Monday, December 31, 2012

Final ‘crude’ points of 2012

As 2012 draws to a close, a few developments over the last fortnight are worth mulling over, ahead of uncorking the champagne to usher in the New Year. But first, a word on pricing - the final ICE Brent February futures contract price cut-off noted by the Oilholic came in at US$110.96 per barrel with US budget talks in the background.
 
Over the last two weeks, and as expected, the cash market trade was rather uneventful with a number of large players starting the countdown to the closure of their books for the year. However, the ICE’s weekly Commitment of Traders report published on Christmas Eve made for interesting reading.
 
It suggested that money managers raised their net long positions in Brent crude futures (and options) by 11.2% in the week that ended on December 18; a trend that has continued since November-end. Including hedge funds, money managers held a net long position of 106,138 contracts, versus 95,447 contracts the previous week.
 
Away from Brent positions, after due consideration the UK government finally announced that exploration for shale gas will resume albeit with strict safety controls. Overall, it was the right decision for British consumers and the economy. It was announced that there would be a single administrative authority to regulate and oversee shale gas and hydraulic fracking. A tax break may also apply for shale gas producers; further details are due in the New Year.
 
Close on the heels of UK Chancellor George Osborne’s autumn statement and the shale announcement, came a move by Statoil to take a 21-year old oil discovery in the British sector of the North Sea off its shelf.
 
On December 21, the Norwegian company approved a US$7 billion plan to develop its Mariner project, the biggest British offshore development in over a decade. According to Statoil, it could produce around 250 million barrels of oil or more over a 30-year period and could be brought onstream as early as 2017 with a peak output of 55,000 barrels per day.
 
Mariner, which is situated 150 km southeast of the Shetland Islands, was discovered in 1981. The Oilholic thinks Statoil’s move is very much down to the economics of a Brent oil price in excess of US$100 per barrel. Simply put, now would be a good time to develop this field in inhospitable climes and make it economically viable.
 
Being the 65.11% majority stakeholder in Mariner, Statoil would be joined by minority stakeholders JX Nippon E&P (28.89%) and Cairn Energy (via a subsidiary with a 6% stake).
 
Elsewhere, Moody's changed the outlook for Petrobras’ A3 global foreign currency and local currency debt to negative from stable. It said the negative outlook reflects the company's rising debt levels and uncertainty over the timing and delivery of production and cash flow growth in the face of a massive capital budget, rising costs and downstream profit pressures.
 
“We also see increasing linkage between Petrobras and the sovereign, with the government playing a larger role in the offshore development, the company's strategic direction, and policies such as local content requirements that will affect its future development plans,” said Thomas S. Coleman, senior vice president, Corporate Finance Group at Moody’s.
 
That’s all for 2012 folks! A round-up of crude year 2012 to follow early in the New Year; in the interim here’s wishing you all a very Happy New Year. Keep reading, keep it ‘crude’!
 
© Gaurav Sharma 2012. Photo: Vintage Shell pump, San Francisco, USA © Gaurav Sharma.

Thursday, December 20, 2012

Splendid dossier on a secretive "supermajor"

In 1999, the merger of Exxon and Mobil created what could be described as an oil & gas industry behemoth and, using some financial metrics, perhaps also one of the most profitable among the international “supermajors”. Despite being a global entity, for many people ExxonMobil remains an enigma.
 
Its sheer presence on the world stage has its admirers yet critics have labelled it as a polluter, a climate-change denier, a controversial lobbyist, a bully and more. For Pulitzer Prize winning author Steve Coll, there is more to it than meets the eye when it comes to ExxonMobil and its financial performance which is more durable than others in the Fortune 500 list.
 
Minus generalisations or a linear exercise in big oil bashing, this latest work of Coll's – Private Empire: ExxonMobil and American Power – is a pragmatic book about a global brand which, in the author’s words, became the "most hated"  oil company in America after the Exxon Valdez oil spill off the coast of Alaska in 1989.
 
That incident itself provides the starting point for a detailed narrative of just under 700 pages, split into two parts – The End of Easy Oil and The Risk Cycle – containing 28 chapters. Banking on his journalistic tenacity and detailed research work including over 400 interviews, declassified documents, legal and corporate records and much more, Coll has pencilled his unique description of this “Private Empire” and it does not disappoint.
 
ExxonMobil has its dogmas, fears, idiosyncrasies, pluses and minuses and the author delves into these based on anecdotal as well as observed evidence. From an obsession with safety post Exxon Valdez to the moving of its headquarters to Irving, Texas, from “the merger” to an insistence on R.O.C.E (Return on Capital Employed) – Coll has tackled it all.
 
The author opines that far from being an attention seeking ruthless corporate giant in bed with politicians, as popular conjecture would have you believe, ExxonMobil’s legendary lobbying in Washington DC was cleverly and aggressively targeted for maximum effect. While it shunned overt politicising of its presence and affairs, the company benefitted from new markets and global commerce that US military hegemony protected the world over. After all, when fighting a tight corner, ExxonMobil often called in a favour from power brokers on Capitol Hill.
 
While the whole book is a thoroughly good read, for the Oilholic, reading Coll’s description of ExxonMobil’s grapples with "resource nationalism" in developing markets (as its oil output in developed jurisdictions started declining) and its management (or otherwise) of operations in inhospitable countries, were the two most interesting passages.
 
From Aceh in Indonesia to the Niger Delta, from the Gulf of Guinea to Chad, ExxonMobil found itself in alien territory and conflicts it had not seen before. But it strategized, adopted, called in favours and more often than not emerged with a result in its favour; if not immediately, then over a period of time, writes Coll.
 
Every saga needs a cast of characters and this one is no exception. One individual and his portrayal by the author stand out. That’s Lee ("Iron Ass") Raymond, ExxonMobil’s inimitable boss from 1993 to 2005. With a doctorate in chemical engineering, boasting Dick Cheney among his friends and a history of denying climate change, Raymond was by all accounts a formidable character and Coll’s description of him does not disappoint. One mute criticism the Oilholic has is that its borderline gossip in parts but one supposes the gossip joins the dots in a weighty narrative.
 
In summation, this blogger found the book to be a definitive one on ExxonMobil and by default a glimpse into the wider ‘crude’ world, it’s wheeling and dealing. The Oilholic would be happy to recommend it to anyone interested in the oil business, its history, market dynamics and the geopolitical climate it is inextricably linked with.
 
Those interested in business, finance and economics would also enjoy this book as would the mainstream non-fiction reader in search of a riveting real world account. Finally, it would also be well worth the while of students of financial journalism to read and learn from Coll’s craft.
 
© Gaurav Sharma 2012. Photo: Front Cover – Private Empire: ExxonMobil and American Power © Allen Lane / Penguin Group UK.


Friday, December 14, 2012

Why Iran is miffed at (some in) OPEC?

The talking is over, the ministers have left the building and the OPEC quota ‘stays’ where it is. However, one OPEC member – Iran – left Vienna more miffed and more ponderous than ever. Why?

Well, if you subscribe to the school of thought that OPEC is a cartel, then it ought to come to the aid of a fellow member being clobbered from all directions by international sanctions over its nuclear ambitions. Sadly for Iran, OPEC no longer does, as the country has become a taboo subject in Vienna.

Even the Islamic Republic’s sympathisers such as Venezuela don’t offer overt vocal support in front of the world’s press. Compounding the Iranians’ sense of frustration about their crude exports being embargoed is a belief, not entirely without basis, that the Saudis have enthusiastically (or rather "gleefully" according to one delegate) stepped in to fill the void or perceived void in the global crude oil market.

Problems have been mounting for Iran and are quite obvious in some cases. For instance, India – a key importer – is currently demanding that Iran ship its crude oil itself. This is owing to the Indian government’s inability to secure insurance cover on tankers carrying Iranian crude. Since July, EU directives ban insurers in its 27 jurisdictions from providing cover for shipment of Iranian crude.

Under normal circumstances, Iranians could cede to the Indian demand. But these aren’t normal circumstances as the Iranian tanker fleet is being used as an oversized floating storage unit for the crude oil which has nowhere to go with the speed that it used to prior to the imposition of sanctions.

The Obama administration is due to decide this month on whether the USA will renew its 180-day sanction waiver for importers of Iranian oil. Most notable among these importers are China, India, Japan, South Korea, Taiwan and Turkey. US Senators Robert Menendez (Democrat) and Mark Kirk, have urged President Obama to insist that importers of Iranian crude reduce their purchase contracts by 18% or more to get the exemption.

So far, Japan has already secured an exemption while decisions on India, South Korea and China will be made before the end of the month. If the US wanted to see buyers cut their purchases progressively then there is clear evidence of this happening. Two sources of the Oilholic’s, in the shipping industry in Singapore and India, suggested last week that Iranian crude oil exports are down 20% on an annualised basis using November 23 as a cut off date. However, a December 6 Reuters' report by their Tokyo correspondent Osamu Tsukimori suggested that the annualised drop rate in Iranian crude exports was actually much higher at 25%.

Of the countries named above, Japan, South Korea and Taiwan have been the most aggressive in cutting Iranian imports. But the pleasant surprise (for some) is that India and China have responded too. Anecdotal evidence suggests that Chinese and Indian imports of Iranian crude were indeed dipping in line with US expectations.

When the Oilholic visited India earlier this year, the conjecture was that divorcing its oil industry from Iran’s would be tricky. Some of those yours truly met there then, now agree that Iranian imports are indeed down and what was stunting Iranian exports to India was not the American squeeze but rather the EU’s move on the marine insurance front.

If Iran was counting on wider support within OPEC, then the Islamic republic was kidding itself. That is because the Organisation is itself split. Apart from the Iraqis having their own agenda, the Saudis and Iranians never get along. This splits the 12 member block with most of Iran’s neighbours almost always siding with the Saudis. Iran’s most vocal supporter Venezuela, is currently grappling with what might (or might not) happen to President Hugo Chavez since he’s been diagnosed with cancer.

Others who support Iran keep a low profile for the fear of getting embroiled in diplomatic wrangling which does not concern them. So all Iran can do is moan about OPEC not taking ‘collective decisions’, hope that Chinese patronage continues even if in a diminished way and stir up disputes about things such as the appointment of the OPEC Secretary General.

The dependency of Asian importers on Iranian crude is not going to go overnight. However, they are learning to adapt in fits and starts as the last 6 months have demonstrated. This should worry Iran.

That’s all from Vienna folks! Since it’s time to say Auf Wiedersehen and check-in for the last British Airways flight out to London, the Oilholic leaves you with a view of his shadow on a sun soaked, snow-capped garden at Schönbrunn Palace. Christmas is fast approaching but even in the season of goodwill, OPEC won’t or for that matter can’t come to Iran’s aid while the US and EU embargo its exports. Even cartels, if you can currently call OPEC one, have limits. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Empty OPEC briefing room podium following the end of the 162nd meeting of ministers, Vienna, Austria. Photo 2: Schönbrunn Palace Christmas market © Gaurav Sharma 2012.

Wednesday, December 12, 2012

OPEC 'maintains' production quota @ 30mbpd

OPEC has maintained its production quota at 30 million barrels per day (bpd) following the conclusion of its 162nd meeting in Vienna, Austria. Member Iraq is yet to be included in the current daily production figure, while Libya would be shortly, it said.

The oil producers group also announced that current Secretary General Abdalla Salem el-Badri's term will be extended for one more year with effect from January 1, 2013 but did not assign any reason for the extension. Under existing norms, an OPEC Secretary General usually steps down after two terms in office.

Sources say, the unexpected move was down to the inability of OPEC members to unite behind a common candidate for the office of Secretary General. The issue has been in the background for some time now.

OPEC said it had reviewed the oil market outlook and the existing supply/demand projections for 2013 in particular. It added that ministers had noted the price volatility witnessed throughout 2012, which in its opinion "remained mostly a reflection of increased levels of speculation in the commodities markets, exacerbated by geopolitical tensions and, latterly, exceptional weather conditions."

It also observed mounting pessimism over the global economic outlook, with downside risks continuing to be presented by the sovereign debt crisis in the Eurozone, high unemployment in the advanced economies and inflation risk in the emerging economies.

Hence, OPEC delegates noted that although world oil demand is forecast to increase marginally during the year 2013, this is likely to be more than "offset by the projected increase in non-OPEC supply" and that projected demand for OPEC crude in 2013 is expected to contract to 29.7 million bpd. This, it said, was "largely behind" its decision to maintain the current production level.

OPEC added that "member countries would, if necessary, take steps to ensure market balance and reasonable price levels for producers and consumers." In taking this decision, member countries confirmed that they will swiftly respond to developments that might have a detrimental impact on an orderly oil market.

Apart from an extension of el-Badri’s tenure, OPEC has appointed Yasser M. Mufti, Saudi Arabian Governor for OPEC, as Chairman of the Board of Governors for 2013, and Ali Obaid Al Yabhouni, UAE Governor for OPEC, as Alternate Chairman for the same period, also with effect from January 1, 2013. OPEC said its next meeting will convene in Vienna, Austria, on May 31, 2013.

Despite persistent questioning by the assembled scribes about details on individual members' quotas, OPEC did not divulge them or how they will be enforced. That's all from the OPEC HQ! Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo:  OPEC Secretary General Abdalla Salem el-Badri at the conclusion of162nd OPEC meeting on December 12, 2012, Vienna, Austria © Gaurav Sharma, December 2012.

Initial soundbites before things kick-off at OPEC

The delegates and ministers have walked in, the press scrum (or should you choose the term g*ng b*ng) is over and the closed door meeting has begun – all ahead of a decision on production quotas and the possible appointment of a new secretary general.

Smart money is on OPEC maintaining output at its current level of 30 million barrels per day (bpd), with the Saudis curbing their breaches of set quotas and the cartel reporting a real terms cut in November. No one smart would put money on who the new OPEC Secretary General might be.

But before that, there are as usual some leaks here and some soundbites there to contend with. These generally nudge analysts and journalists alike in the general direction of what the decision might be. Arriving in Vienna ahead of the meeting, Saudi Arabia’s oil minister Ali al-Naimi, the key man at the table, shunned the international media to begin with and chose to issue a statement via his country’s national press agency.

In his statement, Naimi said the main aim of the December 12 meeting is to keep the balance of the global crude markets in order to serve the interests of producers and consumers. He added that balancing the market will help the growth of the global economy. Since then, he has maintained the same line in exchanges with journalists.

As expected, the Iranians feel a cut in production was needed, saying their fellow members are producing 1 million bpd more than they ought to be. Iran said OPEC’s statement last month, that economic weakness in some major consuming countries could shave off 20% from its global demand growth outlook for 2013, lends credence to their claim. However, a delegate admitted there was "little need to change anything" and that the current US$100-plus OPEC basket price was "ok."

Walking in to OPEC HQ, UAE Energy Minister Mohammad bin Dhaen al-Hamli told the Oilholic that he "hopes to solve" the issue of who will be the next Secretary General. Libya's new oil minister Abdelbari al-Arusi, said he was "happy with OPEC production levels.”

Meanwhile, two key men are not in Vienna – namely Kuwait’s oil minister Hani Abdulaziz Hussein and Venezuela’s Rafael Ramirez. According to a Venezuelan scribe, the latter has sent Bernard Mommer, the OPEC representative for Venezuela’s oil ministry, in his place so he could support President Hugo Chavez, who is undergoing cancer surgery in Cuba. Ramirez added that Venezuela did not believe it was necessary for OPEC to increase production quotas and that the market was “sufficiently” supplied.

Finally, in his opening address, Iraqi oil minister and president of the conference Abdul-Kareem Luaibi Bahedh said OPEC faces a period of continuing uncertainty about the oil market outlook. "To a great extent, this reflects the lack of a clear vision on the economic front. The global economy has experienced a persistent deceleration since the beginning of the year...In the light of this, world oil demand growth forecasts for this year have been revised down frequently," he added.

Turning to the oil price, he said it had strengthened in the six months since June. "For its part, OPEC continues to do what it can to achieve and maintain a stable oil market...However, this is not the responsibility of OPEC alone. If we all wish to benefit from a more orderly oil market, then we should all be prepared to contribute to it. This includes consumers, non-OPEC producers, oil companies and investors, in the true spirit of dialogue and cooperation," said the Iraqi oil minister.

Meanwhile, as a footnote, the IEA raised its projections for non-OPEC supply in 2013 in its Monthly Oil Market Report published on December 12. The agency said global oil production increased by 730,000 bpd to 91.6 million bpd in November. With non-OPEC production rebounding "strongly" in November to 54.0 million bpd, the IEA revised up its forecasts for non-OPEC fourth quarter supply by 30,000 bpd to 53.8 million bpd. For next year, IEA expects non-OPEC production to rise to 54.2 million bpd; the fastest pace since 2010.

It also added that OPEC supply rose by "a marginal" 75,000 bpd to "31.22 million bpd". IEA said the OPEC crude supply increases were led by Saudi Arabia, Angola, Algeria and Libya but offset by recent production problems in Nigeria. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo:  OPEC briefing room at 162nd meeting of OPEC, Vienna, Austria © Gaurav Sharma, December 2012.

Tuesday, December 11, 2012

EIA’s switch to Brent is telling

A decision by the US Energy Information Administration (EIA) this month has sent a lot of analysts and industry observers, including yours truly, crudely quipping “we told you so.” That decision is ditching the WTI and adopting Brent as its benchmark for oil forecasts as the EIA feels its domestic benchmark no longer reflects accurate oil prices.

Ok it didn't say so as such; but here is an in verbatim quote of what it did say: "This change was made to better reflect the price refineries pay for imported light, sweet crude oil and takes into account the divergence of WTI prices from those of globally traded benchmark crudes such as Brent."

Brent has traded at US$20 per barrel premium to WTI futures since October, and the premium has remained in double digits for huge chunks of the last four fiscal quarters while waterborne crudes such as the Louisiana Light Sweet have tracked Brent more closely.

In fact, the EIA clearly noted that WTI futures prices have lagged behind other benchmarks, as rising oil production in North Dakota and Texas pulled it away from benchmark cousins across the pond and north of the US border. The production rise, for lack of a better word, has quite simply 'overwhelmed' the pipelines and ancillary infrastructure needed to move the crude stuff from Cushing (Oklahoma), where the WTI benchmark price is set, to the Gulf of Mexico. This is gradually changing but not fast enough for the EIA.

The Oilholic feels it is prudent to mention that Brent is not trouble free either. Production in the British sector of the North Sea has been declining since the late 1990s to be honest. However the EIA, while acknowledging that Brent has its issues too, clearly feels retail prices for petrol, diesel and other distillates follow Brent more closely than WTI.

The move is a more than tacit acknowledgement that Brent is more reflective of global supply and demand permutations than its Texan cousin. The EIA’s move, telling as it is, should please the ICE the most. Its COO said as early as May 2010 that Brent was winning the battle of the indices. In the year to November, traders have piled on ICE Brent futures volumes which are up 12% in the year to date.

Furthermore, prior to the OPEC output decision in Vienna this week, both anecdotal and empirical evidence suggests hedge funds and 17 London-based money managers have increased their bets on Brent oil prices rising for much of November and early December. Can’t say for last week as yours truly has been away from London, however, as of November 27 the net long positions had risen to 108,112 contracts; a spike of 11k-plus.

You are welcome to draw your own conclusions. No one is suggesting any connection with what may or may not take place in Vienna on December 12 or EIA opting to use Brent for its forecasts. Perhaps such moves by money managers and hedge funds are just part of a switch from WTI to Brent ahead of the January re-balancing act. However, it is worth mentioning in the scheme of things.

In other noteworthy news, Stephen Harper’s government in Canada has finally approved the acquisition of Nexen by China’s CNOOC following a review which began on July 23. Calgary, Alberta-headquartered Nexen had 900 million barrels of oil equivalent net proven reserves (92% of which is oil with nearly 50% of the assets developed) at its last update on December 31, 2011. The company has strategic holdings in the North Sea, so the decision does have implications for the UK as well.

CNOOC’s bid raised pretty fierce emotions in Canada; a country which by and large welcomes foreign direct investment. It has also been largely welcoming of Asian national oil companies from India to South Korea. The Oilholic feels the Harper administration’s decision is a win for the pragmatists in Ottawa. In light of the announcement, ratings agency Moody's has said it will review Nexen's Baa3 senior unsecured rating and Ba1 subordinated rating for a possible upgrade.

Meanwhile, minor pandemonium has broken out in Brazil’s legislative circles as president Dilma Rousseff vetoed part of a domestic law that was aimed at sharing oil royalties across the country's 26 states. Brazil’s education ministry felt 100% of the profits from new ultradeepwater oil concessions should be used to improve education throughout the country.

But Rio de Janeiro governor Sergio Cabral, who gets a windfall from offshore prospection, warned the measure to spread oil wealth across the country could bankrupt his state ahead of the 2014 soccer world cup and the 2016 summer Olympic games. So Rousseff favoured the latter and vetoed a part of the legislation which would have affected existing oil concessions. To please those advocating a more even spread of oil wealth in Brazil, she retained a clause spreading wealth from the “yet-to-be-explored oilfields” which are still to be auctioned.

Brazil's main oil-producing states have threatened legal action. It is a very complex situation and a new structure for distributing royalties has to be in place by January 2013 in order for auctions of fresh explorations blocks to go ahead. This story has some way to go before it ends and the end won’t be pretty for some. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Pipeline, Brooks Range, Alaska, USA © Michael S. Quinton/National Geographic.

Monday, December 10, 2012

A meeting, an appointment & Vienna’s icy chill!

The Oilholic finds himself back in Vienna for the 162nd meeting of OPEC ministers and his first snowfall of the festive season; the latter has eluded him back home in London. Here is a view of Vienna's snow-laced Auer Welsbach Park and it’s not the only place where things are a bit chilly. The OPEC HQ here could be one place for instance!

For this time around, accompanying the usual tussles between the Saudis and Iranians, the doves and the hawks, is the additional stress of appointing a successor to OPEC Secretary General Abdalla Salem el-Badri, a genial Libyan, who is nearing the end of his second term.

Finding a compromise candidate is usually the order of the day but not if 'compromise' is not a by-word for many of its members. Trouble has been brewing since OPEC members last met in June. As a long term observer of the goings-on at OPEC, the Oilholic can say for certain that all the anecdotal evidence he has gathered seems to suggest a clash is imminent. That’s hardly a surprise and it could not have come at a worse time.

OPEC has forecast a 5% drop in demand for its crude oil in wake of shale supply and other unconventional oil from non-OPEC jurisdictions hitting the market in a troubling global macroeconomic climate. It also acknowledged for the first time that shale oil was of concern and then got into a debate with the IEA whether (or not) US production could overtake Saudi Arabia’s by 2020. In light of all this, OPEC could seriously do with some strong leadership at this juncture.

Sources suggest three 'potential' candidates are in the running to succeed el-Badri. Two of these are Thamir Ghadhban of Iraq and Gholam-Hossein Nozari of Iran. Both have served as their country’s respective oil ministers. The third man is Majid Munif; an industry veteran and a former Saudi OPEC adviser. Now, the Oilholic uses the world ‘potential’ above for the three men only guardedly.

Historical and recent acrimony between the Iranians and Saudis needs no documentation. It has only been a year and half since an OPEC meeting broke-up in acrimony and er...highly colourful language! This puts the chances of either one of them settling for the other’s candidate as highly unlikely. Iran is also miffed about the lack of support it has received in wake of international sanctions on its oil industry by several importing jurisdictions.

Some here suggest that Ghadhban of Iraq would be the compromise candidate for the post. However, sources within four MENA OPEC member delegations have told the Oilholic that they are backing the Saudi candidate Munif. Yours truly cannot predict whether they’ll have a change of heart but as things stand, a compromise banking on the appointment of an Iraqi is just not working out.

Never say ‘never’ but the possibility of el-Badri continuing is remote as well. He is not allowed more than two terms under OPEC rules. In order to assuage both the Iranian and the Saudis, perhaps an Ecuadorian or an Angolan candidate might come forward. While such a candidate may well calm tempers in the room, he (or she, there is after all one lady at the table) is highly unlikely to wield the leverage, clout or respect that el-Badri has commanded over his tenure.

As Kuwait prepares to hold the rotating presidency of the cartel, a stalemate over the Secretary General’s appointment, according to most here, is detrimental to “market stability”. How about it being detrimental to OPEC itself at a time when a medium term, possibly long term, rewriting of the global oil trade is perhaps underway?

That's all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo:  Snowfall at Auer-Welsbach Park, Vienna, Austria © Gaurav Sharma, December 2012.

Wednesday, December 05, 2012

A ‘crude’ autumn statement in a freezing UK

UK Chancellor of the Exchequer George Osborne finally got around to delivering his 2012 ‘autumn’ budget on a freezing December afternoon here in London today and there was plenty in it for the Oilholic to mull over. To begin with, in a highly populist move, Osborne not only postponed a 3 pence (5 US cents) rise in UK fuel duty but scrapped the tax measure on motorists altogether. This was followed by an announcement that the Government will set up a new Office for Unconventional Gas with an emphasis on shale gas and coal-bed methane and the role they could play in meeting the country's energy demand.
 
Osborne also announced a consultation exercise with the possibility of new tax incentives for the shale gas industry which is currently in its infancy here. Shale could very well become a part-player in the UK government’s latest strategy as conventional North Sea gas production declines.
 
The Chancellor also said that the UK’s headline rate of corporation tax would fall to 21% in 2014, from 22% in 2013. Additionally, plant and machinery investment allowance was raised from £25,000 to £250,000; duly cheered by independent contractors. Summing up the motive behind his ‘crude’ moves, the Chancellor urged investors to: "Come here, create jobs here; Britain is open for business. This would be the lowest rate of (corporation) tax for any major Western economy."
 
Once Osborne's statement had ended, the Oilholic sought feedback from the crude men around.
 
Robin Cohen, partner in Deloitte’s Energy & Resources practice, felt the government’s positive messages on the potential for shale gas, although tempered by realism on the timelines and challenges for the sector, will be welcomed by those involved in developing a potentially significant future energy resource for the UK.
 
“Recent energy pronouncements from the government and its gas generation strategy reinforce the dramatic (recent) changes in the character of the country’s electricity market from an investor’s perspective. Rather than assessing the viability of future power generation projects by analysing supply, demand and the resulting market prices, investors now need to anticipate the aggregate effect of several key policy measures, some of which have no track record as yet,” he added.
 
These include the carbon price floor, contracts for differences (CFDs) within the levy control framework, the capacity mechanism and the UK’s response to the EU target model for electricity markets. “While the strategy will be broadly welcomed by investors, it highlights the limits to the level of future certainty that the Government can provide,” Cohen added.
 
Anthony Lobo, Head of Oil and Gas at KPMG UK, also said the government's plan to consult on an appropriate fiscal regime for shale gas exploration is a positive sign for the industry.
 
“The UK has been seen as a negative place to invest recently due to very high levels of fiscal uncertainty. The tax increases in 2011 resulted in lowest levels of investment in years. Production also plummeted by 19% in 2011 predominantly as a result of the increase in supplementary charge, this drop negated any tax revenues the government hoped to realise. The announcement today signals the government's intent to support investment in Oil and Gas,” he added.
 
Tim Fox, Head of Energy and Environment at the Institution of Mechanical Engineers, felt the Chancellor had provided some very welcome clarification as to the role of gas in bridging the looming energy gap mid-decade. “It is sensible for the UK to invest in gas-fired power plants at this point in time as they are cleaner than coal, needed to back-up intermittent renewable energy sources, and can be built quicker with much lower up-front costs than nuclear plants,” he said.
 
“News that the Government will set up a new Office for Unconventional Gas is positive…Unconventional has the potential to create thousands of high-skilled engineering jobs and export services over the next decade,” Fox added.
 
There you are! The advisory firms like what the Chancellor said, the engineers and tax consultants did too – now only future investors and big energy companies need convincing. That’s all from the UK House of Commons folks!
 
But before yours truly takes your leave, it emerged overnight that Aberdeen-based Faroe Petroleum has bagged a provisional Icelandic exploration licence in the Dreki area. The company said it was "very excited to get the opportunity to explore and de-risk these extensive prospects” encompassing seven blocks located inside the Arctic Circle to the north east of the Iceland.
 
Faroe added that the move was an important extension of its frontier exploration portfolio in the UK west of Shetlands, Norwegian Sea and Norwegian Barents Sea. Graham Stewart, chief executive of Faroe Petroleum, said, "As with our Norwegian Barents Sea licences, this new Icelandic (Jan Mayen Ridge) licence has significant hydrocarbon potential, and is located in ice-free waters."
 
So on an Arctic note, let’s hope Faroe has better luck than its Scottish cousin Cairn Energy has had (so far) in its icy foray. Keep reading, keep it ‘crude’!
 
© Gaurav Sharma 2012. Photo: Oil Rig, North © Cairn Energy

Monday, December 03, 2012

Crude talking points of the last two weeks

In a fortnight during which the Bank of England hired a man whose signature appears on Canadian banknotes as its new governor, the oil & gas world reiterated its own cross-border nature, when an American firm sold a Kazakh asset to an Indian company. That firm being ConocoPhillips, the asset being its 8.4% stake in Kazakh oil field Kashagan and the Indian buyer being national oil company (NOC) ONGC Videsh – all signed, sealed and delivered in a deal worth around US$5.5 billion.
 
Even with an after-tax impairment of US$400 million, the deal represents a tidy packet for ConocoPhillips as it attempts to cut its debt. Having divested its stake in Russia’s Lukoil, the American oil major has already beaten its asset sale programme target of US$20 billion. So when the final announcement came, it was not much of a surprise as Kazakhstan government officials had revealed much earlier that a move was on the cards.
 
Still it is sobering to see ConocoPhillips divest from Kashagan – the world's biggest oilfield discovery by volume since 1968. It may hold an estimated 30 billion barrels of oil. Phase I of the development, set to begin next year, could yield around 8 billion barrels, a share of which ONGC is keenly eyeing.

India imports over 75% of the crude oil it craves and is in fact the world's fourth-biggest oil importer by volume. Given this dynamic, capital expenditure on asset with a slower turnaround may not be an immediate concern for an Indian NOC, but certainly is for investors in the likes of ConocoPhillips and its European peers.

On the back of a series of meetings between investors and its EMEA natural resources & commodities team in London, Fitch Ratings recently revealed that elongated upstream investment lead times and a (still) weak refining environment in Western Europe remain a cash flow concern for investors.
 
They seemed most concerned about the lead time between higher upstream capex and eventual cash flow generation and were worried about downward rating pressure if financial metrics become strained for an extended period. It is prudent to mention that Fitch Ratings views EMEA oil & gas companies' capex programmes as measured and rational despite a sector wide revised focus on upstream investment.
 
For example, the two big beasts – BP and Royal Dutch Shell – are rated 'A'/Positive and 'AA'/Stable respectively; both have increased capex by more than one-third for the first 9 months of 2012 compared to the same period last year. Elsewhere in their chats, unsurprisingly Fitch found that refining overcapacity and weak utilisation rates remain a concern for investors in the European refining sector. Geopolitical risk is also on investors' minds as they look to 2013.
 
While geopolitical events may drive oil prices up, which positively impact cash flow, interruptions to shipping volumes may more than offset gains from these price increases – negatively impacting both operating cash flow and companies' competitive market positions. Away from capex concerns, Fitch also said that shale gas production in Poland could improve the country's security of gas supplies but is unlikely to lead to large declines in gas prices before 2020.

In a report published on November 26, Arkadiusz Wicik, Fitch’s Warsaw-based director and one of the most pragmatic commentators the Oilholic has encountered, noted that shale gas production in Poland, which has one of the highest shale development potentials in Europe, would lower the country's dependence on gas imports. Most of Poland's imports currently come from Russia.
 
However, Wicik candidly noted that even substantial shale gas production by 2020, is unlikely to result in large declines in domestic gas prices.
 
"In the most likely scenario, shale gas production, which may start around 2015, will not lead to a gas oversupply in the first few years of production, especially as domestic gas demand may increase by 2020 as several gas-fired power plants are planned to be built. If there is a surplus of gas because shale gas production reaches a significant level by 2020, this surplus is likely to be exported," he added.
 
In actual fact, if the planned liberalisation of the Polish gas market takes place in the next few years, European spot gas prices may have a larger impact on gas prices in Poland than the potential shale gas output.
 
From a credit perspective, Fitch views shale gas exploration as high risk and capital intensive. Meanwhile, the UK government was forced on the defensive when a report in The Independent newspaper claimed that it was opening up 60% of the country’s cherished countryside for fracking.
 
Responding to the report, a government spokesperson said, "There is a big difference between the amount of shale gas that might exist and what can be technically and commercially extracted. It is too early to assess the potential for shale gas but the suggestion more than 60% of the UK countryside could be exploited is nonsense."
 
"We have commissioned the British Geological Survey to do an assessment of the UK's shale gas resources, which will report its findings next year," he added.
 
Barely had The Independent revealed this ‘hot’ news, around 300 people held an 'anti-fracking' protest in London. Wow, that many ‘eh!? In defence of the anti-frackers, it is rather cold these days in London to be hollering outside Parliament.
 
Moving on to the price of the crude stuff, Moody’s reckons a constrained US market will result in a US$15 per barrel difference in 2013 between the two benchmarks – Brent and WTI – with an expected premium in favour of the former. Its recently revised price assumptions state that Brent crude will sell for an average US$$100 per barrel in 2013, US$95 in 2014 and US$90 in the medium term, beyond 2014. While the price assumption for Brent beyond 2014 is unchanged, the agency has revised both the 2013 and 2014 assumptions.
 
For WTI, Moody’s has left its previous assumptions unchanged at US$85 in 2013, 2014 and thereafter. Such a sentiment ties-in to the Oilholic’s anecdotal evidence from the US and what many in City concur with. So Moody’s is not alone in saying that Brent’s premium to WTI is not going anywhere, anytime soon. Even if the Chinese economy tanks, it’ll still persist in some form as both benchmarks will plummet relative to market conditions but won’t narrow up their difference below double figures.
 
Finally, on the noteworthy corporate news front, aside from ConocoPhillips’ move, BP was in the headlines again for a number of reasons. Reuters’ resident Oilholic Tom Bergin reported in an exclusive that BP is planning a reorganisation of its exploration and production (E&P) operations. Citing sources close to the move, Bergin wrote that Lamar McKay, currently head of BP's US operations, will become head of a new E&P unit; a reinstatement of a role that was abolished in 2010 in the wake of the oil spill.
 
Current boss Bob Dudley split BP's old E&P division into three units on his elevation to CEO to replace Tony Hayward, whose gaffes in during the Gulf of Mexico oil spill led to his stepping down. BP declined to comment on Bergin’s story but few days later provided an unrelated newsworthy snippet.
 
The oil giant said it had held preliminary talks with the Russian government and stakeholders in the Nordstream pipeline about extending the line to deliver gas to the UK. BP said any potential extension to the pipeline was unlikely to be agreed before mid-2013.
 
The pipeline’s Phase I, which is onstream, runs under the Baltic Sea bringing Russian gas into Germany. A source described the move as “serious” and aimed at diversifying the UK’s pool of gas supplying nations which currently include Norway and Qatar as North Sea production continues to wane. As if that was not enough news from BP for one fortnight, the US government decided to "temporarily" ban the company from bagging any new US government contracts.
 
The country's Environmental Protection Agency (EPA) said on November 28 that the move was standard practice when a company reaches an agreement to plead guilty to criminal charges as BP did earlier in the month. New US E&P licences are made available regularly, so BP may miss out on some opportunities while the ban is in place but any impact is likely to be relatively ephemeral at worst. No panic needed!
 
On a closing note, in a move widely cheered by supply side industry observers, Shell lifted its force majeure on Nigeria's benchmark Bonny Light crude oil exports on November 21 easing supply problems for Africa’s leading oil producer. The force majeure, implying a failure to meet contractual obligations due to events outside of corporate control, on Bonny Light exports came into place on October 19 following a fire on a ship being used to steal oil. It forced the company to shut down its Bomu-Bonny pipeline and defer 150,000 barrels per day of production.
 
However, Shell said that force majeure on Nigerian Forcados crude exports remains in place. Forcados production was also stopped owing to damage caused by suspected thieves tapping into the Trans Forcados Pipeline and the Brass Creek trunkline. As they say in Nigeria - it’s all ok until the next attempted theft goes awry. That’s all for the moment folks! Keep reading, keep it 'crude'!
 
© Gaurav Sharma 2012. Photo: Oil Rig, USA © Shell

Saturday, November 17, 2012

‘Oh Frack’ for OPEC, ‘Yeah Frack’ for IEA?

In a space of a fortnight this month, both the IEA and OPEC raised “fracks” and figures. Not only that, a newly elected President Barack Obama declared his intentions to rid the USA of “foreign oil” and the media was awash with stories about American energy security permutations in wake of the shale bonanza. Alas, the whole lot forgot to raise one important point; more on that later.
 
Starting with OPEC, its year-end calendar publication – The World Oil Outlook – saw the oil exporters’ bloc acknowledge for the first time on November 8 that fracking and shale oil & gas prospection on a global scale would significantly alter the energy landscape as we know it. OPEC also cut its medium and long term global oil demand estimates and assumed an average crude oil price of US$100 per barrel over the medium term.
 
“Given recent significant increases in North American shale oil and shale gas production, it is now clear that these resources might play an increasingly important role in non-OPEC medium and long term supply prospects,” its report said.
 
The report added that shale oil will contribute 2 million barrels per day (bpd) towards global oil supply by 2020 and 3 million bpd by 2035. If this materialises, then the projected rate of incremental supply is over the daily output of some OPEC members and compares to the ‘official’ daily output (i.e. minus the illegal siphoning / theft) of Nigeria.
 
OPEC’s first acknowledgement of the impact of shale came attached with a caveat that over the medium term, shale oil would continue to come from North America only with other regions making “modest” contributions over the longer term at best. For the record, the Oilholic agrees with the sentiment and has held this belief for a while now based on detailed investigations in a journalistic capacity (about financing shale projects).
 
OPEC admitted that the global economy, especially the US economy, is expected to be less reliant on its members, who at present pump over a third of the world's oil and have around 80% of planet’s conventional crude reserves. Pay particular attention to the ‘conventional’ bit, yours truly will come back to it.
 
According to the exporters’ bloc, global demand would reach 92.9 million bpd by 2016, down over 1 million from its 2011 report. By 2035, it expects consumption to rise to 107.3 million bpd, over 2 million less than previous estimates. To put things into perspective, global demand in 2011 was 87.8 million bpd.
 
Partly, but not only, down to shale oil, non-OPEC output is expected to rise to 56.6 million bpd by 2016, up 4.2 million bpd from 2011, the report added. So OPEC expects demand for its crude to average 29.70 million bpd in 2016; much less than its current output (ex-Iraq).
 
"This downward revision, together with updated estimates of OPEC production capacity over the medium term, implies that OPEC crude oil spare capacity is expected to rise beyond 5 million bpd as early as 2013-14," OPEC said.
 
"Long term oil demand prospects have not only been affected by the medium term downward revisions, but by higher oil prices too…oil demand growth has a notable downside risk, especially in the first half of 2013. Much of this risk is attributed to not only the OECD, but also China and India," it added.
 
So on top of a medium term crude oil price assumption of US$100 per barrel (by its internal measure and OPEC basket of crudes, which usually follows Brent not WTI), the bloc forecasts the price to rise with inflation to US$120 by 2025 and US$155 by 2035.
 
Barely a week later, IEA Chief Economist Fatih Birol – who at this point in 2009 was discussing 'peak oil' – created ripples when he told a news conference in London that in his opinion the USA would overtake Russia as the biggest gas producer by a significant margin by 2015. Not only that, he told scribes here that by 2017, the USA would become the world's largest oil producer ahead of the Saudis and Russians. 
 
Realising the stirrings in the room, Birol added that he realised how “optimistic” the IEA forecasts were sounding given that the shale oil boom was a new phenomenon in relative terms.
 
"Light, tight oil resources are poorly known....If no new resources are discovered after 2020 and plus, if the prices are not as high as today, then we may see Saudi Arabia coming back and being the first producer again," he cautioned.
 
Earlier in the day, the IEA forecasted that US oil production would rise to 10 million bpd by 2015 and 11.1 million bpd in 2020 before slipping to 9.2 million bpd by 2035. It forecasted Saudi Arabia’s oil output to be 10.9 million bpd by 2015, 10.6 million bpd in 2020 but would rise to 12.3 million bpd by 2035.
 
That would see the world relying increasingly on OPEC after 2020 as, in addition to increases from Saudi Arabia, Iraq will account for 45% the growth in global oil production to 2035 and become the second-largest exporter, overtaking Russia.
 
The report also assumes a huge expansion in the Chinese economy, which the IEA said would overtake the USA in purchasing power parity soon after 2015 (and by 2020 using market exchange rates). It added that the share of coal in primary energy demand will fall only slightly by 2035. Fossil fuels in general will remain dominant in the global energy mix, supported by subsidies that, in 2011, rose by 30% to US$523 billion, due mainly to increases in the Middle East and North Africa.
 
Fresh from his re-election, President Obama promised to “rid America of foreign oil” in his victory speech prior to both the IEA and OPEC reports. An acknowledgement of the US shale bonanza by OPEC and a subsequent endorsement by IEA sent ‘crude’ cheers in US circles.
 
The US media, as expected, went into overdrive. One story – by ABC news – stood out in particular claiming to have stumbled on a shale oil find with more potential than all of OPEC. Not to mention, the environmentalists also took to the airwaves letting the great American public know about the dangers of fracking and how they shouldn’t lose sight of the environmental impact.
 
Rhetoric is fine, stats are fine and so are verbal jousts. However, one important question has bypassed several key commentators (bar some environmentalists). That being, just how many barrels are being used, to extract one fresh barrel? You bring that into the equation and unconventional prospection – including US and Canadian shale, Canadian oil sands and Brazil’s ultradeepwater exploration – all seem like expensive prepositions.
 
What’s more OPEC’s grip on conventional oil production, which is inherently cheaper than unconventional and is expected to remain so for sometime, suddenly sounds worthy of concern again.
 
Nonetheless “profound” changes are underway as both OPEC and IEA have acknowledged and those changes are very positive for US energy mix. Maybe, as The Economist noted in an editorial for its latest issue: “The biggest bonanza from all this new (US) energy would be if users paid the real cost of consuming oil and gas.”
 
What? Tax gasoline users more in the US of A? Keep dreaming sir! That’s all for the moment folks! Keep reading, keep it crude!
 
© Gaurav Sharma 2012. Oil prospection site, North Dakota, USA © Phil Schermeister / National Geographic.

Friday, November 16, 2012

BP’s settlement expensive but sound

As BP received the biggest criminal fine in US history to the tune of US$4.5 billion related to the 2010 Gulf of Mexico oil spill, the Oilholic quizzed City analysts over what they made of it. Overriding sentiment of market commentators was that while a move to settle criminal charges in this way was expensive for BP, it was also a sound one for the oil giant.
 
Beginning with what we know, according to the US Department of Justice (DoJ), BP has agreed to plead guilty to eleven felony counts of misconduct or neglect of ships officers relating to the loss of 11 lives, one misdemeanour count under the Clean Water Act, one misdemeanour count under the Migratory Bird Treaty Act and one felony count of obstruction of Congress.
 
Two BP workers - Robert Kaluza and Donald Vidrine - have been indicted on manslaughter charges and an ex-manager David Rainey charged with misleading Congress according to the Associated Press. The resolution is subject to US federal court approval. The DoJ will oversee BP handover US$4 billion, including a US$1.26 billion fine as well as payments to wildlife and science organisations.
 
BP will also pay US$525 million to the US SEC spread over three years. The figure caps the previous highest criminal fine imposed on pharmaceutical firm Pfizer of US$1.2 billion. City analysts believe BP needed this settlement so that it can now focus on defending itself against pending civil cases.
 
“It was an expensive, but necessary closure that BP needed on one legal fronts of several,” said one analyst. The 2010 Deepwater Horizon disaster killed 11 workers and released millions of barrels of crude into the Gulf of Mexico which took 87 days to plug.
 
The company is expected to make a final payment of US$860 million into the US$20 billion Gulf of Mexico compensation fund by the end of the year. BP’s internal investigation about the incident had noted that, “multiple companies, work teams and circumstances were involved over time.”
 
These companies included Transocean, Halliburton, Anadarko, Moex and Weatherford. BP has settled all claims with Anadarko and Moex, its co-owners of the oil well and contractor Weatherford. It received US$5.1 billion in cash settlements from the three firms which was put into the Gulf compensation fund.
 
BP has also reached a US$7.8 billion settlement with the Plaintiffs' Steering Committee, a group of lawyers representing victims of the spill. However, the company is yet to reach a settlement with Transocean, the owner of the Deepwater Horizon rig and engineering firm Halliburton. A civil trial that will determine negligence is due to begin in New Orleans in February 2013.
 
Jeffrey Woodruff, Senior Director at Fitch Ratings, felt that the settlement was a positive move but key areas of uncertainty remained. “Although the settlement removes another aspect of legal uncertainty, it does not address Clean Water Act claims, whose size cannot yet be determined. It is therefore too early for us to consider taking a rating action,” he added.
 
Fitch said in July, when revising the company's Outlook to Positive, that BP should be able to cover its remaining legal costs without impairing its financial profile, and that a comprehensive settlement of remaining liabilities for US$15 billion or less would support an upgrade.
 
Recent asset sales have also strengthened BP's credit profile. Last month, BP posted a third quarter underlying replacement cost profit, adjusted for non-operating items and fair value accounting effects, of US$5.2 billion. The figure is down from US$5.27 billion recorded in the corresponding quarter last year but up on this year's second quarter profit of US$3.7 billion.
 
“The company has realised US$35 billion of its US$38 billion targeted asset disposal programme at end the end of the third quarter of 2012. Proceeds from the sale of its 50% stake in TNK-BP in Russia will further improve its liquidity, supporting our view that the company can meet legal costs without impairing its profile,” Woodruff concluded.
 
Meanwhile, Moody’s noted that the credit rating and outlook for Transocean (currently Baa3 negative), which is yet to settle with BP, was unaffected by the recent development.
 
Stuart Miller, Moody's Senior Credit Officer, said, "The big elephant in the room for Transocean is its potential exposure to Clean Water Act fines and penalties as owner of the Deepwater Horizon rig. The recent agreement between BP and DoJ did not address the claims under the Act."
 
However, he felt that Transocean will ultimately settle with the DoJ, and there was a good chance that the amount may be manageable given the company’s current provision level and cash balances.
 
“But if gross negligence is proven, a very high legal standard, the settlement amount could result in payments by Transocean in excess of its current provision amount,” Miller concluded.

Plenty more to unfold in this saga but that’s all for the moment folks. Keep reading, keep it ‘crude’!
 
© Gaurav Sharma 2012. Gulf of Mexico spill containment area © BP Plc.

Monday, November 12, 2012

A brilliant catalogue of ‘crude’ expressions

As paper barrels increasingly get the upper hand in an intertwined global network of crude oil and distillates trading, whether it is the virtual crude you are after or the physical stuff – getting a hang of the market jargon is crucial.
 
Perhaps you are familiar with terms such as contango, backwardation or crack spreads – as many readers of this blog would be. But can you confidently define what a PIONA test is? Or for that matter what’s a No. 6 Fueloil? Or maybe what demulsibility implies to in a crude context or what are charter parties?
 
If you are stumped or curious or unsure or perhaps all three, then – The Oil Traders’ Word(s) – a brilliant compendium of ‘crude’ knowledge containing oil traders’ expressions, trading floor jargon, measurements, metrics and terms put together by Statoil executive Stefan Van Woenzel is just the tonic!
 
In a painstaking endeavour, Van Woenzel has penned the A to Z of oil trading jargon banking on his decades of experience as a trader. In order to put the veracity of his research work to test, the Oilholic subjected The Oil Traders’ Word(s) to a simple test. To begin with yours truly tallied common oil trading expressions to check the author’s description of them, then on to terms that only readers with a mid to high level of investment knowledge would be familiar with and finally to random jump searches by alphabet.
 
The Oilholic is delighted to say that Van Woenzel’s ‘glossary-plus’ emerges with full marks and more on all counts. Expressions, words and jargon aside, metric to imperial measures and explanatory notes make this work of just under 550 pages one of the most purposeful reference books of the oil sector. With close to 2,000 definitions, one would struggle to find a better or even a comparable product to the author’s arduous effort.

This book is not limited to a role of a ‘crude’ dictionary or an industry communications guide. Going beyond that, Van Woenzel has shared his two decades-plus worth of industry wisdom with readers in a separate chapter. Overall, it was a joy to read the book and put the glossary to a very enjoyable test. A multibillion dollar industry must appreciate the value of the author’s commendable research.
 
For his humble part, the Oilholic would be happy to recommend it to fellow ‘crude’ individuals, oil & gas executives, oil traders, energy project financiers, shipping personnel, banking sector professionals, energy journalists and academics. Students of economics, business and energy studies might also find it worth their while to have it handy. If you needed a one-stop oil industry jargon guide, then this book really is the ‘real deal’.
 
© Gaurav Sharma 2012. Photo: Front Cover – The Oil Traders' Word(s) © AuthorHouse.

Friday, October 26, 2012

For US President, the Oilholic endorses 'neither'!

Whilst lounging on Hawaii’s beautiful White Sands Beach in Kona, the Oilholic wondered if the dear readers of this blog know what is a Humuhumunukunukuāpuaʻa (pronounced ‘humu – humu – nuku – nuku – apa – wapa’)? Revelation on what it is and how it relates to energy policy stances of President Barack Obama and challenger Mitt Romney follows. The Presidential debates are over, all banners are up and the speeches are reaching a last minute fervour as Romney and Obama begin the concluding phases of their face-off ahead of the November 6, 2012 US Presidential election day.

As decision day draws nearer, the Oilholic endorses neither as both leading candidates have displayed a near lack of vision required to steer US energy policy in light of recent developments. The USA, despite its oil imports dynamic, believe it or not is the world’s third largest producer of crude oil by volume and among the market leaders in the distillates business.

With the next generation of independent wildcatters’ knack for finding value and economies of scale for small volumes (mostly in Texas and North Dakota), shale oil and an overall rise in countrywide oil output, things can only get better with the right man in charge at the White House. Additionally, the shale gas bonanza bears testimony to just about everything from American ingenuity and the benefits of an impressive pipeline (to market) network to a favourable legislative framework.

Yet both Obama and Romney sound unconvincing on respective plans for the energy industry despite their country’s domestic good fortune in recent years. The President’s policy has been a near failure while his opponent’s plans are insipid at best. Starting with the President first, since the Oilholic is in his birthplace of Hawaii and having arrived from California which hasn’t voted Republican in recent decades, bar the exception of Ronald Regan’s bid for the White House.

On the plus side, the Obama administration has opened up new US regions to oil and gas prospection though red tape persists. It has made noteworthy moves as a proponent of energy efficiency and energy economy drives for motorists and businesses alike. But on this briefest of note, the positivity ends. The BP Deepwater Horizon spill was as much about the failure of the company involved, as it was about the initial fuzzy response of the Obama administration followed by political points scoring as public anger grew when the spill wasn’t plugged for months.

Then of course there is the Solyndra boondoggle and supposed plans for “clean coal” where the less said the better, unless you are an opponent of the President. Shenanigans of the US Congress put paid to any plans he may have had for curbing greenhouse gas emissions. Then of course there are politically fishy manoeuvres ranging from not offering proactive support to shale prospection and delaying the Keystone XL pipeline project from Canada until after the election and to reach (and then again subsequently threaten to reach) US strategic petroleum reserves as petrol prices rose at US pumps.

Yet for all of his incompetence, the American energy industry is not in an unhappy place thanks largely to the Bush administration’s recognition of the domestic reserve potential and Dick Cheney’s super-aggressive push on shale. What is disappointing is that it could have been much better under Obama but wasn’t. Remember all those “Yes we can” posters of his from the 2008 campaign. The Oilholic was hard pressed not to find at least one Obama banner once every four or five streets in major Californian metropolitan areas on a visit back then (using Los Angeles, San Diego, San Francisco, San Jose, Sunnyvale and Sacramento as a basis).

Last week in San Diego yours truly found none and this week in Hawaii has been the same. For the US energy business, the absence of “Yes we can” banners conveys the same metaphorical message of being let down perhaps as the rest of the country. Things are tagging along in the energy business despite of Obama not because of anything in particular that he has done. Of course, he did make a tall claim of a cut in US oil imports from the Middle East which is true. However, the Oilholic agrees with T. Boone Pickens on this one – yes the US production rise has contributed to reduced importation of crude oil but so has the dip in economic performance which cuts energy usage and makes the citizenry energy frugal. What has Obama done?

Well so much so for the President, but what about his challenger? Sigh...The Right Honourable Mitt Romney’s policy is to make (and switch) a policy on the go accompanied by jumbled statements. Or, in something that would make the fictitious British civil servant Sir Humphrey Appleby from BBC’s political satire Yes Minister proud – the Romney campaign’s policy is not to have a policy unless asked about a particular facet of the energy business.

So what do we know so far? Romney stands for less regulation, a more lenient approach to environmental regulations and will cut addiction to subsidies. But political waffle aside, all we have had is him blast Obama over the Solyndra affair, call for a repeal of Clean Air Act without outlining his ‘clean’ alternative and a proposal to allow wind power subsidies to lapse (again without spelling out the Romney plan for Wind Power).

He flags up the shale boom without being mindful that it too needed incentives to begin with before market forces kicked-in. Admittedly, the wind energy sector works to a different dynamic and is indeed subsidy addicted. But a quip to cut subsidies without a cohesive back-up plan reeks of political opportunism. The only way Romney scores better than Obama on energy policy is that he is not Obama and who knows if that might be reason enough to vote for good ol’ Mitt.

Both men have the fuzziest of plans with erratic changes in stance suited to the political climate in an election year. This brings us back to the Humuhumunukunukuāpuaʻa which is the Hawaiian state fish from the tropical reef triggerfish family. The local name simply means "the fish that grunts like a pig" for the sound it makes when caught. It is also prone to sudden erratic changes in position and swimming patterns while negotiating the Hawaiian coral reefs according to a local marine biologist. Kinda like the two main US Presidential candidates isn’t it?

That’s all from Hawaii folks as the Oilholic prepares for the long journey home. It has been a memorable week in another memorable part of America. Alas, all good things must come to an end. Yours truly leaves you with a photo of Hawaiian residents of the Punaluʻu Black Sand beach – the Hawksbill and Green sea turtles (above right) and moi at Old Kona State Airport recreation beach and park.

You can cycle down 30 miles along the Kona coastline and stop every 15 mins to ask “Is that a view? Or is that a view?” and you’ll conclude that that’s a view! The people are lovely, the food is great, the place oozes natural history and tales of human history. Since this blogger also drove 260 miles circling the entire Big Island via its main highway with the help of veteran local tour guide John Mack, one can confirm that different parts of this Hawaiian isle get 11 of the 13 climate ranges known to mankind.

It is a privilege to have spent a week here, where for a change blogging on oil did not reign supreme. Next stop Los Angeles International followed by London Heathrow – a day long up in the air affair! Keep reading; keep reading it ‘crude’ – but its goodbye to the ‘Aloha’ state!

© Gaurav Sharma 2012. Photo 1: White Sands Beach Park, Kona. Photo 2: Oilholic at the Old Kona State Airport recreation beach park, Kona Kailua. Photo 3: Punaluʻu Black Sand beach, Hawaii, USA © Gaurav Sharma 2012.