Natural Gas Tax for Pennsylvania a Possibility

Submitted by Editor on Fri, 01/30/2009 - 12:17pm.

Lawmakers Call for Drilling Tax

A Pennsylvania industry task force, comprised of state Department of Environmental Protection and representatives of the natural gas industry, met this month for the first time to develop new rules for controlling wastewater pollution from drilling operations and methods to treat wastewater. They also discussed ways to streamline the permitting process.

The Marcellus Shale natural gas deposit has sparked an oil and gas well drilling boom in Pennsylvania, where more than 4,100 wells were drilled statewide last year. Hundreds of permits for additional well drilling are under review by DEP.

Heavy use of local resources has generated considerable discussion of the new activity, and the Chairman of the state House Environmental Resources and Energy Committee Camille “Bud” George (D-74), has suggested taxing these operations as a revenue source for local infrastructure and as an additional means to help balance the state budget.

While natural gas is a cleaner burning fuel, the drilling process uses a lot of natural resources and can be extremely harmful to the environment, including nearby water sources, if not executed properly.

The task force hopes to limit surface water discharges from wastewater treatment plants by encouraging reuse of the water used to fracture the shale; locate geologic formations capable of safe, deep, underground water storage; and evaluate new technologies for treatment.

Water use and wastewater disposal issues are already apparent from incidents in southwestern Pennsylvania.

The natural gas industry may have another hurdle, as some state legislators and fiscal watchdog groups are calling for a tax for mineral extraction. Across the nation, the handful of states that are not facing massive budget deficits are those that have an abundance of natural resources and tax for extraction of those resources. In fact, Pennsylvania is the only state under these circumstances that does not impose such a tax.

George suggested that Pennsylvania take a page out of the playbook of these other mineral producing states, like Texas, Arkansas and West Virginia, and tax natural gas extraction.

Now facing an acknowledged $2.3 billion budget deficit, Pennsylvania could benefit from taxing drilling of the Marcellus Shale deposit, which has been estimated to hold enough natural gas to meet the nation’s natural gas needs for at least 14 years (equivalent to 363 trillion cubic feet of gas).

“Giving the oil and gas industry a free pass to utilize commonwealth waters, treatment plants and highways and skirt responsible safeguards makes no economic or environmental sense,” George said.

Source: Energy Resources Group, Harrisburg, Pa.

El Paso Natural Gas - Good Carbs with California

The California Climate Action Registry (CCAR) announced that it has approved and registered the total emissions of El Paso Corporation (NYSE: EP) for all applicable greenhouse gas (GHG) pollutants in the U.S., making it the first natural gas company to obtain a complete CCAR approved GHG emissions inventory. The recognition covers emissions reported for 2007.

El Paso has been a CCAR member since 2006. In 2007, El Paso became the first company to earn CCAR's distinction of Climate Action Leader(TM) for its California emissions and the first organization in CCAR's history that submitted a certified inventory without a single error.

"The certification of our total U.S. emissions is a major milestone for El Paso Corporation," said Doug Foshee, president and chief executive officer of El Paso Corporation. "It is the culmination of a rigorous, three-year emissions inventory program that highlights our continuing commitment to being the neighbor to have. We believe natural gas will play a critical role in the nation's efforts to reduce greenhouse gas emissions, and El Paso will be at the forefront of the development of needed natural gas infrastructure and associated climate change policies."

"Once again, El Paso has demonstrated its national leadership on climate change policies and programs as it impacts natural gas. We applaud this achievement of reporting total U.S. emissions for all applicable emissions from El Paso's assets in the natural gas exploration, production, processing, transmission, and storage segments. El Paso is a pioneer in the area of carbon accounting for the natural gas industry and has served as a true and committed leader in addressing climate change," said Gary Gero, president of the California Climate Action Registry.

CCAR, a private nonprofit organization committed to solving climate change through emissions reporting and reduction, was originally created by the State of California in 2001 to protect and promote companies' and organizations' early actions to calculate, report and manage their GHG emissions. Emissions reports are certified by independent third-parties to ensure compliance with CCAR protocols and standardization across participants and sectors. Organizations that are willing to meet the accounting standards and third party certification requirements show their serious intent to address climate change. CCAR has been widely recognized as a gold standard for public reporting of GHGs.

El Paso's complete emissions report is available through CCAR's Web site at https://www.climateregistry.org/CARROT/public/reports.aspx

The California Climate Action Registry is a private nonprofit organization committed to solving climate change through emissions reporting and reduction. It serves as a voluntary greenhouse gas (GHG) registry for entity-wide emission inventories and also establishes protocols for GHG emission reduction (offset) projects through its Climate Action Reserve program. The protocols are created through a rigorous, transparent process and are widely regarded as among the highest quality standards for offset projects. The Climate Action Reserve also accredits and oversees independent verifiers and tracks the transactions of project offset inventories, adding confidence and credibility to the voluntary carbon market. The accuracy, transparency and integrity of all of the California Registry's standards have earned it the reputation as a respected and internationally recognized leader in climate change issues.

The California Climate Action Registry was originally formed by the State of California in 2001 and is headquartered in Los Angeles, California. For additional information, please visit www.climateregistry.org.

El Paso Corporation provides natural gas and related energy products in a safe, efficient, and dependable manner. El Paso owns North America's largest interstate natural gas pipeline system and one of North America's largest independent natural gas producers. For more information, visit www.elpaso.com.

Chespeake Natural Gas Moving Forward

HOUSTON (Reuters) - Shares of Chesapeake Energy Corp (nyse: CHK - news - people ) climbed more than 6 percent on Wednesday on news that the company plans to sell $1 billion in long-term debt to pay down bank debt, a move one research firm said showed the natural gas company had ample liquidity.

On Tuesday, the Oklahoma City, Oklahoma company announced a $500 million debt offering and on Wednesday a source familiar with the deal told Reuters the company had increased the note sale to $1 billion.

A company spokesman was not immediately available to comment.

Chesapeake ended 2008 with $1.75 billion in cash, below its target to have as much as $2.5 billion on hand, and said Tuesday it would take a $1.8 billion write-down on the value of its natural gas assets.

TransCanada Still Wants Alaskan Natural Gas Pipeline

By ANNE SUTTON , 01.27.09, 11:04 AM EST
AP

Alaska lawmakers worried about sinking prices for natural gas were told to take the long view when considering the economics of a pipeline tapping North Slope gas reserves.

TransCanada Corp. (nyse: TRP - news - people ) Vice President Tony Palmer, who is leading the company's effort to build a multibillion-dollar Alaska gas pipeline, said the project is moving forward as planned despite the economic downturn that has depressed energy demand and prices.
"This project cannot swing with the wind of gas prices month by month. They need to look at what long term gas prices are, and is this project economic in those long term forecasts?" Palmer said following a presentation to the House Resources Committee on Monday.

Many forecasters believe gas prices are about bottomed out, Palmer said. Monday's price of $4.50 per million cubic feet is roughly a third of where prices were a year ago. Palmer said prices are more likely to average $6 or $7 per million cubic feet.

Palmer said his company remains focused on factors that it can control: keeping construction and other costs down and staying on schedule, which will ultimately determine the cost of shipping the gas to market. If the cost of shipping remains under $3 per million cubic feet as planned and natural gas prices rise at least moderately, Palmer said producers and state government will do well.

Obama OKs California Tough Car Regulations: Natural Gas is Looking Good!

WASHINGTON – President Barack Obama opened an ambitious, double-barreled assault on global warming and U.S. energy woes Monday, moving quickly toward rules requiring cleaner-running cars that guzzle less gas — a must, he said, for "our security, our economy and our planet."

He also vowed to succeed where a long line of predecessors had failed in slowing U.S. dependence on foreign oil.

Starting his second week in office, Obama took a major step toward allowing California and other states to target greenhouse gases through more stringent auto emission standards, and he ordered new federal rules directing automakers to start making more fuel-efficient cars as required by law.

The auto industry responded warily. Reducing planet-warming emissions is a great idea, carmakers and dealers said, but they expressed deep concern about costly regulations and conflicting state and federal rules at a time when people already are not buying cars. U.S. auto sales plunged 18 percent in 2008.

And industry analysts said the changes could cost consumers thousands of dollars — for smaller, "greener" cars.

Obama on Monday directed the Environmental Protection Agency to review whether California and more than a dozen states should be allowed to impose tougher auto emission standards on carmakers to fight greenhouse gas emissions. The Bush administration had blocked the efforts by the states, which account for about half of the nation's auto sales.

The new president also said his administration would issue new fuel-efficiency requirements to cover 2011 model year vehicles.

Obama acknowledged the worries of automakers but said urgent action was needed nonetheless. He said, "Our goal is not to further burden an already struggling industry. It is to help America's automakers prepare for the future."

He said that U.S. imports of foreign oil have continued to climb, even as previous presidents pledged to reverse the trend. No more, he said.

"I want to be clear from the beginning of this administration that we have made our choice: America will not be held hostage to dwindling resources, hostile regimes and a warming planet," Obama said in the ornate East Room of the White House, where an audience of environmentalists cheered him on.

Underscoring environmental worries, a new report said many damaging effects of climate change are already all but irreversible, sure to last until the year 3000 and beyond. "It's not like air pollution where if we turn off a smokestack, in a few days the air is clear," said Susan Solomon, chief author of the international report and a climate researcher with the National Oceanic and Atmospheric Administration's Earth System Research Laboratory in Boulder, Colo.

Showing the early limits of bipartisanship, House Republican leader John Boehner said Obama's reopening of a key California ruling was dangerous. "The effect of this policy will be to destroy American jobs at the very time government leaders should be working together to protect and create them," he said.

Obama's order for an EPA review of California's case could shake up the auto industry — 13 other states and the District of Columbia have adopted California's standards, and others are considering them. If California gets a federal waiver to enact tougher emissions standards, the other states could then sign on.

Also, Obama directed federal transportation officials to get going on new fuel efficiency rules, which will affect cars produced and sold for the 2011 model year. That step was needed to enforce a 2007 energy law, which calls for cars and trucks to be more efficient every year, to at least 35 miles per gallon by 2020.

Obama also meant to set a tone with his promises: Science will trump ideology and special interests, attention will stay high even when gas prices fall.

It was a none-too-subtle admonishing of previous administrations, chiefly George W. Bush's.

"It falls on us to choose whether to risk the peril that comes with our current course or to seize the promise of energy independence," Obama said. "And for the sake of our security, our economy and our planet, we must have the courage and the commitment to change."

Obama put that peril he mentioned in stark terms. He said dependence on foreign oil "bankrolls dictators, pays for nuclear proliferation and funds both sides of our struggle against terrorism. It puts the American people at the mercy of shifting gas prices, stifles innovation and sets back our ability to compete."

Recent presidential history is littered with grand but broken promises about weaning a gas-guzzling country from foreign oil. As long ago as 1973, Richard Nixon wanted the nation to be energy independent by 1980. The U.S. now imports even a bigger share of its oil than it did then.

This time could be different, said Phyllis Cuttino, director of a global warming campaign for the Pew Environment Group.

"It is very telling that at a time when he's working feverishly to pass an $825 billion stimulus package, he took these concrete steps on day six," she said. "That speaks volumes to his commitment." Environmental advocates, she added, are "all going to be applauding him — and holding his feet to the fire."

Underscoring Obama's attempt to shore up America's environmental credentials, Secretary of State Hillary Rodham Clinton on Monday appointed a special envoy for climate change.

Going back to Nixon's time, the U.S. imported 36 percent of its oil and refined products, about half coming from the OPEC cartel. During the first 11 months of 2008, imports accounted for nearly 67 percent of the petroleum used each day in the U.S., according to the Energy Information Administration.

Robert Ebel, an authority on energy policy at the Center for Strategic and International Studies, said public sentiment about the new promises may be, "Here we go again." But Obama, given his popularity, a cooperative leadership on Congress and the nation's desire for a reshaped economy, could have a window.

"The memory of $4 a gallon gasoline is not that old, and the financial crisis is very much in people's minds," he said. "All these things put together will help."

Obama framed his energy plan as steady and pragmatic. Sounding much like President Bush did, he warned that there is no quick fix.

EU Must Spend for Russian Alternative

By Maria Golovnina

ALMATY, Jan 26 (Reuters) - Fear of angering Russia may stop Central Asian producers from committing gas supplies to Europe unless they receive solid EU guarantees that the Nabucco pipeline project is well worth taking that risk for.

The energy-rich region, seen by Moscow as part of its sphere of interest, is in the spotlight as an alternative source of energy after Russia's gas conflict with Ukraine deprived Europe of natural gas supplies for two weeks this month.

But analysts said Central Asian producers would be reluctant to make any promises on paper unless Brussels presented them with a set of concrete incentives and guarantees on Nabucco's timing, transit arrangements and financing. "All those countries that would contribute to Nabucco would have to jeopardise their relationship with Russia," said Tanya Costello, a director at Eurasia Group in London.

"I don't think Turkmenistan has enough commitment from the EU that it's really going to happen, that you can really consider taking that risk."

Many hope that this week's Nabucco conference in Hungary, due to be attended by European Commission President Jose Manuel Barroso, would help Europe come up with a more unified position.

EU External Relations Commissioner Benita Ferrero-Waldner toured the Caucasus region ahead of the conference last week, putting special emphasis on her meetings in Azerbaijan -- one of the potential big Nabucco suppliers.

"Azerbaijan intends to receive concrete proposals from participant nations on matters of Azeri and Central Asian gas transportation," Azeri Foreign Minister Elmar Mamedyarov told reporters in Baku ahead of the Hungary meeting.

Russia, however, has aggressively defended its geopolitical turf in the region, promising to raise the price it pays for Central Asian natural gas to European levels from this year.

Natural Gas Explosion in Gloucester

By Dan Peleschuk, Globe Correspondent and James Vaznis, Globe Staff
http://www.boston.com/news/local/breaking_news/2009/01/explosion_destr.html

GLOUCESTER -- An initial investigation has discovered a leak in an underground gas pipe in front of a house that exploded here this morning, a National Grid spokesman said at a press conference late this afternoon.

However, John Higgins, a National Grid spokesman, declined to directly link the leak as the cause of the explosion, which critically injured a 30-year veteran of the city's police department who resided in the Eastern Avenue home. The pipe with the leak was underneath the street, directly in front of the house.

"There was a gas leak, and we moved to make a repair," said Higgins, at the City Hall press conference. "It is now complete."

The state fire marshall's office and state police are now heading the investigation, while local agencies will be assisting.

While officials stressed the area is safe, National Grid crews will work throughout the night, scanning the area for any other potential leaks. Officials also announced the creation of a new hotline to report gas leaks: 800-231-5325.

The explosion occurred shortly before 8 a.m. at 76 Eastern Ave., near Route 128. Officer Wayne Sargent, 59, had just finished his shift and returned home, said Gloucester Fire Chief Barry McKay. He heard some noises from the oil furnace in the basement and decided to check it out. As Sargent walked down the stair case, while calling the oil company on his cellphone, the house exploded.

Sargent, who was conscious after the explosion, was flown by helicopter to Massachusetts General Hospital. In his short time there, his condition has been downgraded from "serious" to "critical."

The explosion damaged two neighboring houses, blowing out the windows to one house, and leaving the side of the other house substantially charred.

Earlier in the day, a National Grid spokesman more directly tied natural gas to the cause of the explosion.

"It appears that natural gas was the cause, but how it entered the house and how it may have ignited is under investigation," said David Graves, a spokesman for National Grid.

David Swift, who lives in the neighborhood, was buying coffee at Jeff's Variety, which is a few buildings away from the explosion, when he heard the blast. He said it sounded like a truck hit the building. He and four or five people ran over to the house and sifted through the debris to help the victim.

Sargent was standing in the basement of the house, he said.

"The house just disappeared from the street," Swift said. "I didn't think anybody would come out of that house after hearing that blast."

A sales clerk, Gayle Silva, said the explosion shook the store so much that tomato paste cans, cigarette packages, and other items fell off the shelves. She said she saw the house explode through a store window, as she was waiting on customers.

"It went up so fast. There were red flames everywhere," Silva said. "I've never seen anything like that before in my life."

Chief said the department had received a few calls in the last few weeks about the smell of gas in the neighborhood. Neighbors said natural gas crews had been working on the street in the last few weeks.

Graves said this morning that he did not have access yet to work crew records for that area so he could not confirm if work had been done in recent days.

Sargent was among eight officers commended earlier this month by the department after they safely apprehended a man who locked himself in his apartment and threw butcher knives at two officers, according to a story in the Gloucester Daily Times.

Sargent is a 1969 Gloucester High School graduate.

On Dec. 17, a house explosion in Scituate killed a man who was inside. The cause remains unclear.

The state fire marshal's office investigated but has not released any details. Police have said "human involvement" was a factor.


Globe correspondent Jenara C Gardner contributed to this report

Alaska Natural Gas Pipeline Becoming PipeDream?

(Published January 24, 2009)
ANCHORAGE, Alaska — Energy market analysts addressed an Anchorage audience hoping for a multibillion dollar Alaska natural gas pipeline and the news was not good.

The global economic crisis has slashed demand for natural gas and dimmed chances for an Alaska pipeline, they said. The line also faces expanded competition.
"It's certainly going to be taken off the urgent list," said Ed Kelly, a Houston-based vice president with the global energy consulting firm Wood Mackenzie.
Kelly and a BP gas sales executive each delivered a grim overview of gas markets Friday at the Alaska Support Industry Alliance conference.

The alliance represents drillers, builders, haulers and other contractors who depend on petroleum development.

The recession and credit crunch have hammered industries that use natural gas, depressing demand and prices, said Kelly and Brian Frank, president of BP's gas marketing company.

"It's not a pretty story right now in terms of North American gas markets," Frank said.

Gas customers are regularly filing for bankruptcy, he said.

Competitive challenges to an Alaska gas line also could increase, including an expected surge in imports of liquefied natural gas, production of huge gas discoveries in Lower 48 shale deposits and a rise in renewable energy such as wind power.

Frank stopped short of saying the Alaska gas line is in jeopardy of further delay or even shelving because of poor market conditions.

Instead, he said, the conditions highlight the staggering risk of investing in a pipeline that could cost more than $30 billion to build.

Frank also repeated the contention regularly voiced by oil companies controlling the huge North Slope gas reserves: Steps are needed to "mitigate project risk and uncertainty."

That's generally taken to mean a long-term deal between the state and the oil companies on how 35 trillion cubic feet of gas would be taxed.

Top officials in Gov. Sarah Palin's administration have argued no such pact is necessary to achieve a profitable pipeline, even during times of low gas prices.

State Sen. Charlie Huggins, R-Wasilla, said the tough market outlook means state officials must keep looking at the tax question. Officials also should look at alternate ways of selling gas, and making it available for Alaska use, rather than just hope a blockbuster pipeline somehow will come together.

"We have to be flexible enough mentally to plan for other courses of action," Huggins said.

He likes the idea expanding output of a small LNG export operation at Nikiski so large volumes of Alaska gas could be shipped to Asia or the Lower 48.

BP, ConocoPhillips and Exxon Mobil have said an overland pipe is more economically viable than an LNG project.

Two competing pipeline proposals are in the planning stages. Each would stretch about 1,700 miles from the North Slope to an existing pipeline network in Alberta, Canada.

One project belongs to Calgary-based TransCanada Corp., which last year won an exclusive state license that includes up to $500 million in state incentive money.

BP and Conoco are teaming up on the other pipeline proposal, a joint venture called Denali. The companies did not apply for the license that TransCanada received.

One positive coming from the recession might be a decline in construction costs for a pipeline, Kelly said.

Drue Pearce, a former state senator and now federal coordinator for Alaska natural gas transportation projects in Washington, D.C., said steel prices have fallen sharply.

TransCanada and Denali are focused more on developing pipeline cost estimates and less on current gas markets, which could strengthen in the years it will take to arrange financing and regulatory approval of a project, Pearce said.

Information from: Anchorage Daily News, http://www.adn.com

$4.51 mmBTU is Natural Gas Price low

By Reg Curren

Jan. 23 (Bloomberg) -- Natural gas fell to the lowest price in more than two years in New York as demand for the industrial and heating fuel slumps in a deepening recession.

Weak factory demand blunted storage withdrawals during frigid weather last week. A supply decline of 176 billion cubic feet reported by the U.S. Energy Department today was about 23 percent less that it would have been in a healthier economy, said Scott Speaker, JPMorgan Chase & Co.’s natural gas strategist.

“Under last year’s demand conditions, with the same degree days, we would have been looking for a 225 to 230 billion-cubic- foot withdrawal,” Speaker said in an e-mailed response to questions. “The recession has resulted in a severe loss in the manufacturing sector.”

Natural gas for February delivery fell 16.3 cents, or 3.5 percent, to settle at $4.518 per million British thermal units at 3:07 p.m. on the New York Mercantile Exchange, the lowest closing price since Sept. 27, 2006. Gas has dropped 20 percent this year and is down 67 percent from the 2008 high of $13.694 per million Btu reached on July 2.

U.S. gas inventories fell to 2.56 trillion cubic feet in the week ended Jan. 16, 1.2 percent above the five-year average, the Energy Department said.

“The situation we’re in is one of extreme weakness in the industrial sector,” Speaker said in a conference call today after cutting his forecast for gas prices.

Gas will average $5.69 per million Btu on the New York exchange this year, down from $6 predicted on Dec. 17, Speaker said in a report.

Job Losses

The number of Americans filing their first unemployment benefit claims matched a 26-year high, the Labor Department said yesterday.

“It has become clearer in the past month that severe manufacturing weakness will have an impact on natural-gas demand that goes beyond a brief hiccup or temporary condition simply needing some producer-driven tightening,” Speaker said.

Steel companies, carmakers and chemical companies, which use gas to heat buildings and power machinery, have shuttered plants or slowed operations in the past year.

ThyssenKrupp AG, Germany’s largest steelmaker, said today it will delay production at stainless steel operations in Alabama for a year because of a slump in demand.

In the past month, DuPont Co., the third-largest chemical maker, announced plans to cut 4.2 percent of its workforce because of sliding demand. Dow Chemical Co., the biggest U.S. chemical maker, also enacted production curtailments. Alcoa Inc., the world’s largest aluminum maker, announced its third production cut in as many months earlier in January.

More Cold Needed

“We had some of the coldest weather in years and still only drew 176 billion,” said Phil Flynn, senior trader at Alaron Trading Corp. in Chicago. “That is showing us that it’s going to take consistently cold weather to get natural gas stockpiles below the five-year average.”

The week ended Jan. 17 was 30 percent cooler than the same period a year earlier, based on heating degree days, a measure of energy demand, data from the National Oceanic and Atmospheric Administration show.

Heating needs last week were 14 percent above normal for the entire U.S., as lower temperatures covered the Midwest and Northeast, David Salmon of Belton, Missouri-based Weather Derivatives, said in a note on Jan. 19.

The slowing U.S. economy probably limited withdrawals from storage, he said. Salmon expected stockpiles to fall 162 billion cubic feet, compared with as much as 237 billion in previous years when similar temperatures occurred.

About half of U.S. homeowners rely on gas for heating.

To contact the reporter on this story: Reg Curren in Calgary at rcurren@bloomberg.net.

Ukraine Transporting Natural Gas

By ANDREW E. KRAMER
Published: January 20, 2009
New York Times
Russia resumed pumping natural gas through Ukraine to Europe on Tuesday, after two weeks of disruption in a dispute over prices. The gas was expected to reach energy-starved homes to the west within three days. The Russian gas monopoly, Gazprom, said that the flow of gas was restarted around 10:30 a.m. Several hours later, gas began pouring across Ukraine’s western border into Slovakia, Hungary, Bulgaria and Moldova, The Associated Press reported. The prime ministers of Russia and Ukraine signed an agreement on Monday to resolve a dispute over the price of natural gas and the terms of its transshipment. Russia halted the supplies on Jan. 6, leaving hundreds of thousands of homes in southeastern Europe without heat and causing the shutdown of hundreds of factories.

Germany Receives Natural Gas

By Amanda Jordan

Jan. 21 (Bloomberg) -- Germany, Europe’s biggest energy market, was among European Union states to report full deliveries of Russian natural-gas via Ukraine after exporter OAO Gazprom resumed shipments yesterday.

E.ON Ruhrgas AG, the gas unit of Germany’s largest utility, is getting complete volumes of gas, the company said today in an e-mailed statement. The central European country, the biggest foreign customer of Russian gas, had drawn fuel from stockpiles the past two weeks to meet demand.

States further east began to receive Russian gas via Ukraine yesterday as Gazprom turned on the taps after a 12-day halt. More than 20 nations were affected by the cutoff as the two former Soviet neighbors refused to compromise in a spat over pricing, transit fees and outstanding debt. A truce reached over the weekend paved the way for a resumption in shipments.

Slovakia was the first nation to receive gas, followed by Hungary, Czech Republic, Austria, Poland, Romania, Bulgaria, Serbia and Slovenia. Countries that had tapped reserves, sourced alternative imports and restricted gas use during the crisis announced an end to emergency measures. Russia supplies a quarter of Europe’s gas, about 80 percent of which passes through Ukraine.

Slovakia, Czech Republic

Russian gas entered Slovakia yesterday morning, Economy Minister Lubomir Jahnatek said at a press conference. Slovakia had curbed gas consumption for industrial users during the crisis, leading to output cuts at companies including carmakers. Czech gas trader RWE Transgas AS received Russian deliveries last night, RWE AG spokeswoman Annett Urbaczka said today from Essen, Germany.

Gas reached the Austrian border yesterday, Economy Minister Reinhold Mitterlehner said in Vienna. Austria gets 51 percent of its gas from Russia, according to OMV AG, the country’s biggest oil and gas company. Hungary registered the arrival of supplies at 1:20 p.m. local time yesterday, Edina Lakatos, a spokeswoman for gas-network operator FGSZ Zrt., said in an e-mail.

Gazprom and Ukrainian state utility NAK Naftogaz Ukrainy signed a 10-year gas contract on Jan. 19, a deal welcomed by European Commission President Jose Barroso, who also called for new energy routes and sources to protect the EU in the event of future supply disruptions.

“This painful episode is a sharp reminder that the EU needs to take energy security seriously,” Barroso said yesterday at the commission’s Brussels headquarters. Russia and Ukraine hurt their credibility by failing to respect earlier pledges to reopen pipelines, he said.

Nabucco Boost

Barroso’s comments may boost efforts to bring the OMV-led Nabucco pipeline project to fruition. The planned 3,300-kilometer (2,050-mile) link would carry Caspian gas via a route from Turkey through Bulgaria, Romania and Hungary to western Europe from 2013.

Hungary’s ambassador for the 7.9 billion-euro ($10.6 billion) project, Mihaly Bayer, said the gas crisis had increased the chances of realizing Nabucco, according to Nepszabadsag. The dispute has raised the willingness of EU countries to back the plan, Bayer said in an interview with the newspaper.

Austria’s Mitterlehner said yesterday that the country would “work on diversifying our gas supplies, for instance with Nabucco.”

Turkey this week urged a speedy agreement on the Nabucco link and presented draft accords for the pipeline prior to a meeting of the project’s partners in Budapest on Jan. 27.

“The latest natural-gas crisis has demonstrated that Turkey’s insistence on wrapping up Nabucco is very well- founded,” Energy Minister Hilmi Guler said in an interview.

Slovenia, Poland

Slovenia started receiving gas from Russia at 5 p.m. local time yesterday, Alojz Stana, director of state-owned distributor Geoplin d.o.o, said today in a statement. The country, which imports 60 percent of its gas from Russia, has been able to ensure stable flows to companies and households by using alternative supplies during the shutdown, he said.

Gaz-System SA, Poland’s gas-pipeline operator, started to receive Russian gas at the Drozdowicze entry point, spokeswoman Malgorzata Polkowska said today. Poland, which relies on Russia for about 45 percent of its gas, tapped storage and increased shipments via Belarus during the shortage.

Romania, which usually gets about 7.2 million cubic meters of gas a day, or 12 percent of its needs, from Russia, also got deliveries today, Economy Minister Adriean Videanu said.

“We’re importing 3 million cubic meters of gas as of this morning through two stations,” Videanu told reporters in Bucharest. “This is all we need now as consumption dropped because of milder weather.”

Serbia, Bulgaria

Neighboring Serbia announced the delivery of imports from Russia this morning.

Utility Srbijagas is getting the full 10 million cubic meters of gas contracted, General Manager Dusan Bajatovic said by phone from Belgrade. “We are expecting normalization of supplies to all our customers by the end of the day,” he said.

Bulgaria also said Russian gas deliveries had been fully restored. Following the resumption in supply, the country has lifted all restrictions on consumption, Prime Minister Sergei Stanishev said today at a press briefing in Sofia.

The agreement reached during the weekend in Moscow requires the transit of as much as 120 billion cubic meters of Russian gas to Europe this year through Ukraine, which will buy 40 billion cubic meters for its own market.

The price of gas for Ukraine will be $360 per 1,000 cubic meters in the first quarter and adjusted quarterly until next year, when the country moves to a “European market price,” Gazprom said in a statement.

To contact the reporter on this story: Amanda Jordan in London at ajordan11@bloomberg.net

Europe Stuck with Russian Natural Gas?

Summary

After a three-week standoff, Russia and Ukraine have finally resolved their natural gas row, a conflict that has caused supply disruptions throughout much of Europe. Despite the agreement, European countries have begun laying out plans for new energy projects to lessen the impact of future disruptions. Many obstacles lie ahead for Europe’s plans, however, meaning Russia is likely to retain its powerful supplier role in the near future.Analysis
Related Special Topic Page

* Russian Energy and Foreign Policy

Nearly three weeks into a major dispute over natural gas prices, Russia and Ukraine finally reached a substantive deal Jan. 19. No one is happier than Europe. This is especially true of Central and Southeastern Europe, which have had to cope with diminished natural gas supplies (or none at all) over the course of the extensive row, causing major heating and electric shortages and a costly drop in industrial production.

But while natural gas shipments from Russia through Ukraine and on to the European states will slowly resume over the next few days, the Europeans will remain uneasy about the future of their energy security — and will feverishly proceed with plans to escape Moscow’s energy grip as soon as possible.

Europe made similar declarations, and had the same intentions, in 2006, the last time its natural gas supply was jeopardized by an energy row between Russia and Ukraine. In the years since then, nine new energy projects actually have come online. These include two natural gas pipelines and six liquefied natural gas (LNG) facilities, which bring an annual 62 billion cubic meters (bcm) of natural gas, and one nuclear plant that produces and annual 650 megawatts of electricity (MWe).

To put this in context, Europe consumed more than 500 bcm of natural gas in 2007, receiving around 160 bcm (more than a quarter of supplies) from Russia. In addition, Europe’s annual demand for natural gas is projected to increase to more than 800 bcm over the next decade. While the recent projects account for a considerable amount of new energy supplies, nearly all of them are in Western Europe, thus providing little help to Central and Southeastern Europe.

Russia supplies the amount of natural gas it does to Europe for good reason. Europe shares a land border and a deep history of energy ties with Russia, unlike other suppliers such as the Middle East or North Africa. The pipelines from Russia’s Yamal Peninsula to Europe cover a large distance and were fairly expensive to build, but they were constructed in the Soviet era under a central-planning system that did not prioritize efficiency and returns on investment; it is doubtful such projects could or would be built today. The volume and nature of Russian natural gas dictates that it can be transported most efficiently via pipeline. And Russia has a vast and established pipeline network it uses to send energy throughout Europe. Finding a cost-effective alternative to this network will be doubly hard in the current period of financial instability.

Rather than focusing on rumors of new energy projects circulating in Europe, examining which efforts to shift to energy alternatives actually have made it past the planning phase will prove more helpful in understanding the future of European energy dependence on Russia.

2 More Natural Gas Wells in Barnett Shale Formation

Zilber Ltd. and Chesapeake Energy Corp., of Oklahoma City, have constructed two natural gas wells at Zilber’s Mountain Valley Lake single-family home development in Burleson, Texas, just south of Forth Worth.

The 1,000-acre development, which Milwaukee-based Zilber Ltd. acquired from a land subsidiary of Texas-based Bass Brothers in 1996, rests on top of the Barnett Shale Formation, which has produced significant natural gas production in the last four years, according to a Zilber Ltd. spokesman.

Zilber Ltd., a diversified commercial and residential real estate development and management company, began building homes under its Homes by Towne trade name that sell for between $130,000 and $200,000 on the Burleson property in 1998. The real estate company signed the agreement with Chesapeake Energy to explore for natural gas in 2005.

“Though our expertise is residential and commercial real estate, we’ve learned from Joe Zilber, our founder and chairman of the board, that opportunity comes in many forms and one should never pass up an opportunity,” said Art Wigchers, Zilber Ltd.’s president. “This was a great opportunity.”

Israel Natural Gas Find

Israel`s largest-ever reserve of natural gas discovered off Haifa coast
By Avi Bar-Eli, TheMaIsramco announced Sunday that "extremely significant" reserves of natural gas have been discovered at its Tamar 1 offshore drill site 90 kilometers west of Haifa.

The natural gas reserve is the largest ever discovered in Israel - three times bigger than that of the "Yam Thetis" consortium and worth $15 billion.

"Subject to receipt of further data from the drill site, the estimated reservesrker Correspondent Tamar is a joint venture between the U.S. company Noble Energy (36%), Isramco (28.9%), Delek Drilling and Avner Oil and Gas Exploration. It is named after the grand-daughter of geologist Yossi Langotsky.

Drilling is difficult: the sea floor is 1,700 meters below the surface of the water and under the sand is a 1,400-meter thick stratum of salt. The drill at the Tamar 1 permit site reaches 5,000 meters below sea level.

Tel Aviv stocks rose on the back of the announcement. Isramco shares rose 123 percent, the Delek Group was up 57 percent, and Avner was up 45 percent.

Slovakia Buys Natural Gas from Czeck

PRAGUE, Czech Republic—After ten days without natural gas from Russia, Slovakia secured an alternative delivery from the Czech Republic on Jan. 17. According to the agreement between Slovakia Prime Minister Robert Fico and his Czech counterpart Mirek Topolanek, Slovakia will receive 20 millions cubic meters of natural gas through their gas line, called Jamal.

The Slovak government also canceled its state of emergency, which only allowed around 1,000 companies to use limited natural gas. They are allowed to resume production on Monday, Jan. 19.

“Due to the Russian natural gas stoppage, Slovakia has lost around 100 million euros (US$ 150 million) daily,” said Fico after the meeting in Prague. The agreement with the Czech Republic came just one day before the meeting between Ukraine and Russia to settle the gas crisis.

Together with other countries in the Balkans, Slovakia is one of the most troubled by the current gas shortage crisis, completely depending on natural gas deliveries from the former Soviet Union. After Ukraine and Russia could not agree on gas prices in 2009, the dispute quickly developed to a total halt of Russian gas to Europe.

Traders Playing Pricing Futures for Oil Profits

By Mark Shenk

Jan. 16 (Bloomberg) -- Crude oil rose in New York for the first time in three days as traders purchased contracts in an attempt to profit from higher prices in future months.

Oil for delivery later this year is more expensive than for the front month, allowing traders to lock in gains. The February contract, which expires on Jan. 20, is trading at a $6.06 discount to March, down from $8.14 yesterday. Investors who made bets that February oil would fall further closed out their positions today, an action called short covering.

There’s “short-covering ahead of the Tuesday expiration,” said John Kilduff, senior vice president of energy at MF Global Inc. in New York. The discount of February oil to March touched a record for the contracts yesterday, “so it was due for a bounce.”

Crude oil for February delivery rose $1.11, or 3.1 percent, to settle at $36.51 a barrel at 2:47 p.m. on the New York Mercantile Exchange. Futures declined 11 percent this week and 60 percent from a year ago.

There will be no floor trading in New York on Jan. 19 because of the Martin Luther King Day holiday.

The price of oil for delivery next December is 58 percent higher than the front-month contract. This structure, in which the subsequent month’s price is higher than the one before it, is known as contango.

The oil market may have also increased because of rising equity prices. U.S. stocks gained for a second day as investors snapped up shares in the Standard & Poor’s 500 Index trading at its cheapest valuation since 1991. The S&P 500 added 0.8 percent to 850.12.

‘Hostages’

“The oil price and the equity markets are hostages to people’s perceptions about the economy,” said Adam Sieminski, the chief energy economist at Deutsche Bank AG in Washington. “On the days when we think we’re starting to hit the bottom of the economy, the oil market and the equities markets go up.”

Crude-oil inventories at Cushing, Oklahoma, where West Texas Intermediate traded on the Nymex is stored, climbed 2.5 percent to 33 million barrels last week, the Energy Department said on Jan. 14. It was the highest since at least April 2004, when the department began keeping records for the location.

“Increasingly, the front month futures contract is trading in relation to supply and demand at Cushing, Oklahoma, as opposed to the global demand picture,” said Tim Evans, energy analyst with Citi Futures Perspective in New York.

OPEC agreed to a record 9 percent cut in supply targets at a Dec. 17 meeting to reverse the plunge in oil prices, which have dropped more than $100 a barrel in New York in the past six months. The group’s next scheduled meeting is on March 15.

Brent crude oil for March settlement declined $1.11, or 2.3 percent, to $46.57 a barrel on London’s ICE Futures Europe exchange.

Demand Forecast

Prices dropped earlier after the International Energy Agency said that global demand will decline for a second year, the first back-to-back contraction since 1983.

The IEA, which advises 28 nations on energy policy, cut its 2009 forecast by 1 million barrels a day on expectations the economic outlook will deteriorate. The agency estimates consumption will shrink 0.6 percent to 85.3 million barrels a day. OPEC, the U.S. Energy Department, JPMorgan Chase & Co. and Deutsche Bank AG have already said demand will fall this year.

“The IEA numbers certainly highlight how weak the economy is and the impact on demand,” said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. “The IEA report is joining a chorus of very bearish numbers.”

Higher Volume

Volume in electronic trading on the exchange was 428,966 contracts as of 3:49 p.m. in New York. Volume totaled 652,858 contracts yesterday, up 37 percent from the average over the past 3 months. Open interest yesterday was 1.26 million contracts. The exchange has a one-day delay in reporting open interest and full volume data.

Oil may fall next week, according to a Bloomberg News survey. Seventeen of 35 analysts, or 49 percent, said futures will decline through Jan. 23. Twelve respondents, or 34 percent, forecast oil will rise and six said there will be little change. Last week, 41 percent of analysts expected a gain in prices.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.

Nine Days No Natural Gas to Europe from Russia

By JOHN W. MILLER

Europe's big countries weighed in to try to force Russia to resume natural-gas supplies to the Continent via Ukraine, warning Moscow long-term relations could be damaged if it doesn't start pumping gas soon.

Interventions Thursday by Germany, France and the U.K. came after more than a week of diplomacy and threats by top European Union officials that yielded few results.

The cutoff began after Moscow and Kiev failed to agree to a 2009 price for Russian natural gas. Despite agreements to resume shipments to the EU, gas remained cut off for a ninth day Thursday, leaving parts of the EU without gas to heat homes or operate factories. That has led to complaints the EU lacks a strong foreign policy and permanent heavy-hitting leadership to resolve such a crisis -- leaving national governments to step in.

"Confidence in Russia could be lost in the long term," Chancellor Angela Merkel of Germany said after meeting U.K. Prime Minister Gordon Brown in Berlin.

Ms. Merkel was expected to meet Russian Prime Minister Vladimir Putin in Berlin on Friday. Mr. Brown was to meet Ukraine President Viktor Yuschenko in London on Thursday night.

The French foreign ministry appeared to shoot down a Russian proposal to hold an energy summit to break the deadlock in Moscow. "Conditions are not ripe" until gas flows have resumed, said a foreign-ministry spokesman. Ukraine asked for a more neutral location for the summit.

A tougher line from Germany could break the deadlock, analysts said. Germany is Russia's most important gas customer and often an ally for Moscow. German policy makers said they hope to convince Moscow that it can't afford to alienate the EU since Russia needs Western investment and technology to modernize its economy. Ms. Merkel said Thursday, however, that Germany has "no complete alternative."
—Marcus Walker and Andrew Osborn contributed to this article.

Write to John W. Miller at john.miller@dowjones.com

Liquid Natural Gas Plant is Offline in Qatar

By ADAM SCHRECK – 10 hours ago

DUBAI, United Arab Emirates (AP) — Investigators in Qatar are trying to determine what caused a breakdown that has halted about a third of the country's liquefied natural gas output, an official for the plant's operator said Thursday.

The Qatargas I plant has been shut since January 8 because of a "mechanical failure," said the official, who spoke on condition of anonymity, citing company policy. He did not say when supplies would resume.

"We have to take our time to determine what are the root causes. We're waiting for the result of this investigation," he said when asked for a timeframe. "It's important for us to be prudent."

The plant is operated by a consortium led by state-owned Qatar Petroleum and has an annual capacity of 10 million tons. Energy giants Exxon Mobil Corp. and Total S.A. are among the companies that have minority stakes in the facility.

Much of the fuel shipped from the plant is destined for Spain and Japan. The Qatargas official said customers are "aware of what's going on."

The stoppage comes at a time when natural gas supplies to much of Europe are constrained because of a dispute between Russia and Ukraine.

Serene Gardiner, an energy analyst at Standard Chartered Bank in Dubai, said the Qatar shutdown will likely put little added strain on European markets but could eventually affect supplies in big liquefied natural gas importers such as Japan and South Korea.

"Most of the gas in the world goes through pipelines, so in that sense it's small. But if you look at it in terms of LNG, it's quite big," she said of the stoppage. "It's too early to say" what the effect on markets might be, she added.

Qatar, a tiny but wealthy Persian Gulf state, is the world's largest producer of liquefied natural gas. It is investing heavily to boost its production of the fuel, which is formed by cooling regular natural gas to make it easier to transport aboard ships rather than by pipeline.

The country can produce nearly 31 million tons of LNG annually, according to the Qatargas official and the U.S. Energy Information Administration.

Natural Gas Prices Dropping Daily

Natural gas prices getting cheaper by the day
By STEVE EVERLY
The Kansas City Star
Most of the talk these days is about gasoline prices, but natural gas is making news of its own: It’s getting cheaper by the day.

Natural-gas prices are down to levels not seen since 2006, and settled Wednesday at $4.97 per 1,000 cubic feet on the New York Mercantile Exchange.

Put another way, that’s more than 60 percent below where they were in July. That has wiped out predictions of a few months ago of heating bills rising 30 percent or more this winter.

The Energy Information Administration predicts that nationwide, those who use natural gas to heat their homes should pay 4 percent less than they did last winter.

How quickly any change in natural-gas prices will be passed along to consumers will depend on the gas utility. In Kansas, the cost of gas is adjusted monthly, while Missouri utilities typically change the cost twice a year, although it can be done more often if there is a sharp change in prices.

For those on level-payment plans, utilities periodically take the average of the last year’s gas bills, with some making an adjustment for estimated changes in gas prices.

The drop in wholesale prices also won’t fully show up on heating bills because gas utilities bought some of the gas they are reselling this winter when wholesale prices were higher.

Also, the amount of gas that customers use will affect what they will pay.

The decline in the price for each unit of gas nevertheless means customers dodged sharply higher heating bills, which at one time were expected to be an average $300 more this winter compared with last winter.

It provides a sharp contrast to what European consumers face this winter. Russia has stopped deliveries of natural gas to Europe, causing supply disruptions and prices to rise sharply.

If that happened to oil supplies, the U.S. would be affected as well. But natural gas is different.

The U.S. supplies 85 percent of the gas it uses and could supply more, and most of the rest comes from Canada. By contrast, the U.S. relies on imports to supply about 65 percent of the crude oil it needs.

For now, the U.S. can produce more natural gas than the country can use. The amount of gas in storage is above average, and demand is expected to decline 1 percent this year because of the economy.

Next winter could bring more good news for consumers: The Energy Information Administration doesn’t expect average natural gas prices to rise until sometime in 2010.

To reach Steve Everly, call 816-234-4455 or send e-mail to severly@kcstar.com.
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T. Boone Seeks Natural Gas Money from USA

By DAVE MICHAELS / The Dallas Morning News
dmichaels@dallasnews.com

WASHINGTON – T. Boone Pickens said Tuesday that he's seeking as much as $28 billion from the economic stimulus plan to convert heavy-duty trucks from diesel to natural gas engines. Pickens' latest lobbying effort comes as congressional Democrats negotiate details of the $800 billion package of tax cuts and government spending. It also comes two months after California voters rejected a similar proposal – sponsored mostly by one of Pickens' companies – that would have devoted $5 billion for the same purpose.

Still, Pickens continues to gain fans among lawmakers and grass-roots supporters for his "Pickens Plan" to reduce oil imports.

Pickens said he discussed his request Tuesday with House Speaker Nancy Pelosi, Energy and Commerce Committee Chairman Henry Waxman and Education and Labor Committee Chairman George Miller.

A Pelosi spokesman refused to provide details of the "private conversation."

"They, of course, didn't jump up and give me a standing ovation," Pickens said. "But we talked about the subject. And I think they are thinking about all of this very seriously."

A longtime Republican, Pickens appears to have soothed hard feelings over his funding of the Swift Boat attacks on Sen. John Kerry in the 2004 presidential race. He appeared at Tuesday's news conference with environmentalist Robert F. Kennedy Jr., a Democrat.

Kerry, now chairman of the Senate Foreign Relations Committee, said he agrees with some of Pickens' goals, such as moving away from oil.

But Kerry, who's pushed Democrats to devote more stimulus funds for green energy projects, said he's "not convinced fossil fuels are in need of further subsidy."

Pickens wants to see a pilot program that would convert about 350,000 heavy-duty trucks from diesel to natural gas engines. The effort would cost $75,000 per vehicle and create about 454,470 jobs, according to Pickens.

"350,000 [trucks] on natural gas would decrease – get this number – your [oil] imports by 5.14 percent," Pickens said.

The American Trucking Association hasn't signed onto that plan. A spokesman said too many questions remain – including the need for more natural gas refueling stations.

The Pickens Plan envisions the U.S. reducing oil consumption by switching transportation fuel to natural gas and electricity.

Critics point out that Pickens's plan promotes natural gas at a time when lawmakers and automakers are focused on encouraging the development of electric cars and fuel from crops.

Even if Pickens fails to win support for his natural gas plan, the stimulus may benefit his proposal to build the world's largest wind farm.

That project has been delayed as Pickens ran into trouble financing it.

Pickens also says a lack of transmission – to carry wind power from remote West Texas to population centers in Texas and California – has slowed his plans.

But Monty Humble, vice president and general counsel of Pickens' Mesa Power Group, said the stimulus would contain funding to enable "an accelerated build-out of transmission."

"That would benefit our project," Humble said.

Kennedy said Tuesday that government should fund the transmission, which the U.S. Department of Energy has estimated at $60 billion if the country got 20 percent of its electricity from wind.

NO Natural Gas to Europe on Tuesday

Jan. 12 (Bloomberg) -- Russia’s efforts to extract more money from Ukraine by cutting off natural gas supplies sent the fuel to a three-year high in Europe, and set up prices for a steeper decline.

OAO Gazprom, Russia’s state-run gas export monopoly, today said Ukraine had agreed to an accord on monitoring gas flows, which will pave the way for resuming shipments through Ukraine to Europe. The global recession is reducing demand just as new liquefied natural gas terminals open, increasing the capacity for imports. The post-winter thaw usually drives spot prices lower, and the cost of most European gas is tied to months-old oil prices, which have plunged 74 percent since July.

Natural gas “will drop like a stone,” said Thierry Bros, an analyst at Societe Generale, France’s second-largest bank, in an interview from Paris.

Patrick Heather, U.K.-based BG Group Plc’s former gas-trading chief, says prices probably will weaken to 47 pence a therm ($7.13 per million British thermal units) after the dispute between Ukraine and Russia ends. Gas for immediate delivery in the U.K. today dropped as much as 18 percent to 55.50 pence a therm, according to prices from ICAP Plc.

Deutsche Bank AG, Merrill Lynch & Co. and McKinnon & Clarke Ltd. forecast, on average, 47.9 pence a therm during the second quarter in the U.K., Europe’s biggest market. Futures on the ICE exchange show prices dropping to 46 pence a therm by June.

Hurting Gazprom

A drop would sting Moscow-based Gazprom, while reducing costs for consumers and power companies, including Essen-based E.ON Ruhrgas AG, the largest buyer in Germany, and France’s GDF Suez, based in Paris.

Only a prolonged cold spell across the continent, field shutdowns in the North Sea or a failure by Gazprom to restore gas flows to Europe would likely prevent a slump in prices.

Russia halted shipments through Ukraine last week, cutting off deliveries to at least 19 other European countries, in a dispute over prices and gas transit costs.

Top Russian officials including Gazprom head Alexei Miller flew to Brussels today to approve a European Union-brokered deal to allow international monitoring of flows into Ukraine’s pipelines. Once shipments resume, it may take three days for gas to fill the pipelines and reach Germany, E.ON Ruhrgas spokesman Kai Krischnak said yesterday.

Europe relies on Russia for 25 percent of its gas, most of which passes through Ukraine, according to Gazprom. Demand rose 23 percent in the past decade as power generators turn away from coal, which generates more carbon emissions linked to global warming.

Russian Discounts

Russia sold gas at subsidized prices to former Soviet states since the collapse in 1991. Gazprom’s policy now is to raise prices to what it considers the market level, rather than forgo revenue to build political ties.

“With the monitors it will be very clear what’s going on,” Ronald Smith, head of research at Alfa Bank in Moscow, said in an interview yesterday. With its economy slowing and gas prices peaking, Russia has an incentive to make sure shipments continue, he said.

Gazprom plans as much as 10 trillion rubles ($320 billion) for projects to bring gas to market over the next 11 years, including developing deposits in Siberia and the Arctic.

“Gazprom is now struggling for cash,” said Karen Sund, founder of Oslo-based consulting firm Sund Energy. “They need large funds for new investments in both fields and infrastructure, and they are testing the limits of goodwill with several of their buyers.”

Full Inventories

Warmer-than-normal weather in October and November allowed Italy, Germany and neighboring countries to pump record amounts of gas into underground storage. Halfway through the heating season, Europe’s natural-gas stockpiles are about the same as a year ago, according to Gas Storage Europe, an association of pipeline and terminal operators.

Inventories at Europe’s seven biggest trading hubs were 38.6 million cubic meters on Jan. 5, or 74 percent full, compared with 73 percent a year ago. Five of those were 99 percent full by early November.

Once confined to regional markets by pipelines, natural gas is becoming a global commodity similar to crude oil. Supplies are emerging from the Middle East, Africa, Russia and Indonesia in the form of liquefied natural gas, where molecules are cooled to a liquid so they can be transported by ship and stored in tanks.

Irving, Texas-based Exxon Mobil Corp., the world’s biggest oil company, and others are investing in Qatar, home of the world’s third-largest gas reserves, to raise exports. Worldwide sales grew 7 percent in 2007 to 226.4 billion cubic meters, according to Paris-based trade association Cedigaz. Wood Mackenzie Consultants Ltd., in Edinburgh, expects about 20 million tons of new LNG supply this year, the equivalent of 12 percent of 2007 exports or 0.9 percent of world gas demand.

European Prices to Fall

“European prices are going to come down significantly over the next two or three years” and approach U.S. levels, said Frank Harris, head of global LNG at Wood Mackenzie, in an interview.

February gas at the TTF hub in the Netherlands, Europe’s second most-active market, is trading at the equivalent of about $8.49 per million British thermal units, compared with $5.52 for Henry Hub gas in Louisiana, the U.S. benchmark.

As the recession drags down North American demand, growing production means more LNG tankers will end up in Europe, Harris said. Italy expects to start imports at a new LNG terminal at Rovigo by June, while the U.K. will begin three more receiving plants this year. More are under construction in Spain and France.

Economic activity is expected to decline 1 percent this year in both the U.S. and the European nations that use the euro, while Russian growth is expected to slow to 5 percent from 7.2 percent in 2008, according to the consensus of economist estimates compiled by Bloomberg.

Ties to Oil

Most of the continent’s gas is sold through annual contracts that use formulas linked to the cost of crude, with a delay of three to nine months.

“Oil-linked contracts are peaking” after crude plunged from the July record of $147.27 a barrel, said Sund, the Norwegian consultant. Oil in New York was trading near $39 a barrel today.

The slowing global economy will have a “significant impact on industrial gas demand across Europe,” said Ian Cronshaw, head of energy diversification at the International Energy Agency in Paris. About 20 percent of Europe’s steelmaking has been closed, Cronshaw said in an interview.

The IEA has no estimate for 2009 gas demand, although it expects European oil consumption to fall 1.3 percent this year. Deutsche Bank expects U.S. gas demand to decline 1.5 percent this year.

Chemical Shutdowns

BASF SE of Ludwigshafen, Germany, the world’s biggest chemical maker, said in November that canceled orders by carmakers forced it to close 80 factories that use gas to make plastics. Midland, Michigan-based Dow Chemical Co., which in 2007 has greater revenue in Europe than the U.S., said last month it will permanently close 20 factories and idle 180 more.

European spot gas prices rise during colder months, when heating demand is highest, and typically decline in the spring. U.K. prices have fallen in nine of the past 11 years during this period, ICE Futures data show. The biggest seasonal drop since the U.K. market was liberalized in 1990 was between November 2005 and May 2006, when gas tumbled 73 percent.

Temperatures across Europe are also forecast to rise this week, with the U.K. likely to average 9 degrees Celsius (48 Fahrenheit) today, up from 1 degree on Jan. 8, according to CustomWeather Inc.

With “a double whammy of a Russia-Ukraine resolution and a five degree improvement in the weather, you’re going to see it tumble” said Heather, the former BG Group gas trader, of the European natural gas market.

To contact the reporter on this story: Ben Farey in London at bfarey@bloomberg.net

Europe Natural Gas Deal Done? NYET!

By Christian Lowe and Dmitry Zhdannikov

MOSCOW/KIEV, Jan 12 (Reuters) - A deal to restore Russian gas supplies via Ukraine to Europe appeared on the verge of collapse after Moscow rejected additions by Kiev as a 'mockery of common sense'.

Russian President Dmitry Medvedev appealed to EU leaders late on Sunday to exert influence on Kiev to withdraw the annotations. Government sources said Prime Minister Vladimir Putin had proposed sending officials to Brussels on Monday for emergency talks.

Ukraine, its own supplies cut off in a dispute with Moscow over the price it pays for Russian gas, signed an agreement on Sunday allowing monitors to check gas flows across its territory to Europe and assuage Russian fears Kiev would siphon off gas for itself. But it appended its own declaration to the deal Russia had signed a day earlier.

The European Union was also party to the deal and EU monitors had already begun arriving when the new dispute flared.

"I cannot call such stipulations and additions other than a mockery of common sense and violation of earlier achieved agreements," Medvedev said of the Ukrainian terms.

"These actions, in fact, aim to disrupt the existing agreements on monitoring gas transit and are clearly provocative and destructive in essence ... I therefore order the government not to implement the document signed yesterday."

His statement sparked a new flurry of diplomatic activity. The European Commission said its chief, Jose Manuel Barroso, and Ukrainian Prime Minister Yulia Tymoshenko had agreed to address Russia's concerns.

BROADER TENSIONS

The commercial dispute over gas prices has played out against a background of broader tensions between Ukraine, seeking to join the NATO alliance, and its giant northern neighbour.

Russia cut off all gas via Ukraine to Europe last week. The EU, which gets a fifth of all its gas supplies via that route, has found itself playing arbiter in a bitter power-play between two ex-Soviet states still acting out a separation.

Russian Natural Gas Still in Russia

The Salt Lake Tribune - Three years after the last drama involving Russia, Ukraine and gas supplies to Europe, here we are again. Russia's monopoly supplier Gazprom cut off gas shipments to Ukraine on New Year's Day because of alleged unpaid bills, and by Jan. 7 no gas was moving across Ukraine to the European Union either.

Since the EU depends on Russia for a quarter of its natural gas, and 80 percent of that gas moves west through Ukrainian pipelines, that was no laughing matter.It's the former Soviet satellites that are most dependent on Gazprom's gas, because that's the way the pipelines ran in Soviet times. Some of them will run out very fast if their fellow EU members in western Europe do not share gas from their own strategic reserves. And Turkey (not an EU member) has turned to Iran to replace the missing Russian gas.

Only it's not really Russian gas at all. Most of it comes from the Central Asian state of Turkmenistan. And the dispute between Russia and Ukraine is not a normal commercial dispute (as both sides insist), nor is it some kind of Russian strategic move (as the believers in a new Cold War maintain). It is a thieves' quarrel.

Since it is Turkmenistan's gas, you would expect the Turkmens to sell it to European countries directly, and pay transit fees to Russia and Ukraine for shipping it west through their pipelines. Instead, Gazprom secured long-term rights to Turkmenistan's gas by agreeing to pay it a rumoured $340 per thousand cubic meters -- which is almost double the $179.50 that Ukraine actually paid in 2008.

Times are hard all over (Gazprom's shares have fallen by 76 percent since September) and Russia actually needs the money badly, so the pressure to raise the price of gas to subsidized ex-Soviet customers is higher than usual. But that is not what caused the gas to be cut off to Ukraine on Jan. 1, and to everybody else in Europe a week later. The reason for that is probably a murky internal fight over the division of the spoils.

Gazprom is an opaque organization with many leading Russian political figures on its board and its management committee. But it is a model of transparency compared to RosUkrEnergo, yet another middleman with the job (which clearly does not need doing) of buying gas from Gazprom and selling it to Ukraine. It was set up after the 2006 Russian-Ukrainian confrontation over gas.

Half of RosUkrEnergo is owned by Gazprom, and the other half by Ukrainian businessmen who steadfastly refuse to reveal their identities. The cutoff in gas shipments to Ukraine allegedly occurred because the Ukrainian government had paid an outstanding gas bill for $1.5 billion to RosUkrEnergo by the end of the year, but the money had not yet appeared in Gazprom's account -- and probably more importantly, because Ukraine was refusing to pay an additional $615 million in fines for late payment.

Now wait a minute. Maybe Ukraine was technically a month late in paying the bill (and maybe not), but whoever heard of a 40 percent fine for one month's late payment? The glaring lack of detail about this "fine" reinforces the suspicion that the sum involved is really money creamed off the sale of Gazprom's sales to RosUkrEnergo and on to Ukraine that is now in dispute between the Russian and Ukrainian beneficiaries of a sweet little scam.

The thieves would certainly include high-ranking people in the Kremlin and in Ukrainian President Viktor Yushchenko's government. So it's easy to see how the quarrel could escalate into an interstate confrontation, with Russia accusing Ukraine of stealing gas and Kiev accusing Moscow of turning off the taps for all of Europe. And there's really not much that the European Union can do except to wait until the thieves have made a deal.

This episode will reinforce the EU's conviction that it is unwise to remain heavily dependent on gas that comes through Russia and Ukraine, not so much because they fear the return of Joseph Stalin as because they dislike dealing with a bunch of Al Capones. However, the short-term options for alternative sources are limited.

In the longer term, the solution is to stop burning fossil fuels to provide Europe's energy, but that isn't going to happen for quite a while.

Gwynne Dyer is an independent journalist.

Russian Natural Gas to Europe Flowing

Kiev, Ukraine (AHN) - Europe's gas delivery problem has been solved with the agreement by Russia and Ukraine to have a monitoring team oversee the natural gas deliveries in the continent.

With the arrival on Thursday of the EU monitoring group in Ukraine, Gazprom is expected to turn on again the tap and resume gas deliveries to over 15 European nations. The natural gas pass through pipelines that go through Ukraine.

EU Energy Commission spokesman Ferran Terradellas estimates it may take three days before the whole delivery system functions again.

According to a spokesman of Ukraine's Naftogaz, members of the EU mission and Russian experts will visit gas pumping outlets. They are expected to arrive in Kiev on Friday. Russian Prime Minister Vladimir Putin said the EU team is welcome to different parts of Russia to check the gas flows.

Until the resolution of the deadlock between Gazprom and Naftogaz officials through a surprise meeting in Moscow, various parts of Europe suffered from the lack of heating fuel since Wednesday at a time when winter has hit the EU.

While some heating stations were able to secure alternative energy, others could only run on natural gas and had to be temporarily shuttered.

Brazil Postures to Bolivia - Keep Your Natural Gas

By Carla Simoes and Jeb Blount

Jan. 8 (Bloomberg) -- Brazil may close 15 natural-gas-fired power plants tomorrow, reducing use of the fossil fuel in favor of cheaper hydroelectric power amid a gas dispute with Bolivia.

Brazil’s Electricity Sector Monitoring Committee will consider the plan to shut the plants at a meeting tomorrow morning in Brasilia, Edison Lobao, Brazil’s energy minister, said in an interview. If approved, this will be the second mass- plant closure in as many weeks. The country’s national grid operator earlier this month shut all gas-fired plants in Brazil’s industrialized southeast.

The proposed shutdowns prompted Brazil to cut its imports of gas from Bolivia, the provider of about half the country’s supply, by more than a third in recent weeks. Bolivia, whose largest source of government revenue comes from taxes on hydrocarbons, is sending two ministers to Brazil to discuss the cuts, Lobao said.

“Right now the gas-fired plants are being used as a strategic reserve and all of the thermal plants will probably be turned off,” Lobao said in an interview from his office in Brasilia. “This will be decided tomorrow and we will probably turn off 15 plants. This will reduce costs.”

Bolivian President Evo Morales will send Hydrocarbons and Defense of State Interests Minister Hector Arce and Planning and Development Minister Carlos Villegas to the meeting in Brasilia, according to La Razon, a La Paz newspaper.

On Jan. 1, Petroleo Brasileiro SA, or Petrobras, Brazil’s state-controlled oil company, cut its imports of natural gas by more than a third to about 19 million cubic meters a day from 31 million, the Rio de Janeiro based company said yesterday.

Argentine Alternative

The Bolivian government said yesterday that it may seek new markets for the country’s gas in Argentina, La Razon reported.

A lack of production and pipeline capacity has limited sales to Argentina to about 2.2 million cubic meters a day, even though Bolivia has a contract to supply as much as 7.7 million cubic meters a day to its only other gas export market.

Normal purchase amounts in Brazil will likely be restored in three months, Lobao said.

Brazilian electricity grid manager Operador Nacional do Sistema Eletrica shut thermal-power plants after rains filled reservoirs, making cheaper hydroelectric resources available, Petrobras has said. Petrobras runs many of the plants.

Gas-fired generators are used during drought periods and to reduce demand for hydropower, allowing dams to refill. Brazil gets more than 80 percent of its electricity from the dams.

Filling Reservoirs

In Brazil’s southeast and central west, which includes Rio de Janeiro and Sao Paulo states, reservoirs were 56 percent full in December, compared with 46 percent a year earlier, according to the operator’s Web site.

Under its contract with neighboring Bolivia, Brazil must buy an average of 24.8 million cubic meters (876 million cubic feet) of gas a day each year and a monthly average of no less than 19 million cubic meters a day, Petrobras said.

If imports fall below the minimums, Petrobras still has to pay for the gas it doesn’t use. Petrobras has the right to buy as much as 31 million cubic meters a day, the maximum that can be shipped through the pipeline that links the two countries.

To contact the reporter on this story: Jeb Blount in Rio de Janeiro at jblount@bloomberg.net

Natural Gas Wake Up Call for Europe

www.news.cn
BRUSSELS, Jan. 7 (Xinhua) -- The natural gas shortfalls caused by a Russia-Ukraine dispute demonstrate the need for the European Union (EU) to reconsider the role for natural gas as a bridging fuel to sustainable energy, said the WWF on Wednesday.

The gas cut-off should serve as a wake-up call for the EU to boost energy efficiency and the use of renewables, said the conservation organization.

The WWF has supported the comparably clean natural gas as a logical mid-term alternative to high-polluting coal in the power sector and oil in the heating sector. It now says that it is now time to reconsider this role for natural gas.

"We cannot promote a fuel anymore which is used as a weapon by some countries and certain corporations against consumers," said Stephan Singer, WWF International Director of Energy Policy in Brussels.

Instead, WWF strongly supports immediate EU legislation on energy efficiency in buildings and the promotion of renewable energies in the power sector, said the WWF.

The EU is importing about 100 million tons of oil equivalents of natural gas from Russia each year, about one quarter of total natural gas consumption in the EU. About 80 percent of the gas imports from Russia are pumped through Ukraine. A dispute over prices and debt repayments has affected gas supplies for more than a dozen EU countries.

Russia Did Not Send Natural Gas to Europe Today

By Philip P. Pan
Washington Post Foreign Service
Tuesday, January 6, 2009; 1:37 PM
MOSCOW, Jan. 6 -- The flow of natural gas from Russia to Europe plummeted Tuesday, with several countries reporting a complete halt in shipments and others experiencing major reductions as Russia deepened its gas embargo against neighboring Ukraine in the middle of a winter cold spell.

Russia and Ukraine blamed each other for the sudden drop in deliveries, which caused supply disruptions as far away as Italy and Germany, but the two sides appeared set to resume direct talks later this week after six days of finger-pointing in a fuel price standoff with political overtones.

Austria, Bulgaria, Croatia, Greece, Macedonia, Poland, Romania, Slovakia, Turkey and the Czech Republic said gas shipments coming through Ukraine had stopped or fallen sharply. Germany, Europe's largest consumer of Russian gas, said deliveries had been "massively reduced" and predicted shortages if they were not restored and temperatures remained low.

The Balkans appeared hardest hit, with Croatia saying it was reducing supplies to industrial customers and Slovakia preparing to declare a state of emergency. Bulgaria, which relies on Russia for almost all its gas, said it was preparing to restart a shuttered nuclear reactor because it had enough reserves to last only a few more days.

Two Bulgarian cities were left without gas, including one on the freezing Black Coast in which 12,000 households lost central heating, the Associated Press reported. "We are facing a serious natural gas crisis in which Bulgaria is a victim of the conflict between Russia and Ukraine," said Prime Minister Sergei Stanishev.

After expressing reluctance to mediate while making reassuring statements about ample reserve supplies, the European Union condemned the sudden gas cutoffs as "completely unacceptable" and indicated it was considering a three-way summit with Russia and Ukraine as an "extreme option."

Gazprom, the Russian gas monopoly, blamed the shortfalls on "unilateral action" by Ukraine, accusing the former Soviet republic of shutting down three export pipelines and forcing Russia to cut deliveries to one-seventh their normal levels. "Ukraine alone is wholly to blame for the situation," said company spokesman Sergei Kupryanov.

Ukraine's state energy firm, Naftogaz, said it was Russia that halted deliveries through the three pipelines, adding that the total flow of gas from Russia plunged Tuesday morning to 73.8 million cubic meters per day, down from 315 million the previous day. "We did not turn anything off. There is simply no gas there," said Naftogaz spokesman Valentyn Zemlyansky.

Ukraine's President Viktor Yushchenko said the country was using its own gas to maintain pressure in the pipeline and keep deliveries to Europe moving. But he warned that Russia might suspend all shipments through the pipelines, which deliver one-fifth of the gas that Europe uses.

The reductions came a day after Russian Prime Minister Vladimir Putin ordered Gazprom to cut deliveries using the Ukrainian pipelines by as much as 20 percent, a move the Kremlin presented as retaliation for Ukraine's alleged theft of fuel meant for other countries after Russia stopped sending it supplies.

Bohdan Sokolovsky, the Ukrainian president's representative on energy issues, denied any theft and said Ukraine had enough gas in storage to supplement its own production and satisfy domestic demand into April. He accused Russia of trying to force Ukraine to accept a crippling price hike, and warned that the reduction could cause pressure in the pipelines to drop and trigger a shutdown as soon as next week.

Russia halted gas shipments to Ukraine on Jan. 1, saying that the country owed more than $600 million in late fees on overdue bills and that it had rejected a new contract raising prices for 2009 closer to what Gazprom charges other countries in Europe. At the same time, Russia pledged to continue pumping gas through Ukrainian pipelines for its other European customers.

Natural Gas Producers Stock Up in New Year's Start

Shares of natural gas and petroleum producers extended their hot streak on Monday as the sector tapped into a fresh $2 surge in oil prices on top of recent gains.

Crude prices gained 23% in the past week -- the largest jump in 22 years, according to Pritchard Capital Partners.

Oil service stocks have risen 22% since a low point on Dec. 5. Exploration and production stocks are up 33% from their Nov. 21 lows.

Catalysts for higher energy prices include the conflict in Gaza between Israel and Hamas, a call from Iran to cut off oil sales to countries that support Israel, and Russia's natural gas dispute with Ukraine.

Against this backdrop, crude prices accelerated gains from earlier in the session to close up $2.01 at $48.35 a barrel in regular trading on the New York Mercantile Exchange.

The Amex Oil Index (XOI) rose 1.2% to 1,033. Refiner Valero (VLO) led the charge with a rise of more than 5% to $24.45.

The Amex Natural Gas Index (XNG) rose 4% to 411, breaking through the 400 level for the first time since Dec. 11. Component Questar (STR) rose 7% to $ 36.62 after a Barron's article praised its results from the Haynesville shale.

The Philadelphia Oil Service Index (OSXX) jumped 3.5% to at 135. Components National Oilwell Varco (NOV) and Exterran Holdings (EXH) both rose about 6%.

Adding a heavy dose of caution to the buying spree in the sector, UBS analysts downgraded 10 names from the oil service sector to neutral from buy while leaving six buy ratings intact in the face of slack demand for oil and eroding price power.

A recent move up from the group amounts to a bear market rally, UBS said.

"In our minds, it's about two things: when does global oil demand start to turn up and when does the pricing pendulum swing back in favor of the service companies?" said UBS analysts, who expect oil prices to stay in the $50 a barrel range through the spring.

UBS maintained buy ratings on Halliburton (HAL) and Baker Hughes, but downgraded Schlumberger (SLB), Weatherford (WFT) and BJ Services (BJS) to neutral.

UBS kept buy ratings on Transocean (RIG), Noble Cop. (NE) and Atwood Oceanics (ATW), but cut shares of Diamond Offshore (DO) and Ensco (ESV) to neutral and assigned a sell rating on Hercules Offshore (HERO).

Among energy stocks in the spotlight, Chesapeake Energy Corp. (CHK) rose 6% to $18.32. The company said it sold volume from various assets in the Anadarko and Arkoma Basins for $412 million, conveying a royalty interest to investors associated with Argonaut Private Equity.

Assets sold include proved reserves of approximately 98 billion cubic feet equivalent. Under the deal, termed a "production payment transaction," Chesapeake retains drilling rights on the properties below currently producing intervals. The Oklahoma City-based natural gas company said the move was part of efforts to build up cash reserves. The purchase was financed by GS Loan Partners, an affiliate of The Goldman Sachs Group, Inc.

Soleil Securities on Monday downgraded Tesoro Corp. (TSO) to sell from hold after a 64% run-up in the refining giant's share price in the past month.

Tesoro could be facing threats from imports now that Reliance Petroleum's Jamnagar refinery in India has started up. Refining margins on the West Coast improved in the second half of December because of lower production, but refinery utilization rates have been rising and demand remains weak, Soleil noted.

Shares of Tesoro nevertheless rose 1.7% to $14.03.

-Steve Gelsi; 415-439-6400; AskNewswires@dowjones.com

(END) Dow Jones Newswires
01-05-09 1517ET
Copyright (c) 2009 Dow Jones & Company, Inc.

Natural Gas Prices Effected by War

Jan. 5 (Bloomberg) -- Crude oil rose for a third day in New York after Israeli troops crossed into the Gaza Strip, escalating the 10-day old conflict and threatening stability in the Middle East, the largest oil producing region.

Oil gained as much as 5 percent after thousands of Israeli troops crossed the border Jan. 3 in a bid to capture bases Hamas militants have used to launch rocket attacks on the country. Arab nations and the international community must do more to support Gaza's population, Tehran-based Press TV reported Iran's Foreign Minister Manouchehr Mottaki as saying yesterday.

Prices are being driven by ``that worst-case scenario,'' said Gerard Burg, energy and minerals economist at National Australia Bank Ltd. in Melbourne. ``What if it drags in a few neighbors and leads to a broader conflict?''

Crude oil for February delivery rose as much as $2.34 to $48.68 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $47.90 at 8:29 a.m. in Singpapore.

The contract rose 3.9 percent to $46.34 on Jan. 2, the highest settlement since Dec. 11. Prices climbed 23 percent last week, the most since August 1986, buoyed by the Gaza conflict, a natural gas dispute between Russia and Ukraine, and a rebound in equity prices. Oil tumbled 27 percent the week before.

The Middle East accounts for almost a third of the world's oil production. Prices jumped to a then-record $78.40 a barrel in July 2006 after Israel attacked Iranian-backed Hezbollah forces in Lebanon. Iran is the fourth-largest oil producer.

Market Reaction

While no production is at risk in the latest conflict, a market reaction is inevitable, even if it's been more than 30 years since war there last cut supplies, National Australia's Burg said.

Oil surged in 1974, helping spur a recession in the developed world, after an oil embargo that followed the Arab- Israeli war in October 1973.

Brent crude oil for February settlement rose $1.76, or 3.8 percent, to $48.67 a barrel on London's ICE Futures Europe exchange. It gained 2.9 percent to settle at $46.91 on Jan. 2.

U.S. Secretary of State Condoleezza Rice canceled a planned visit to China this week to monitor events in the Middle East, the State Department said.

Israel has resisted international calls for a halt in hostilities, saying it needs to shut down the military wing of Hamas. The Islamic refused to renew a six-month cease-fire that expired on Dec. 19, citing Israel's economic blockade of the province.

Oil fell 54 percent last year, the first annual drop since 2001, and the biggest loss since trading started. Prices reached a five-year low of $32.40 on Dec. 19, and had probably fallen too far given the long-term outlook, National Australia's Burg said. The absence of many traders and investors on holidays is probably also adding to the volatility in prices, he said.

To contact the reporter on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net
Last Updated: January 4, 2009 19:33 EST

Natural Gas Drilling Down in Barnett Shale

By JIM FUQUAYjfuquay@star-telegram.com
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Drilling has declined faster than was predicted just two months ago and may have to decline more for gas prices to rise. STAR-TELEGRAM ARCHIVES/M.L. GRAY Related Tags (BETA)
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The number of drilling rigs active in the Barnett Shale finished the year down 26 percent from its peak in early October, mirroring a decline in drilling nationwide as natural gas prices have plunged amid worries about weak demand.

There were 159 rigs operating in 14 North Texas counties as of Dec. 26, according to the most recent report from RigData. That was down 12 from the previous week and down 55 from the 2008 peak of 214 active rigs in the Barnett.

It’s the biggest sustained decline in the Barnett since late 2001, when there were fewer than 100 rigs, according to RigData. Drilling in 2008 generally remained above 200 rigs until recently.

Nationally, the rig count fell by 98, or 5.7 percent, said Baker Hughes, a Houston-based oil-field services and equipment firm that has tracked North American drilling for decades. That was the biggest one-week drop since 1993 and left the U.S. rig count down 20 percent from its yearly high.

Rigs exploring for natural gas accounted for 80 of the idled rigs in the past week, Baker Hughes said. There were 1,267 rigs looking for gas, down 21 percent from the 2008 high of 1,606, on Aug. 29.

Overall, 1,623 rigs were active both onshore and offshore in the United States, Baker Hughes said. That peaked in 2008 at 2,031, in September.

What’s happening

Natural gas futures have plunged since peaking at $13.58 per 1 million Btu in July. On Friday, gas settled at $5.97.

Drilling has declined faster than was predicted just two months ago.

As recently as Oct. 24 there were 205 active rigs in 16 Barnett counties, according to RigData. At the time, Richard Mason, publisher of Land Rig Newsletter in Lubbock, said he expected to see the rig count fall as much as 20 percent in the first quarter of 2009.

Last month, Mason updated his forecast, saying the rig count could drop as much as 30 percent and predicted "the most difficult drilling environment in 10 years."

On the ground

As gas prices continued to weaken, XTO Energy President Keith Hutton said in early December that the number of rigs looking for natural gas in the United States might have to drop to 1,200 before production would fall enough for prices to rise again.

As of Dec. 26, XTO was running 16 rigs in the Barnett, just under the approximately 19 rigs it generally operated last year. Chesapeake Energy showed the biggest cut in its Barnett rig fleet, from 43 in late September to 32 as of Dec. 26, according to RigData.

Devon Energy, based in Oklahoma City, remains the busiest driller locally, with 38 rigs. That’s about what Devon, the Barnett’s largest producer, has operated in the past year.

JIM FUQUAY, 817-390-7552

Europe Natural Gas Supply in Limbo?

Jan. 2 (Bloomberg) -- Poland and other European consumers of Russian gas transported through Ukraine have so far seen little change in supplies after OAO Gazprom cut off deliveries to the former Soviet state yesterday in a price dispute.

In a similar conflict in 2006 some clients, including Hungary and Italy, registered shortfalls in shipments in the shutoff, which lasted for more than two days.

Western Europe gets most of its Russian gas via pipelines through Ukraine. Russia and Ukraine are preparing to resume talks and Ukrainian Prime Minister Yulia Timoshenko gave assurances there will be no disruption of natural-gas supplies to the European Union, the EU’s executive branch said Dec. 31. Timoshenko made the assurance in a call with European Commission President Jose Barroso, the EU said.

“There’s no change in gas volume in the European Union” this morning, European Commission spokeswoman Christiane Hohmann said by phone from Brussels, citing the Network of Energy Security Correspondents, which pools energy information. NESCO was set up by the EU in 2007 to improve information and provide early warning of threats to energy supplies.

Polskie Gornictwo Naftowe I Gazownictwo SA, Poland’s largest gas distributor, said Russian gas supplies via Ukraine were down and that deliveries via Belarus had risen.

Polish Supplies

“Poland’s gas needs are fully covered,” state-controlled Polskie Gornictwo said in an e-mailed statement. Supplies at the Ukrainian border dropped by about 6 percent at 5 p.m. local time today, the statement added.

Poland receives 14 million cubic meters of gas a day via Ukraine, more than 30 percent of its imports from the former Soviet Union.

In Hungary, which saw deliveries fall as much as 35 percent in the 2006 dispute, there was a drop of pressure detected at the border, but no decline in the amount delivered so far, Edina Lakatos, a spokeswoman for Mol Nyrt. unit FGSZ Zrt., which operates the country’s gas transmission network, said by phone.

Lakatos said Ukraine had notified Mol that it planned to cut deliveries by 5 million cubic meters a day, but added Hungary could replace the missing amount from reserves.

Germany is the largest importer of Russian gas, getting 37 percent of its fuel from Gazprom. Supplies to Essen-based E.ON Ruhrgas AG, the gas unit of the country’s largest natural gas supplier, were “as normal today,” spokesman Helmut Roloff said.

Slovakia and the Czech Republic today said their supplies have so far been unaffected. Italy said it can meet any short- term demand from storage and could, if necessary, increase supplies from Algeria.

Algerian Option

Italy, Europe’s third-largest market for the fuel, has enough stored gas to meet its needs, said an official from the Industry Ministry, who asked not to be identified by name. If necessary the country can increase deliveries from Algeria to meet demand, he said today.

Slovakia’s Slovensky Plynarensky Priemysel SP, which transported 73 billion cubic meters of gas in 2007, more than 12 times the country’s own consumption, said shipment of Russian gas through its pipes is unaffected.

Other customers also reported normal flows.

“The Czech Republic will receive 100 percent of natural gas shipments today,” Martin Chalupsky, the spokesman for Prague-based RWE Transgas AS, said by phone today. “We have been reassured both by Gazprom and Ukrainian officials that there won’t be any long-term disruptions to gas supply.”

-- With reporting by Peter Chapman in Brussels, Brian Parkin in Berlin, Balazs Penz in Budapest, Adam Freeman in Rome, Radoslav Tomek in Bratislava, Lenka Ponikelska in Prague, Katya Andrusz and Katarzyna Klimasinska in Warsaw and Fred Pals in Amsterdam. Editors: Guy Collins, Shaji Mathew

To contact the reporter on this story: Rob Verdonck in London rverdonck@bloomberg.net

Gazprom Natural Gas Giant asking 5.5 Billion from Russia

Sergei Karpukhin/Reuters

MOSCOW — A year ago, Gazprom, the Russian natural gas monopoly, aspired to be the largest corporation in the world. Buoyed by high oil prices and political backing from the Kremlin, it had already achieved third place judging by market capitalization, behind Exxon Mobil and General Electric.

Today, Gazprom is deep in debt and negotiating a government bailout. Its market cap, the total value of all the company’s shares, has fallen 76 percent since the beginning of the year. Instead of becoming the world’s largest company, it has tumbled to 35th place. And while bailouts are increasingly common, none of Gazprom’s big private sector competitors in the West is looking for one.

That Russia’s largest state-run energy company needs a bailout so soon after oil hit record highs last summer is a telling postscript to a turbulent period. Once the emblem of the pride and the menace of a resurgent Russia, Gazprom has become a symbol of this oil state’s rapid economic decline.

During the boom times, Gazprom and the other Russian state energy company, Rosneft, became vehicles for carrying out creeping renationalization.

As oil prices rose, so did their stocks. But rather than investing sufficiently in drilling and exploration, Russia’s president at the time, Vladimir V. Putin, used them to pursue his agenda of regaining public control over the oil fields, and much of private industry beyond.

As a result, by the time the downturn came, they entered the credit crisis deeply in debt and with a backlog of capital investment needs. (Under Mr. Putin, now the prime minister, Gazprom and Rosneft are so tightly controlled by the Kremlin that the companies are not run by mere government appointees, but directly by government ministers who sit on their boards.)

“They were as inebriated with their success as much as some of their investors were,” James R. Fenkner, the chief strategist at Red Star, a Russian-dedicated hedge fund, said of Gazprom’s ambition to become the world’s largest company. “It’s not like they’re going to produce a better mousetrap,” he said. “Their mousetrap is whatever the price of oil is. You can’t improve that.”

Investors are now fleeing Gazprom stock, once such a favorite that it alone accounted for 2 percent of the Morgan Stanley index of global emerging market companies. Gazprom is far from becoming the world’s largest company; its share prices have fallen more quickly than those of private sector competitors. The company’s debt, amassed while consolidating national control over the industry, is one reason.

After five years of record prices for natural gas, Gazprom is $49.5 billion in debt. By comparison, the entire combined public and private sector debt coming due for India, China and Brazil in 2009 totals $56 billion, according to an estimate by Commerzbank.

Mr. Putin used Gazprom to acquire private property. Among its big-ticket acquisitions, in 2005 it bought the Sibneft oil company from Roman A. Abramovich, the tycoon and owner of the Chelsea soccer club in London, for $13 billion. In 2006 it bought half of Shell’s Sakhalin II oil and gas development for $7 billion. And in 2007, it spent more billions to acquire parts of Yukos, the private oil company bankrupted in a politically tinged fraud and tax evasion case.

Rosneft is deeply in debt, too. It owes $18.1 billion after spending billions acquiring assets from Yukos. And in addition to negotiating for a government bailout, Rosneft is negotiating a $15 billion loan from the China National Petroleum Corporation, secured by future exports to China.

Under Mr. Putin, more than a third of the Russian oil industry was effectively renationalized in such deals. But unlike Hugo Chávez of Venezuela or Evo Morales of Bolivia, who sent troops to seize a natural gas field in that country, the Kremlin used more sophisticated tactics.

Regulatory pressure was brought to bear on private owners to encourage them to sell to state companies or private companies loyal to the Kremlin. The assets were typically bought at prices below market rates, yet the state companies still paid out billions of dollars, much of it borrowed from Western banks that called in the credit lines in the financial crisis.

Rosneft, which was also held up as a model of resurgent Russian pride and defiance of the West as it was cobbled together from Yukos assets once partly owned by foreign investors, was compelled to meet a margin call on Western bank debt in October.

Critics predicted Russia’s policy of nationalization would foster inefficiency, or at the very least disruption as huge companies were bought and sold, divided up and repackaged as state property. At stake were assets worth vast sums: Russia is the world’s largest natural gas producer and became the world’s largest oil producer after Saudi Arabia reduced output this summer to support prices.

A deputy chief executive of Gazprom, Aleksandr I. Medvedev, predicted the company would achieve a market capitalization of $1 trillion by 2014. Instead, its share price has fallen 76 percent since the beginning of the year and its market cap is now about $85 billion.
Mr. Medvedev, the Gazprom executive, defended Gazprom’s performance and attributed the steep drop in its share price relative to other energy companies to the company’s listing on the Russian stock exchange, which is volatile and lacks investors who put their money into companies for the long term.
Mr. Medvedev said the share price “does not reflect the company’s value” and blamed the financial crisis that began on Wall Street for the company’s woes.

It is true that Gazprom is far from broke. The company made a profit of 360 billon rubles, or $14 billion, from revenue of 1,774 billion rubles, or $70 billion, in 2007, the most recent audited results released by the company.

Valery A. Nesterov, an oil and gas analyst at Troika Dialog bank in Moscow, said Gazprom’s ratio of debt to revenue — before interest payments, taxes and amortization — was 1 to 5 in 2007, high by oil industry standards but not so excessive as to jeopardize the company’s investment grade debt rating.

The company, meanwhile, says it will go ahead with capital spending to develop new fields in the Arctic, and continues to pour money into subsidiaries in often losing sectors like agriculture and media. It is also assuming, through its banking arm, a new role in the financial crisis of bailing out struggling Russian banks and brokerages.

Investors say an unwillingness to cut costs in a downturn is a common problem for nationalized industries, and another reason they have fled the stock. When oil sold for less than $50 a barrel in 2004, Gazprom’s capital outlay that year was $6.6 billion; for 2009, the company has budgeted more than $32 billion.

Gazprom executives say they are reviewing spending but will not cut major developments, including two undersea pipelines intended to reduce the company’s reliance on Ukraine as a transit country for about 80 percent of exports to Europe. Gazprom and Ukraine are again locked in a dispute over pricing that Gazprom officials say could prompt them to cut supplies to Ukraine by Thursday.

“All our major projects in our core business — upstream, midstream and downstream — will continue with very simple efforts to meet demand both in Russia and in our export markets,” Mr. Medvedev said.

But revenue is projected to fall steeply next year. Gazprom received an average of $420 per 1,000 cubic meters for gas sold in Western Europe this year; that is projected to fall to $260 to $300 in 2009.

“For them, like everybody else, sober realism has intruded,” Jonathan P. Stern, the author of “The Future of Russian Gas and Gazprom” and a natural gas expert at Oxford Energy, said in a telephone interview.

A significant portion of the country’s corporate bailout fund — about $9 billion out of a total of $50 billion — was set aside for the oil and gas companies. Gazprom alone is seeking $5.5 billion.

For a time, Gazprom, a company that evolved from the former Soviet ministry of gas, had been embraced by investors as the model for energy investing at a time of resource nationalism, when governments in oil-rich regions were shutting out the Western majors. In theory, minority shareholders in government-run companies would not face the risk their assets would be nationalized.

But with 436,000 employees, extensive subsidiaries in everything from farming to hotels, higher-than-average salaries and company-sponsored housing and resorts on the Black Sea, critics say Gazprom perpetuated the Soviet paternalistic economy well into the capitalist era.

“I can describe the Russian economy as water in a sieve,” Yulia L. Latynina, a commentator on Echo of Moscow radio, said of the chronic waste in Russian industry.

“Everybody was thinking Russia had succeeded, and they were wondering, how do you keep water in a sieve?” Ms. Latynina said. “When the input of water is greater than the output, the sieve is full. Everybody was thinking it was a miracle. The sieve is full! But when there is a drop in the water supply, the sieve is again empty very quickly.”