New Technology Is Set to Liberate Natural Gas That for 25 Years Was Trapped Beneath Sea Floor

SHETLAND, Scotland—On the windswept hills that line the west coast of the Shetland Islands, roaming sheep bear lonely witness to a surprising industrial comeback.

A gray, metal-and-concrete skeleton slowly emerging from the peat bogs makes up the last leg of Laggan-Tormore, Total SA's FP.FR +0.07% £3.3 billion ($5 billion) project to extract natural gas from the North Sea's wild western edge. For more than 25 years since its discovery, the field has lain trapped beneath a bed of hard rock and deep, stormy waters. But the French oil company says that by the summer of next year, the gas finally will be liberated, meeting 5% of the U.K.'s needs. Areas that 10 years ago were thought to be thoroughly exploited, or too technically challenging, now are yielding major new developments.

"Technology and science showed there is oil where people thought there wouldn't be oil any more," says Manoucherh Takin, from the London-based Center for Global Energy Studies. U.K. North Sea oil and gas production has dropped by more than half since its peak of around 4.6 million barrels a day in 1999 as aging fields have become depleted. Norway's similar-size peak came five years later, but production has dropped almost 15% since then.

But now, new technology, assisted by higher oil prices and modest tax incentives, is forecast to reverse that decline. This will bring significant economic benefits for both countries. The U.K. oil industry employs around 440,000 people and last year contributed £11.5 billion to flagging government coffers—more than any other sector. Oil and gas accounts for half of Norway's exports and 20% of its gross domestic product.

Interest in the North Sea among international energy companies has been so great that support services are in danger of maxing out. West of the U.K.'s Shetland Islands, where the North Sea merges into the Atlantic Ocean, lies the distant Laggan-Tormore discovery. "There are mighty storms, the subsea water is very cold," says Jean-Pierre Minster, the head of research and development for Total.

The extreme environment meant the standard way of tapping offshore oil since the 1960s, a steel platform on the surface, would have been too risky and costly, says Patrice de Viviès, the company's vice president for Northern Europe.

After years of research, technology that didn't exist when the field was discovered in 1986 became the key to unlock its potential, he says.

Total reinforced its drill bits to pierce the hard sedimentary rock above the reservoir, Mr. Minster says. It avoided the stormy surface by locating extraction equipment on the sea bed and will operate it remotely from shore. To overcome the extreme subsea cold, the company found new insulating materials to sheath pipes that carry gas from the wells to the shore.

New technology has enabled other nearby developments.

Advanced seismic sensors on the sea floor, providing a clearer image of geological structures than previously possible, will enable Chevron Corp. CVX -0.01% and its partners to drill more-efficiently targeted wells to develop the $6 billion to $8 billion Rosebank project, the U.S.-based company says. The project could eventually yield as much as 240 million barrels of oil equivalent, making it one of the largest new U.K. prospects.

BP BP.LN +1.08% PLC says new ways of gathering and processing seismic data are helping the British company and its partners move ahead with a third phase of the $9 billion Clair field development, originally discovered in 1977.

Within five years, fields west of Shetland are expected to produce 17% of the U.K.'s oil and gas, says Total's Mr. de Vivies. That will help the country's production rebound back above two million barrels of oil equivalent a day by 2017, compared with 1.55 million barrels last year, according to Oil & Gas U.K., a trade group.

The second area driving the North Sea revival is around 200 miles southeast of Laggan-Tormore, in Norwegian waters, where Sweden's Lundin Petroleum ABLUPE.SK -1.74% has been digging through major oil companies' leftovers.

"The consensus at the end of the '90s was that the fall [in discoveries] on the Norwegian shelf was due to a lack of resources," says Hans Christen Rønnevik, Lundin's exploration manager. "That was a view we didn't subscribe to."

"We are hard-core geologists and geophysicists who look at data and interpret them in new ways," he says. By looking through old seismic surveys with a modern eye, Lundin guessed that there was a big undiscovered field in the Utsira High, a geological structure that is one of the most heavily-drilled areas in Norway, he said.

The company gathered three-dimensional seismic data using technology that produces higher resolution images than old techniques, Mr. Rønnevik says.

Finally, in September 2010, Lundin drilled what turned out to be the largest oil discovery in Norway in about three decades, now called Johan Sverdrup and shared with Norwegian state oil company Statoil STL.OS -0.15% ASA. The field contains an estimated 1.7 billion to 3.3 billion barrels of recoverable oil, equivalent to up to six times Norway's current annual crude output.

That discovery has inspired others. Statoil this month said it had found between 40 million and 150 million additional barrels of oil and gas near the Gullfaks license in the northern North Sea, a field which started production back in 1986.

"We're also tending to look at the edges, underneath and between reservoirs that we've already found," says Trevor Garlick, regional president for BP North Sea.

Such discoveries could mean that Norway "will continue to discover as much as one billion barrels every year for the next 20 years," says Jarand Rystad, chief executive of Oslo-based consulting firm Rystad Energy AS.

The Norwegian Petroleum Directorate says it expects the country's total oil and gas production to bottom out at 3.7 million barrels of oil equivalent a day this year and rebound to 3.8 million barrels by 2017.

There is a danger that the North Sea could fall victim to its own success.

As activity increases, the supply chain is being stretched, says Ross Cassidy, lead Norway analyst at U.K.-based consulting firm Wood Mackenzie. The availability of drilling rigs has become a problem, particularly in Norway, where drilling for around five of the 50 wells expected to be sunk this year have been delayed because of rig shortages, he said.

"That's the No. 1 challenge," to the revival of the region, Mr. Cassidy says.

Sources : GÉRALDINE AMIEL, SELINA WILLIAMS and KJETIL MALKENES HOVLAND

A version of this article appeared April 26, 2013, on page B6 in the U.S. edition of The Wall Street Journal, with the headline: Chilly North Sea Comes Back to Life.

Gaz de schiste: quels avantages ? Quels risques ?

Four Magic Tricks for Fiscal Conservatives

CAMBRIDGE – The United States is famous for its ability to innovate. Aspiring fiscal conservatives around the world thus might be interested in learning four tricks that American politicians commonly use when promising to cut taxes while simultaneously reducing budget deficits.

These are hard promises to keep, for the simple reason that a budget deficit equals government spending minus tax revenue. But, each of the four tricks has been refined over three decades. Indeed, they first acquired their colorful names in the early years of Ronald Reagan’s presidency: the “magic asterisk,” the “rosy scenario,” the Laffer hypothesis, and the “starve the beast” scenario. As shop-worn as these tricks are, voters and journalists still fall for them, so they remain useful tools for anyone posing as a fiscal conservative.

The first term was coined by Reagan’s budget director, David Stockman. Originally, it was an act of desperation, because the numbers in the 1981 budget plan did not add up. “We invented the ‘magic asterisk,’” Stockman wrote in The Triumph of Politics in 1986. “If we couldn’t find the savings in time – and we couldn’t – we would issue an IOU. We would call it ‘Future savings to be identified.’”

Ever since, the magic asterisk has become a familiar American device. Recent examples include the recommendation of the Simpson-Bowles commission – tasked in 2010 with charting a fiscal-consolidation path – to cut real spending growth by precise amounts, without saying where the cuts would be made. US presidential candidate Mitt Romney’s spending plans contain the same conjuring trick. So, too, his plan to eliminate enough tax expenditures to offset the $5 trillion in revenue lost from cutting marginal tax rates by 20%, while refusing to say which tax loopholes he would close.

As Election Day nears, the pressure on a candidate to be more specific grows. The conjurer thus resorts to the rosy scenario: since he cannot find enough tax loopholes to eliminate, he must claim that what he meant by closing the revenue gap was that stronger economic growth will bring in the additional revenue.

Here, Murray Weidenbaum, the chairman of Reagan’s first Council of Economic Advisers, deserves the credit for inventing what he called “perhaps my most lasting legacy.” In its early years, the Reagan administration forecast 5% income growth (twice the long-run average), in order to imply in its projections a boost to revenues big enough to make up for its many tax cuts. Since then, candidates of both major US political parties have relied on rosy scenarios.

Indeed, overly buoyant official growth forecasts are a fact of life in almost all of a sample of 33 countries, contributing to overly optimistic budget forecasts. European governments are particularly biased. From 1991 to 2010, for example, Italy forecast growth rates at the three-year horizon that were, on average, 2.3 percentage points above what was actually achieved.

In the Republican primaries last year, candidate Tim Pawlenty assumed a 5% growth rate to make his own plan work. He was all but laughed out of the race. Romney probably cannot get away with this sleight-of-hand, either. The press asks, “Why should we believe that the growth rate will magically accelerate just because you become president? Where will this GDP come from? It sounds like pulling a rabbit out of a hat.”

Right on cue, it is time for the famous Laffer hypothesis – the proposition, identified with the economist Arthur Laffer and “supply-side economics,” that reductions in tax rates are like magic beans: they so stimulate economic growth that total tax revenue (the tax rate times income) goes up rather than down.

One might think that the Romney campaign would not resurrect so discredited a trick. After all, two of his main economic advisers, Glenn Hubbard and Greg Mankiw, have both authored textbooks in which they argue that the Laffer hypothesis is incorrect as a description of US tax rates. Mankiw’s book, in its first edition, even called proponents of the hypothesis “charlatans.”

Each Republican presidential candidate since Reagan has had good economic advisers who disavow the Laffer hypothesis. Yet, time and again, the president (or candidate), his vice president (or running mate), and his political aides eventually rely on Laffer’s flawed argument. And they, not academic economists, formulate policy. Hubbard and Mankiw advised former President George W. Bush in his first term, when he cut taxes and transformed a record surplus into a record deficit.

The final trick, “starve the beast,” typically comes later, if and when the president has enacted his tax cuts and discovers that smoke and mirrors do not trump reality. He cannot find enough spending to cut (the magic asterisk has disappeared up the conjurer’s sleeve); the acceleration in GDP is nowhere to be seen (the rosy scenario having vanished); and tax revenues have not grown (no rabbit in the Laffer hat).

The audience is now told that losing tax revenue and widening the budget deficit was the plan all along. The performer explains that the deficit is all the fault of congress for not cutting spending and that the only way to tame the beast is to raise the budget deficit because “Congress can’t spend money it doesn’t have.” This trick never workseither, of course. Congress can, in fact, spend money it doesn’t have, especially if the president has been quietly sending it budgets that call for just that.

By the time the crowd realizes that it has been conned, the magician has already pulled off the greatest trick of all: yet another audience that came to see the deficit shrink leaves the theater with the deficit bigger than before.

Source : http://www.project-syndicate.org/  Article : Jeffrey Frankel

Read more at http://www.project-syndicate.org/commentary/fiscal-conservatives--four-tricks-by-jeffrey-frankel#j7DfPvPJvHy5iY9u.99 

U.K. Banks Prefer Bond Buybacks as Loan Demand Stays Low

Flush with cash but wary of making any more bad loans, U.K. banks are buying back their own bonds, potentially reinforcing criticism that they aren’t doing enough to help the economy out of recession.

Lloyds Banking Group PLC LLOY.LN -0.19% this week offered to repurchase up to £10 billion in senior debt, adding to a £4.6 billion transaction in July Barclays PLC BARC.LN -0.41% on Monday said it had agreed to pay around £1.8 billion to repurchase bonds, while Royal Bank of Scotland Group PLC com RBS.LN +0.78%pleted a £4.15 billion deal.

All three banks have cash to spare, after shoring up liquidity this year to withstand the euro-zone crisis and downgrades to their credit ratings.

Politicians and the Bank of England want the country’s banks to jumpstart the economy and make more loans to households and businesses, but lenders say they are doing what they can and that there aren’t enough credit-worthy customers. New loans also mean setting aside capital to cover potential losses.

Bond buybacks have looked like a better option. Even after paying a premium to entice investors, banks can improve their profitability by getting rid of the relatively-expensive funding, and also cut the size of their future interest-rate bills. Analysts say the deals demonstrate how far the U.K. banking sector has come since 2008, when a dearth of capital pushed RBS and Lloyds into state hands and Barclays raised emergency funds.

“Banks are showing their rude health and the strength of their liquidity positions,” said Michael Symonds, a credit analyst at Daiwa Securities. “They could make loans to the real economy but here banks see real risks if they look at the uncertain economic outlook and the capital expense with granting a new loan.”

In addition to the pressures of a weak economy, U.K. banks are in a hard, long slog to adapt to an array of business and regulatory pressures. Lloyds and RBS in particular are unloading hundreds of billions of pounds in unwanted assets from their balance sheets to repair their businesses. Both banks took large state bail-outs in 2008 and 2009 that still haven’t been repaid.

Those rescues had in part been necessary because the two banks had far more short-term wholesale funding, or borrowings from other banks, than liquid assets such as cash and government bonds. When markets seized up in 2008, they couldn’t keep funding themselves. Now, liquidity far outstrips short-term debt at RBS and Lloyds, as well as Barclays.

The downside is it can actually cost money to keep so much cash on hand because of eroding inflation. The banks have to rationalize how much they actually need to hold, now that the euro zone’s problems may have calmed down.

“Liquidity comes at a cost. Using some of it [to] buy back some of your more expensive debt boosts your margin,” said James Longsdon, a managing director of financial institutions at Fitch Ratings.

Meanwhile, the government is continuing to take steps to try and get banks to lend more. RBS, Lloyds and Barclays have all tapped a “Funding for Lending” program started in August that effectively lets banks turn portfolios of business and mortgage loans into cash from the Bank of England. The more banks lend, the less they pay to borrow the money.

Analysts and people at the banks say what is really needed to stimulate growth is a relaxation in capital standards, though that would go against rules being put in place by international regulators. Every time a bank makes a loan, it has to hold capital against it.

 Source :  Margot Patrick / The wall street Journal

Asian cities to become top finance centres by 2022 - survey

Nearly two thirds of 450 British investment bankers surveyed said Hong Kong, Shanghai or Singapore would be the top global finance centre in 10 years.
One fifth felt London would be the world leader in 2022 and one sixth said New York would hold no.1 spot.
"A fast growing, low tax and bank friendly environment like Singapore stands as a perfect antidote to the comparatively high tax and anti-banker sentiment of London and New York," said Mark Cameron, operations chief at Astbury Marsden.
The annual ‘Preferred Location Survey' also found Singapore is the city where British bankers would most like to live, claiming 31 percent of the vote, up from 27 percent last year.
New York was second with a fifth of votes while London slipped to third with 19 percent of the votes versus 22 percent last year.
"Financial centres in the West have taken a real battering since the start of the financial crisis," said Cameron.
"Cities like Singapore and Hong Kong have been quick to capitalise on setbacks in London and New York, courting investment banks and reacting to demand from expats," he added.
Investment banks and trading firms in New York and Europe have struggled to maintain profitability in recent years amid economic uncertainty partly linked to the ongoing euro zone debt crisis.
Bankers and traders in the United States and Europe also face the prospect of draconian restrictions on their riskier practices, moves likely to impact future profitability.
Commodities trader Trafigura said in May that Singapore would become its main trading centre as it seeks to tap demand in Asia, dealing a blow to its former home Switzerland.
Asian banks, in contrast to their Western peers, avoided much of the damage inflicted by the latest financial crisis and have benefited in recent years from solid economic growth and a booming commodities market across the Asia-Pacific region.

Source : REUTERS (Editing by David Cowell)

Big Mac index

The Economist's latest Big Mac index

THIS time round our Big Mac index looks at changes since global money-markets seized up in the summer of 2007. The index is based on the theory of purchasing-power parity, which says that exchange rates should eventually adjust to make the price of a basket of goods the same in each country. Our basket contains just one item: the Big Mac hamburger. It works by calculating the exchange rate that would leave a Big Mac costing the same in each country. For example: at current exchange rates a Big Mac, which sells for $4.33 in America, costs just $2.29 (75 roubles) in Russia, whereas in Brazil it sells for a sliver under $5 (10 reais). So the dollar buys a lot of burger in Russia, signalling that the rouble is cheap and the real rather pricey. There have been some big shifts in fortune since the first rumblings of the crisis. The Venezuelan bolivar has moved from 1% to 83% overvalued thanks to high inflation and a static currency peg with the dollar which is creating a growing trade imbalance with America. The Australian dollar has moved from being 14% undervalued to 8% overvalued. In the early part of the crisis Australia’s well-capitalised banks proved remarkably resilient; more recently, the currency has benefited from a spike in commodities prices, and from strong exports to China. By contrast, the British pound is now undervalued: its financial industry, a big chunk of the overall economy, was at the heart of the recent turmoil (the pound depreciated sharply in 2008) and its biggest export market, the euro zone, is in a dreadful mess.

Source : The Economist online