Wednesday 31 August 2022

Euro-dollar parity!

There's a thing, eh?

You'll see it described as "pound collapses" - but against the EUR, Sterling is where it was back in 2013, and higher than has been across most of 2017-2021.  OK, not as high as the blip in 2015, but still ... "despite Brexit" ... 

Nope: this is about the USD.  Always the safe haven.  Never underestimate ... etc etc.

OK - now back to all your favourite Ukraine themes. 


Friday 26 August 2022

Price cap £3,549 - and consequences

 Thar she blows, £3,549.  What now?  Some observations and considerations:

  1. Electricity prices[1] are driving gas prices now (in case you didn't know), thanks to France and its chronic dependency on chronic nukes.  Ironic, huh, Macron?
  2. Speaking of which: no point in whimpering about Ukraine.  Completely out of our hands.  Always was.  Might as well be hung for a sheep as a lamb.   (Please don't tell me that if we, alone in the west[2], had told Zelensky to surrender and begged Putin to give us a special supply of cheap gas and oil, this would all have gone away.)
  3. Courtesy of CU (constructively engaged elsewhere): unless you can reduce demand for energy (and/or increase supply), whatever your chosen means of paying for this, it's massively inflationary.  Which we've been talking about since Feb last year - the only surprising thing is, how long it's taken. 
  4. Truss[3] needs to get her act together right now - the political vacuum will leave her gasping for air in three weeks time[4].
  5. All the "big schemes" floated so far are for residential customers only: what about business?
  6. Where are the plans for rationing?  Up until now, "ministers have let it be understood" they think that energy use is a matter for individual choice.  Suddenly, they are starting to talk about "encouraging people to use less".  Won't wash.  Germans and French seem to recognise this.
  7. This is war.  The population needs to understand that their politicians understand.  Will somebody kindly act accordingly?
Only one chance for Truss.  Get into Downing Street: forget everything she's said & promised up until now: "declare war": give it everything she can muster, blood / toil / tears / sweat, and be seen to be doing so.  This is an economic May 1940.  Might even need to give Starmer a seat in the Cabinet.

[1]  Q:  So what's the driver of electricity prices now?  A:  Industrial demand destruction, in Europe and in China.
[2]  As I said in March, the ignorance of western politicians (particularly in Germany), as to what the Ukraine thing would mean in energy terms, was complete.  Putin has been undone by this ignorance: and so have we all.
[3]  Q:  Who'd want to be PM at a time like this?  A: They all would!  That's what they're like!
[4]  Government silence is allowing every grandstanding opportunist, Lab/ Lib/SNP, to say "just freeze the cap for [6][12][24] months" [circle your choice here].  Soon, people will assume that'd be something we could just do, rather easily.  Even the BBC accepts that isn't true, but it won't be long before it takes hold. 

Thursday 25 August 2022

Can Russia sustain this indefinitely?

On this blog we've all, contributors and commentators alike, recognised from the start that Russia has enormous powers of endurance.  So that's not at issue.  

But what of its political stability for the long haul?  Its ability to re-equip?  To raise adequate manpower?  For a very good essay on this, I recommend Can Russia Continue to Fight a Long War from the esteemed RUSI, whose Ukraine coverage is generally quite excellent. 

To the question of whether Russia has the political capacity to sustain a prolonged conflict, the answer must be a qualified yes.  What of the material capacity of Russia to generate military power?  Here, the answer is more ambiguous. A key consideration will be how Russia’s major manufacturers function in the absence of Western components – which, notably, they have failed to substitute in the last decade...

The growth of China as Russia’s largest supplier of machine tools may provide a margin of safety for the Russians, but Western suppliers still account for a large percentage of machine tool imports. The more important point, however, is what an inability to produce machine tools domestically tells us about the state of Russian industry and its potential to achieve import substitution.  As such, Russia is likely to struggle with many areas of import substitution even if it accepts lower quality products and higher costs. There are certain things it simply cannot make. Russia will not replace nonfungible military capabilities without external help from China ...

If Russia has to keep a steady stream of resources flowing to the front lines because it is not allowed the luxury of a pause or because a second offensive also fizzles out, its material capacity to conduct a long war will be limited...

Moreover, the Russian military training system will struggle to generate combat-effective units in numbers – even if it can push new recruits into existing understrength units ... Russia can generate a large number of new troops, but only if it avoids intensive refresher training and trickles new recruits into existing units, which risks mixed units on the front underperforming. If it seeks to generate fully formed units during an operational pause for a second phase of offensive activity, its training pipeline may substantially limit its capacity.


Monday 22 August 2022

Ofgem: price cap + a very unusual resignation

In my experience, the reasons for someone resigning are rarely revealed by the ostensible account.  Sometimes they've actually been fired.   Sometimes they were at the end of their tether - maybe out of their depth - and looked for some convenient pretext, or picked a fight on a semi-spurious 'point of principle'.  Sometimes they are just one of life's serial resigners with a track-record of flouncing off.  And sometimes, I suppose, the whole thing should be taken at face value.

Anyhow, last week there was an interesting one: "Ofgem director Christine Farnish resigns over price cap change".  Who she?  Good question.  Is the precise mechanism of the Ofgem price cap a resigning matter?  Well, it's incredibly technical, as a glance at Ofgem's many publications on the topic indicates: a helluva balancing act in fraught circumstances, with lots of competing strategic desiderata in play.  Only Theresa May ever wanted this cap thing, and the weight now resting upon it is wildly more than it was ever designed to bear.

The underlying complexity is a genuine one: what should be the hedging strategy of a utility supplier in ultra-volatile market conditions?   An answer to this is required because the price cap logically needs to take it into account.  What's being hedged is technically a short option - always ultra-problematic.  There's no single "right" answer, not least because high volatility (and we are talking off-the-scale vol here) is naturally accompanied by thin liquidity in the hedging markets, and acute pressure on lines of credit, all for very logical technical reasons.  In case anyone imagines there's an element of crying wolf here, just consider the number of suppliers who've gone bankrupt or otherwise exited the market in the past 12 months.  Much of that was Ofgem's fault for licensing minnows in the first place, but Bulb (e.g.) isn't in that category and Bulb is languishing under state control at the expense of all of us.  The government, for one, has no idea how Bulb should hedge, and so it ruled that it wasn't to be allowed to.

For those interested, there's another technically fascinating phenomenon at work in the hedging arena: backwardation in the gas market.  This is where the forward curve is trading at lower prices than the spot market - generally not something seen in the gas market, except ultra-fleetingly**.   But since last year when this whole thing kicked off (starting in the Far East - see this blog from Feb 21 - long before Putin played his hand about 12 months ago, but made much worse by his subsequent actions) there have been unprecedently sustained periods of deep backwardation.  This, incidentally, is the only reason the big players like Centrica are still alive and kicking: they've been able to lock in at prices they are fairly sure will end up looking OK, relative to spot prices.  They may still have had to take the risk of an open long position for quite a while, however.   The small players might have wanted to go the same way - but didn't have the credit standing to take on the same position.  The strain on even Centrica's lines of credit is enormous.

The last 8 weeks have seen astonishing movements along the forward curve - prices for calendar '23 and '24 have more than doubled.  Even with this, there's still a degree of backwardation.

I don't know if the "£6,000 price cap" forecast is warranted - putting numbers on predicted commodity prices is a mug's game; and I've no idea who "Auxilione" are, except that they seem to be attention-seeking.   (As an MP acquaintance of mine says, you can always get on the news if you are willing to take your trousers down in public.)  Doesn't detract from the difficulties ahead, though.

But resigning over the technicalities of the price cap?  She should have done that a long time ago: it's been a can of worms since the very start.



**There are all manner of pseudo-science theories about this - e.g. "backwardation can't ever be sustained in the gas market" - but, like econometrics in general, they are mostly bullshit 

Wednesday 17 August 2022

Rough Gas Storage: A Long, Odd Tale

I last wrote at length about the 'Rough' gas storage facility five years ago, and the story is taking another turn; so, once again by popular request ...

Many moons ago it was discovered by offshore operators (Amoco) that the 'Rough' gas field they'd developed in the North Sea had almost uniquely favourable reservoir geology.  The sandstone is incredibly regular, making it highly suitable for gas storage.  So, only a few years after commencing production, they sold it (at a very handsome price) to the old monopoly British Gas, which had decided it could use a mammoth offshore storage facility for seasonal storage (pump gas in during summer, pump it out in winter).

More: BG declared it was an absolute necessity, to support the heavily winter-biased demand of its residential customer base - the first of many porkies it has told in this tale.  Pre-privatisation, BG was, remarkably, an unregulated monopoly, though it was still liable to the occasional inquiry into its capital expenditures (which it was of course foisting on us captive customers): so it made a bit of a case for why Rough was essential.  I won't bore you with it now, not least because it turned out to be entirely spurious when, a decade later, the privatised BG was being split up and the division which handled BG's residential customer base - still a monopoly at that stage - was invited to bid for whatever capacity in Rough it required to meet customer demand.  It bid for ... precisely zero: yes, somehow when push came to shove Rough wasn't essential - it was in fact totally unnecessary.

Anyhow, in the meantime they'd spent around £1bn - quite a lot of money in the 1980s - on converting the offshore production facilities to be able to inject and withdraw gas at will, coupled with substantially upgraded onshore facilities for the same purpose.  When anyone tells you (as they often will) that essential utilities are too important to be in private ownership, and that monopolies are the right way to go for efficiently ensuring security of supply etc, remind them about Rough - and apply to me for yet more examples of grotesque monopoly gold-plating at our expense, because they are legion.

Well, the thing had had been built, so it was sunk costs by then.  No need to record the complex chain of transactions by which the facility was separated out from what became Centrica, passed through various hands, and eventually was bought back by Centrica to become part of their complex and quite cleverly managed portfolio.  (Just in case anyone thinks I have a down on Centrica, read back through the Centrica-tagged posts by clicking on the label below: you'll find I used to have a high regard for them.  It's their recent subsidy-farming manifestation I dislike.)  Suffice to say, Centrica ran Rough quite intelligently on an open-access commercial basis for many years.  Over time, seasonal storage (pump in for 180 summer days, then pump out across the winter period) became less attractive in the face of much more flexible new (and smaller) onshore gas storage facilities, plus increasing access to a big surfeit of storage capacity on the continent (another long story) via two big cross-channel pipelines, plus burgeoning LNG import capacity of a very flexible nature.  Even then, Centrica was able to respond with clever, more flexible storage packages which they delivered via use of Rough.

Eventually as the beast grew older, they needed to think about how long it would last.  There was a small explosion at one point, and other old-age mishaps.  Ten years or so ago, they started angling for government money, firstly to build more storage, then to bail them out at Rough itself.  They started spinning yarns about safety, and how much new drilling would be required to replace the old wells, and how only a subsidy would allow them to do this, and how we'd all freeze in winter if they closed it down.  They didn't convince anyone, so five years ago they shut it down, saying they would pump out the rather large amount of "cushion gas" - the minimum inventory a gas storage facility requires to operate at all - and that would be the end of it.  Amazingly enough, once again, it turned out that UK plc managed quite nicely without Rough, thank you very much.  The wonders of the free market, which was comfortably delivering all the necessary seasonal flexibility without any subsidy whatever.

More recently, Centrica somewhat unexpectedly started hinting that all might not be over at Rough.  First, they suggested it might be converted for CO2 storage ... then (as hydrogen started to become all the rage) for hydrogen storage - all somehow needing a big subsidy (because, of course, it's all totally uneconomic).  And there was everyone believing they'd pulled the plug forever / it was rickety and unsafe / etc etc.

Now ... it turns out they think they can press it back into service as a regular natural gas storage facility - by October!  FFS!  They've just obtained two of the permits they need to be able to do so - and, needless to say, are in intense negotiations with the ever-gullible Civil Service for what public money is going to be sent their way for coming to the rescue this winter, when Putin's punishment reaches its wintry worst.  Inventing a whole new rationale - a strategic reserve of gas (equivalent to a whole couple of days' worth to start with, maybe rising to 10 days' worth with a big refurb job.  10 days, just think ...)  Well, fair to say, times are different now. 

We can only hope someone in Whitehall is playing back to Centrica its bullshit statements of many years, and giving them a very hard time.  Somehow, though, I doubt it.


Saturday 13 August 2022

Russia and leaking methane: the anecdote

By popular request ... (BTL here)

One of the few noteworthy outcomes from Cop26 in Glasgow was an international agreement to reduce methane leakage, CH4 being a far worse GHG than CO2, albeit much less persistent in the atmosphere.  Until then the gas had never received the attention it deserved, though if we get to the point where trapped methane from the Siberian permafrost starts escaping big-time, it certainly will.

There are many places in the western world - OK, in some states of the USA, to be precise - where regulatory standards for methane leakage and/or their enforcement, are essentially non-existent.  But the technology for tightening up on this is very straightforward, so it should be low-hanging fruit.  It's important for every reason under the sun, but not least that methane leakage from the natural gas system as a whole gives shale fracking a bad name:  if you've ever paid close attention to the notorious anti-fracking film GasLand, the genuine problems it highlights are not really to do with fracking per se, but rather the leaky infrastructure downstream of the drilling.   

Needless to say, (a) the COP26 agreement is being resisted by the oil & gas lobby in America; (b) Russia, China, India et al didn't sign up to it anyway; and (c) by far the greatest culprit is of course Gazprom and the entire Russian gas system, which is as leaky as all Hell (and there's a lot of leaking methane in Hell), on a scale hard to comprehend.  The World Bank has for 30 years been promoting schemes for doing something about it in Russia, whose own technology is not up to the job.

So to the story.  When I was in Moscow some years ago, one of the Russians I was on after-work-beer terms with told me this.  He was a mathematician working in the gas sector, and one day he was assigned to a small team that had been set the following challenge.  There were no gas meters to speak of in the entire Russian gas system, from one end to the other (domestic heat control was famously achieved by opening the windows in winter), but in order to satisfy certain World Bank requirements they needed to quantify gas leakage across the network.  They had some basic pressure readings etc at various points on the system, but they would need to develop some kind of modelling technique to derive an estimate of the methane lost.

Diligently, they worked on the task, and after some months came up with a complex formula for making the required estimate, in classic Russian fashion.  This they presented to the relevant Board member of Gazprom, who received their conclusions with interest.  He thanked them for their hard work, but told them that they'd overlooked something, namely the "environmental factor".  What is that? they queried.  Well, he said, you take the formula you've come up with, and multiply the whole thing by 0.1.  Why? they asked.

He leaned forward, and quietly but pointedly said: Because we couldn't be losing that much gas - could we, hmm?


Wednesday 10 August 2022

Lefties and personal material wealth, haha!

Dunno how many of you know who Aaron Bastani is, so we'll start with a brief and hopefully fair pen-picture.  Bastani is highly articulate, apparently well-read, and sharp.  He's in the category I tend to describe as "honest lefties": with notable blind-spots and a distorted worldview (usually a variant of sub-marxism), they'll nevertheless generally bow to truth and logic when confronted inescapably.  (The code for this is that they've noticed something is "problematic" - i.e. sits very awkwardly with their worldview, making them deeply uncomfortable, exactly because they feel the force of the logic and the truth.)

Plus, Bastani is a tough cookie, a serious and driven entrepreneur who Gets Things Done: notably, his impressive Novara Media creation, now a burgeoning mini-empire of alternative media.  At the start of this project, his purposeful and businesslike conduct could have been labelled "social entrepreneurship", but it must now fast be reaching the point where he can start to cash in, if he wants to.  (His commitment to leftism is clearly intellectual rather than temperamental, and he has many very traditional conservative traits: enthusiasm for family & becoming a house owner; married in church; etc etc.)

And now, hahah! he gets to interview "The World's Biggest Political Streamer", Turkish-American Hasan Piker, "arguably the most influential political voice on livestreaming service Twitch".  Mr Piker, we very quickly realise, makes a shedload of money from his own ultra-successful leftie media activity.

Bastani is just wide-eyed & drooling with pleasure at talking to this guy.   54 minutes in, he gets to ask his new friend about ... his big, new, nice-part-of-LA *ahem* mansion and his costly new electric Porsche.   Now to be fair to Bastani, he does kinda try to get his man to justify such expenditures; but boy, he let's him off the hook easily.  They quickly agree that the Red Line is, never to become a landlord ...  oh, and not to have three Porches - "that would be ridiculous!".  Right, right.  Everyone should have nice things that are within their means "... as long as your morals are not compromised."  Ah yes, of course.

It's just so funny.  Because it looks for all the world like Bastani is casting for arguments as to how he's gonna justify his own Porche in a year or two's time.  Go for it, Aaron!  You know that a part of you is capitalist, really.


Tuesday 9 August 2022

Edging closer to winter 2022-23 in Europe

Neither Tory leadership candidate really wants to acknowledge what's coming down the line for Xmas.  They'd much prefer to trade upbeat, positive-sounding stuff.  Boris sure as Hell doesn't want it to be discussed: anything that goes tits-up will be the exclusive responsibility of Whomever Follows, because, hey, there was no delinquency on his watch.   The same reticence can be seen across Europe.  We mulled this over four weeks ago; but as I return from a short hol, evidently the prospects for winter still remain too scary for anyone to acknowledge in full detail.  I suppose we must credit Gordon Brown (not a man who ever got much credit from C@W, and who has much to atone for) for at least having a try.  Even he only talks about domestic energy bills, as if the energy itself is not at issue.  And what of the food?

At the time of writing, only Italy and Slovakia are receiving any Russian gas to speak of: supplies to Germany are down to a trickle.  The gas systems of Europe are so stressed and constipated as they try to replace this with 'reverse-flow' sources - LNG terminals to the west of Europe, pushing gas eastwards - that various technical limitations have been reached and there's even spare capacity at UK LNG terminals right now: the amount we can onward-export via cross-channel pipelines is maxxed out.  The UK, and even more so, Spain (which is similarly well-provided with LNG terminals, but really can't export much to France at all) are islands of 'low' (relatively low) wholesale gas prices.  Demand destruction looms across industrial Europe.  And it's a really hot summer!

(Speaking of which, hot weather sends electricity prices up, too ...)

Presumably, Putin is showing his hand, gas-wise, as early as this in order to give European politicians a low-impact (relatively low) demo of what's to come.   If, despite the inclinations of France / Italy / Hungary / many German businessmen towards an "accommodation", Europe actually has to wear this in winter 2022-23, the dynamics of world trade will be monumentally distorted.  To say nothing of the politics.  Ukraine may be planning a spectacular counter-offensive for the weeks to come, and China continues its firework display: but otherwise, all eyes are on Germany.  What will Scholz do?


Thursday 4 August 2022

Cultural Stereotyping: Shock, Horror!

So, hot-foot from the metropolitan political hurlyburly, the sophisticated Drew family block vote of two is in Devon, in a fabulous waterfront fish'n'chips establishment.  Well, the food and drink is fabulous - but on the telly in the corner (sadly) is the BBC's Commonwealth Games coverage, blaring out "It-a-Brom-Ting, It-a-Brom-Ting".

Says the proprietor:  I'll tell you what's a Brum thing.  The Brummies all order a jug of gravy to go with their fish!  Yes!  They all do! 

Cultural stereotyping?  Oh, they have absolutely no inhibitions down here!


Monday 1 August 2022

Truss & Sunak: from the front line

Writing as a paid-up member of the elite selectorate, I can report on what we found from each of the candidates over the weekend.  Mrs Drew and I don't lightly wield our block-vote of 2, so we went in as open-minded as possible.  

Sunak was first, on Friday morning.  He was slick, cheerful; the meeting was a simple church hall affair, and very open.   If I say it all went without a hitch, you'll wonder why (so just read on).  Sunak has his set lines, but answered questions plainly and with nuanced answers; he didn't (always) just give questioners what they were asking for.  The invited audience was card-carrying South London Tories, and the demographic attending was what you find these days, on average, in South London - not remotely the "70-year old white" Tory profile of legend.  The pic below indicates clearly enough the straightforwardness of it.  We were promised refreshments and there were some.  We were promised a signed bottle of champagne to auction, and there was one.  No entry fee.

(That's himself in the throng, below, talking to the blue-turbaned Sikh.  Yes, he really is that small.)

Then Truss.  All very cloak-and-dagger: a "secret" special guest (turned out to be Tugendtwat as warm-up act); apply by eventbrite and you'd only be told the secret venue a few hours beforehand.  Which was ... an aircraft maintenance hangar at Biggin Hill Airport.  There were no chairs (- why would there be, in an aircraft maintenance hangar, ho ho! -) until someone told the airport staff there'd be a walkout if they couldn't rustle up a few.  Airport security telling people not to take photos inside the hangar (this was relaxed for photos of herself).  Stewards coming round pressing envelopes on attendees for "contributions" and entry to a raffle for a bottle of gin; and there wasn't one.  We were promised water, juice and "Hon Nobs" (sic!), and there was water.  Perhaps Tugendtwat was the Hon. Nob.

Truss was awful.  Wild, unqualified promises.  "I will reform the ECHR" (has she told them this?) etc etc.  The invited audience was South London Tories again ... and the demographic attending was almost entirely white.

And she's the favourite?  Blimey, this is dire.