A dead cat bounce?

The latest rally in the equity markets has been quite frustrating for me, but I am positive of going short further. Firstly, I was expecting Citi to be nationalized this time around after its stock price fell below $1. Then, Mr. Pandit announced that the bank is profitable followed by similar announcements by Bank of America. The market has rallied thereafter for 9 consecutive sessions. Inspite of the Fed's braveheart efforts to buy governments bonds, this is a bear market rally and there is more pain to be seen. I closed some of my short positions, but I am definitely holding on to others to see new lows. Nouriel Roubini has an interesting article on the "dead cat bounce":

Reflections on the latest dead cat bounce or bear market sucker’s rally

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Nouriel Roubini | Mar 14, 2009

It is déjà vu all over again. We have already seen this Groundhog Day movie at least six times over and over again in the last year or so: the market starts to rally – this time around about 8% in a week - and the chorus of optimists starts to say that this is the bottom of the economic and financial crisis and that we are at the beginning of a sustained stock market rally that signals the true end of this bear market.

Even before the latest bear market rally started last week I wrote the following on March 2^nd:

Of course you cannot rule out another bear market sucker’s rally in 2009, most likely in Q2 or Q3: the drivers of this rally will be the improvement in second derivatives of economic growth and activity in US and China that the policy stimulus will provide on a temporary basis: but after the effects of tax cut will fizzle out in late summer and after the shovel-ready infrastructure projects are done the policy stimulus will slack by Q4 as most infrastructure projects take year to be started let alone finished; similarly in China the fiscal stimulus will provide a fake boost to non-tradeable productive activities while the traded sector and manufacturing continues to contract. But given the severity of macro, household, financial firms and corporate imbalances in the US and around the world this Q2 or Q3 sucker’s market rally will fizzle out later in the year like the previous 5 ones in the last 12 months.

And, as we pointed out here on March 9^th:

I have also argued that another bear market rally may occur some time in Q2 or Q3 of this year and may end up like the previous six. Indeed in the last 12-18 every time something dramatic happens (that leads to a lower stock market low) and the government reacts to it with a more aggressive policy action optimists come out and say that this is the dramatic and cathartic event that suggests that a bottom has been reached: they said that after Bear Stearns, after the collapse and rescue of Fannie and Freddie, after Lehman, after AIG, after the TARP was announced, after the G7 communique’, after the $800 fiscal stimulus package was announced last November (the onset of the latest sucker’s rally).

And after a while markets are again “shocked shocked” (to paraphrase the French police inspector in Casablanca) to discover that the macro news are much worse than expected in the US and abroad, that earnings news are much worse than expected not just for financials, realtors, home builders and consumer discretionary firms but also for most other non-financial firms, and that financial markets/firms shocks/news are worse than expected.

And indeed, as predicted, in the last week another bear market rally has started in earnest; the latest rally is just a dead cat bounce. Let us explain next in much detail why this is another bear market rally…

Back in business

It's been a while since I have entered a single letter in this space. Many reasons, shouldn't really delve into it. But, I'm back. The focus initially will be primarily on the Indian, US and to a certain extent the Chinese markets. 

The last few months, I have been busy cherry picking some great investment ideas and it has done quite well for me inspite of the volatility in global markets. Volatility, indeed, can work you wonders, but you need to have qualities of a shrewd investor - patience, diligence and more patience. 

Here's a simple article illustrating the fact: 

In a recent report called "How to Stop Worrying and Learn to Love Volatility" (PDF file), Lord Abbett senior economist Milton Ezrati showed how market volatility "can actually help build wealth over time, especially for longer-term investors."

Till later guys. Adios

‘08 could be the tipping point for voluntary carbon markets

‘08 could be the tipping point for voluntary carbon markets 15 Jan, 2008, 1534 hrs IST,Mehul Verma, INDIATIMES NEWS NETWORK

NEW DELHI: Global warming has been successful in creating a growing consciousness to trade carbon emission. World over experts have been analyzing the carbon markets and various studies are being held out to tap the benefits of carbon. However, there remains a huge untapped potential in the voluntary carbon markets waiting to be explored. Year 2008 could very well be the tipping point for the voluntary carbon markets. The concept of voluntary carbon markets (VCM) consists of companies, governments, organizations, organizers of international events and even individuals taking the responsibility of their carbon emissions by voluntarily purchasing the carbon offsets. In fact, the voluntary carbon markets function in a much simpler way as compared to Clean Development Mechanism (CDM), created by Kyoto Protocol. Under the voluntary carbon markets, the carbon offsets may be purchased by retailers or organizations of relatively small size. On the other hand, the CDM market is known for its voluminous trading. Being less complicated in terms of paper work and volume, the voluntary carbon markets offer an ideal platform for mid-size trading business operations. à The second advantage of a voluntary carbon markets over Clean Development Mechanism (CDM), lies in the equality of treatment. Clean Development Mechanism (CDM) favors developed nations over developing nations in terms of fixing emissions norms. Voluntary carbon markets are easier to operate and stand fair chances of growth in developing economies. According to Dr Anne-Marie, expert on climate change with Lloyd's Register Quality Assurance (LRQA), “The voluntary carbon market refers to any sale or purchase of emission credits or emission reductions that occur outside a regulated market. A regulated market is one set up by governments such as Clean Development Mechanism (CDM) and European Union Greenhouse Gas Emission Trading Scheme (EU ETS).” Voluntary carbon markets have historically served as sources of experimentation and innovation in the carbon markets. These markets most likely to reach poorer and smaller communities in developing countries faster. This is, in partly, because they are free from red-tapism & bureaucracy and offer a lower transaction cost compared to regulated carbon markets. No Forwards Trade In such markets, there are no widely accepted standards, processes for certification and verification, or requirements to list credits on established registries. Even then, the unorganized players of the carbon market stand a better chance to get the ticket to trade as the entry level requirements in this market are simpler. Reports suggest _ as a part of the consolidation in the market that began to take shape in 2006, various groups- non-profits and industry associations aim at creating rigorous standards and processes as a way of ensuring confidence and quality in the market. Those carbon markets that may have earned carbon credits before registration stand a fair chance of being transformed into the unorganized carbon market. These credits are normally verified by third-party accredited bodies against the voluntary carbon standard 2007. However, “Regulated markets like CDM and EU ETS are set up by governments or the United Nations and include registry trading, which allows only regulated credits, so the registries associated with regulated markets would not allow trading of voluntary credits. “Voluntary markets need registries to track trades to eliminate double trading and also to allow forward trades. Voluntary markets must develop their own registries both because their voluntary carbon units can not be traded on the regulated market registry platform and for credibility and transparency,” according to Dr. Anne-Marie. “So far the voluntary carbon market has been characterized by being restricted to trading only occurring between buyers of emission units and sellers who are the projects or organizations whose activities have generated an emission reduction (there are no options, forward trades, etc., as occurs in other energy markets). The main reason for this is a lack of a formal register to track trades,” she adds. Given the Bali road map, both the regulated market (EU ETS, CDM and JI) as well as the voluntary market will grow between now and 2012. However, the voluntary market growth expectation according to studies by LRQA stresses upon the growing desire of organizations to demonstrate their CSR/sustainable credentials by going carbon neutral, which requires a combination of in-house reductions -- and final offsetting of those emissions that can not be reduced. For such organizations the voluntary markets offer an opportunity to manage their offset in a credible manner. Organizations’ emissions in this case are not subject to a regulated constraint such as EU ETS; Finally, the developing markets in USA where there are no regulated markets and where the voluntary market is the way to manage carbon portfolios. The voluntary market is not going to grow to the size of the regulated market, but it will become an important part of the market mechanisms that reduce emissions in the coming days.

ET Art Index

This is the art index created by Osian and Economic Times. Highly questionable but a good repository of some leading contemporary Indian artists. I am sure ET will come out with new indices for the art market - art large cap, art small cap, Deccan art index ;)


Close on the heels of the success of the equity indices, which ET had launched in recent years, ET now unveils its next generation index called the ET Art Index powered by Osian’s – Connoisseurs of Art, the world’s premier Archive on the Indian contemporary fine and popular arts. This index was developed keeping in mind the growing interest in Indian contemporary art across the globe and the need to track its performance vis-à-vis other asset classes like equities, gold and real estate.
The ET Art Index could become an ideal benchmark not only for the fund managers and insurance companies, but also for investors including High Net worth Individuals (HNIs). With increased interest in Indian art and new art funds slated to be launched in the country, the need for a quantitative evaluation of the movement of art prices is now imperative.In order to develop this index, ET and Osian’s have used the transactions of artworks belonging to India’s leading 51 contemporary artists. The transaction value of these 51 artists comprise 88% of the total organized Indian art market in the year 2005 while it was over 91% in the year 1997. Some of the prominent artists included in the art index are Jamini Roy, A.R. Chughtai, M.F. Husain, F.N..Souza, Tyeb Mehta, V.S. Gaitonde, Akbar Padamsee, Ganesh Pyne, J. Swaminathan, J. Sultan Ali, Bhupen Khakhar and the three Tagores - Abanindranath, Rabindranath and Gaganendranath.

ET Art Index is calculated on the basis of the average Square Inch Rate (S.I.R) of works of art of these top artists. Since works of artists are in different media and dimensions, the S.I.R is the appropriate basic unit so as to measure and compare the values of art fairly.

This is calculated by dividing the sale value by the area/volume of the artwork.
The Liquidity and Historical Significance weights have been considered so as to arrive at the final index values. The historical weight for each artist have been given on the basis of a range of criteria such as originality, critical acclaim, exhibition and publication history, collector profile, sales record. However the liquidity weights are given purely based on the total traded value of each artist for the calendar year.

The year 1997 has been taken as the base year for the purpose of calculating the base values. This year was a turning point in the history of the Indian Contemporary Art, according to experts, in which, among other issues, the first professional auction was held by an Indian organisation, HEART. The base value has been converted into 100 to obtain the index figures.

On a Compounded Annualized Growth (CAGR) basis, ET Art Index gave a return of 47.8% since it’s inception in Jan 01, 1998. From a level of 100 on Dec 31, 1997 the index value stood at 2513.1 on March 22, 2006. During the same period, BSE Sensex gave a return of 14% on a CAGR basis. The significant movement of the ET Art Index started in the year 2003, which was also the beginning of the boom period for the Indian equity market.

Artists in ET Art Index

Ali, J. Sultan

Ara, K.H.

Baij, Ramkinkar

Barwe, Prabhakar

Bawa, Manjit

Bendre, N.S.

Bhattacharjee, Bikash

Biswas, Nikhil

Bose, Nandalal

Broota, Rameshwar

Buksh, Ustad Allah

Burman, Sakti

Chandra, Avinash

Chittaprosad

Chowdhury, Jogen

Chughtai, Abdur Rehman

De, Biren

Dhurandhar, M.V.

Dodiya, Atul

Gaitonde, V.S.

Goud, Laxma

Gujral, Satish

Hebbar, K.K.

Husain, Maqbool Fida

Keyt, George

Khakhar, Bhupen

Khanna, Krishen

Mazumdar, Chittrovan

Mazumdar, Hemendrana

Mehta, Tyeb

Menon, Anjolie Ela

Mookherjea, Sailoz

Padamsee, Akbar

Patwardhan, Sudhir

Pyne, Ganesh

Ramachandran, A.

Ram Kumar

Raza, S.H.

Rodwittiya, Rekha

Roy, Jamini

Sabavala, Jehangir

Sen, Paritosh

Shreshtha, Laxman

Singh, Arpita

Souza, Francis Newton

Subramanyan, K.G.

Swaminathan, Jagdish

Tagore, Abanindranath

Tagore, Gaganendranath

Tagore, Rabindranath

Varma, Raja Ravi

TECHNOLOGY & SUNLIGHT: SOLVING INDIA'S ENERGY, WATER, AND ENVIRONMENTAL CHALLENGES TO CREATE A GREEN, PROSPEROUS FUTURE

Quite a dated article, but definitely indicative of the macro numbers and the need for alternative energy in India.

by Ed Ring
March 17, 2007

India at night from outer space - already glowing with energy and light

To ensure India will have adequate energy and water supplies in the future...

The first step is to predict where India's population will level off. Assume India's population is going to peak at around 1.3 billion people. This may be somewhat underestimating reality, but everything that follows can be proportionately increased based on higher population projections.

Next, determine how many units of energy (expressed in millions of BTUs per year), and how many cubic meters of water per year, on average, are required to sustain the lifestyle for a citizen of a fully industrialized nation. Currently, on average, each Indian citizen consumes 25 million BTUs of energy per year and consumes not quite 500 cubic meters of water. In the European Union, which provides a useful comparison, the average energy consumption is well over 150 million BTUs per citizen per year, and just over 500 cubic meters of water.

It is safe to assume India will employ more energy efficient "leapfrog" technologies as she industrializes, meaning that it will not be necessary to achieve increases in per capita energy consumption all the way to the levels of the Europeans. This is also a safe assumption because much of Europe's energy consumption is required for heating during their much colder winters.

...assume that India's per capita energy production will need to get to at least 50% of that currently enjoyed by Europeans. Taking into account projected population increases, this means India's total national energy production per year will need to quadruple from 25 quadrillion BTUs per year to 100 quadrillion BTUs per year.

India's water production per person would not have to increase, but overall supply will still need to keep pace with population growth, meaning India will eventually need to divert 667 cubic kilometers of water per year, up from 500 cubic kilometers per year today. Bear in mind that abundant energy leads to abundant water, since a cubic meter of seawater can be desalinated for a mere two kilowatt-hours (ref. "Photovoltaic Desalinization").

DELIVERING ABUNDANT FRESH WATER
TO EVERY CORNER OF INDIA

With India's future water challenges, the problem isn't so much one of supply, it's more a problem of uneven distribution. The north and east of India enjoy abundant supplies of water, but the south and west of India are relatively arid. It is important to note that if the proposed aquaducts, reservoirs and pumping stations were built, India's major river interlinking projects, through a system of reservoirs and aquaducts, (ref. India's Water Future) could then move water in cubic kilometer volumes relatively cost effectively. Once the costs of the interlinking system are borne, the biggest ongoing cost is the energy required for the pumps. But to pump a cubic kilometer of water up a 250 meter lift, which is what it would take to get water from the Ganges basin to the Deccan Plateau, would only require 100 megawatt-years of power. To pump 50 cubic kilometers of water per year from the Ganges basin upwards 250 meters into aquaducts flowing south and west, which is more than the most ambitious of India's current interlinking projects, would only require about 5 gigawatt-years of electricity. This amount of electricity represents only about one-half of one percent of India's current total yearly energy production (all sources).

HOW MUCH ELECTRICITY WOULD BE REQUIRED TO PUMP WATER FROM THE GANGES TO THE KRISHNA BASIN?

As the table indicates, it would take 3.8 gigawatts of electricity (representing about 2.7% of India's estimated 2005 electrical generating capacity of about 140 gigawatts), running constantly, to pump water 250 meters uphill at a volume of 38 cubic kilometers per year. Put another way, a 250 meter lift will require about 100 megawatt-years for each cubic kilometer pumped.

Water supply in India, regardless of whether or not there are a few interlinking projects on a national scale, will be managed, overwhelmingly, using decentralized solutions. Both innovation and traditional methods can combine and evolve, proliferating via an information enlightenment nurtured by internet communications, to produce thousands of water management projects: cisterns in buildings, contour berms to collect and percolate runoff, refilling underground aquifers with runoff, and smaller but numerous new reservoirs (ref. "Harvesting Water"). It is important to emphasize that as India generates more energy, more uses for water will be required. India is challenged not only to redistribute water on a national scale, but also to use water much more efficiently.

...plant biofuel crops in the desert...

Strip mining the lands for biofuel is driving a new round of global deforestation - especially in the tropics - of catastrophic proportions.

When forests are regrown, more tigers and other wildlife may survive. Equally important however is the role forests play in increasing water supplies.

One often overlooked but decisive contribution to water supply and storage is through reforestation. India has lost about 90% of her forest cover. Watersheds need to be reforested everywhere, and when they are, the springs will flow again, and the water tables will rise. Forests moderate heat, they increase cloud formation and rainfall, they protect topsoil, and they nourish aquafirs. Do you want more fresh water? Then reforest India. (ref. "Profitable Reforesting," and "Reforesting Brings Rain").

Not only on the land, but just offshore, reforesting needs to be a priority for India. The best way to protect India's coast from tidal surges is to replant the mangrove forests (ref. "Mangroves Stop Tsunami"). Mangrove deforestation has occurred on a massive scale worldwide, and can be reversed simply by planting more mangroves.

Most projections of India's future energy supplies are almost completely reliant on increasing conventional energy production, and they are also far too low. An interesting side note is that India's most ambitious plans for nuclear power don't amount to more than about 3% of India's projected energy production (ref. "India's Nuclear Power"). India cannot plan to simply double energy production, they must quadruple it. To do this, conventional sources (including nuclear power) are not sufficient. A breakthrough is required, and that breakthrough is almost here.

SOLAR ELECTRICITY IS THE
MOST PROMISING RENEWABLE

There is only one source of renewable energy that can quickly get built and installed and can produce 50 quadrillion BTUs or more per year, and that is solar energy, photovoltaic energy in particular (ref. "Power the World With Photovoltaics," "Photovoltaic Powered Cars," and "The Photovoltaic Revolution). India needs a photovoltaic array on every rooftop. Today photovoltaic cells, in the whole world, produce at most 10 gigawatt-years of electric power per year, which at 3,416 BTUs per kilowatt-hour, equates to only .3 quadrillion BTUs. Given worldwide energy production is over 400 quadrillion BTUs, photovoltaic power today is a drop in the bucket. But that is about to change.

CHINA, INDIA, USA, EUROPE - KEY VARIABLES 2005

India's terribly inefficient energy intensity (BTU's per unit of GNP) is reason for hope - through more energy efficiency, quantum increases in energy output may not be necessary for India to achieve first world per capita economic status

Photovoltaic manufacturing relies on supplies of polysilicon, which have never been reliable. But there are new designs that require far less silicon, or no silicon at all. These next generation photovoltaic cells are called "thin skin," a catch-all term describing several technologies which all use a far thinner coating of photo-electric material. There are companies claiming to have this technology all over the world, including India. (ref. "Thin Film Photovoltaics," "Crystaline Photovoltaics," and "The Photovoltaic Boom). It is vital that photovoltaic technology be the top priority of India's alternative energy research and development community, as well as for investment in manufacturing. There is no other plausible way to produce, within a decade, a quantity of energy sufficient to lift the Indian economy to sustainable prosperity. Even if the thin film breakthroughs don't occur, India should invest in polysilicon manufacturing for the production of conventional crystaline photovoltaics. Even at current costs, conventional photovoltaics make long-term economic sense, and the greatest cost to their manufacture is energy, which can be produced by photovoltaics themselves. Conventional photovoltaics now have an energy payback of 20+ to one.

India can have a green and prosperous future

Other than photovoltaics, solar electricity via solar-thermal arrays is surprisingly cost-competitive and space-efficient (ref. "Solar Thermal Power," and "Saharan Solar Power") The space-efficiency of solar energy collection units (electric and thermal) enables decentralized energy development. Alternative technologies in general support the design of each home or building being adapted to collect and store solar, wind, or even geothermal energy. In a modern green structure, thermal energy from any source can be stored on-site and converted back into electricity, as well as used for space heating and water heating. Thermal energy can even by used as an energy source for refrigeration. Clearly the design of buildings to acquire and store energy is another area where technology, tradition, and innovation can significantly address India's future energy challenges.

Just as the potential for nuclear power to address India's energy needs may be overstated - as well as the risks therein, the potential for biofuel is overstated as well, and the risks of biofuel are decidedly understated (ref. "IPCC Report & Deforestation," and "Biofueled Global Warming"). Biofuel can provide an important supplemental fuel, but even at 2,500 barrels of oil per square kilometer per year - which would be an excellent yield - there is not enough land in India to begin to rely on biofuel to replace conventional fuels, let alone provide the fuel necessary to quadruple India's energy output. As it is, biofuel crops are beginning to crowd out food crops, pushing up the price of food. Biofuel crops also can provide the reason for further deforestation. Biofuel crops make sense as a supplemental fuel, not as a comprehensive energy solution. Biofuel crops make sense in arid regions where any crop is a welcome bulwark against desertification, and biofuel will eventually be extracted from virtually all municipal waste, but under no circumstances should a forest be cut down just to grow biofuel.

India's green and prosperous future will require education, infrastructure, innovation, pluralism, and enlightened, adaptable environmentalism.

Addressing India's energy and water needs requires servicing five interrelated industrial sectors; agriculture, manufacturing, transportation, buildings and shelter, and waste management (ref. "The Electric Car Revolution," "Clean the Ganges," "Organic Farming in India," and "India's Energy Future""). In all these areas, green technology and high technology, working together, can provide answers. Often solutions will embrace traditional practices as much as adopt scientific breakthroughs, and working synergistically within all these dimensions is necessary to quicken progress. It should be a source of inspiration that India can complete the process of industrialization today, meaning she can leapfrog obsolete legacy technologies that often hamper innovation in the west.

To produce so much more energy, to collect and distribute so much water, India's challenges are daunting but achievable. The key is to balance large scale projects that are often costly and difficult to manage ecologically, with smaller projects that can be adopted at the scale of individual homes or communities. And at both scales, the solutions will be easier if there is a faith and reliance on India's world-class intellectual and scientific community to provide assistance through high technology.

About the Author: Ed "Redwood" Ring is the Editor of EcoWorld, reporting on clean technology and the status of species and ecosystems. This story was originally published in the January-March 2007 issue of "TerraGreen" Magazine, published by the Energy and Resources Institute in New Delhi, India (www.teriin.org). In his spare time, Mr. Ring grows and gives away trees, especially his beloved Redwoods.

Making Mumbai an International Financial Centre??? - Long way to go

The Trader Monthly magazine has come up with a ranking of the top cities for traders and financial houses to live in. 50 locales were ranked based on a mix of work and lifestyle factors, exploring everything from the breadth of local financial-services infrastructure to time-zone considerations. Mumbai incidentally is 46th on the list and these were the specific comments:

"#46 Mumbai Lots of lows in the burgeoning financial powerhouse: the dearth of entertainment options and the utter lack of non-super-humid days, to name two. "

Incidentally, Dubai's made a major foray into the trading world.

"For the true-blue speculator, Dubai’s unique mix of boomtown adrenaline, gushers of money and seemingly boundless opportunity make it like no other place traders might want to be. "

Below is the top 10 ranking:
1) Chicago
2) London
3) New York
4) Dubai
5) Miami
6) Boston
7) Dublin
8) Los Angeles
9) Toronto
10) Sao Paulo

3G may turn it around for telecom

Rajesh S Kurup / Mumbai May 3, 2007
The outlook for the telecom sector is robust for the current financial year due to the huge capital expenditure plans announced by service providers, increase in telecom penetration and infrastructure sharing becoming more prevalent.

If the government keeps its promise of releasing more spectrum, we will witness the onset of third generation mobile telephony, which enables high-speed data transfer. If it becomes popular, the average revenue per user, which has been declining for most operators, may well go up significantly.

The largest private telecom company, Bharti Airtel, has announced a capital expenditure of $3.5 billion (about Rs 15,000 crore) this financial year, while the second largest, Reliance Communications, has announced Rs 10,000 crore. AV Birla group's Idea Cellular has announced a capital expenditure of about Rs 12,000 crore for the next two years.

Other players too have large plans. These include Hutchison Essar (Rs 7,200 crore), state-owned Bharat Sanchar Nigam Ltd (Rs 4,715 crore), Tata Teleservices (Rs 4,150 crore), Aircel (Rs 3,680 crore), MTNL (Rs 1,970 crore) and Spice Communications (Rs 1,285 crore).

According to an analyst, the majority of the capital would be used for the expansion of services in the country, resulting in faster rollout of services, especially in the rural and semi-urban areas, connecting the length and breadth of the country in the next 24 months. However, the results would emerge within the next two quarters, or latest by the end of this year.

Indian telecom companies are also looking at increasing the pace of erection of passive infrastructure or towers. Reliance is committed to setting up another 8,000 towers, in addition to its existing 12,000 BTSs, and Bharti Airtel has announced an addition of 30,000 BTSs to its existing 40,000 towers. GTL Infrastructure is looking at adding 400 towers a month to its existing 1,200 cell sites.

The emergence of tower sharing, after a recent Telecom Authority of India (Trai ) notification that a BTS can be shared among three players, would result in faster rollout of services. Analysts expect the Indian telecom sector to witness one of its fastest growths during this financial year, especially during the last two quarters of the year.

The industry is also expecting a fall in handset prices that would help in driving telecom penetration. The present telecom penetration stands at an abysmal 14.3 per cent, compared with other developing nations across the world. For example, the telecom penetration in Pakistan stands at around 27 per cent, more than double of India.

The prices of entry-level handsets have fallen to around Rs 1,000 from Rs 4,000 three years ago. Analysts and industry sources expect a further reduction in prices to around Rs 800-900 that would drive telephony growth in the country.

Macquarie Research has raised its wireless subscriber forecast to 425 million subscribers by March 2010, up from our earlier forecast of 400 million. This is based on higher wireless penetration expectations for each of the 23 wireless circles in India.

According to an analyst firm, this would drive revenues and EBITDA margins for the companies in the telecom space.

Another important factor is the country's strong economy that is expected to grow at around 9-10 per cent during the year. The rising income levels of Indian households would provide a "huge impetus" for the wireless sector growth in the country.

Industry expects a monthly net addition of around 7.5-7.7 million per month for the next two years, compared with the existing 6.6 million per month.

Moreover, the entry of Vodafone would also bring in more value-added services and features to the country, that would make other Indian companies launch newer customer-friendly services. If spectrum is released this quarter, as is expected by the industry, it would result in the rollout of 3G services in the country. For the sector, the current year and the next could well turn out to be the best years.

ONGC gets 38% premium reduction on risk cover

One of the big changes with the liberalization of the industry.

ONGC gets 38% premium reduction on risk cover
Falaknaaz Syed / Mumbai May 09, 2007

The Oil and Natural Gas Corporation (ONGC) has secured a 38 per cent reduction in premium on its insurance policy for 2007-08, in spite of consecutive losses in the last two years. The policy is due for renewal on May 11.

ONGC’s insurance policy is the country’s largest insurance policy. Insurance policies, where the sum insured is Rs 2,500 crore and above, are called large risk policies and are largely reinsurance driven i.e. the reinsurers decide the terms and conditions of the policy.

RS Sharma, CMD of ONGC, said, “We have received a confirmation from United India today that the risk has been placed overseas. We have paid the premium and the insurance policy will be issued to us before May 11.” When asked about the premium, he said, “This year the reduction in premium is 38 per cent.”

Speaking about the risk sharing, MK Garg, CMD of United India Insurance company, said, “The mandatory 15 per cent of the risk is reinsured with GIC. United India is the lead insurer and the remaining three insurers, New India Assurance, Oriental and National Insurance are sharing around 8 per cent. The remaining 77 per cent will be reinsured overseas.”

ONGC’s current assets in India exceed $20 billion. For the purpose of this insurance cover, the declared value is around $15 billion. This is an increase of 25 per cent over last year’s declared assets. Last year, the declared assets were approximately $13 billion and the premium was $47 million. United India was the insurer, with Ace and AIG being the reinsurers.

The premium amount changes every year, depending on the asset value and the reinsurance market capacity and costs. The premium is quoted at $29 million this year, though the company reported losses of

Rs 1,800 crore or $400 million in 2005. It also lost a vessel called Sagar Bhushan in 2006, where the claim amount could vary between $30 million and $70 million.

Companies must cosy up to new accounting standards

Asish K Bhattacharyya / New Delhi March 23, 2007


In accounting, an asset is said to be impaired if its recoverable value falls below the value at which it is carried in the balance sheet. How can this happen?

Initially, an enterprise acquires an asset only if it finds it economically viable to do so, that is, if the net present value (NPV) from acquiring the asset is zero or positive. Hence, on the acquisition date, the recoverable value of the asset would generally be higher than its acquisition cost.

However, subsequent events, such as increase in competition in the market or reduction in demand for the product or service, might adversely affect the service potential of the asset, causing its recoverable amount to fall below the carrying amount. This results in impairment of the asset and requires changes in the carrying amount to reflect the new reduced value of the asset.

Accounting standards require enterprises to test assets for impairment, whenever events that lead to a fall in their recoverable value occur. If the carrying amount of an asset is higher than its recoverable amount — defined as higher of its ‘value in use’ and ‘net selling price’ — the enterprise recognises an impairment loss and writes down the carrying amount to the recoverable amount.

Goodwill and intangible assets that are not put to use (for example, patent or licence not put to use), are tested for impairment at least annually. On reversal of events that caused recognition of impairment loss, subject to certain conditions, the enterprise writes back the impairment loss. For impairment loss on account of goodwill, these conditions are so stringent that impairment on account of goodwill is written back only rarely.

The ‘value in use’ component in the definition of recoverable amount requires us to attribute cash flows generated by a firm to specific assets. This is difficult to do if assets are defined too narrowly.

For example, a particular piece of equipment in a factory does not produce cash flows independently from other facilities in the factory; it is the factory as a whole which generates cash flows. To deal with this, the recoverable amount is computed for a group of assets, and impairment loss, if any, is then allocated to individual assets that constitute the group.

A group of assets tested collectively for impairment is known as a ‘cash generating unit’ (CGU). A CGU is the smallest identifiable group of assets generating cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets. Identification of CGUs involves judgement and there is the possibility of a difference of opinion arising between auditors and management. Deviations are possible on both sides.

The management may be tempted to group assets at a higher level than appropriate, in order to cover impairment loss of some assets by the healthy performance of other assets in the group. On the other hand, auditors, who are averse to risks and avoid situations that might attract criticism or litigations for negligence, may insist on grouping assets at a level lower than appropriate.

Once the CGUs have been correctly identified, ‘value in use’ of an asset (or a group of assets) is calculated as the present value of estimated future cash flows expected to arise from the continuing use of the asset in its present condition and from its disposal at the end of its useful life. The present value is determined by discounting pre-tax cash flows by an appropriate pre-tax discounting rate.

The other source of recoverable amount, ‘net selling price’, is the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable and willing parties, less the costs of disposal.

The best evidence of an asset’s net selling price is a price in a binding sale agreement, in an arm’s-length transaction, reduced by costs of the disposal. If there is no binding sale agreement, the net selling price is the asset’s market price (current bid price) in an active market, reduced by costs of disposal.

In case current bid prices are unavailable, the net selling price is estimated with reference to the price of the most recent transaction. There might be situations where neither a binding sale agreement nor an active market for an asset is available.

In such a situation, the net selling price should be based on the best information available regarding the amount that the entity could obtain, at the balance sheet date, for the disposal of the asset. Outcome of recent transactions for similar assets within the same industry should be used as the basis for estimating the amount.

Some experts take a restrictive view of the concept of net selling price stipulated in the accounting standards by not accepting the appraisal method — which is an otherwise well-accepted method to determine the value of land, buildings and other assets — as an appropriate method to determine the net selling price. It is inappropriate to take such a restrictive view of net selling price. Let us consider a hypothetical case. Suppose, a company has three divisions, one of which is making losses.

The company has decided to continue running the loss-making division due to strategic reasons. Therefore, there is no binding contract for sale. Further, let’s assume that there is no active market for the purchase and sale of the same or similar businesses. There is no merger or acquisition in the industry.

The book value of the assets of the division (which is a CGU) is Rs 26 crore. Their value in use is Rs 12 crore. These assets include a large freehold plot of land, which is carried in the balance sheet at Rs 3 lakh (the historical cost), and buildings.

While the division itself has been running at a loss, its land and buildings have appreciated beyond their book value, with the appraisal method providing an estimated net sale value of Rs 41 crore. There is no way to take into account this significant economic fact if we reject the appraisal method, and the company will have to provide a misleading impairment loss of Rs. 14 crores.

On the other hand if we accept the net selling price determined through the appraisal method, no impairment loss is to be recognised. Here rejection of the net selling price determined through the appraisal method is inappropriate, more so since another accounting standard permits upward revaluation of fixed assets based on value determined through the appraisal method. In this situation, the management might want to use the appraisal method to estimate the net selling price, while auditors might argue against it based of a restrictive interpretation of the standards.

In most situations, it is the auditor’s view which ultimately prevails since managements and audit committees of the board of directors have traditionally been averse to adverse comments in audit reports. This mindset of managements and the audit committees should change. Implementation of new accounting standards and revised accounting standards involve judgment. Moreover, accounting practices for new accounting standards, such as accounting for impairment, are yet to evolve.

Therefore, managements should assert their position on interpretation of new accounting standards, provided they are confident that their interpretation of the accounting rule is based on sound accounting principles and the spirit of the accounting standards. This also increases the responsibility of audit committees. Instead of passively going with auditor’s view, they should provide an independent review of the accounting policy of the company.

The writer is professor of finance and control at IIm-C

Real estate prices in Mumbai

R Ravimohan / New Delhi March 16, 2007



Over the medium term of a few years, real estate prices in Mumbai should become competitive against other cities.

Real estate prices in Mumbai, and most cities around the country, have skyrocketed in the past one year. Since Mumbai still remains the price-setter for the rest of the country, let us understand the dynamics of real estate prices in this city. The market is rife with razor-sharp speculations on the expected direction of property prices, with almost an equal probability of prices staying at current levels, or going up even further, or coming down. Is there any methodical conclusion we can reach on the future direction of realty prices?

Several factors have combined to push prices up in Mumbai. For the past four years—backed by soft real estate prices, easy availability of finance, lower interest rates, liberalising construction rules, and better houses being constructed—there was a sustained buying trend that kept growing steadily. The wealth effect of rising income levels due to better wages, combined with the relentless growth of services (financial services, technology, BPO, retail, etc.), spawned a huge unmet demand for quality office space. Additionally, continued buoyancy in the stock markets diverted a lot of funds to the real estate markets. Private equity and venture funds also started taking strong positions on real estate, which infused large fresh funds into real estate. Then came the conjecture about the large-scale rollout plans by Indian and global retail Goliaths, which gripped the market in a frenzy of speculation. During all this time, the retail homeowner’s demand continued unabated, given the easy availability of home loans, and perhaps even spurred by the fear that if they did not buy they might miss the bus. The high prices are also a result of the failure of developers to bring new areas under development fast enough to counter this price hike.

The factors that can moderate prices are obviously the opposite of what have been identified as the drivers above. Most importantly, prices are completely out of whack with global trends, and have now reached a level where services are no longer competitive and have begun seeking alternative locations. Further, the high prices have attracted a new frenzy of construction, which on completion over the next few months will exert pressure on prices. The Bandra-Worli sea link, which is going full steam ahead, is expected to open up more areas on the Western corridor to access downtown Mumbai faster, thereby increasing supply. But the real benefit of this project is the encouraging prospects for the Trans-Harbour link, which will vastly increase the supply from the mainland to the hitherto land-locked paradigm of Mumbai. The provisions in the latest Budget proposals to withdraw Section 801b from March 2007, service tax of 12.5 per cent on lease rentals, and rising costs will dampen demand for residential property.

The floor space index (FSI) too impacts real estates prices. The higher the FSI, the larger the floor space that can be constructed per square foot of ground area, and therefore the lower the real estate prices. Currently the average FSI for Mumbai is less than 2. To put this in perspective, Hong Kong is now running well above 14! Admittedly Mumbai's infrastructure, as it stands now, does not give much scope for increase in the FSI. But large integrated developments, which have become the trend, are now able to achieve a considerably higher FSI. This gives rise to the hope that the pressure on the land area and, effectively, prices will ease progressively as the FSI gets liberated in tandem with improvements in road infrastructure.

Ultimately market forces will prevail. Sensible businesses will look for alternative locations. Any major ITeS or IT company now operates with big delivery centre operations somewhere else in the world other than in India. While India is still the fountainhead of talent, companies are not going to find homes and offices at viable prices in India at these levels. Unless prices moderate, the trend to set up delivery and off-shore centres in faraway locations such as South America and East Europe will gather momentum. Retail demand will sag if prices do not ease. Overseas markets such as Singapore and Dubai have become favoured destinations for Indian investors in real estate, because those are more attractively priced and the quality of those properties and the environment are also far superior. Interest rates on mortgages will move up significantly, choking off the smaller home buyers. Government policies on FDI on real estate are likely to be delayed, and probably be incremental, given the political sensitivities. Given the high prices, it will really be a brave foreign heart who will now bet billions on Indian realty! These are fundamental reasons why I believe prices will moderate.

However, I do expect continued buoyancy in the economic growth of both India and Mumbai. Thus, the salary push and attraction of foreigners to invest in India will continue. Indeed, buying continues till now unabated. Funds are still being generated in sumptuous measures in the overseas market, targeting real estate investments in India. Surely this inflow will keep the prices up, at least in the short term. I also believe that the developers and land ownership have a strong influence on the market, which is yet to get the full effect of the buyer’s power. We are far from the perfect market; so leaving the prices of real estate entirely to the market is not going to moderate the prices quickly. However, over the medium term of a few years, I expect real estate prices in Mumbai to become competitive against other cities, which are vying for businesses to shift to their cities. The prices in these cities are at considerable lower level than in Mumbai today. This slow moderation could be accelerated if the government decides to step in and step up city development plans, which is good, or if the money supply growth is sharply yanked, giving rise to deflationary expectations, which might be ill-advised, as it can potentially choke off the larger economy itself. The scope for any further sharp increase in real estate prices appears limited, with no further good news left for the market to rise up on.

The author is managing director and CEO, Crisil, a Standard and Poor’s company

Travel Guides for business

Business travel has witnessed a huge growth. With extensive expansion of multinationals in emerging markets, people are not just restricted to North America and Western Europe and are exploring new markets previously unknown to them. I have a habit of buying country travel guides whenever I visit a new country be it on leisure or business. But, what I have noticed is that there are no guides which exclusively cater to business travellers. I would definitely invest in any company which make such products. Moreso, the famous guides like Lonely Planet, Frommers, Frodders, GKT, all have their own shortcomings.

These are some of the topics that can be covered in the business travel guides:
1) History*
2) Places to stay and eat*
3) Detailed section on economy
4) Directory and description of prominent companies
5) Section on how to do business in the country
6) Section on politics

The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance by Ron Chernow

I have been wanting to write a review on this book since a while. In this fascinating book, Chernow portrays the great influence that the Morgan banks had on the American economy and further since the late 18th century. It is a great book for individuals working in emerging markets and for others as well. It vividly describes how George Peabody started the banking house being a banker for the American states in London. Today, most emerging markets are in the same state (if not better) as America was earlier. Indeed, at that moment, the credit profiles of most of the American states didn't look good. This book describes how the British bankers harassed the states and how over time the financial centre changed from London to New York.

Chernow divides the 700 page book into several sections. The first section called the Baronial era in banking, is the most fascinating of the lot. After George Peabody establishes the bank, he died fairly young and brought in Junius Morgan from the US to be his successor. Junius Morgan scaled new heights, and then his son JP Morgan Sr. (Pierpont) took over. Pierpont is the name associated with the Morgan banks. He had a very powerful character which has been very colourfully described in the book (along with his comical physical traits). This was the infamous age of "Robber barons" where the banks, railroads, big steel and oil industry were very closely associated, if not owned by the same.

The second era is the "Diplomatic era", where Pierpont was succeeded by his son JP Morgan Jr (Jack). Jack was not as influential as his father and he was overshadowed by other bankers such as Dwight Morrow. This era is where the bank plays a very large international role rescuing the Bank of England and also helping finance the Nazis, Mussoline and Japanese nationalists. The other important event was the depression and how the bank was resilient inspite of it. This section was less vibrant compared to the first one and had very few fascinating characters.

The third era covered was called the "Casino era" and this was the birth of modern finance. With the Glass Steagle Act, the bank split into Morgan Guruantee and Morgan Stanley. This section describes a lot of the takeover battles that Morgan Stanley and Guarantee get involved in.

The book intertwines the history of the bank with the political and societal aspects very well. It also describes how the banking world was filled with groupism since the early days - the bank filled only white male protestants and both Jack and Pierpont hated jews. In fact, each bank had their own religious and social affiliations.

An excellent book! Must read.

Guru

Just watched the box office hit movie "Guru" by Mani Ratnam. The movie was very articulately made and depicted the life of the late Dhirubhai Ambani. The story of the lead character, Gurukant Desai (played by Abhished Bacchan) follows that of the business scion in every step. Scenes of his initial years in Yemen (shown as Turkey in the movie), where he sold cans of petrol and then returning back to his village to start his own venture trading in polyester. Overall, the movie was very entertaining and motivating to see the rags to riches story of the greatest Indian tycoon.

Inspite of being a book buff, I never happened to pick up a biography of Dhirubai (probably because they are not well written!). Here are a list of the books on Dhirubai and Reliance:

Dhirubhai Ambani: The man behind reliance by K Bhushan (Unknown Binding - Jan 1, 2002)

Dhirajlal Hirachand Ambani (Great personalities: life sketch series) (Paperback - Dec 1, 2005)

The Polyester Prince: The Rise of Dhirubhai Ambani by Hamish McDonald (Paperback - Sep 1999)

Guess many more are in line...

Let’s pass on the alphabet soup

By Gillian Tett

Published: December 28 2006 22:01 | Last updated: December 28 2006 22:01

When bright sparks at ABN Amro, the Dutch bank, recently invented an innovative debt product, it triggered a wave of Star Wars jokes. For the eggheads christened their brainchild – which has taken credit markets by storm this winter – a CPDO.

It stands for constant proportion debt obligation but, with a name like that, some bankers quip, it might be a new friend for R2D2 and C3PO, the robots from the films.

Welcome to the world of complex finance, a sector now so rich in abbreviations it leaves even seasoned financiers, as well as investors, scratching their heads.

A couple of decades ago, when new financial products hit the markets, banks gave them names. A host of new words crept into the investment bible over the years, such as “options”, “swaps” or “puts”.

These days, it seems, bankers cannot be bothered to name their creations. Instead, the trend is to wrap financial products in sets of initials almost as unwieldy as the products themselves. Thus the credit markets are full of CDOs (collateralised debt obligations), ABSs (asset backed securities), CDSs (credit default swaps), LCDSs (loan CDSs) and even the ABCDS (a CDS of an ABS).

Then there are CLOs (collateralised loan obligations), ECOs (equity collateralised obligations) and the recently arrived CDO2 and CDO3 (CDOs of CDOs of CDOs).

A longer-standing abbreviation is the CMBS (commercial mortgage backed securities) or its cousin the RMBS (residential mortgage backed securities), not to mention Reits (for real estate investment trusts).

This month Bank of America produced the Aldo (adjustable liabilities debt obligation), which is designed to compete with the CPDO. Bankers, however, sometimes call these “reverse CPPIs” (standing for constant proportion portfolio insurances) just to be more confusing still.

Some investors blame the “alphabet soup” on the fact that many bankers in complex finance have been trained in science and mathematics. Others suspect that bankers are just making life complicated to exude an aura of mystery – and justify fat fees.

Another factor driving the trend is broader acceleration
of the global financial innovation cycle. Low interest rates have left investors scrambling to find new ways to earn returns – and banks are responding by inventing products at such a furious pace, they barely have time to think up names.

“There is greater investor demand for products using derivatives – that drives the alphabet soup,” says Bob Pickel, head of the International Swaps and Derivatives Association (best known as the ISDA).

The soup is expected to thicken in 2007. Satyajit Das, a former derivatives trader who is now a consultant, says he is tempted to produce a spoof product called an unspecified fund obligation – or UFO.

Oil & Gas 101 - ABC of Industry

In this article, I will examine one of the most relevant industries of our era - petroleum. We will review the basics - constituents of petroleum, geology and then explore how oil drilling works and the later stages of completion and production. The content on the processes and geology have been extracted from several books and websites.

I have come across a lot of professionals working on specific segments of the industry - economists, investment bankers, consultants. These professionals provide some valuable advice to the industry participants, but many fail to understand the basics of the industry - like, what are the traps in the sedimentary basins where petroleum is found or the different types of technologies used in the drilling. Ofcourse, you can create your fancy financial models even without knowing the nitty gritty details, but it is always useful to have this knowledge and to speak in the language of a person in the industry.

Further articles will also explore the deal making process in the industry - how the land rights are allocated and the different types of deal structures among the industry partners.

Oil ExplorationOil is a fossil fuel that can be found in many countries around the world. In this section, we will discuss how oil is formed and how geologists find it.

Forming Oil
Oil is formed from the remains of tiny plants and animals (plankton) that died in ancient seas between 10 million and 600 million years ago. After the organisms died, they sank into the sand and mud at the bottom of the sea.



Over the years, the organisms decayed in the sedimentary layers. In these layers, there was little or no oxygen present. So microorganisms broke the remains into carbon-rich compounds that formed organic layers. The organic material mixed with the sediments, forming fine-grained shale, or source rock. As new sedimentary layers were deposited, they exerted intense pressure and heat on the source rock. The heat and pressure distilled the organic material into crude oil and natural gas. The oil flowed from the source rock and accumulated in thicker, more porous limestone or sandstone, called reservoir rock. Movements in the Earth trapped the oil and natural gas in the reservoir rocks between layers of impermeable rock, or cap rock, such as granite or marble.

These movements of the Earth include:

Folding - Horizontal movements press inward and move the rock layers upward into a fold or anticline.
Faulting - The layers of rock crack, and one side shifts upward or downward.
Pinching out - A layer of impermeable rock is squeezed upward into the reservoir rock.

Finding Oil
The task of finding oil is assigned to geologists, whether employed directly by an oil company or under contract from a private firm. Their task is to find the right conditions for an oil trap -- the right source rock, reservoir rock and entrapment. Many years ago, geologists interpreted surface features, surface rock and soil types, and perhaps some small core samples obtained by shallow drilling. Modern oil geologists also examine surface rocks and terrain, with the additional help of satellite images. However, they also use a variety of other methods to find oil. They can use sensitive gravity meters to measure tiny changes in the Earth's gravitational field that could indicate flowing oil, as well as sensitive magnetometers to measure tiny changes in the Earth's magnetic field caused by flowing oil. They can detect the smell of hydrocarbons using sensitive electronic noses called sniffers. Finally, and most commonly, they use seismology, creating shock waves that pass through hidden rock layers and interpreting the waves that are reflected back to the surface.



In seismic surveys, a shock wave is created by the following:

Compressed-air gun - shoots pulses of air into the water (for exploration over water)
Thumper truck - slams heavy plates into the ground (for exploration over land)
Explosives - drilled into the ground (for exploration over land) or thrown overboard (for exploration over water), and detonated
The shock waves travel beneath the surface of the Earth and are reflected back by the various rock layers. The reflections travel at different speeds depending upon the type or density of rock layers through which they must pass. The reflections of the shock waves are detected by sensitive microphones or vibration detectors -- hydrophones over water, seismometers over land. The readings are interpreted by seismologists for signs of oil and gas traps.
Although modern oil-exploration methods are better than previous ones, they still may have only a 10-percent success rate for finding new oil fields. Once a prospective oil strike is found, the location is marked by GPS coordinates on land or by marker buoys on water.

Preparing to Drill
Once the site has been selected, it must be surveyed to determine its boundaries, and environmental impact studies may be done. Lease agreements, titles and right-of way accesses for the land must be obtained and evaluated legally. For off-shore sites, legal jurisdiction must be determined.
Once the legal issues have been settled, the crew goes about preparing the land:

The land is cleared and leveled, and access roads may be built.
Because water is used in drilling, there must be a source of water nearby. If there is no natural source, they drill a water well.
They dig a reserve pit, which is used to dispose of rock cuttings and drilling mud during the drilling process, and line it with plastic to protect the environment. If the site is an ecologically sensitive area, such as a marsh or wilderness, then the cuttings and mud must be disposed offsite -- trucked away instead of placed in a pit.
Once the land has been prepared, several holes must be dug to make way for the rig and the main hole. A rectangular pit, called a cellar, is dug around the location of the actual drilling hole. The cellar provides a work space around the hole, for the workers and drilling accessories. The crew then begins drilling the main hole, often with a small drill truck rather than the main rig. The first part of the hole is larger and shallower than the main portion, and is lined with a large-diameter conductor pipe. Additional holes are dug off to the side to temporarily store equipment -- when these holes are finished, the rig equipment can be brought in and set up.

Setting Up the Rig
Depending upon the remoteness of the drill site and its access, equipment may be transported to the site by truck, helicopter or barge. Some rigs are built on ships or barges for work on inland water where there is no foundation to support a rig (as in marshes or lakes). Once the equipment is at the site, the rig is set up. Here are the major systems of a land oil rig:



Power system
large diesel engines - burn diesel-fuel oil to provide the main source of power
electrical generators - powered by the diesel engines to provide electrical power

Mechanical system - driven by electric motors
hoisting system - used for lifting heavy loads; consists of a mechanical winch (drawworks) with a large steel cable spool, a block-and-tackle pulley and a receiving storage reel for the cable
turntable - part of the drilling apparatus

Rotating equipment - used for rotary drilling
swivel - large handle that holds the weight of the drill string; allows the string to rotate and makes a pressure-tight seal on the hole
kelly - four- or six-sided pipe that transfers rotary motion to the turntable and drill string
turntable or rotary table - drives the rotating motion using power from electric motors
drill string - consists of drill pipe (connected sections of about 30 ft / 10 m) and drill collars (larger diameter, heavier pipe that fits around the drill pipe and places weight on the drill bit)
drill bit(s) - end of the drill that actually cuts up the rock; comes in many shapes and materials (tungsten carbide steel, diamond) that are specialized for various drilling tasks and rock formations

Casing - large-diameter concrete pipe that lines the drill hole, prevents the hole from collapsing, and allows drilling mud to circulate

Circulation system - pumps drilling mud (mixture of water, clay, weighting material and chemicals, used to lift rock cuttings from the drill bit to the surface) under pressure through the kelly, rotary table, drill pipes and drill collars
pump - sucks mud from the mud pits and pumps it to the drilling apparatus
pipes and hoses - connects pump to drilling apparatus
mud-return line - returns mud from hole
shale shaker - shaker/sieve that separates rock cuttings from the mud
shale slide - conveys cuttings to the reserve pit
reserve pit - collects rock cuttings separated from the mud
mud pits - where drilling mud is mixed and recycled
mud-mixing hopper - where new mud is mixed and then sent to the mud pits

Derrick - support structure that holds the drilling apparatus; tall enough to allow new sections of drill pipe to be added to the drilling apparatus as drilling progresses

Blowout preventer - high-pressure valves (located under the land rig or on the sea floor) that seal the high-pressure drill lines and relieve pressure when necessary to prevent a blowout (uncontrolled gush of gas or oil to the surface, often associated with fire)


Drilling
The crew sets up the rig and starts the drilling operations. First, from the starter hole, they drill a surface hole down to a pre-set depth, which is somewhere above where they think the oil trap is located. There are five basic steps to drilling the surface hole:
Place the drill bit, collar and drill pipe in the hole.
Attach the kelly and turntable and begin drilling.
As drilling progresses, circulate mud through the pipe and out of the bit to float the rock cuttings out of the hole.
Add new sections (joints) of drill pipes as the hole gets deeper.
Remove (trip out) the drill pipe, collar and bit when the pre-set depth (anywhere from a few hundred to a couple-thousand feet) is reached.
Once they reach the pre-set depth, they must run and cement the casing -- place casing-pipe sections into the hole to prevent it from collapsing in on itself. The casing pipe has spacers around the outside to keep it centered in the hole.
The casing crew puts the casing pipe in the hole. The cement crew pumps cement down the casing pipe using a bottom plug, a cement slurry, a top plug and drill mud. The pressure from the drill mud causes the cement slurry to move through the casing and fill the space between the outside of the casing and the hole. Finally, the cement is allowed to harden and then tested for such properties as hardness, alignment and a proper seal.

New Drilling Technologies
The U.S. Department of Energy and the oil industry are working on new ways to drill oil, including horizontal drilling techniques, to reach oil under ecologically-sensitive areas, and using lasers to drill oil wells.

Drilling continues in stages: They drill, then run and cement new casings, then drill again. When the rock cuttings from the mud reveal the oil sand from the reservoir rock, they may have reached the final depth. At this point, they remove the drilling apparatus from the hole and perform several tests to confirm this finding:

Well logging - lowering electrical and gas sensors into the hole to take measurements of the rock formations there
Drill-stem testing - lowering a device into the hole to measure the pressures, which will reveal whether reservoir rock has been reached
Core samples - taking samples of rock to look for characteristics of reservoir rock
Blowouts and Fires
In the movies, you see oil gushing (a blowout), and perhaps even a fire, when drillers reach the final depth. These are actually dangerous conditions, and are (hopefully) prevented by the blowout preventer and the pressure of the drilling mud. In most wells, the oil flow must be started by acidizing or fracturing the well.

Once they have reached the final depth, the crew completes the well to allow oil to flow into the casing in a controlled manner. First, they lower a perforating gun into the well to the production depth. The gun has explosive charges to create holes in the casing through which oil can flow. After the casing has been perforated, they run a small-diameter pipe (tubing) into the hole as a conduit for oil and gas to flow up the well. A device called a packer is run down the outside of the tubing. When the packer is set at the production level, it is expanded to form a seal around the outside of the tubing. Finally, they connect a multi-valved structure called a Christmas tree to the top of the tubing and cement it to the top of the casing. The Christmas tree allows them to control the flow of oil from the well.
Once the well is completed, they must start the flow of oil into the well. For limestone reservoir rock, acid is pumped down the well and out the perforations. The acid dissolves channels in the limestone that lead oil into the well. For sandstone reservoir rock, a specially blended fluid containing proppants (sand, walnut shells, aluminum pellets) is pumped down the well and out the perforations. The pressure from this fluid makes small fractures in the sandstone that allow oil to flow into the well, while the proppants hold these fractures open. Once the oil is flowing, the oil rig is removed from the site and production equipment is set up to extract the oil from the well.

Extracting the Oil
After the rig is removed, a pump is placed on the well head.



In the pump system, an electric motor drives a gear box that moves a lever. The lever pushes and pulls a polishing rod up and down. The polishing rod is attached to a sucker rod, which is attached to a pump. This system forces the pump up and down, creating a suction that draws oil up through the well.

In some cases, the oil may be too heavy to flow. A second hole is then drilled into the reservoir and steam is injected under pressure. The heat from the steam thins the oil in the reservoir, and the pressure helps push it up the well. This process is called enhanced oil recovery.

With all of this oil-drilling technology in use, and new methods in development, the question remains: Will we have enough oil to meet our needs? Current estimates suggest that we have enough oil for about 63 to 95 years to come, based on current and future finds and present demands.

The new tribes of polyglot finance

Indeed, a very pertinent article! The second last paragraph is what a few of us Indian bankers are trying to change. Ofcourse, this will come along with the growth of our own companies and economy and as we gain a leverage and bargaining power in the world markets.
- Parshu

By Gillian Tett

Published: December 8 2006 19:48 | Last updated: December 8 2006 19:48

When derivatives traders collect their bonuses next month, many of the “hurrahs” will be uttered in French. For though Wall Street is popularly viewed as the cradle of high finance, a curious feature of today’s financial world is that derivatives whiz-kids often hail not from the US, but France.

Some of these are found at French banks, such as BNP Paribas or Calyon; others at non-French groups, such as Barclays or JPMorgan. Either way, this Gallic bent highlights a bigger truth that politically correct banks hate to admit: namely that national patterns still exist in today’s financial jungle.

While places such as the City of London are now admirably polyglot, the distribution of these “immigrants” is uneven. “The City is extremely diverse but there are pockets of [national] concentration, particularly in sales,” says Avinash Persaud, a seasoned City observer.

Take the French. They have become prominent in complex finance, it is whispered, because numeracy is highly respected within French culture. “France has a very good educational system for producing derivatives traders,” notes Shaun Wainstein, London head of equity derivatives at BNP Paribas.

A love of abstract reasoning also helps with research skills: officials at Fitch credit rating agency, for example, have noticed a high proportion of French analysts in their London ranks. Russians are also over-represented in complex finance, perhaps reflecting a cultural emphasis on numeracy. Greeks punch above their weight in derivatives, too. India is another fertile source of whiz-kids. Indeed, some US banks now hire more graduates from the subcontinent than from Harvard.

Germans, however, are notably under-represented in complex finance. For while their education system produces brilliant scientists, these rarely want to leave academia or industry. British culture, by contrast, might have less respect for numeracy – but those eggheads who do emerge often head for the City. It is also relatively rare to see an Irish derivatives trader, though the Irish are plentiful in sales roles, which require charm. Spanish, Italians, British and French also appear whenever interpersonal skills matter, such as in advisory work.

Anglo-Saxons, meanwhile, arguably appear in most categories. But the place where Americans (and, to a lesser extent, the British) are notably over-represented is the upper echelons of investment banks, which remain dominated by white, male faces, in spite of the banks’ “diversity” rhetoric.

Of course, for every stereotype, exceptions abound. Just look at Anshu Jain, the high profile (Indian) head of investment banking at Deutsche Bank. Nevertheless, even with a meritocracy – or perhaps because of it – national patterns are likely to stay, as long as educational differences abound. Vive la différence, as the French derivatives traders might say.


The writer is the FT’s capital markets editor

Copyright The Financial Times Limited 2006