Philippine Daily Inquirer: Drilling of 51 oil, gas wells expected in next 10 years

Drilling of 51 oil, gas wells expected in next 10 years
Posted: 1:47 AM | Jan. 08, 2005
Abigail L. Ho
Inquirer News Service

WITH investor interest in exploration and development of petroleum resources expected to increase, the government expects 51 new oil and gas wells to be drilled in the next 10 years.

According to the Department of Energy's updated Philippine Energy Plan for 2005 to 2014, these drilling projects will need P27.3 billion in investment: P24.9 billion for offshore drillings and P2.4 billion for onshore drillings.

A further P6.9 billion will be needed for gathering of two- and three-dimensional seismic data on identified sites, the plan says.

A recent Supreme Court decision affirming the constitutionality of foreign ownership of mining projects resulted in renewed interest in oil and gas exploration.

The Department of Energy recently awarded exploration contracts that had been in limbo since early 2004, when the Supreme Court -- before its recent reversal of decision -- declared that purely foreign entities could not go into mining in the Philippines.

These contracts were awarded to Japan Petroleum Exploration Co. Ltd. for oil and gas exploration activities in the Tanon Strait in Negros Occidental province and to Hong Kong-listed South Sea Petroleum Holdings Ltd. in the Agusan-Davao Basin in Davao province.

The government expects to award around six more contracts in the coming months.

Energy Secretary Vincent Perez earlier said that Malacañang was likely to approve soon an exploration contract that the energy department was currently negotiating with a consortium led by Australian natural gas firm BHP Billiton Petroleum.

BHP Billiton and consortium members Unocal Corp., Amerada Hess, and Sandakan Oil have applied for contracts to explore two blocks spanning 8,000 kilometers in the deepwater part of the southern Sulu Sea. Negotiations were prolonged because of the Supreme Court decision in early 2004.

Under its proposed work program, BHP Billiton will initially invest $1.65 million in geophysical studies on the two blocks and $32 million for drilling four wells.

The government will be holding a second round of petroleum contracting in August, following the success of the first auction in 2003.

Apart from the new drillings, the oil and gas sector will need P453.1 billion in new investments over the next 10 years, according to the Philippine Energy Plan.

This amount will cover development work and production of oil, gas, and condensate.

The oil and gas sector, including the new drillings and other development activities, will require a total of P487.2 billion from 2005 to 2014, the energy plan says.

With INQ7.net

*****

Prudent Investor Says: Given the government's thrust to develop the oil and energy sector, aside from the mining industry, you may expect market activities to focus on issues related to these. The underlying macro fundamentals merits for the development of the said sectors. The mining and oil industry, in my opinion, will be the market leaders for 2005.

Financial Times : Fed insists that the only way for rates is up

Fed insists that the only way for rates is up
By Philip Coggan
Financial Times

Investors should not be in any doubt. US interest rates are heading steadily upwards this year. The minutes of the latest US Federal Reserve meeting, released this week, made that perfectly clear.

At the start of 2004, some economists still believed the US could get through the year without a tightening in monetary policy. In the event, the Fed started raising rates in June and pushed through five quarter point increases over the course of the year. If the Fed were to tighten by a quarter at every meeting in 2005, short rates would be more than 4 per cent by the end of the year.

This steady pace reflects the unusual levels to which rates fell after the bursting of the dotcom bubble, the terrorist attacks of September 11 2001 and the corporate scandals of 2002. The Fed appeared to face a deflationary threat and thus cut rates to crisis levels of 1 per cent. It was slow to move them back up because of its fear of repeating the mistakes made by the Bank of Japan in the 1990s. Once deflation sets in, it can be very hard to reverse, not least because nominal interest rates cannot be cut below zero.

By the middle of last year, it seemed as if the US economy was strong enough to take the strain. Consensus forecasts suggest that US gross domestic product will have grown by 4.4 per cent in 2004. US monetary policy was starting to look far too loose.

The problem for the markets is that rates started from such a low point. There is thus a long way to go before the normal or "neutral" level is reached. And the Fed is unwilling to risk shocking the markets with a couple of big moves of, say, a percentage point. Investors are thus forced to suffer the Chinese water torture of regular small increases.

At what level will rates stop rising? One rough guess is that nominal rates should be around the same level as the trend growth rate of nominal GDP. For the US, that would be around 3.5 per cent.

Another approach is to say that rates should be modestly positive, after inflation. Here, however, the problem is that there are so many different inflation measures. The official US consumer price index was 3.5 per cent higher in November than a year previously. That leaves real rates looking sharply negative. But core inflation, excluding fuel and food, is only 2 per cent. If the latter measure is acceptable, then rates should be at around a neutral level in the range of 3 per cent to 4 per cent.

In the light of history, rates of 3 per cent to 4 per cent would hardly be alarming. After all, short rates were 6.5 per cent as recently as December 2000.

Nevertheless, the adjustment period could be painful. When the cost of financing is low, the temptation to speculate is high. This has been exacerbated by the decline in the dollar. When rates were 1 per cent, investors borrowing in dollars and investing in assets denominated in another currency found that their cost of financing was zero or even negative. The Fed minutes noted that low rates were encouraging "potentially excessive risk-taking in financial markets".

Such risk-taking may be showing up in the low levels of corporate and emerging market bond spreads, or in the speculative surges seen in some commodity prices last year. It may also have encouraged banks to devote more of their capital on trading, an often lucrative but unreliable source of profits.

So far, the adverse effects of higher interest rates have not shown up in the US economy. The housing market was very strong in 2004. Most US homebuyers have fixed mortgage rates and those are set with reference to Treasury bond yields, which, at the longer end, are around the same levels as a year ago.

The bond market was "the dog that didn't bark" in 2004. Traditionally, when short rates rise substantially, long rates move higher as well. Perhaps investors are still relaxed about inflation and relieved that the Fed is taking action. Or perhaps Treasury bond yields are being kept artificially low by buying from Asian central banks.

Either way, one has to wonder whether the dog can stay silent this year if the Fed keeps raising rates. A rate rise every meeting would leave the Fed funds rate equal to the current 10-year Treasury bond yield by the end of the year.

It is not out of the question for short rates to be equal to, or higher than, long rates. But such inverted yield curves tend to occur after inflationary busts, when central banks have been forced to push short rates temporarily high to squeeze the economy.

No such conditions are being forecast for 2005. The consensus prediction for US GDP growth this year is 3.5 per cent, around the trend rate, and consumer prices are expected to rise by only 2.3 per cent.

Something must surely give. Either the economy will have to slow sharply, justifying current long bond yields, or those bond yields will have to rise. The danger is that they might have to rise quite sharply. Another rule of thumb is that the long-term bond yield should be equal to the trend rate of nominal GDP. If one assumes an inflation rate of 2 per cent, that means 10 year bond yields could rise to 5.5 per cent from the current 4.3 per cent.

US equities, which still look overvalued, may struggle either way. A weaker economy would hit earnings while higher bond yields might prompt switching into fixed income.

Then there is the impact on the dollar. In the past few days, it looks as if the dollar's decline against the euro may have come to at least a temporary halt. The last Fed funds increase took US short rates above those in the eurozone. It seems highly unlikely that the European Central Bank will raise rates soon. So the yield attractions of the dollar should grow over the coming year.

For the time being, it also looks as if investors have switched their attention from the US trade deficit to the superior growth rate of the US economy relative to the eurozone. That may allow the dollar to rally in the short term, although the long-term prospects for the US currency do not look bright.

philip.coggan@ft.com

ABS-CBN News: Fitch on RP banks: Very risky

Fitch on RP banks: Very risky
By DAXIM LUCAS
TODAY Senior Reporter

The local banking industry continues to face significant risks owing to stagnant credit demand and a high level of nonperforming assets, according to the latest assessment of international debt watcher Fitch Ratings.

As a result, Fitch has downgraded the ratings of three local banks including that of the country’s largest lender, Metropolitan Bank and Trust Co.

In a statement, Fitch announced that it cut Metrobank’s long-term foreign currency rating to “BB minus” with a “negative” outlook from its previous rating of “BB” with a “stable” outlook.

Metrobank is the country’s largest financial institution with over P107 billion in assets under management as of last year. Its large portfolio masks, however, an underlying problem with asset quality‚ caused by aggressive lending policies—which became obvious only in the aftermath of the 1997 East Asian financial crisis.

Fitch also downgraded Metrobank’s so-called individual rating to “D/E” from “E” reflecting the credit watcher’s opinion of the bank’s riskiness.

According to Fitch, individual ratings attempt to assess how a bank would be viewed if it were entirely independent and could not rely on external support. “These ratings are designed to assess a bank’s exposure to, appetite for, and management of risk, and thus represent our view on the likelihood that it would run into significant difficulties such that it would require support,” it said on its website.

Fitch maintained, however, Metrobank’s so-called support rating at “3” which represents its view on the ability of the bank’s shareholders to bail out the institution in the event of sudden financial shocks.

Observers note that Metrobank’s multiple downgrade at the hands of an influential debt watcher cements the role of rival Bank of the Philippine Islands as the country’s leading financial institution in terms of asset quality, although not in terms of asset size.

At the same time, Fitch also downgraded the individual rating of the Rizal Commercial Banking Corp. (RCBC) to “D/E” from “D” while putting its long-term foreign currency rating of “BB minus” on a “negative” outlook.

RCBC’s support rating was affirmed at “3.”

Fitch also downgraded the Philippine National Bank’s (PNB) individual rating further to “E”from “D/E” while affirming its support rating at “3.” PNB continues to struggle in its rehabilitation plan after suffering a massive bank run during its troubled privatization in 2000.

Also subjected to lower ratings were Equitable-PCI Bank and midsized lender Security Bank Corp., both of which were put on “negative” outlooks in sympathy with the outlook of the Philippine government.

RATING THE BANKS

Fitch’s “negative” outlook on RP prompts broader downgrade of local corporates.

Metrobank’s risk rating cut to “BB minus” with a “negative” outlook

RCBC risk rating cut to “BB minus” with a “negative” outlook

Equitable-PCI’s risk rating of “BB” reduced to “negative” outlook

PNB’s individual rating downgraded to “E” from “D/E”

Security Bank’s risk rating of “BB” also placed on “negative” outlook

BPI now the undisputed leader among local banks in terms of asset quality

******

Prudent Investor says: With these downgrades, the banking sector is unlikely to attract foreign money, probably except for a few (Banco De Oro, Bank of the Philippines Islands, perhaps) which also means they are unlikely to lead the market for the year 2005.

People's Daily Online:Chinese overseas investment hit 1.8 bln US dollars from Jan. to Nov.

Chinese overseas investment hit 1.8 bln US dollars from Jan. to Nov.

China poured 1.8 billion US dollars as non-financial investment in overseas areas in the first 11 months of last year, according to the latest figures from the Chinese Ministry of Commerce (MOC).

Over that period, Latin America surpassed Hong Kong as the largest investment absorber, attracting 889 million US dollars.

About 1.69 billion US dollars, or 94 percent of the total 1.8 billion US dollars, is direct monetary investment. Some 994 million US, or 55.12 percent, flew to the mining industry, MOC statistics show.

The statistics also indicate that the Chinese overseas processing industry improved significantly in the first three quarters of last year. Ninety-five companies engaged in the overseas processing industry were approved by the MOC during the first 11 months of last year, doubling the number from 2003.

Chinese overseas contracting businesses also boomed during the time. The business volume and value of the newly-signed contracts increased 28.8 percent and 43.5 percent from January to November of 2004, respectively, MOC statistics show.

Source: Xinhua

Prudent Investor Says: The Chinese are coming!

William Rees-Mogg for the TimesOnline: This is the Chinese century

This is the Chinese century
William Rees-Mogg
TimesOnline

America may believe it is still at the heart of events, but the future is being shaped on the margins

THE 18TH and 19th centuries were the British centuries, in which industrial, political and imperial development in Britain shaped the world. The 20th century was the American century; the United States changed the world, providing a margin of victory in two world wars, and developing all the major new technologies: telephones, automobiles, television, jet aircraft, the internet and so on. We all assume, as Washington undoubtedly assumes, that we are still living in the era of American hegemony, though it is already clear that China may be an emerging superpower.

I think that we may be missing an idea familiar to economists, which was developed in the second half of the 19th century. That idea is “marginalism”. It is one of those concepts universally accepted by professionals, but little understood outside. All that the “marginalist revolution” really amounted to was the recognition that economic change is determined by what happens at the margin of transaction. The extra apple sets the price for all apples; if there is one apple short, all apples cost more; one surplus, and they all cost less.

The most popular explanation is Mr Micawber’s: “Annual income £20, annual expenditure £19 19s 6d, result happiness. Annual income £20, annual expenditure £20 0s 6d, result misery.” Mr Micawber was an economist of the marginalist school.

Clearly, the United States is still by far the largest and most powerful economy on earth, with the most powerful defence technology. Yet it is China, not the United States, that is changing the global economy.

As a producer, an exporter and as an importer, the growth of the Chinese economy is changing the marginal levels of global supply and demand. Over the weekend I was reading many forecasts by eminent economists of the world economy in 2005. I was also listening to similar forecasts on television, including CCTV International, the Chinese 24-hour news service. The unanimity was astonishing, as one buzzed from channel to channel, subject to subject, and economist to economist.

What is the prospect for the dollar? That depends on China. The euro? China. The oil price? China. Industrial commodities? China. Global equity markets? China. Bond prices? China. World trade? China. World growth? China. In each case, forecast was not based on the absolute size of the Chinese economy, which is still much smaller than that of the United States. The forecasters, looking at their different markets, were all convinced that marginal changes attributable to China would be the decisive factor. That and low Chinese costs.

Some of the figures I found quite unexpected. In the past two years the growth of Japanese exports to China has accounted for 80 per cent of the growth in the Japanese economy. If one measures world trade, the United States and China together account for half of the growth. That certainly makes the United States and China the engines of growth for the whole world economy; by comparison, Europe is a miserable slowcoach. Yet China’s economy is growing at twice the rate of America’s.

In the past 30 years the whole Asian economy has averaged growth which was 3 per cent higher than the rest of the world. China is outperforming the rest of Asia.

On Saturday all the quotas on textile imports were lifted by the World Trade Organisation. This will be an extraordinary opportunity for Chinese textile and clothing manufacturers. Their current share of the US market is about 17 per cent; that is expected to rise to 50 per cent. China’s share of the European Union market is expected to rise from 18 to 30 per cent. We already buy Chinese toys; we shall soon all be wearing Chinese clothes.

Yet China is not content to remain as a producer of low or middle-technology goods. As the purchase of IBM’s personal computer division shows, China is equally a competitor in areas of advanced technology. China has an educational system designed to produce scientists and technologists for the 21st century. Except at the very highest university level, Chinese scientific education has outpaced that of Britain.

China is not only a highly successful exporter, but has also become a very large-scale importer, both of oil and raw materials and of goods from other Asian countries. In Asia, China is a net importer, not only from Japan, but also from other neighbouring Asian countries. Japan also has the benefit of being a major investor in the development of Chinese industry. The big surplus in China’s trade is with the United States, and the surplus in trade with Europe is expected to grow.

In 2008 the next Olympic Games will be held in Beijing. That will be a celebration of the development of China both as an economic power and as a major power in international affairs. There is, inevitably, a long way to go. Deng Xiao Ping’s free-market reforms were initiated only in 1978.

No less than 60 per cent of the Chinese population still works on the land, at low wages and usually with peasant levels of productivity. Yet that gives an indication of the reserve of manpower that still remains to be brought into the modern economy. The Chinese economy probably still has another 25 years of high growth ahead of it. Before it reaches full maturity, the Chinese economy will be a multiple of its present size.

My own optimism is not only based on the growth of the economy, though that is the outstanding economic growth record of the past two decades. China has also understood the important of domestic and international freedom of trade and the need for the best possible relations with trading partners. With direct material and financial support, China has been one of the large contributors to the relief of the Indian Ocean countries after the tsunami disaster. The economic maturity of the new China has been accompanied by increasing political maturity. That is the best guarantee for the future of what is beginning to look like the Chinese century.

Reuters Technology: Researchers See Gigabit Data Over Power Lines

Researchers See Gigabit Data Over Power Lines
Wed Jan 5, 2005 04:23 PM ET

WASHINGTON (Reuters) - Engineers at Penn State University said on Wednesday they had found a way for power lines to transmit data to homes at rates far faster than high-speed Internet connections from cable and telephone companies.

Broadband service over power lines has been highly touted by equipment makers and federal regulators as a possible competitor to cable and telephone services that handle nearly all of the 30 million U.S. residential broadband connections.

But despite dozens of trials, few electric utilities have attempted to sell the service to customers, citing cost and technical problems. The Penn State researchers said while the technology would improve, lowering the costs of power-line broadband would remain challenging.

Power-line broadband systems available today typically promise data speeds of roughly one megabit to three megabits per second, similar to cable and digital subscriber line, or DSL, service.

The Penn State engineers, Pouyan Amirshahi and Mohsen Kavehrad, estimated in a research paper released Wednesday that their system could deliver data at close to one gigabit per second over medium-voltage electrical lines in ideal conditions, with speeds of hundreds of megabits per second available to home users.

Their system would uses repeaters placed every one kilometer, (0.62 miles) and requires power lines to have been modified to reduce interference with the data signals. The engineers said their estimates were based on computer models, and that the data speeds available in a real-world version would depend on how many repeaters a power company used.

The Penn State study was funded with a grant from AT&T Corp. (T.N: Quote, Profile, Research) , which has taken part in prior trials of power-line broadband.

Prudent Investor Says: A looming threat to current broadband providers?

Forbes.com's Joshua Levine: "If It Works, You Can Break It"

Prudent Investor Says: Instead of continuously yammering and yacking all day long, why don't we consider the Estonian solution...an E-Republic!!!

"If It Works, You Can Break It"
Joshua Levine, 12.20.04
Forbes.com

Since independence in 1991 little Estonia has used a knack for technology and a ravenous appetite for change to make itself a largely wired e-republic.

It proved to be a lucky break for Estonia that the Soviet Union took such pains to dampen any yearnings for freedom in the Baltic States. It meant that Estonian universities were not allowed to offer too many courses in philosophy and the social sciences. Philosophy is a dangerous thing among a patriotic people longing for the brief independence they lost.

What did the Soviets want Estonians to study instead? Computer science, cybernetics, artificial intelligence and information technology. Estonians did much of the software programming and development for the Soviet space program, not to mention the KGB. The Soviets placed one of their most important centers of AI research near the capital city of Tallinn.

Independence came anyway in 1991, of course, but by squelching any budding Tom Paines the Soviets unwittingly helped foster one of the more remarkable post-Soviet success stories. There are only 1.4 million Estonians in a country a little bigger than Holland. Half of it is covered in forest. But beneath the trees Estonia hums. With virtually no outmoded infrastructure to weigh them down, the resourceful Estonians have constructed a kind of e-republic that has already outpaced many of its new, much richer European neighbors.

Internet and mobile phone usage per capita, for instance, is higher in Estonia than it is in France. Over half of all Estonians now pay for their street parking spaces automatically, using their mobile phones. The same system flopped when Estonian Mobile Telephone's technology was marketed in Oslo, which is not exactly backward technologically. And Swedish companies often test ideas first in Estonia, since Estonians are known to have a heartier appetite for change than even the forward-thinking Swedes.

"People like to say, don't touch things that work," says Linnar Viik, who lectures at Tallinn Technical University. "But Estonians like to look behind the thing and wonder whether there's anything we can change about it. In Estonia you might say, if it works, you can break it."

Viik is considered one of the founding fathers of this little e-republic on the Baltic. In the mid-1990s, when Estonia was still determining what it wanted to be when it grew up, Viik figured in Estonia's Tiger Leap program. Tiger Leap was designed to weave computer literacy and IT into the fabric of the new nation, rather than just promoting them as specialized skills for a technological elite. "It was a lucky coincidence for us that we got our independence at a time when the Net was the cheapest, easiest-to-learn data transfer protocol," says Viik. "Developed countries were still depreciating their huge investments in mainframes and couldn't adopt the new technologies as easily as we could."

You can feel Tiger Leap's broad reach as you connect to the Net while filling up at one of Statoil's Wi-Fi-equipped gas stations-just some of the hundreds of Wi-Fi hot spots and wired public Internet access points scattered around the country. According to the latest figures 52% of Estonians use the Net regularly.

The government runs its Thursday-morning cabinet meetings on computer, and it is close to doing away with paper altogether. Sessions that used to take most of a day now take half an hour as ministers politely tap out their comments instead of grandstanding. Next year the official record of government business will no longer be printed on paper, except for a single copy for the archives. It will exist solely on the Web. "If the Internet was reborn as a country, it would be Estonia," United Nations Development Program administrator Mark Malloch Brown has said.

Two years ago Estonia introduced an optional smart ID card that is making documents and money obsolete in a growing range of public and private transactions. An Estonian can use it instead of a passport to travel within the EU, to get on the bus and subway and to file taxes with a card reader attached to his computer (refunds in five days for the electronic filers, several months for the paper filers).

"I rarely sign pieces of paper anymore," says Sten Hansson, the information adviser to the Estonian state chancellery. Hansson is 31 now and has already served in government for ten years. Siim Raie, the 27-year-old director of Estonia's chamber of commerce, just took out a personal home loan without picking up a pen. But this is not just a demographic revolution. Hansson's 84-year-old grandfather just got his smart card.

The government was going to make the smart card mandatory, but the libertarian-minded Estonians always prefer choice to diktat. So far 620,000 out of 800,000 working-age Estonians have asked for one because it makes life easier. It doesn't appear to bother anyone that the chip is gradually ingesting every detail of an Estonian citizen's life. Next up: e-voting and e-police, which will put a driver's entire history of traffic violations on the card's chip.

When Estonia determined that its traditional customs process was keeping it from winning mobile phone assembly projects, it got an e-customs system that cut average processing time from several hours to about 20 seconds today. That proved key to snaring a 4,000-man assembly line from Finnish manufacturer Elcoteq, which might otherwise do that work in China. The Elcoteq plant is fully responsible for 25% of Estonia's manufacturing exports.

Estonia is often lumped together with two other new republics, Latvia and Lithuania, as the so-called Baltic tigers. All three joined the EU in May. All three have thrived since independence and stand in marked contrast to other former Soviet republics for their speed and agility in adapting to the hard realities of capitalism. GDP growth in all three countries is chugging along in the neighborhood of 6% a year, compared with under 2% in the rest of the EU.

Each of the Baltic republics differs markedly from its neighbors in culture and language, however. Estonia looks across the Gulf of Finland for its cultural and linguistic roots. Like the Finns, Estonians can be dour and tend toward an almost pathological industriousness (when they aren't singing, that is: There are 133,000 Estonian folk songs, one of the largest numbers in the world).

This is no Scandinavian welfare state. Top individual taxes in the $10 billion economy are 26% and heading down to 20%, and all reinvested profits are free of corporate income taxes. "To get your primary needs met, you have to do something," says Linnar Viik. "We are a very pragmatic society, which can be quite horrible sometimes. An Estonian might ask what is the efficiency factor of the new museum of modern art."

Old Tallinn stretches out below Hansson's chancellery office atop Toompea, the 9th-century fortified hill at the city's heart. Cobblestones slickened by mist lead down past austere Lutheran churches with stiff spires and squat lemon-colored mansions from Tallinn's prosperous trading past.

The town's medieval echoes have lately reached fresh waves of tourists- 2.7 million last year. This pillar of the old Hanseatic trading league is getting hip. The shops that line the town's fine squares do a brisk trade in hand-knitted sweaters and linen, and its traditional restaurants serve up a mean elk steak. Just as important to Tallinn's coffers are the Finns who hop a 90-minute ferry from Helsinki for bargain booze and affordable prostitutes-the unsurprising windfall from Estonia's low taxes and low wages.

Harder to see are the small workshops where a new generation of software designers is looking to turn Estonia into a kind of Silicon-Valley-with-herring. Within tech-savvy Scandinavia, however, the secret is already out. SEB, the huge Swedish bank, recently moved most of its code-programming operations to Estonia.

Sander Mägi is a typical Estonian go-getter. In 1996 he dropped out of college after his first year to take a programming job with a cable modem company that went bankrupt soon after. In 2000 he joined with Oliver Wihler, a Swiss programmer who had left his job in London for Tallinn's more agreeable lifestyle and shorter commute. "My friends were mystified-they thought I was going to the Balkans," jokes Wihler. The two founded Aqris Software, and introduced RefactorIT in 2002. Refactor basically works like a kind of spreadsheet for programs written in Java code, automatically remodeling an entire application to reflect changes in parts of its code. The benefit here is speed, saving the thousands of man-hours it would take to reprogram manually.

The biggest customer is Zed, a digital content supplier for mobile phones. Small sales have been made to Nokia, Philips and Fujitsu. Aqris has pretty much doubled every year, earning $1 million cumulatively. Last year it made over $400,000 on revenue of $1 million and won an award as Estonia's best technology developer.

"We're obviously not going to compete with India on projects that require hundreds of developers," says Wihler, "nor are we necessarily going to do exactly what we're told to do."

The feisty subversive streak surfaced flamboyantly in the peer-to-peer networks Kazaa and Skype. Kazaa has driven the record industry crazy by letting pc users around the world join forces to share one another's recorded music, free. Skype offers free telephone calls over the Internet.

Under the hood of both products are peer-to-peer engines built in a three-man Estonian garage called Bluemoon, headed by 32-year-old Jaan Tallinn. Tallinn met Kazaa founders Niklas Zennström and Janus Friis when he was writing the software that pays for parking spaces via mobile telephone. All three were working at the time for Sweden's Tele2, a breeding ground for many of the region's entrepreneurs. The trick for Skype was developing a system that allowed each computer to index a wider network of computers than Kazaa does. A technology called Global Index did this, allowing Skype to handle traffic that passed 1.3 million simultaneous users last month. "These guys are the best software developers I have ever seen in my life," says Niklas Zennström. "They're very skillful at problem-solving."

Zennström and Tallinn are already training their peer-to-peer sights on new applications, though neither will say exactly what. It might well be banking, says Linnar Viik, who has seen prototypes of peer-to-peer payment systems, where the network itself manages the customer base, reducing transaction costs to zero.

Estonia's problem now is how to inject enough capital and managerial know-how to bring its Baltic wonder boys to the world stage. "I can see tons of interesting products in Estonia today, but they've stopped their development at €2 million and ten people," says Allan Martinson.

Martinson recently resigned as chairman of MicroLink, which he had transformed from the Dell Computer of Estonia to a diversified IT services company. He has just launched Martinson Trigon Venture Capital. "It's a good time to be in VC in Estonia," he says, "but it remains to be seen whether Estonia can be a truly global player. It's not just about IT, it's about attitude."

Martinson is investing in a company called Oskando, which markets a GPS tracking system for car security. Oskando plans to develop a simple, cheap unit for use in, say, a child's lunch box. The trick is getting the price below $100, which Oskando thinks it can do. "We did some innovative stuff with solar cells," says Martinson. "Estonians are great at finding interesting shortcuts."

With their natural reserve Estonians aren't exactly the world's slickest self-promoters. Word of what's happening up on the Baltic is slowly starting to leak out, however, thanks, in large part, to the hype surrounding Kazaa and Skype. Steve Jurvetson of Silicon Valley VC firm Draper Fisher Jurvetson first did business in Estonia after falling in love with Kazaa. His firm negotiated the deal in December 2003 that made Draper Fisher the largest investor in Skype, and Jurvetson stuck around when he saw Tallinn's entrepreneurial beehive. It didn't hurt that both of Jurvetson's parents are Estonian, although he says that growing up he had little connection to the culture.

Jurvetson has invested in an Estonian company called Egeen, which has the exclusive rights to collect blood samples from Estonian hospital patients. It uses the patient information to conduct clinical studies for pharmaceutical clients all over the world. The Estonian kicker here is an IT database that links all patients throughout the country in real time. This lets Egeen easily and quickly assemble a sample group according to the exact criteria a client needs for a particular study.

"That's the key to why Egeen wins business competing globally with much larger companies," says Jurvetson. "After Skype, we saw tons of opportunities here to follow up. It's like the entire country has this eager, immigrant mentality. Except that in this case they immigrated back to their own country."

Bloomberg: Aluminum Falls Most in 17 Years, Copper Slides on China Concern

Aluminum Falls Most in 17 Years, Copper Slides on China Concern

Jan. 4 (Bloomberg) -- Aluminum prices in London plunged the most in more than 17 years and copper fell on speculation that investors are reducing holdings as Chinese demand for metals slows, halting a yearlong rally.

``There's got to be some sort of shift out of commodities this year,'' Maqsood Ahmed, an analyst at Calyon Financial in London, said in a telephone interview. ``Maybe it's happening sooner than we think.''

Global demand growth for aluminum will slow to 5.3 percent in 2005 from 8.1 percent last year, Barclays Capital said Dec. 16. In China, the world's top copper user, consumption gains will drop to 10 percent from 15 percent in 2004, Barclays said. Metals used in appliances, autos and homes surged last year as demand exceeded mine output and speculative investors bought commodities in a bid for higher returns.

Aluminum for delivery in three months on the London Metal Exchange closed open outcry trading down $168, or 8.5 percent, to $1,800 a metric ton. It was the biggest decline since October 1987. The lightweight metal used in food packaging and construction gained 22 percent in 2004, the most in five years.

Copper fell $254, or 8.1 percent, to $2,895 a ton, its biggest one-day drop since Oct. 13. The metal, used in wiring and plumbing, advanced 37 percent on the exchange in 2004, the biggest riser among seven metals. It traded at a 16-year high of $3,179.5 on Oct. 11.

``There has been selling from funds'' that piled into the metals markets last year, Roy Carson, a trader at Triland Metals in London, said in a telephone interview.

Narrowing Deficit

The prices of oil, gold and base metals have fallen at the start of this year due partly to selling by hedge funds and other speculators who bought amid surging global demand for raw materials in 2004. Commodities priced in dollars also were purchased to protect against the decline of the dollar against other currencies, including the euro and yen.

Other metals on the LME also closed lower. Lead dropped 9.2 percent to $922 a ton, its biggest fall in 15 years. Nickel had its biggest slide in a month, down $1,025 to $14,000. Zinc was down $83, the most in 7-1/2 years, to $1,165. Tin fell $220 to $7,560.

Copper demand in 2005 will rise 4.6 percent to 17.5 million tons, exceeding production by 277,000 tons, Barclays Capital said in its report last month. The deficit in 2004 was 684,000 tons, the bank said. Producers such as Phoenix-based Phelps Dodge Corp. raised output in 2005, narrowing the shortfall.

China, the world's No. 2 user of aluminum, is trying to slow demand growth to avoid inflation. The nation's government limited loans and raised interest rates in 2004.

``We think we have seen the top of the commodity cycle,'' Nick Moore, an analyst at ABN Amro in London, said in a telephone interview. ``We are in the endgame.''

Metal Company Shares

Shares of Pittsburgh-based Alcoa Inc., the world's largest aluminum producer, fell 43 cents, or 1.4 percent, to $30.56 at 12:10 p.m. in New York Stock Exchange composite trading. Montreal-based Alcan Inc. fell 65 cents to C$58.15 ($47.46) on the Toronto Stock Exchange.

Phelps Dodge, the world's No. 2 copper producer, fell $3.65, or 3.7 percent, to $92.24 in New York and has dropped 9.2 percent since they closed on Dec. 29 at $101.55.

``Phelps Dodge has been a leader of the copper market,'' Michael Purdy, vice president at ABN Amro in New York, said in a television interview.

Other metal producers also fell. Shares in Melbourne-based BHP Billiton, the world's largest mining company, closed in London down 4.2 percent to 25.5 pence, the biggest one-day fall since Oct. 13. London-based Anglo American, the world's No. 2 miner, dropped 1.6 percent to 1,212 pence a share. Rio Tinto, the world's No. 3 miner, dropped 3.3 percent to 1,482 pence.

Dollar's Drop

The dollar rose 1.4 percent to $1.3298 versus the euro in London, after trading at a record low of $1.3666 on Dec. 31. The dollar's 7.3 percent drop against the European currency last year made dollar-denominated commodities cheaper for holders of euros.

``Commodities for much of December were matching the dollar blow-for-blow,'' ABN's Moore said. ``There's no reason why that shouldn't continue.''

LME-monitored copper inventory was unchanged at 48,875 tons, the exchange said in a daily report. The total shrank 89 percent in 2004 as consumers withdrew metal from storage.

Speculators increased their net-long position in New York copper futures in the week ended Dec. 28, according to U.S. Commodity Futures Trading Commission data.

``There was very good fund buying last week,'' Robert Barham, a trader at IFX Markets in London, said in a telephone interview.

Speculative long positions, or bets prices will rise, outnumbered short positions by 26,523 contracts on the Comex division of the New York Mercantile Exchange, the Washington- based commission said in its Commitments of Traders report. Net- long positions rose by 3,306 contracts, or 14 percent, from a week earlier.

***
Prudent Investor Says: Endgame? I think not. I have noted presciently in my New Year's outlook that the US Dollar was poised for a massive rebound. Naturally, commodities such as industrial metals whom have risen due to the US dollar's fall, moved inversely to the currency's tracks. Given that the US dollar fell quite sharply late late year, this move was 'on the screen'. The US dollar's plight is hardly a done deal.

Moreover, it seems that US dollar's rebound has coincidentally been baneful to the US markets. Could this simply be the one of the symptoms from the US FEDERAL RESERVE's recent monetary tightening?

New York Times: With Geopolitics, Cheap Oil Recedes Into Past

With Geopolitics, Cheap Oil Recedes Into Past
By JAD MOUAWAD
New York Times

IT was a year that people in the oil markets are unlikely to forget - a year that prices set records, forecasts lost touch with reality, and almost everything that could go wrong, did. It was also a year that politics returned to the oil market.

And the trend is likely to continue this year. While oil prices have declined since October, many of the issues that have vexed the oil industry in 2004 are expected to recur. Cheap oil increasingly looks like a thing of the past.

Through the 1990's, prices were stable, supplies were secure and there was plenty of extra capacity to keep energy costs low and world growth buzzing. At an average of $20 a barrel, oil was viewed as just another commodity.

But then came ethnic and labor troubles in Nigeria; chaos and protests in Venezuela before President Hugo Chávez won a referendum allowing him to stay in power; hardball energy politics in Russia; and the continuing insurgency in Iraq.

While supplies of oil to the world markets were rarely interrupted, the uncertainties created by these events raised crude oil prices in New York by two-thirds this year, to a high of more than $55 a barrel in October. And as energy costs surged, many analysts, traders and politicians woke up to the reality that oil was different from cocoa or coffee.

"Oil is a political commodity," said Robert Mabro, president of the Oxford Institute for Energy Studies, one of the world's foremost energy experts. "Geopolitics is the most fundamental issue if you're looking at oil markets. People seem to have forgotten that since the 1980's."

Of course, this is not the first time that oil and politics have mixed.

Decades ago, militant governments in Iran and Libya, for example, nationalized their oil sectors, forcing American and European companies out and taking charge of their natural resources. Then came the oil embargo and the price shocks of 1973-74 and 1978-81, with long lines for gasoline and steep rises in inflation.

But for the most part, politics had dropped off the energy map since then. In the 1980's, energy experts largely discounted a war between two of the Persian Gulf's top oil producers, Iran and Iraq, because Saudi Arabia and some other OPEC nations could simply crank up their production to make up for losses.

Even the invasion of Kuwait by Iraq in the summer of 1990, and the subsequent embargo on their oil exports, roiled energy markets for only a few weeks.

But in recent years, the oil industry has undergone a fundamental change. While demand has steadily increased each year, the industry's exploration efforts have not kept pace in new discoveries.

Now that worldwide production is running at full speed to meet increased demand, there is no cushion left in the system to weather a potential blow to producers like Iraq, Venezuela, Iran, Russia or Nigeria.

So, once again for oil markets, politics matters.

For instance, said Amy Myers Jaffe, the associate director of Rice University's energy program, Saudi Arabia's oil industry is no longer seen as being impenetrable to terrorist attacks; tensions in the Persian Gulf could swell over Iran's nuclear program; Nigerian factions may erupt in violence; and the fighting in Iraq goes on.

"All kinds of things can affect this market," Ms. Jaffe said, "especially when you're in a razor-thin situation. The only thing that could dramatically alter the outlook is a major economic recession."

The heightened geopolitical risk has translated into higher prices, something analysts call a "risk premium." Crude oil prices have averaged $30 a barrel since 2000, but last year crude oil in New York climbed to an average of $41 a barrel. While energy prices are high, adjusted for inflation they are below the level in March 1981, when crude oil approached $70 a barrel in today's dollars. Still, analysts do not expect prices to fall anytime soon.

High world prices since mid-2002 have helped sustain the economic recovery of Russia, which is raising output, according to the Energy Information Agency of the Department of Energy.

The former Soviet Union, of which Russia is by far the biggest country, is the world's largest producer, the agency says, followed by Saudi Arabia and the United States. The biggest consumers are the United States, which imports over half its needs; China; Japan; and the former Soviet Union, which uses about a third as much as it produces. Leo Drollas, chief economist for the Center for Global Energy Studies in London, expects oil prices to be higher in 2005, on average, than they have been this year. The institute was founded in 1990 by Sheik Ahmed Zaki Yamani, the former Saudi oil minister.

Even oil companies, which are usually extremely conservative about their price outlook, are coming around to that realization. Lord Browne, the chief executive of BP, now sees a new bottom of $30 a barrel for the next few years.

"There is something fundamental holding prices up, whether that's at $45, $40 or $35 a barrel," Mr. Mabro of the Oxford Institute said. "And politics won't improve things. Except if you believe a miracle is going to happen in Iraq."

***

Prudent Investor Says: This article practically demolishes such arguments that the current oil conundrum has been a function of free markets. Oil has fundamentally been the epitome of the collective government’s self-serving interest, ineptitude and inefficiency as much as the fiat money standard. For as long as governments persist to intervene the markets will remain distorted simply due to resource misallocation. And such inefficiencies pave way for unintended consequences as seen in today’s oil prices.

New York Times: Globally, Stocks Are Poised to Advance Further

Globally, Stocks Are Poised to Advance Further
By ERIC PFANNER
International Herald Tribune

LONDON

DESPITE the strongest global economic growth since the 1970's and outsized gains in corporate profits, 2004 was a decidedly ho-hum year for international stock markets, which took their cues from Wall Street. So, what will happen this year if, as expected, growth and profits ease back toward more normal rates?

Stock prices could actually forge ahead solidly, if not spectacularly, market strategists say. Average gains of 10 percent or so are expected globally, and some regions, including Continental Europe, could do a bit better. And if the dollar declines further, as many analysts expect, American investors who put some of their money into overseas securities might do even better, once currencies are converted. It is not that investors are returning to the irrational exuberance of the late 1990's - or even the milder wave of post-bubble optimism that washed over many global markets in 2003. But stocks in some regions remain attractively priced, at least relative to bonds, analysts say.

"We're not gung-ho, we're realistic," said Richard Batty, global investment strategist at Standard Life Investments in Edinburgh. "But markets generally have been pricing in a more pessimistic outlook than we think is warranted."

Many global stock markets finished 2004 above where they started, but not spectacularly so. In Japan, the Nikkei index was up only 7.61 percent, despite an improved economic outlook. Morgan Stanley Capital International's index showed a better gain in Japan - 10.9 percent, and for Americans who converted their yen-based gains into dollars, the rise was 16 percent. In Europe, stocks generally posted slightly larger gains, even as growth continued to be disappointing. In China and in Russia, stocks showed little change at the end of the year, despite strong economic growth. Morgan Stanley Capital International calculated a 2 percent rise for China.

The best performances were in emerging markets that benefited from a surge in commodity prices, particularly in Latin American markets like Mexico and Peru, and in some secondary European markets, including Iceland, Belgium, Norway, Austria, Hungary and Romania. Because of the fall in the dollar that accelerated toward the end of last year, American investors who ventured into foreign stock markets did considerably better than investors who used the local currencies. A local investor in the euro zone, for instance, would have seen gains of only 13.3 percent, based on a Morgan Stanley Capital International index of the region; in dollar terms, the return was 22.4 percent.

Morgan Stanley strategists predict gains of 8 percent in European stocks next year, based on share prices in mid-December. They see solid double-digit gains in Japan, with the Topix index, which finished 2004 at 1,149.63, rising to near 1,300 by the end of this year.

At Lehman Brothers, analysts are less enthusiastic about Japan, but see comparable gains in Europe. With dividends reinvested and including the effects of an additional 5 percent drop in the dollar against the euro, which they predict for this year, gains for American investors in euro-denominated shares could reach double digits. Other analysts, too, point to the euro zone as one of the most promising areas for share price growth.

To be sure, the dollar is one of several variables that make predicting share prices as dicey as ever. If it continues to fall, as many analysts expect, given the size of the United States' current account deficit, that could put upward pressure on inflation, prompting the Federal Reserve to raise interest rates more aggressively than it did in 2004. A weaker dollar could also lead to a renewed increase in oil prices, because oil is traded globally in dollars.

Though oil prices eased in December, ending the year at $43.35 a barrel, after passing $55 in October, a combination of continuing high prices and tighter monetary policy in the United States might slow global economic growth by curbing American demand for imports. Economists generally expect global growth to ease from rates near 5 percent last year to 3.5 percent to 4 percent this year, with a slight uptick in inflation. The combination makes some analysts wary about prospects for global stock markets.

"We've moved from above-trend growth and below-trend inflation to above trend in both," said Tim Bond, a strategist at Barclays Capital here. "That's negative for almost every asset class, except perhaps commodities."

Nonetheless, investors seem to be prepared to give stocks a chance. A Merrill Lynch survey of global fund managers in December showed that 77 percent expected equities to do better than bonds or cash this year. The managers were particularly bearish on bonds, which fall in price when interest rates are on the rise.

Continued strength in corporate earnings should provide some support for share prices, analysts say. Last year, companies in the United States, Europe and even Japan reaped the benefits of several years of cutting costs. As strong economic growth drove demand higher, profits of companies in the MSCI All-Country World index, a broad gauge of global stock prices, were on track for an annual increase of 25 percent, analysts at Morgan Stanley said. This year, they expect less impressive gains of 8 percent, just above the long-term trend of 7 percent.

Given that Europe has borne the brunt of the dollar's slide, with a rising euro making the region's exports less competitive, analysts' relative optimism about European stocks may seem surprising. But euro zone stocks are priced attractively, with price-to-earnings ratios around 14 percent, compared with about 16 percent for stocks globally.

European corporate profits are also expected to hold up fairly well, despite the strong euro. Companies seem to be suffering less than might seem likely, given policy makers' noisy laments about the weak dollar.

There are several reasons for this. European companies, like their American counterparts, have grown extremely frugal about capital expenditures, after the spree of the bubble years. And, particularly in Germany, long known for high labor costs, several big manufacturers have cited the threat of low-wage competition from new European Union members in the east and won concessions from workers.

Overall, hourly labor costs in the euro zone grew by only 2 percent in the third quarter of 2004, compared with a year earlier, the lowest increase since 1998.

"The unions seem to be getting more pragmatic," Mr. Batty said. "They realize things are changing. From a stock market point of view, this is great news."

As always, optimism about Europe needs to be tempered, analysts say. Some worry about the effects of a shift to new international accounting standards, which is required for all publicly traded companies in the European Union by the end of this year. One result could be increased volatility in reported earnings.

And the euro zone economy, which analysts at ABN Amro say will grow by only 1.5 percent this year, after 1.8 percent growth in 2004, could slow even further, particularly if consumer spending continues to stagnate.

Possible weakness in consumer spending could also hurt Britain, which remains outside the euro zone and has enjoyed several years of strength compared with its neighbors. Analysts worry that a boom in housing prices, which has fueled consumer spending, may be over, with prices already easing slightly in recent months. Nevertheless, most analysts are optimistic about the outlook for British stocks, which were rising at the end of last year, bolstered by banking issues.

Many analysts expect the Japanese economy to slow, too, after a solid 2004; Morgan Stanley predicts 0.5 percent growth, after 4 percent last year. That makes many strategists wary about prospects both for Japanese stocks, which have not drawn much strength from improved corporate finances, and the overall economy after more than a decade of recessionlike conditions.

Some analysts, however, see an opportunity in Japan for patient investors. A slowdown in the growth of corporate profits - analysts expect that once the numbers are in for 2004, they will show profit growth of 60 percent - seems inevitable, but it will not prevent a longer-term recovery from taking hold. "We think the market will begin recognizing that Japan has taken the first step toward returning to normal," said Naoki Kamiyama, a strategist at Morgan Stanley, in a note to investors.

Elsewhere in Asia, all eyes remain on China. A mild slowdown in that country's runaway growth rate, and a possible easing of the currency's tie to the dollar, could put pressure on shares, which performed poorly last year. Analysts say other Asian markets, particularly those with heavy exposure to technology stocks, like South Korea and Taiwan, might do better, though.

And other emerging markets, especially those that have benefited from a global surge in commodity prices, could continue to power ahead, strategists say. Many South American markets, for instance, have enjoyed a period of relative political and financial stability, and resource-rich countries like Brazil have fared particularly well.

Over all, said Mr. Bond at Barclays Capital, "equities globally are well placed against bonds, but it will be a year of modest returns."

***
Prudent Investor says: Not so fast there...most of these analysts are talking from the rear view mirror perspectives, in other words using the immediate past as a measure to predict future performances. Caveat, dear readers.

According to several leading multilateral institutions such as the OECD and World Bank, the prospects of slower economic growth for the world are more likely in 2005, as to how much of that could be equated with gains in the global equities and more so in the commodities (some, not all) front is something to be reckoned with, unless of course we could see some foreign currency reserve rich Asian nations picking up the consumer demand and domestic investment slack caused by the anticipated global softening. But of course, economics is not the sole determinant, liquidity is likely a more influential factor. With global Central Banks likely to follow on the footsteps of the US Federal Reserve in its 'measured pace' of monetary tightening, the odds are stacked in favor of a 'lesser' optismistic outlook for the major equities and bond markets compared to these 'mostly' pollyannaish mainstream forecasts.

It will be a challenging 2005 indeed. Care to place your bets?