessed with the price and geopolitics of oil.

Every other commodity remains secondary.

But while the internal combustion engine will be with us for awhile, the world is changing, and oil will slowly fade in importance.

In its place, the world will increasingly focus on rare elemants that are used in various power and technological applications.

Already in 2009, there was a huge spike in interest in rare earth elemants, as the world discovered that the green technologies of the future (new engines, batteries, not to mention iPods and other technological devices) would lead us on a journey to countries like Bolivia, Chile, and China, and that in China’s case especially, there would be serious concerns about access and ongoing supply.

So to get ready for this future, we’ve put together a brief overview of rare earth elemants, and other commodities that you must pay attention to. The first part is a presentation from Avalon Rare Metals, explaining what they’re all about, and the second lists key countries to pay attention to.

Now, meet the new OPEC — >

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See Also:

• The Next BRICs: Six Surging Countries You Must Pay Attention To This Decade

It’s 35.4 degrees in Miami this morning, one of the city’s coldest mornings in decades.

The ongoing Florida chill is what’s devastating the orange juice crop, and sending prices soaring.

In the UK, a freakishly cold and snowy winter is prompting a range of anomolies from a natural gas shortage, to a surge in activity at adultery websites.

Meanwhile a deep freeze in the rest of Europe is pushing up all energy prices. Oil is at a 15-year high.

Same too for China, where cold and snow is causing a surge in demand for heating oil.

The world is freezing!

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See Also:

• Call The Dukes: Deep Freeze Threatens To Destroy Five Months Of Orange Growing
• ‘Alarmist’ Gas Crisis Turns To Rationing As UK National Grid Cuts Off Factory Supplies
• Blistering Cold Sends Oil To $83

Update: A commenter reminds us we’ve posted this before, but you know what, we don’t mind. If we had forgotten about it, then surely several readers have, too, and it’s just that good.

Original post: Russian gas giant Gazprom has an amazing corporate anthem which starts with the lyrics “Don’t bother trying, you’ll never find a surer friend than Gazprom.” It’s not new, but it never gets old, and you will enjoy watching it immensely.

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• You Know Natural Gas Has Gone Big Time When Cramer is All Over It
• CERA Analyst Jim Osten: There’s A Permanent Oversupply Of Natural Gas
• American Shale Gas Revolution Threatened By Fracking Environmentalists

A trade war is one of those calamities that people always see lurking right around the corner.

No doubt it’s going to be one of the big fears for 2010 (just as it was in 2009, 2008, 2007, etc.) It’s kind of like wild inflation in that respect.

Generally though, the world continues to move towards freer trade, despite little skirmishes that never amount to a full-blown war.

But with China rushing headlong into recovery, and with the Western world faltering, there’s a new case to be made for the outbreak of protectionism.

Michael Pettis, a Peking University professor and author of the excellent China Financial Markets blog, sees it coming this year, and believes China is totally unprepared for what’s about to come.

I am no expert on the subject of criminal law or the environment, and so have little to add beyond all that has already been said, but the huge amount of angry criticism China has received on the very visible subjects of the Copenhagen meeting and the execution of a British subject caught smuggling drugs will make it easier for tariffs and restrictions aimed at China to generate popular approval in Europe, North America and the developing world, especially since protectionists can easily add a “moral dimension” to their arguments.

I am not sure Chinese policymakers fully understand how vulnerable China is to trade war.  This is perhaps because the “success” of the stimulus package has convinced them that they are less vulnerable to external demand than they originally thought.  But this would be a serious misreading.  The stimulus package has postponed the effect of declining net foreign demand on Chinese unemployment, but has actually increased its vulnerability by increasing the future gap between what China produces and what it consumes.  China needs foreign demand to keep absorbing its excess capacity for several more years while it engineers the difficult transition to domestic consumption-led growth, but I don’t see either China taking the necessary steps to force the transition or foreigners looking very eager to help China through the process.

This sabotage of Copenhagen as a crucial turning point is an interesting one. The conclusion some are coming to is that the summit — regardless of how symbolic it was — represents China’s willingness to take big-time international criticism, whereas previously they had a reputation for always seeking to save face.

If public criticism no longer means very much to the Chinese government, then harsher measures, like various protectionism measures, will have to do.

Read the rest of Pettis’s post here — >

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See Also:

• And Just Like That, The US Amps Up The Trade War Against China
• I Was In The Room When China Purposely Ruined Copenhagen To Humiliate Obama
• Copenhagen Was A Total Failure And It’s Barack Obama’s Fault

For those interested in natural gas, CNBC held a good, brief debate on it between bull Arthur Gelberg, and Jim Osten of Camrbridge Energy Research Associates (CERA), who argues that we’re basically looking at a permanent sate of oversupply.

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See Also:

• Even When Natural Gas Rallies, United States Natural Gas Still Sucks
• Marc Faber: Avoid The US Disaster, Buy Wheat, Sugar, Natural Gas, And Japan In 2010
• Natural Gas Spikes Thanks To Record Supply Drop

While America was kvetching about new security restrictions, and what it would mean for holiday travel, Iran continued its descent into total public chaos for the second time this year.

The first time was in the aftermath of the disputed elections this summer.

According to The Wall Street Journal, the nephew of chief opposition leader Mir Hossain Moussavi has been killed.

The protests — which coincide with the Iranian festival Ashura (celebrating martyrdom) — brings new uncertainty to the regime. In a timely, must-read regime critic and Duke professor Ayatollah Mohsen Kadivar predicts the current system is toast — and that it’s only a matter of time.

Meanwhile, wrenching images and videos are flowing out of the country once again. The LA Times has culled several interesting videos.

Now see the footage >>

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See Also:

• Battling Forces Dig In, As Iraq-Iran Oil Well Standoff Continues
• STRATFOR: The Iran Incursion Wasn’t Trivial, Was Meant As A Clear Message To Washington DC
• Neda And Iran’s YouTube Revolution

The 800-mile long trans-Alaska pipeline — a key artery in our national oil infrastructure — is on the verge of collapse owing to the decreased production out of Alaska’s North Slope.

As with other key components of oil infrastructure, the pipeline does not do well then the flow slows to a trickle. Underutilization is a major problem.

The Seattle-Tacoma News Tribune (via The Oil Drum) has an interesting report on the situation there

In the 1980s, at peak oil flows, a barrel of oil made the trip from Prudhoe Bay to Valdez in four days.

Now it takes 13 days.

The slower flow causes the temperature of the hot oil to cool faster. At some point, the oil temperature will dip below the freezing point of water along certain segments, unless Alyeska reheats the oil inside the pipe.

As it gets colder, ice and wax may coat the insides of the pipeline. The colder oil might also increase the risk of buried segments of the pipeline jacking up in the ground, company officials said.

The problems have been building for decades and will only become more pressing as oil production declines further.

For example, Alyeska, owned by BP, Conoco Phillips, Exxon Mobil and two smaller companies, used to launch devices to scrape wax — a component of the oil — out of the pipe’s interior every several weeks.

Now it’s every four to seven days.

Read the whole story >

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See Also:

• Decline In Alaskan Crude Production Threatens Entire US Oil Infrastructure
• Battling Forces Dig In, As Iraq-Iran Oil Well Standoff Continues
• Stratfor: An Iraqi Oil Renaissance May Destroy OPEC

It’s over a week later, and armed forces from both Iraq and Iran are still battling over a dispute oil well.

Reuters:

Iraqi troops say they will defend the well, where Iranian troops raised a flag for several days this month.

It is unclear how many troops are involved in the stand-off, but as many as 30 lightly armed Iraqi troops usually occupy border outposts in sensitive areas, and up to 10 in other areas. Some 11 Iranian soldiers are stationed near the disputed well.

The seizure of the well, which Iraq says is part of its Fakka oilfield in southeast Maysan province, triggered protests from the government in Baghdad and caused a rise in prices on jittery world oil markets.

For more, go re-read Stratfor’s analysis of the situation, about the message Iran is sending to the US.

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See Also:

• Stratfor: An Iraqi Oil Renaissance May Destroy OPEC
• STRATFOR: The Iran Incursion Wasn’t Trivial, Was Meant As A Clear Message To Washington DC
• Stratfor: It’s Not Just Greece; Other Eurozone Countries Are Teetering On The Brink

Burlington Northern (BNI) has just published an internal video interview with its soon-to-be owner Warren Buffett about what Berkshire Hathaway (BRK) plans to do with the company.

The answer?

Nothing.

In classic Buffett form, he insists he has no plans to do anything with the railroad excpet let it run itself as it’s always done.

You’ll see. Several times throughout the interview he’s asked about this or that (pension stuff, infrastructure, etc.) and his answer is the same each time. Burlington’s management will handle it. It’s none of his — or anyone else at Berkshire’s — business.

At the end he notes that it’s taken him 79 years, but that with this acquisition he’s finally fulfilled a boyhood dream.

—-

	MKR:	Hi, I’m Matt Rose.  Welcome to this special edition of BNSF Video News.  As you all know, we’ve been in the news a lot with the major announcement that we have the future ownership position of BNSF being acquired by Berkshire Hathaway.  So I’ve been asked a lot of questions around, what does this mean for BNSF, what does it mean for the individuals that work for BNSF, what does it mean for customers, and what does it mean for the communities in which we operate?  And so I thought, who better to ask these questions to than Warren Buffett, chairman, chief executive officer of Berkshire Hathaway.  We have a great treat.  We’ve got Warren with us today at this taping, so we’re going to get right into it.  I’ve asked about 20 people to send in a number of questions, of “ask-Warren” questions, and they did.  They sent in about 150 questions.  We’re only going to ask about 15 to 20.  We’ll see how we do on time.  So let’s get right into it.  Again, Warren, welcome, thank you for joining us.  The first one is, why BNSF, and why now?
	WB:	Well, uh, you know, I love railroads.  I mean, you go back 70 years when I used to be going down to Union Station every Sunday, and so I’ve watched it for years.  And, and we couldn’t have done this 20 years ago, in terms of the size of Berkshire.  But Berkshire piles up.  We don’t pay out any dividends, so we pile up 8 or 9 or 10 billion dollars a year, and, and, you know, this is a dream for me, you know, getting a chance to buy a wonderful railroad like this, and uh, uh, you know, I couldn’t be happier about it.
	MKR:	So, the next one.  In announcing the acquisition, you said it’s an all-in wager on the economic future of the United States.  Buffett, who has been building up his rail holdings for several years, said in the statement, I love these events.  So would you please just share your perspective and thoughts on the future of the rail industry?
	WB:	Well, it has to do well if the country does well, and the country is going to do well.  So, you know, I don’t know about next week or next month or even next year, but if you look at the next 50 years, this country is going to grow, it’s going to have more people, it’s going to have more goods moving, and rail is the logical way for many of those goods to travel, and probably a greater percentage all the time, just in terms of, of cost efficiency, in terms of fuel efficiency, in terms of environmentally-friendly.  So there’s no way rail is going to lose share, and I think the pie is going to grow, and I think the rail share of the pie is going to grow.
	MKR:	So the next question.  You said in the past, you’d rather buy a great business at a fair price than a fair business at a great price.  What does BNSF meet the definition of a great business?

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See Also:

• Why Buffett Finished Off Burlington: It’s the Inventories, Stupid
• Doug Kass: Warren Buffett’s Burlington Buy Is Bad News For Berkshire
• Buffett Bets $44 Billion On U.S. Railroad!