JULY 15, 2010
By SUSAN DAKER And RUSSELL GOLD
BP/European Pressphoto Agency
Left, oil gushing from the BP well early Thursday, and right, the successfully capped well later in the day.
HOUSTON—Oil stopped flowing into the Gulf of Mexico from BP PLC’s blown-out well for the first time in nearly three months. But BP and U.S. officials warned it was far too early to declare victory.
BP said oil has stopped flowing into the Gulf of Mexico from a leaking well as the company closed off valves during a test of a new cap. Joe White discusses.
BP said Thursday afternoon it shut the valves on a new cap on the well as it tested its latest effort to contain the massive spill.
That temporarily stopped the surge of crude oil that has fouled a wide swath of the Gulf from Texas to Florida, upended domestic politics in the U.S. and raised the prospect that the oil industry will face significant new government curbs on its activities on and offshore.
The test could take up to 48 hours to complete. If the results are ideal, the cap could be used to stop the flow from the well while work resumes on efforts to plug it permanently. More likely, a successful test will enable BP to siphon all the oil from the well to ships on the surface in a controlled manner, eliminating leaks until the permanent fix is made.
Although BP has managed to temporarily halt the undersea gusher, company and federal officials insist there is only one permanent solution to the disaster: A relief well that will tap into the shaft of the blown-out well and allow BP to pour heavy drilling fluid and cement into the oil reservoir, 19,000 feet below the water’s surface, to kill the leak for good.
BP has said the relief well could be finished by the end of July. U.S. officials have stuck to an estimate of mid-August.
BP and federal officials sought Thursday to avoid appearing too optimistic, in light of setbacks to earlier efforts to stop the flow. President Barack Obama on Thursday called the progress a positive sign, but cautioned: “We’re still in the testing phase.”
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BP said the undersea cameras trained on the well head could likely show oil flowing again during the testing.
"What I’m trying to do is maintain my emotions remembering this is the start of our test," Kent Wells, a BP senior vice president, said Thursday. "I don’t want to sort of create a false sense of excitement."
Still, BP’s shares jumped on the news. Its American depositary shares closed Thursday up 7.6% at $38.92, the stock’s highest level since June 4. The share price, which hit a 14-year low in late June, has recovered 36% of its slide since the April 20 explosion of the Deepwater Horizon rig triggered the spill.
Mr. Wells said BP engineers would consult every six hours with government scientists and decide whether to continue with the test.
The key to determining whether the cap can contain the oil until the relief well is done will be the results of pressure tests BP is conducting on the well.
If the tests show that pressure under the cap is low, that means oil coming up from the underground reservoir is escaping out of the pipe and seeping into underground rock formations. This could present a problem as the oil fills up tiny holes in the rock and creates new fractures. Ultimately, the oil could find its way up to the seabed and begin leaking into the Gulf.
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European Pressphoto Agency
A shot from a video feed from a BP remotely operated vehicle shows activity around the top of the new cap.
"We would not want that," retired Coast Guard Adm. Thad Allen, head of the federal spill response effort, said Thursday.
Officials say there is very little information about the condition of the well underground. The steel pipes might be in good shape. Or they could have been damaged by the initial blowout in April, or worn down over the past three months.
Richard Haut, a senior research scientist at the Houston Advanced Research Center and a well-technology expert, said dirt and debris shooting up the well alongside oil and natural gas could have worn down the walls of the pipe, allowing oil to escape into the rocks. “That’s the worst-case scenario,” he said. “You don’t want to see oil escaping through the sides.”
If the well has been damaged, closing off the flow of oil and increasing the pressure could potentially worsen the problems. One reason for pessimism is that earlier this summer when officials pumped heavy drilling mud down the well in an ultimately unsuccessful effort to stop the flow, they were able to build up only a relatively low pressure.
Even if the well test succeeds—and pressure readings remain high—Mr. Allen said engineers planned to open the valves back up by Saturday afternoon and let the well flow again, collecting most but not all of the oil. New seismic tests will then be taken to see if there is any evidence of oil leaking out of the well below the surface.
Whatever the final judgment on the well’s soundness, BP said the cap’s installation was an important step for spill responders working to prepare for an expected busy hurricane season. The new cap can allow vessels on the surface collecting oil siphoned from the well to more quickly disconnect from the system and flee a storm. In that event, there would be a free flow of oil from the well. But if the cap can seal the well, spill responders can abandon the site knowing that oil could be contained. For the past several weeks, a more loosely fitting cap and containment vessels have managed to keep up to about 25,000 barrels of oil a day out of the Gulf. Federal officials estimate that between 35,000 and 60,000 barrels a day are gushing from the well.
—Guy Chazan and Donna Kardos Yesalavich contributed to this article.
@4 years ago
#WSJ Business #Wall Street Journal #SUSAN DAKER #RUSSELL GOLD
By MICHAEL M. PHILLIPS
JULY 13, 2010
Michael M. Phillips/The Wall Street Journal
Jim Kreutz, a Nebraska farmer, hedges 70% of his 345,000-bushel corn harvest every year.
GILTNER, Neb.—Farmer Jim Kreutz uses derivatives to soften the blow should the price of feed corn drop before harvest. His brother-in-law, feedlot owner Jon Reeson, turns to them to hedge the price of his steer. The local farmers’ co-op uses derivatives to finance fixed-price diesel for truckers who carry cattle to slaughter. And the packing plant employs derivatives to stabilize costs from natural gas to foreign currencies.
Far from Wall Street, President Barack Obama’s financial regulatory overhaul, which may pass Congress as early as Thursday, will leave tracks across the wide-open landscape of American industry.
Designed to fix problems that helped cause the financial crisis, the bill will touch storefront check cashiers, city governments, small manufacturers, home buyers and credit bureaus, attesting to the sweeping nature of the legislation, the broadest revamp of finance rules since the 1930s.
How Farmers Use Derivatives
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Here in Nebraska farm country, those in the business of bringing beef from hoof to mouth are anxious, specifically about the bill’s provisions that tighten rules governing derivatives. Some worry the coming curbs will make it riskier and pricier to do business. Others hope the changes bring competition that will redound to their benefit.
"Out here we like to cuss the large banking institutions because of the mortgage mess, but we also know that without them some of these markets don’t work," says Mike Hoelscher, energy program manager for AgWest Commodities LLC, a Holdrege, Neb., brokerage that provides derivatives services to the farming industry.
Derivatives are financial instruments whose value “derives” from something else, such as interest rates or heating-oil prices. The first derivatives were crop futures, which appeared in the U.S. at the end of the Civil War and became a standard facet of business for companies across America.
During the financial crisis, they became notorious as American International Group Inc. and others were gutted by bad bets on derivatives linked to bad mortgages.
President Obama and other proponents say the financial overhaul will prevent the kind of reckless lending and borrowing that sank the financial system and left taxpayers with the check. They say non-financial companies are worrying unduly about the derivatives portion of the legislation. The Senate is expected to approve the financial regulatory overhaul on Thursday, sending it to the president.
The full impact won’t be known for years, but in Nebraska nerves are already on edge.
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Executives at Five Points Bank in Hastings think the new rules on mortgage lending will make the home-loan business less profitable. “When they create a new regulator, it really scares us,” says Nate Gengenbach, vice president of commercial and agricultural lending.
Advance America Cash Advance Centers Inc. thinks the new Bureau of Consumer Financial Protection will take aim at the payday-loan business, though it’s not clear what steps the agency will take. Advance America’s storefront at the Skagway Mall in Grand Island charges an effective 460.08% annualized interest rate on a two-week $425 loan.
But it’s the derivatives portion—the part of the bill aimed directly at Wall Street—that might end up touching most lives in rural America.
The new law requires most derivatives transactions be standardized, traded on exchanges, just like corporate stocks, and funneled through clearinghouses to protect against default.
Faced with intense lobbying, Congress partially exempted businesses that use derivatives for commercial purposes. So, farmers and co-ops probably won’t face new collateral requirements, for instance—although there remains a dispute over that section of the bill. Those that trade derivatives on regulated exchanges, such as the Chicago Board of Trade, are less likely to see immediate impacts than those conducting private over-the-counter deals, which will face federal regulation for the first time. The goal is to make such deals transparent.
The question for these farmers is whether such rules will make hedging more expensive. Some say new requirements on big players will create higher costs for small players, including the cash dealers will have to put aside to enter into private derivatives transactions. Some brokers think restrictions on big-money banks and investors will drain the amount of money available to the everyday deals farmers favor.
Michael M. Phillips/The Wall Street Journal
Jon Reeson, a feedlot owner, uses derivatives to hedge the price he pays for feed and the price he gets for steer.
Others predict the opposite effect, pushing money from the private market to the exchanges and creating more competition that will benefit farmers.
Uncertainty reigns in Giltner, a town of 400 residents 80 miles west of Lincoln. At first glimpse, Giltner’s landscape seems featureless, a fading horizon of corn and soybeans. But its details are more subtle, including wildflowers and shaded creeks. Everywhere galvanized-steel sprinkler systems crawl across farm fields like giant stick insects.
Mr. Kreutz, an outgoing 36-year-old with a sandy crewcut and sunburned neck, gave up a career in finance and took over the 2,800-acre family farm after his father’s death. As he works his fields, he checks the crop futures prices on his smart phone.
Here’s how Mr. Kreutz does it: Say in early summer he sees that the price for a Chicago Board of Trade futures contract on corn for delivery later in the year is $3.56 a bushel. If he likes the price, and wants to lock it in, he calls AgWest and sells a futures contract for 5,000 bushels. The futures contract is a derivative in which the price for corn is set now for exchange in the future, though no kernels will change hands. Instead, when the contract nears expiration, Mr. Kreutz and the buyer of his contract will settle—in effect—by check.
By fall, when Mr. Kreutz is ready to deliver his crop to the local co-op, the market price might have fallen by 50 cents. He’ll sell his actual corn for that lower amount. But he’ll make up the difference through his financial hedge. (Mr. Kreutz buys a new futures contract at the lower price to make good on his earlier promise, making up the 50 cents.) In all, he’ll have hit the price target he locked in earlier in the year, minus brokerage fees.
If the price rises during the summer, as it did during the food crisis two years ago, Mr. Kreutz has to pony up extra cash for his broker—a margin call—to maintain his positions. He recoups that by selling his actual corn at a higher price, but has to take a loss to meet the futures contract he signed earlier in the year, missing out on a windfall but ultimately meeting his target price.
Mr. Kreutz does this type of operation dozens of times a year, hedging about 70% of his 345,000-bushel corn harvest.
Such deals ripple through the local economy. When Mr. Kreutz gets a margin call from his broker, he turns to his banker, Mr. Gengenbach, for a loan to cover it. Mr. Gengenbach estimates that one quarter of his farm clients use derivatives.
"Somebody like Jim has a lot of money in his crop out here," says the 37-year-old Mr. Gengenbach. "If he can’t protect that, it’s not good for us."
Mr. Kreutz’s brokerage, AgWest, thinks the new finance law will hurt both firm and farm. If big investors and dealers have to keep more cash on hand, there will be less liquidity in the market and therefore the cost of derivatives will increase, Mr. Hoelscher, the broker said.
A few minutes from the Kreutz family farm are the corrals of Jon Reeson’s feedlot. Mr. Reeson, 43, is married to Mr. Kreutz’s sister Jane. His feedlot holds as many as 1,500 steer, mostly Black Angus, which grow from 600-lb. calves into 1,300 pounders ready for slaughter.
Mr. Reeson uses derivatives to hedge both the price he pays for feed and the price he gets for selling his steer.
The fattening takes about 7,000 pounds of food for each animal. Mr. Reeson can’t count on a favorable price from his brother-in-law’s farm, in which he has a stake, so when he sees a feed price he likes, he seals it with a futures contract.
In April, he called AgWest and locked in a price with a futures contract for $95 per hundredweight of cattle. Since then the market price has dropped to $90. If the price stays there until October, he’ll have made the right call, earning a higher price than if he’d relied on the market alone. If the price spikes higher, though, he’ll miss out on potential gains.
Mr. Reeson is willing to live with that possibility in exchange for locking in a profit or a narrowed loss. Derivatives hedging helped him survive the recession of 2008-2009, when cash-strapped diners avoided steak and the price of beef plunged.
He’s watching the new legislation warily and can’t yet tell if it will hurt or help.
When his cattle have reached full weight, Mr. Reeson puts them on Roger and Barb Wilson’s trucks for the trip to the slaughterhouse. The Wilsons have seven semi tractors and 16 trailers, and one of their biggest costs is diesel fuel to keep the fleet on the road.
In 2004, Cooperative Producers Inc., his local co-op, offered Mr. Wilson a price-protection plan for 10,000 gallons of diesel at about $2.50 a gallon, with 90 days to use it.
CPI had a choice. It could take its chances and hope the price of fuel would drop before Mr. Wilson took delivery on his full order, a windfall for the co-op. If diesel prices jumped, though, the coop would take a bath. “That falls under speculation,” says Gary Brandt, CPI’s vice president of energy. “But that’s not what cooperatives do. That’s what Goldman Sachs does.”
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Michael M. Phillips/The Wall Street Journal
Black Angus cattle at Jon Reeson’s feedlot in Giltner, Neb.
Instead, CPI hedged on the New York Mercantile Exchange, buying a futures contract on heating oil, a close market substitute for diesel fuel. The co-op goes a step further and hedges also the difference between the prices of fuel traded in New York and delivered in Nebraska.
For the 57-year-old Mr. Wilson, the pricing plan proved a mixed blessing. The first year, the pump price shot up by another 20 to 25 cents, meaning he was getting a good deal. The following year the pump price dropped about a quarter a gallon, but Mr. Wilson was obliged to pay the higher price. “It hurt to have to pay for that fuel,” he recalls sourly. He quit the program after that.
The finance law’s imminence has prompted CPI’s Mr. Brandt to warn his sales team and customers that the co-op may have to end its maximum-price fuel contracts. He’s worried too that CPI might have to cut its fuel supplies if it can’t hedge against price drops.
"We have to start making a game plan if they take away the ability for us to hedge that inventory," Mr. Brandt says.
The Wilsons deliver Mr. Reeson’s steer to a low, cement-gray complex on the edge of Grand Island, Neb., where trucks arrive loaded with cattle, and others leave loaded with meat. Over the past year, Mr. Reeson has sold 1,125 steer to the packing plant, which is owned by JBS USA, a Greeley, Colo., unit of Brazilian-owned JBS SA.
JBS buys livestock two ways. Sometimes it pays cash for the following week’s kill. Sometimes it buys further forward, agreeing in July, for instance, to a fixed price for steer delivered in December. JBS hedges on the derivatives market to make sure live cattle prices don’t drop before it takes delivery.
The company also sells beef cuts forward to restaurant chains, promising delivery at set prices months ahead of time. JBS expects to have enough meat to fulfill the agreements. But if it runs short, it doesn’t want to risk having to pay higher prices to buy meat to supply those restaurants.
So, it uses the derivatives market to play it safe. To do so, the company has to find a way to hedge different cuts of beef: Tenderloins might represent 1.5% of the total value of a steer. Strip loins might make up 3%. In a sense, JBS protects itself by reconstructing the steer through a derivatives trade on the Chicago Mercantile Exchange. “We try to put the carcass back together financially,” says company spokesman Chandler Keys.
The company hedges electricity for its refrigerators and natural gas for its boilers. It hedges currencies to stabilize its income from overseas. It hedges fuel for its fleet of thousands of trucks.
Even executives at a big firm such as JBS haven’t been able to nail down the precise impact of the legislation on their business, introducing an unaccustomed level of uncertainty into their operations. They aren’t changing the way they use derivatives, yet, hoping instead that exemptions for commercial users will insulate them.
"To get food, particularly highly perishable food like meat and poultry, through to the consumer, you have to manage your risk," says Mr. Keys.
—Sarah N. Lynch contributed to this article.
@4 years ago
#WSJ Business #Wall Street Journal #MICHAEL M. PHILLIPS
As Global Consumption Soars, Big Buyers Join Growing Effort Toward Eco-Friendly Practices Meant to Sustain Species
JULY 12, 2010
By PAUL ZIOBRO
The world’s rising appetite for seafood is on a collision course with its wild fisheries, leaving restaurant companies and other big buyers caught in the middle.
Amid reports the world’s oceans are in danger of being emptied of some fish, companies such as McDonald’s Corp., Long John Silver’s owner Yum Brands Inc. and Red Lobster parent Darden Restaurants Inc. have embraced the growing movement toward more eco-friendly seafood-buying practices.
Enforcement of federal fisheries conservation laws has helped the haddock, above, recover from declines.
They are working with scientists and nonprofit groups to ensure the fish they buy is sustainable, meaning caught in a way that doesn’t damage the ability of the species to reproduce.
"We know if we go raping and pillaging it today, there’s nothing left for tomorrow," says Ken Conrad, the owner of the chain of 10 Libby Hill seafood restaurants in North Carolina and Virginia and chairman of the National Fisheries Institute, a seafood-industry trade group.
Some experts say their efforts are coming none too soon.
A recent United Nations study predicts that unless something changes, nearly all commercial fisheries will be producing less than 10% of their onetime potential by the middle of this century. Already, almost 30% of the world’s fish stocks fall into that category.
Production by wild fisheries has remained fairly steady over the past decade, totaling about 90 million metric tons per year, says the U.N.’s Food and Agriculture Organization. But annual seafood demand will rise to at least 150 million metric tons by 2030, it adds.
While some fishing-industry groups agree that they need to change the industry’s standards, they think smarter fishing can keep fisheries from becoming depleted.
"We know where weaknesses are and a tremendous amount is being done to address those challenges," says Gavin Gibbons, spokesman for the National Fisheries Institute, a seafood industry trade group. "The idea that vast fisheries broadly are headed to wholesale collapse contains a healthy dose of hyperbole and doesn’t recognize much of the work being done."
Population growth and the public’s growing appetite for seafood are only part of the problem. Mismanagement of fisheries and illegal fishing also have hurt some wild fisheries.
One glaring need for reform came from North Atlantic cod, the only fish McDonald’s used in its Filet-o-Fish sandwich until the late 1980s. Newfoundland cod-fishing grounds became so overfished that the fishery shut down in the early 1990s. Fish suppliers and harvesters “destroyed the whole fishing area,” says Gary Johnson, senior director of McDonald’s global supply chain. McDonald’s now uses five different whitefish species in the sandwich.
McDonald’s, which buys 50,000 metric tons of whitefish a year, now judges fisheries on three factors: how closely they are monitored to ensure that, for example, fishing boats don’t cheat on their quotas; whether enough fish are left to allow the stock to rebound each season; and the toll taken on the environment from the fishing methods being used. McDonald’s says the vast majority of its fish now comes from sources that meet sustainability guidelines, such as those given by the Marine Stewardship Council.
In 2007, McDonald’s stopped using Eastern Baltic cod because it was skeptical that the number of fish being caught was being recorded correctly. This year, after suppliers improved their reporting standards, McDonald’s once again began buying Eastern Baltic cod, underscoring how large buyers can force change in practices.
McDonald’s wouldn’t disclose how much the tighter monitoring and pickier buying has added to its costs.
Not all of the large chains can expect their buying habits to trigger change, though. Red Lobster parent Darden, which buys 100 million pounds of seafood annually, decided shortly after it bought the Capital Grille chain in 2007 to take Chilean sea bass off the chain’s menu because it couldn’t find a supplier that used suitably sustainable fishing methods.
"We swallowed hard about taking it off [the menu], but we’re such a small player that we would not be able to have an influence," says Bill Herzig, senior vice president of purchasing and supply-chain innovation. The company has only been able to persuade a few suppliers, including one Thai shrimp farm, to adopt sustainable practices.
Some species, such as haddock and Atlantic sea scallops have recovered from previous declines, after the U.S. government began enforcing parts of federal fisheries conservation legislation in the 1990s, says Ray Hilborn, a professor of aquatic and fishery sciences at the University of Washington.
As wild fisheries are unlikely to be able to meet the world’s growing seafood demands, aquaculture—or raising seafood in enclosed, controlled environments—is one way to make up the shortfall.
But aquaculture has its own set of challenges. Farm-raised fish need more pesticides and antibiotics in captivity, and some fish, like salmon, have to be fed dye additives to give their flesh the orange hue consumers expect. Meanwhile farm-raised fish can have an indirect effect on their wild cousins because they consume feed that comes from the sea, which depletes the wild supply.
Darden works with the nonprofit Global Aquaculture Alliance on global standards for sustainable aquaculture. Darden also is pioneering new practices, including incorporating more grains into the diets of captive fish to reduce their reliance on seafood-based feed.
Greenpeace says that while restaurants and other large seafood buyers have become more mindful of the environmental impacts of their purchases, some are still looking too narrowly at sustainability.
For instance, large-scale harvesting of the Alaskan pollock, one of the fish McDonald’s uses, affects the food supply of Steller sea lions and fur seals, says John Hocevar, Greenpeace’s ocean-campaigns director. He encourages the large chains to invest in new methods of aquaculture that don’t upset the environment.
McDonald’s says it buys only Alaskan pollock that comes from sources certified by third parties as sustainable.
"The state of global fisheries is such," Mr. Hocevar says, that the big chains "don’t have a sustainable source. They’ve just found a less bad source."
@4 years ago
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