23/5/2014: Another 'Big Deal' of the Russian Week

Thought the Russian gas deal with China was a 'biggy'... at USD400-440 billion valuation (over 30 years) it is. And here are some of the details: http://trueeconomics.blogspot.ie/2014/05/2152014-russia-china-gas-deal.html

Welcome to the big numbers week for Russia. Today, Lukoil and Total announced a new deal for developing Bazhnov Shale Oil Field: http://www.lukoil.ru/press_6_5div__id_21_1id_24775_.html

The field (dating to Jurassic deposits) was discovered 45 years ago back in 1968 by an accident, the field is currently being developed by a number of companies, including a partnership between Rosneft and ExxonMobil, and Salym Petroleum - a JV between Shell and Gazprom Neft.

So far, reported recoverable reserves are officially booked at 3.5 billion barrels (500 million metric tonnes). Official estimates are for daily yields of 1-2 million barrels per day by the end of this decade. For comparative, US North Dakota aims to reach production levels of 1.2 million barrels per day by 2015 - this is the largest US shale oil play at this time. Its biggest field - Bakken - is small comapred to Bazhenov (see here one older report: http://www.forbes.com/sites/christopherhelman/2012/06/04/bakken-bazhenov-shale-oil/ and an FT report on same: http://www.ft.com/intl/cms/s/0/17e0e3d0-25c6-11e3-aee8-00144feab7de.html#axzz32YDYxj72).

Overall estimates put Bazhenov reserves at between 20 billion barrels and 950 billion -1 trillion barrels, which runs into recoverable equivalents of up to 160-170 billion barrels. Merill Lynch 2013 assessment estimated reserves at 75 billion barrels (recoverable , EIU estimates from 2013 show Bazhenov recoverable reserves at between 3.7 and 14.8 billion barrels of light crude. At mid-point (excluding outlandishly large 160bn estimate), this implies some 40 billion barrels worth around USD3.3 trillion at past decade averages. Which puts into perspective that USD440 billion gas deal.

At the upper end of this estimate, Bazhnov field pushes to 4 times Saudi Arabia's oil reserves or roughly 30 years of world supply at current demand levels. This is why IEA considers Bazhenov field as the world's largest source of shale. Of course, Russia is already producing more oil than Saudi Arabia with daily production of 10.3 million barrels per day and Russian most productive fields - those of West Siberia, like Salym group, are declining, with production dropping at an average of 2% annually.

Here's the map of Russia's main oil producing regions:

Bazhenov covers roughly 1/3rd of the West Siberian basin (http://en.wikipedia.org/wiki/File:USGS_-_Bazhenov_Formation_Oil_Reservoir.png)

But back to the Russia-China gas deal... there is huge legacy infrastructure network linking Europe with Western Siberian basin, and virtually no networks linking it to the Asia-Pacific. With the gas agreement signed this week, this is about to start changing. Which means that the gas deal will promise to wire shale oil and gas reserves of the entire Siberia into the massive AP markets, providing two key deliverables for Russia:

1. Diversification of demand, linking more closely pricing in the Western European markets (stagnant of economic growth and demographic expansion) to that of dynamic AP. Russia wins in this scenario big time, as it will no longer be held hostage to the declining macroeconomic fortunes of the EU.
2. Head-on competition with North America (where LNG and oil shipments will have to go via sea transport as opposed to pipe in Russian case).

Europe also wins, as the second point above will help contain energy price inflation in the EU as North Sea production declines in decades ahead.

The point that is being missed on the Russia-China deal by many analysts is that, politics aside, Russia will benefit from a massive shifting of economic activity East - to the regions rich in resources and starving of infrastructure to develop them. With this shift, Russian social development also will gain - the sparsely populated expanses of Eastern Siberia can do with the population growth that can happen on foot of large and sustained capex uplift. 

23/5/2014: An Icy Gust from the IBRC's Promo Notes Past...

So Irish Central Bank pre-sold EUR350 million worth of 'Anglo' bonds that were due to be sold under its minimum commitment to sell EUR500 million worth of bonds in 2014. Except it pre-sold them back in 2013... Here is the original Bloomberg report on the matter:  http://www.bloomberg.com/news/print/2014-05-01/irish-central-bank-said-to-mull-faster-2014-bank-aid-bond-sales.html

Why is this important?

Remember, the EUR25 billion worth of 'Anglo' Government bonds held by the Central Bank after the February 2013 'deal' or swap of Promissory Notes for bonds carries with it a commitment to sell minimum required volume of bonds annually to the market.

Here's Minister Noonan on this:

Also, remember, the bonds held on Central Bank balancesheet accrue interest payments from the Government that the Central Bank subsequently 'returns' as divided to the state (having taken its 'cost' margin out to pay for necessary things, like, new HQs building etc).

Once the bonds are sold, however, the interest is paid to their private sector holders.

It is likely that the yield on Government bonds sold was somewhere around 3%, which means that Irish taxpayers just spent EUR10.5 million in interest payments that were, put mildly, unnecessary. We were not required to sell these bonds in 2013 and could have waited until 2014 to do so.

Let's put this into proper perspective: EUR35 million was pledged by the Government this month to help resolve homelessness crisis. Laughably small amount, but still - a necessary gesture from the cash-strapped state. This could have been EUR45 million (or more) should the Central Bank not engage in bonds activism.

So why did Professor Honohan go to the markets to sell the bonds back in 2013? The reason is simple: ECB was never too happy with the 'deal' that pushed Ireland dangerously close to using Central Bank to fund the state (IBRC). Accelerating sales of bonds pro forma accelerates Central Bank exit from such an arrangement.

Alas, happy or not, ECB hardly can do anything about unwinding the 'deal' in practice without doing some serious damage to the euro system. That said, we might see Frankfurt ramping up pressure on CBI to accelerate future sales, once the banks stress tests are fully out of the way - in, say, 2015. That will once again bring to our attention the simple fact that the mess that was IBRC did not go away.

Keep in mind that the Government own estimates of the impact of the promo notes deal on government deficits over the short term was the total 'savings' of EUR2,025 million in 2014-2015. Doubling the rate of disposals from current will see this reduced by EUR30 million in two years.

More problems are ahead relating to the interest rates. The bonds are floating rate notes, with yield tied to  6 months euribor http://www.ntma.ie/news/ntma-issues-eight-new-floating-rate-treasury-bonds-in-exchange-for-promissory-notes/ reset every six months.

The problem is that whilst euribor was running at 0.372% back in February 2013, nowadays it is at 0.410% - a difference of 0.038%, which, over EUR25 billion quantum implies annual interest costs increases of some EUR95 million. Most of this is going to be rebated back to the Government via the Central Bank, but with any acceleration in the sales of bonds, this is also going to get eroded.

All in, we are already running below EUR2 billion 2014-2015 'savings' assessed on the Promo Notes deal, and counting...

22/5/2014: Irish Domestic Energy Prices

As you all know, I have been covering the state of affairs when it comes to the state-sanctioned inflation here in Ireland for some time - including in the pages of my now defunct column at the Sunday Times.

Here is the article from the Irish Independent on energy price inflation in Ireland, comparative to the EU: http://www.independent.ie/irish-news/electricity-prices-fourth-highest-in-eu-after-5pc-rise-30294653.html

And the original EU data: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/8-21052014-AP/EN/8-21052014-AP-EN.PDF

Still believe in the benevolence of the State? Or that Irish Government should be running gas & oil resources of this country? Really?

22/5/2014: Poverty in the US Cities: Regional Comparatives

Bloomberg published a fascinating list of 50 US cities with biggest exposure to poverty amongst their populations. The full list is available here: http://www.bloomberg.com/visual-data/best-and-worst/most-poverty-us-cities

Just to make exercise a little different, I grouped them into four main regions. One would expect the results to show South to have highest poverty exposures, the West showing relatively benign poverty, but due to high ethnic diversity and significant presence of minorities, somewhat higher poverty exposure than, say North-East... alas, here are the numbers in full glory.

Ranking in descending order: West shows lowest poverty exposures, followed by the South excluding Florida (different composition of population by age and ethnicity), and so on, until Mid-West comes out the worst, but only as long as we include the State of Michigan (Detroit and Flit being numbers 1 and 2 worst off cities when it comes to poverty).

22/5/2014: Happy Times Roll: Irish Manufacturing Producer Prices

Deflation keeps hammering Irish Manufacturing sector:

Per CSO: year on year, factory gate prices fell 2.7% in April 2014, compared with a decrease of 3.1% in the year to March 2014, including

• a decrease of 3.1% in the price index for export sales (subject to potential effects of currency fluctuations) and 
• a decrease of 0.6% in respect of the price index for home sales.

Nothing to worry about, folks, this economy is gaining strength and momentum all of the time... PMIs booming and producers confidence is rising (if you ask IBEC).

22/5/2014: Paging Super Mario: Cleanup in the German Isle

Remember the OMT - the ballistic missile Super Mario fired in the direction of the markets to calm the hell out of them and dramatically lower the bond yields for the countries saddled with the likes of the FG/LP/Troika coalitions (known colloquially as 'peripherals')?

Well, those pesky Germans never really liked the idea and as we all know (past history is a good indicator) when Germans don't like something, it is for a long... long... long time...

21/5/2014: Ireland Ranks 14th in Economic Connectedness

McKinsey Global Institute Global Connectedness Index was published in April this year, scoring countries connectedness index and overall flows based on data through 2012.

Rank of participation by flow as measured by flow intensity and share of world total.

Couple of things to notice: Ireland's position is strong at 14th rank, but it is not as strong as one would have expected. And certainly would not be anywhere near the 14th rank were we to consider Ireland's indigenous enterprises, as opposed to MNCs.

Another point: Ireland's strengths are in only one segment: services flows. Which are, of course, skewed very heavily by a handful of MNCs trading out of ICT services and IFSC. In fact, we rank below Russia in Data and Communications flows, despite being a global hub for ICT services MNCs.

Scarier bit: we rank below virtually all our direct competitors in the global markets.

21/5/2014: Few Slides Covering Russian Banks

Few slides from my bigger and newer Russia Deck - these covering Russian banks:

 In the above, note the nonperforming loans... Ugly does not even begin to describe Ukrainian situation. Russia's NPLs, however, are benign by comparative to rest of the FSU...

 Summary as is in both above and below...

21/5/2014: That Medicated Happiness in the Club Med...

"France’s love of anti-depressants, sleeping pills and other prescription medication has reached new heights according to figures showing one in three adults in the country use some form of psychotropic drug. A study by France’s National Drug Safety Agency (ANSM) found that 32 percent of French people used such medications in 2013, either on a regular or occasional basis, French daily Le Parisien reported Tuesday." This was reported in here.

There's more: "Another study released this week, carried out by Ipsos on behalf of the French Hospital Federation, found that 84 percent of patients polled said that doctors often hand out unnecessary prescriptions." And "a study by carried out by the company Celtipharm, also cited by Le Parisien, found that 230,000 French people were risking their health each month by mixing psychotropic drugs with other, non-compatible medication."

A cross-nations comparative shows trends for anti-depressant drug use across Europe for the period 1980-2009: http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0066455

Interestingly, Mediterranean countries fared really poorly in the above study: Greece, Italy and Spain all recorded above average rises in the use of anti-depressants, with big increases from the mid-1990s on.

21/5/2014: Irish Credit Supply to Cash Ratios are Heading South, Still

Irish Central Bank and Government departments have been pushing hard to convert Irish economy into cashless, electronic accounting data storehouse, where everything gets counted and taxed (at least in theory).

Meanwhile, in Ireland's real economy, cash remains the king as the only metric of money supply still expanding in the deleveraging hell gripping the financial system:

To remind you: in Q4 2013, Irish private households' deposits fell to their lowest point since March 2009 (note, this makes them the lowest since around Q3 2005 as current figures reflect addition of the Credit Unions deposits to the dataset (they were not counted in until January 2009).

That's right... let's do away with cash so Irish banks deposits get another superficial (accounting) boost and few million worth of tax euros flows into the state coffers. Happy times all around... we know Irish households are getting richer and richer by day...

21/5/2014: Russia-China Gas Deal

Russia and China signed bilateral gas deal to supply 38bcm of Russian gas per annum, with an option of expanding shipments to 61bcm. The deal covers 30 years of supply. Full valuations and prices are not yet known, but the deal at 38bcm/annum x 30 years was originally valued at USD440 billion.

Here are the best reports on the deal so far (to be updated):

http://www.businessinsider.com/russia-and-china-sign-billion-gas-pipeline-mega-deal-2014-5

Update: zerohedge covers price details here: http://www.zerohedge.com/news/2014-05-21/russia-and-china-finally-sign-400-billion-holy-grail-gas-deal

WSJ on the deal: http://blogs.wsj.com/moneybeat/2014/05/21/russia-strikes-gas-gold-in-china/ pointing to heating up competition in Asia-Pacific energy markets and Russia's play coming ahead of Canadian exports flows. This, in part, explains why Russia agreed on a deal pricing gas at just above USD350 bcm whereas Russia previously looked for a price closer to USD400 bcm. As you can see from the second chart below, over the years while the deal with China was in negotiations stages, gas price inflation fell significantly, reducing room for price upside in the deal.

The deal is of huge importance to Russia.

Russian economy is only weakly-dependent on gas prices, Government deficits are somewhat more closely linked to these. See more here: http://trueeconomics.blogspot.ie/2014/03/2232014-russian-capital-flight-and.html and in the slide below:

The reason for this is that Russian economy is not as dependent on exports (gas accounts for ca 60% of these on goods side):

And in the long run, there is spending and income channel feed through from gas prices (and exports) to domestic demand:

It is worth noting that China-delivery price of Russian gas can be lower than European delivery for two reasons:

1. Internally contained transit costs
2. Lower risk of disruptions (remember that Ukraine routinely pushed Russian gas shipments to the brink by either threatening to or actually syphoning gas designated for Western European deliveries for domestic use) and non-payment (settlements are likely to be in Chinese yuan, rather than in the USD and with this, there is no risk of non-payment, as in the case of Ukraine). See: http://trueeconomics.blogspot.ie/2014/04/1042014-game-of-chicken-ukraine-debts.html for more.

Also, gas for China will be coming from newer fields, which are located closer to the Chinese border and, although more expensive in production, are not competing with Western Europe-focused Western Siberian fields.

Finally, new pipeline holds promise bringing exploration and production further East from existent centres of production.

All across - this should be a very good deal for Russia and China. The core threat here is to the US exports of LNG to Asia-Pacific, where US producers are collecting huge margins, compared to European markets. But this threat is still some years (if not decades) off from becoming a significant pressure point.

20/5/2014: Irish Credit Supply to Non-Financial, Non-Property Sectors

We keep hearing about banks lending to enterprises and the recovery in the banking sector in general. And we keep watching credit supply in the economy shrinking and shrinking and shrinking. The reality, of course, is simple: our banking system continues to deleverage and alongside, our companies continue to deleverage. This means that legacy debts relating to property investments and development are being washed off the books. Which, of course, accounts for property-related credit. But…

Take a look at this chart, plotting credit advanced to Irish private sector enterprises.

The property deleveraging story is in solid orange. And not surprisingly, it is still heading down. With all the fabled foreign and domestic property buyers reportedly killing each other on their hunts for bricks and mortar assets in Ireland, there is less and less and less credit available for the sector. In part, some of this decline is now being replaced by foreign funding (lending and equity, including private equity). But the credit story is still the same: property related lending is down 6% y/y in Q4 2013 (latest for which we have data).

Deleveraging in financial sector is also there - the sector credit lines have shrunk 15% y/y in Q4 2013.

But what on earth is happening in the 'healthy' (allegedly) sectors of the economy - those ex-Property and ex-Financial Intermediation? Here, total credit is down 4% y/y in Q4 2013.

In fact, from Q2 2009 onward, Irish financial system registered not a single quarter of y/y increases in credit supply to non-financial and non-property enterprises in Ireland. That's right: credit did not go up even in a single quarter. Worse, between Q4 2011 and Q4 2013, average annual rate of decline in credit to real economy was -4.0% which is exactly the same as in Q4 2013. In other words, even in terms of growth rates, there is no improvement.