Saturday, November 07, 2015

Keystone XL farce and rail freighters' smiles

The Obama administration’s long anticipated rejection of the Keystone XL project – an extension [from Hardisty, Alberta to Port Arthur, Texas] to the already existing transnational pipeline between Canada and the US – on 5 November hardly came as a surprise to the oil and gas industry. But is it finally the end of the saga? Not quite, only for the Obama White House staff. 

Once a new US president is in, the project sponsors can, should they choose to do so (and is quite likely they will), launch a fresh application with amendments and new proposals. Quite frankly, the development might be new, but the talking points aren’t.

The saga has dragged on and on for seven years and descended into a farce that even provided material for comedian Jon Stewart on more than one occasion (click here). However jokes apart whatever side of the argument you are, that the whole thing got dragged into the quagmire of US politics in the way that it did, is no laughing matter.

This blogger has always maintained that the project’s rejection is not some sort of a fatal blow to Canada’s oil and gas industry, but rather an inconvenience and one that has arrived at a time of wider difficulties in the market. Several analysts in Canadian financial circles concur and rail freight companies probably cheered the rejection, despite their own problems with safety related issues and incidents when it comes to moving crude oil.

Of course, moving crude by rail to the Gulf Coast costs almost double per barrel in the region of $7.00 to $11, but for some it won't be a choice. Moving crude by rail is probably twice as much environmentally unfriendly, something few of the pipeline extension's naysayers appear to be touching on.

There will need to be some medium term adjustments. As the Oilholic noted in 2013, TransCanada is already forging ahead with a West to East pipeline corridor aimed at bringing domestic crude in meaningful volumes from Alberta to Quebec and New Brunswick by 2017 and 2018 respectively. Additionally, considerable amount of lobbying is afoot in terms of looking towards Eastern markets, especially China (despite the recent oil price decline), via British Columbia’s coastline

As for the near term, Moody’s expects currently available pipeline and rail transportation to meet anticipated production growth through to the fourth quarter of 2017.

“Post 2017, we expect that as oil egress from Canada becomes constrained, additional rail capacity will fill the void until one of the three proposed major domestic pipelines – Trans Canada's Energy East, Kinder Morgan's Trans Mountain expansion or Enbridge's Northern Gateway – is approved and built,” said Moody’s analyst Terry Marshall. 

There already exists about 550,000 barrels per day (bpd) of unused rail capacity in Western Canada at present, according to the Canadian Association of Petroleum Producers' (CAPP) data. That’s over and above the approximate 200,000 bpd of capacity that will be used to ship oil in 2015, and few, including Moody’s analysts, are in any doubt that moving crude by rail will rise in all likelihood.

Rail freighters' joy is also likely to be further prolonged by the current political climate in Canada. With the oil and gas industry friendly Stephen Harper administration having been voted out after nine years in office, it is all but guaranteed the new Liberal Party Government's pre-election promise to “rework the domestic pipeline approval process” will go ahead.

Not quite clear on the minutiae and what this would entail until details are published and then put to the Canadian parliament later down the year. However, having seen plenty of such overtures in numerous jurisdictions, the Oilholic feels an increase in cost and timescale of the regulatory process is highly likely, alongside the escalating cost of environmental compliance in Canada. 

All of this comes at a time when Canadian oil exploration and production companies could well have done without it. A tough few years are on the horizon. That’s all for the moment folks! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2015. Photo: Railway oil tankers outside of Calgary, Alberta, Canada © Gaurav Sharma, March 2011.

Wednesday, October 28, 2015

The enduring legend of El Dorado

Having spent much of one’s career dabbling in the commodities sphere in general and the crude oil market in particular, the Oilholic, while not claiming to have any doctorate in gold matters, is nonetheless fascinated by the unique appeal of the shiny yellow metal passed down the ages, stretching from ancient to the modern world. 

Gold, one humbly suggests is the ultimate fool’s commodity. Excepting industrial use, it is bought and sold for one purpose alone – selling for more than the purchase price coupled with a lust in many, perhaps all, cultures for wanting more of the stuff. This lust triggered the desire to colonise others and several gold rushes in the history of mankind. While California’s Gold Rush of the late 1840s is the stuff of legends, human history is littered with other gold rushes.

However one enduring legend, born here in Colombia, transcends all others and epitomises this lust – that’s the myth (or is it) of El Dorado. The Oilholic, out of morbid curiosity and certainly not wanting to miss out on Bogota’s splendid Museo del Oro, decided to dedicate his entire last day in South America towards probing the local legend that’s all too international. Scholars in the Colombian capital say that while toughing it out with the Incas in the 1530s, the Spanish Empire and its conquistadors started hearing tales about a tribe of natives high in the Andes Mountains where gold was much in abundance.

When the tales reached Spanish royalty, conquistador Gonzalo Jiménez de Quesada was dispatched to lead an expeditionary force into the Colombian highlands. Upon gaining their first territorial victory in 1537, among the first pieces of local intelligence to reach the ears of Jimenez de Quesada’s soldiers was an ever more detailed narrative about that "Land of Gold."

Conquered Musica Indians told the Spanish that on the shores of Laguna de Guatavita or Lake Guatavita (35 miles northwest of modern Bogota) once lived a chieftain who periodically covered himself in gold dust during religious ceremonies and festivities, and then dived from a raft into the lake shedding the riches, as depicted here in an ancient artwork on display at the Museo del Oro (see left). On each occasion, natives then threw gold, emeralds and precious jewels into the lake to appease a mythical god that lived underwater.

Jiménez de Quesada’s men were told the ceremonies ended by turn of the 15th century, when the chieftain was killed and his subjects conquered by another Musica tribe some 50 years before their arrival. Part convinced by the tale, seeing locals displaying a liking for gold trinkets, and the promise of untold riches, the Spanish named the late Musica chieftain “El Dorado” or “The Golden One” and set about finding the lake.

With their conquest of the Colombian highlands complete, the Spanish finally located Lake Guatavita having dedicated lives, limbs and their local loot to the cause. The Spanish Crown ordered the lake to be drained by “all resourceful means”. Given the year was 1545, with all the resources of the time, Jiménez de Quesada’s men could only lower the water level to dabble at the edges of the lake.

A few hundred pieces of gold were indeed found, but Colombian and Spanish historical archives suggest there was no mass discovery. Furthermore, even if all of the gold was in deeper waters of Lake Guatavita – it was beyond human reach at the time. After the death of Jiménez de Quesada in 1579, businessman Antonio de Sepúlveda took on the mantle of draining Lake Guatavita.

In their previous attempt, Spanish soldiers could only muster three metres worth of drainage, but de Sepúlveda’s men managed 20 metres. At a great cost and further loss of lives, they found more gold but nothing on the scale the Spanish crown was hoping. 

Meanwhile, the legend of El Dorado and riches of the “new world” reached other European colonial powers. The English, Dutch and Portuguese all vowed to beat the Spanish to it. Better still all three, and even the Spanish at a later stage, concurred from the lack of success at Lake Guatavita that the promised gold paradise must be “somewhere else in Northern half of South America”, as it was the part of the continent they had encountered natives with a penchant for gold, and a breathtaking array of ornaments.

The legend of El Dorado got the era’s poster child in the form of adventurer Sir Walter Raleigh; trusted lieutenant of Queen Elizabeth I of England and purveyor of tobacco, another commodity unknown to his homeland before he introduced it from one of his many travels. 

Like his colonial peers, Sir Walter failed in his attempts to find the Land of Gold (that he often confusingly labelled "City of Gold") first in 1595 and then 1617, which in his opinion was somewhere in modern Guiana. Instead, he lost both his son (Watt Rayleigh in battle) and his head, having miffed King James I for starting a skirmish with the Spanish against the English monarch’s wishes.

Yet Sir Walter’s conjecture about the existence of the Land of Gold in a widely circulated book, described as, and subsequently proven to be inflated nonsense, only fuelled the legend further. And so went the idiocy associated with it driven by lust. Countless more lives, limbs and ironically gold from colonial powers' treasuries were lost across South and Central America in the quest for El Dorado for another 300 years! Published in 1849, Edgar Allan Poe’s poem – Eldorado – just about summed it up:

“Gaily bedight, a gallant knight, in sunshine and in shadow,
Had journeyed long, singing a song, in search of Eldorado.

But he grew old, this knight so bold, and o'er his heart a shadow,
Fell as he found, no spot of ground, that looked like Eldorado.

And as his strength, failed him at length, he met a pilgrim shadow
"Shadow," said he, "Where can it be - this land of Eldorado?"

"Over the Mountains of the Moon, down the Valley of the Shadow,
Ride, boldly ride, the shade replied – "If you seek for Eldorado!"

The last such recorded attempt, a source of much disdain in Bogota, was in 1898 when British expatriate Hartley Knowles’ company – Contractors Ltd – drained the Lake Guatavita so low that only mud and slime was left rendering it impossible to explore when sludgy. Subsequently, the mud baked in Colombian sunshine all that was left was nature’s version of concrete.

Having wasted millions and destroyed the area, all the nutcases could find were a few trinkets that fetched £500 at a Sotheby’s auction back then, and can be seen today at the British Museum! A much more impressive collection, should gold be your thing, can be found at the Museo del Oro (see examples on the right). 

Thankfully, Lake Guatavita was declared a protected area in 1965. Nature and rainfall restored some of its lost beauty in subsequent decades, after years of greed and pillaging ruined it. Private salvage, let alone draining the Lake, are now illegal and punishable by a custodial sentence, one is informed.

And well, no gold discovery on the scale of 15th Century projections put forward by Sir Walter and others was ever made. Yet the El Dorado legend and mankind’s attraction for the shiny yellow metal remains undiminished. Each time another asset class feels the squeeze or a currency gets shorted, headlines about “investors plying into gold” emerge with every price decline or uptick duly reported.

From Hollywood blockbusters to the Indian Wedding Season, star-crossed lovers’ offerings to central bank vault deposits, gold and its lure is all around us. Mankind it seems has never stopped looking for El Dorado in some way, shape or form!

On that note, the Oilholic must board flight AA1122 from his El Dorado; Bogota’s international airport in the small hours of the morning. That’s all from South America folks. It’s been a fascinating few weeks in this vibrant continent. Next stop Dallas, and then on to London Heathrow. Adiós América del Sur; adios Colombia! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo I: Museo del Oro, Bogota, Colombia, Photo II: El Dorado legend gold sculpture at Museo del Oro, Bogota. Photo III: Ancient gold ornaments at Museo del Oro. Photo IV: El Dorado International Airport, Bogota, Colombia © Gaurav Sharma, October 2015.

Monday, October 26, 2015

Santos hopes to give peace a chance in Colombia

After a fascinating two weeks travelling around South America, the Oilholic is back where the journey on the continent started in Bogota, Colombia, before heading back to London. 

In using the Colombian capital (seen on the left from Mt. Monserrate) as a starting point, this blogger wanted to both feel first hand as well as write about how far this country has come following five decades of armed conflict resulting in a tragic human and socioeconomic cost, above all else. More so, as peace is finally getting a chance in 2015.

In September, President Juan Manuel Santos inked a preliminary agreement with the Revolutionary Armed Forces of Colombia (or FARC). After three prolonged attempts since the 1980s by successive Colombian governments to broker peace, the recent accord appears to be the best chance for achieving that objective.

Despite being the first president in decades to have an upper hand on FARC thanks largely to a heavy military build-up under his predecessor Alvaro Uribe, Santos staked his presidency on finding a solution to end the violence through peaceful means, though not at any cost.

Reaching an agreement depended on FARC doing jail time, as demanded by the court of public opinion so heavily traumatised by violence perpetrated by the rebels over the years on a daily basis. On that front there is some dissatisfaction with the proposed deal.

While the finer points are still to be worked out over the next six months, the Santos administration and FARC have broadly agreed that foot soldiers of the militant outfit would receive amnesty, but its leaders charged with “serious crimes” will face a special tribunal that would include foreign judges alongside Colombian ones.

Those FARC operatives who cooperate and confess to their crimes would receive lighter penalties including five to eight years of community service with restriction on movement, but not prison time in the strictest sense. However, those who do not cooperate could go to jail for up to 20 years. 

A judicial framework along similar lines would be applied to right-wing paramilitary forces and their supporters. In return, FARC, which still has over 6,000 combatants, has also agreed that the rules will only apply if they give up their weapons. 

The significance of the deal cannot be overstated even if public demand for stricter penalties on FARC is not being met. From M-19 to the still active ELN, Colombians have seen too much death and destruction, and the dark side of human conflict that no one needs to see.

Among the many expressions by Colombian artists summing up the tragedy of conflict within the country's borders, the Oilholic was privileged to see the late Alejandro Obregón’s Muerte a la bestia humana (Death to human beast) on display at the National Museum of Colombia in Downtown Bogota.

Friends here in Colombian capital say the painting (see right) was Obregón’s expression of disgust at those responsible for the kidnapping and gruesome murder of Gloria Lara de Echeverri, a government official abducted in June 23, 1982. 

Her body was found five months later on the steps of a church. While a FARC faction was alleged to have been behind the act, the case was never fully resolved and remains a source of debate to this day. For Obregón and his peers in the art community, Gloria Lara, like several of her countrymen and women were innocent victims who deserved better but lasting peace, bar the odd ineffective ceasefire aside, could not be brokered. 

So if an imperfect deal now offers a chance for peace, then it needs to be looked at. FARC knows its back is against the wall and has as much of a vested interest in making the deal work as the Santos administration. Things are changing in Colombia. While every life is precious, and 600 Colombians civilians were lost to conflict last year, 2015 has so far been the year to see the fewest deaths to armed conflict since 1985, according to local data.

While there is petty crime and gun violence in Bogota, it is no longer the kidnapping capital of the world, like it was back in the 1980s. Beleaguered FARC’s ire has been directed more towards near daily attacks on Colombian infrastructure, mainly power lines and oil pipelines.

One recent attack resulted in 15,000 barrels of crude spewing into a river. April saw heated exchanges of fire between government forces and FARC. However, while talks were progressing the skirmishes diminished in frequency and ferocity.

It now remains to be seen, if the agreement holds, and Santos has said the Colombian people will have their say on the final agreement. The visible human tragedy aside, disruption caused by conflict lowers the country’s GDP by 15% to 20% per annum according to some estimates. It appears a chance to change that is on the horizon. Here's hoping it holds. That’s all from Bogota for the moment folks! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2015. Photo I: View of Bogota, Colombia from Mt. Monserrate. Photo II: Muerte a la bestia humana by Alejandro Obregón on display at National Museum of Colombia in downtown Bogota © Gaurav Sharma, August 2015

Saturday, October 24, 2015

Dilma and the Petrobras scandal's aftermath

Bidding Adiós to Buenos Aires, the Oilholic has landed in the bursting metropolis of Sao Paulo, Brazil, one’s penultimate stop in South America before returning to Bogota and flying back home following a two week trip to South America.

Walking down the city’s vibrant Avenida Paulista, a 1.75 mile thoroughfare that has several businesses, financial and cultural institutions (including the Museu de Arte de São Paulo), glitzy skyscrapers, malls, hotels and shops lining up either side of it, one gets a real buzz of modern Brazil.

However, the country’s President Dilma Rousseff would get a largely unwelcome buzz were she to walk down the avenue. Most in Brazil’s commercial heart lay the blame for the Petrobras corruption scandal, uncovered earlier in February, firmly on Rouseff’s door even tough she has not been directly implicated in anything uncovered by corruption investigators so far.

There have been several mass protests here in Sao Paulo, along with Rio de Janeiro and other major Brazilian cities calling for the President to be impeached. As the Oilholic noted earlier this year in a Forbes column, the scandal has politically scarred Rouseff, a former chairwoman of Petrobras’ board of directors, beyond repair in the unforgiving world of Brazilian politics.

Many of those facing investigations and jail time happen to be from her side of the Brazilian political spectrum – the Workers’ Party. That’s what fuels people’s anger. Mass protests grab headlines, but sporadic smaller protests – like one this blogger witnessed on Avenida Paulista – are commonplace (see above left).

For people who call the Americas third-largest oil producer behind the United States and Canada their home, Petrobras has always held a special place in hearts and minds. So to see it humiliated on the world stage and financially wounded by a corruption scandal plays on peoples minds in a struggling economy.

In global terms, according to BP’s latest statistics on the industry, Brazil is the world’s 9th largest oil and gas producer pumping out some 2.95 million barrels per day, with Petrobras as its custodian.  

Furthermore, as the US Energy Information Administration, notes, “Increasing domestic oil production has been a long term goal of the Brazilian government, and discoveries of large offshore, presalt oil deposits have already transformed Brazil into a top-10 liquid fuels producer.”

However, weak economic growth and the scandal implicating several high profile people at Petrobras has reduced the chances for production growth over the short term; at least of the kind that was hoped for back in 2010 according local sources. 

Clearly, going by the mood in Sao Paulo, not many want to let Rouseff off the hook, whether rightly or wrongly. That’s all from Brazil folks, as one leaves you with a view of the magnificent Catedral da Se de Sao Paulo (above right). Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo I: Anti-Dilma Rousseff protests on Avenida Paulista, Sao Paulo, September 23, 2015. Photo II:  Catedral da Se de Sao Paulo, Brazil © Gaurav Sharma, October 2015.

Friday, October 23, 2015

'Crude' implications of Argentina's election

The Oilholic has hopped over from Santiago de Chile for a splash and dash pre-election visit to the Argentine capital of Buenos Aires. Braving fake banknotes, dodgy cab drivers, eateries where prices change daily and a services sector with few scruples if any, yours truly finds himself peeking at ongoing electioneering in the run-up to the October 25th presidential election, standing beside the Obelisco de Buenos Aires.

In all likelihood, a presidential run-off looms for a successor to Cristina Fernandez de Kirchner, who claims to be leaving behind a “crisis free” country where of course inflation is close to 30% by unofficial accounts and the IMF expects the economy to shrink further.

Centre-left candidate Daniel Scioli, handpicked by Kirchner (who cannot seek a third term under the constitution), is vying with centre-right man and Buenos Aires mayor Mauricio Macri. Not many in the Argentine capital, give the “third guy” Sergio Massa, a former ally of Kirchner's (before relations soured), much of a hope. However, his support – should a run-off happen – would be vital. 

The incoming president would have an almighty mess to deal with in a country that has the dubious title of slipping from being a developed economy at the turn of the previous century to a third world country in the 21st century. Both main candidates promise to lower inflation to single digits and stimulate growth. Some (but not all) in Buenos Aires are simply glad Kirchner would be gone.

Discussing what shape the country’s energy policy in general (and oil and gas policy in particular) takes would be pointless before we know who the next occupant of the President’s office is. Much still remains at stake, including Buenos Aires’ continued hostility to offshore oil and gas exploration in the Falkland Islands (or Las Malvinas) as the Argentines call it, given the history of the territory. Despite Kirchner’s whinging to deflect attention from internal political woes, oil and gas explorers in the contentious British territory, claimed by Buenos Aires, are not going to go away.

If anything, the oil price decline, rather than something Buenos Aires does, is likely to have a bigger impact on future prospects. Away from the contentious side issue, it’s the direction of Argentina’s shale exploration that’s of a much bigger significance in a global context.

As the US Energy Information Administration noted earlier this year, if you exclude the US and Canada – only Argentina and China happen to be producing either natural gas from shale formations or crude oil from tight formations (tight oil) at an international level. How the country’s promising Neuquen Basin develops further would have a massive bearing on the economy. But where we go from here, given for instance the Repsol versus Federal Government histrionics of the past, would be anyone’s guess. 

The Oilholic intends to probe the subject more deeply at a later stage both on this blog as well as for Forbes, once we know who the next Argentine president is.

However, for the moment, that’s all from Buenos Aires folks. Yours truly leaves you all with a breathtaking  view of the Andes Mountain range as seen from LAN Airlines flight 1447 coming from Santiago de Chile to Buenos Aires (right). Keep reading, keep it crude!

Update, October 26th: With 96% of the votes counted, according to the AFP, Scioli was marginally ahead with 36.7% of the vote, while Macri had 34.5%. Massa, who came a distant third has accepted defeat but not stated who he would be supporting. A presidential election run-off has been scheduled for November 22.

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© Gaurav Sharma 2015. Photo I: Obelisco de Buenos Aires, Argentina. Photo II: Andes Mountain as seen from flight LAN1447 Santiago de Chile to Buenos Aires, Argentina © Gaurav Sharma, October 2015


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