Tuesday, April 30, 2013

A historical perspective on oil and world power

Throughout his illustrious career, academic Peter Randon Odell enriched the available oil and gas market commentary and analysis of his time, writing close to 20 books and numerous research papers. In 1970, Odell wrote arguably one of his most authoritative works on the subject – Oil and World Power. He went on to update and revise it no less than eight times with the last imprint reaching bookshelves in 1986.

After over two decades, the old master’s insight is available once again via a Routledge reprint, under its Routledge Revivals Initiative which aims to re-print academic works that have long been unavailable. While the publisher’s hunt for scholarly reprints is rewinding the clock back to the last 120 years, the Oilholic is not the least bit surprised that Odell’s most popular work is among the first to roll off Routledge’s printing presses for 2013 under the Revivals Initiative.

It was Odell who was among the first to catalogue the oil industry’s commercial clout and pragmatically noted in this book that the oil and gas business was one which no country could do without given the inextricable link between industrialisation and fossil fuels.

Above anything else, this reprinted book offers Odell’s insight on the oil and gas business as it had evolved up and until the 1980s, pre-dating the corporate birth of ExxonMobil, the collapse of the Soviet Union, America’s shale bonanza and resource nationalism to the extent we see today. This in itself makes the reprint of Oil and World Power invaluable.

The reader gets a glimpse of energy hegemony as it was up and until the 1980s and Odell’s insight on issues of the day. From OPEC soundbites to the anxieties of consuming nations, from the decline of International Oil Companies (IOCs) to the rise of National Oil Companies (NOCs) – it’s all there, coupled with changing patterns of oil supply and the dramatic fall in oil prices in 1986.

Yet, Odell’s conclusions in this book, of just over 300 pages split by 11 chapters, sound eerily similar; a sort of a forerunner to what industry commentators are mulling over in this day and age. In fact, the deep links, which he refers to in this book, between oil and gas extraction, conflict, resource nationalism, global politics and economic prowess are as entrenched as ever.

After discussing the bigger picture, the author goes on to offer a fair bit of forward-thinking conjecture on the relationship between the oil and gas business and economic development. There are also subtle hints at the resource curse hypothesis – a discussion which was hardly mainstream in the 1980s but is hotly debated these days.

This reprint bears testimony to the brilliance of Odell in tacking such issues head on. It would be of immense value to students of energy economics, industrial studies, international development, geopolitics and political hegemony. But above all, those looking to probe the history of the oil and gas business must certainly reach out for this engaging volume. 

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© Gaurav Sharma 2013. Photo: Front Cover – Oil and World Power © Routledge

Wednesday, April 24, 2013

An arduously researched book on ‘crude’ Russia

When looking up written material on the Russian oil and gas industry, you are (more often than not) likely to encounter clich├ęs or exaggerations. Some would discuss chaos in wake of the collapse of the Soviet Union and the rise of the oligarchs as a typical “Russian” episode of corruption and greed – yet fail to address the underlying causes that led to it. Others would indulge in an all too familiar Russia bashing exercise without concrete articulation. Amidst a cacophony of mediocre analysis, academic Thane Gustafson’s splendid work – Wheel of Fortune: The Battle for Oil and Power in Russia – not only breaks the mould but smashes it to pieces. This weighty, arduously researched book of just under 700 pages split by 13 chapters does justice to the art of scrutiny when it comes to examining this complex oil and gas exporting jurisdiction; a rival of Saudi Arabia for the position of the world’s largest producer and exporter of oil.
 
It is about power, it is about money, it is about politics but turning page after page, you would realise Gustafson is subtly pointing out that it is a battle for Russia’s ‘crude’ soul. In order to substantiate his arguments, the book is full of views of commentators, maps, charts and tables and over 100 pages of footnotes. The narrative switches seamlessly from discussing historical facts to the choices Russia’s political classes and the country’s oil industry face in this day and age.
 
The complex relationship between state and industry, from the Yeltsin era to Putin’s rise is well documented and in some detail along with an analysis of what it means and where it could lead. In a book that the Oilholic perceives as the complete package on the subject, it is hard to pick favourite passages – but two chapters stood out in particular.
 
Early on in the narrative, Gustafson charts the birth of Russian oil majors Lukoil, Surgutneftegaz and Yukos (and the latter’s dismembering too). Late on in the book, the author examines Russia’s (current) accidental oil champion Rosneft. Both passages not only sum up the fortunes of Russian companies and how they have evolved (or in Yukos’ case faced corporate extinction) but also sum up prevailing attitudes within the Kremlin.
 
What’s more, as crude oil becomes harder and more expensive to extract and Russian production dwindles, Gustafson warns that the country’s current level of dependence on revenue from oil is unsustainable and that it simply must diversify.
 
Overall, the Oilholic is inclined to feel that this book is one of the most authoritative work on Russia and its oil industry, a well balanced critique with substantiated arguments and one which someone interested in geopolitics would appreciate as much as an enthusiast of energy economics.
 
This blogger is happy to recommend Wheel of Fortune to readers interested in Russia, the oil and gas business, geopolitics, economics, current affairs and last but certainly not the least – those seeking a general interest non-fiction book on a subject they haven’t visited before. As for the story seekers, given that it’s Russia, Gustafson has more that few tales to narrate all right, but fiction they aren’t. Fascinating and brilliantly written they most certainly are!
 
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© Gaurav Sharma 2013. Photo: Front cover - Wheel of Fortune: The Battle for Oil and Power in Russia © Belknap Press of Harvard University Press.

Wednesday, April 17, 2013

‘9-month’ high to a ‘9-month’ low? That's crude!

In early February, we were discussing the Brent forward month futures contract's rise to a nine-month high of US$119.17 per barrel. Fast forward to mid-April and here we are at a nine-month low of US$97.53 – that’s ‘crude’!

The Oilholic forecast a dip and so it has proved to be the case. The market mood is decidedly bearish with the IMF predicting sluggish global growth and all major industry bodies (OPEC, IEA, EIA) lowering their respective global oil demand forecasts.

OPEC and EIA demand forecasts were along predictable lines but from where yours truly read the IEA report, it appeared as if the agency reckons European demand in 2013 would be the lowest since the 1980s. Those who followed market hype and had net long positions may not be all that pleased, but a good few people in India are certainly happy according to Market Watch. As the price of gold – the other Indian addiction – has dipped along with that of crude, some in the subcontinent are enjoying a “respite” it seems. It won’t last forever, but there is no harm in short-term enjoyment.

While the Indians maybe enjoying the dip in crude price, the Iranians clearly aren’t. With Brent below US$100, the country’s oil minister Rostam Qasemi quipped, "An oil price below $100 is not reasonable for anyone." Especially you Sir! The Saudi soundbites suggest that they concur. So, is an OPEC production cut coming next month? Odds are certainly rising one would imagine.

Right now, as Stephen Schork, veteran analyst and editor of The Schork Report, notes: "Oil is in a continued a bear run, but there's still a considerable amount of length from a Wall Street standpoint, so it smells like more of a liquidation selloff."

By the way, it is worth pointing out that at various points during this and the past week, the front-month Brent futures was trading at a discount to the next month even after the May settlement expired on April 15th. The Oilholic counted at least four such instances over the stated period, so read what you will into the contango. Some say now would be a good time to bet on a rebound if you fancy a flutter and “the only way is up” club would certainly have you do that.

North Sea oil production is expected to fall by around 2% in May relative to this month’s production levels, but the Oilholic doubts if that would be enough on a standalone basis to pull the price back above US$100-mark if the macroclimate remains bleak.

Meanwhile, WTI is facing milder bear attacks relative to Brent, whose premium to its American cousin is now tantalisingly down to under US$11; a far cry from October 5, 2011 when it stood at US$26.75. It seems Price Futures Group analyst Phil Flynn’s prediction of a ‘meeting in the middle’ of both benchmarks – with Brent falling and WTI rising – looks to be ever closer.

Away from pricing, the EIA sees US oil production rising to 8 million barrels per day (bpd) and also that the state of Texas would still beat North Dakota in terms of oil production volumes, despite the latter's crude boom. As American companies contemplate a crude boom, one Russian firm – Lukoil could have worrying times ahead, according to Fitch Ratings.

In a note to clients earlier this month, the ratings agency noted that Lukoil’s recent acquisition of a minor Russian oil producer (Samara-Nafta, based in the Volga-Urals region with 2.5 million tons of annual oil production) appeared to be out of step with recent M&A activity, and may indicate that the company is struggling to sustain its domestic oil output.

Lukoil spent nearly US$7.3 billion on M&A between 2009 and 2012 and acquired large stakes in a number of upstream and downstream assets. However, a mere US$452 million of that was spent on Russian upstream acquisitions. But hear this – the Russian firm will pay US$2.05 billion to acquire Samara-Nafta! Unlike Rosneft and TNK-BP which the former has taken over, Lukoil has posted declines in Russian oil production every year since 2010.

“We therefore consider the Samara-Nafta acquisition as a sign that Lukoil is willing to engage in costly acquisitions to halt the fall in oil production...Its falling production in Russia results mainly from the depletion of the company's brownfields in Western Siberia and lower than-expected production potential of the Yuzhno Khylchuyu field in Timan-Pechora,” Fitch Ratings notes.

On a closing note, the Oilholic would like to share a brilliant article on the BBC's website touching on the fallacy of the good biofuels are supposed to do. Citing a Chatham House report, the Beeb notes that the UK's "irrational" use of biofuels will cost motorists around £460 million over the next 12 months. Furthermore, a growing reliance on sustainable liquid fuels will also increase food prices. That’s all for the moment folks. Until next time, keep reading, keep it crude! 

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© Gaurav Sharma 2013. Photo: Oil Rig © Cairn Energy Plc.

Tuesday, April 02, 2013

The Keystone XL saga: Views of Toronto analysts

The Oilholic arrived in Toronto, ON for the briefest of visits to find the energy community here in bullish mood about the Keystone XL pipeline project getting a nod of approval from the Obama administration this summer.

Out of a snap, unscientific, random poll of seven energy analysts in downtown Toronto, none of the commentators thought the project’s second application for approval would be turned down this summer by the US Government. Only one analyst thought the second application would face severe delays yet again. On the subject of what next if the unthinkable happens and the US yet again denies approval, most thought Canada can find plenty of takers for Alberta’s most precious resource.

Simply put, if the US does not want oil derived from a bituminous source, there are many takers – as is evident from the interest in the oil sands from burgeoning Asian importers. Make no mistake, the oil sands would be developed, most said. Additionally, there were some predictable quips as well from our friends in Toronto along the lines of “Obama doesn’t have a re-election to fight, so he’ll approve”, “who would the US deal with Canadians or Venezuelans?” or “it could be a shot in the arm for US refinery upgrade projects”.

All of these quips ring true in parts. Furthermore, a recent poll, conducted across the border by the non-partisan Pew Research Center, suggests two-thirds of Americans (66%) favour building the pipeline, which would transport oil from Alberta via the Midwest to Texan refineries. For purposes of its research, Pew polled 1501 adult US citizens between March 13 and 17. The survey result is a pretty convincing one, polled by a very respectable source.

Away from Pew’s findings was a totally unrelated editorial calling for the project’s approval in none other than the Chicago Tribune. The Oilholic is not from Illinois but is quietly confident that President Obama, who was once a senator from the state, does read his local broadsheet. On March 29, printed on page 22, he would have found the lead editorial declaring: “Enough dawdling. Obama should approve the Keystone pipeline.”

Further down the editorial, the paper wrote: “The President is expected to make a decision by this summer. He rejected a Keystone plan a year ago, in the midst of his re-election campaign. This was applauded by some environmental groups and angered the Canadian government. But the most significant impact was this: It kept Americans from getting good-paying jobs.”

Powerful stuff one would say! Canada, you have the support of the President’s (once) local newspaper! Furthermore, most Chicago-based analysts the Oilholic spoke to last week seemed to be clamouring for an approval. Phil Flynn, senior analyst at Price Future Group, said it had been a sad political story symptomatic of dysfunctional US politics and government.

“Here we have a bizarre situation that a pipeline is geopolitically right, but politically...a mess! Democrats had a pop at President George W. Bush tying him with “big oil”; Obama is getting the other end of the stick with people labelling him “big green.” Had he approved the Keystone XL project before it had become a “major issue” in this social media age – well it would not have become an issue at all; just one of the many North American pipelines plain and simple!”

“I see it as a classic case of a bungled energy policy. The Obama administration grossly underestimated the both the importance of Canadian oil sands and American shale and worse still that we could be energy independent. This side of the border, the shale gas revolution happened not because of Washington, but rather despite of Washington,” he said.

Most in the trading community this blogger met in Toronto and Chicago feel an important reason why Keystone XL is going to be approved this time around is because the US labour unions want it badly. Now, hardly any Democrat would flag this up as a reason for approving the project in the summer. Saddest part of it all – for both Canada and the US – is that the Keystone XL project is such a small part of the ongoing energy story of both countries.

Flynn reckons it is all about finding a way to approve it and save face in the summer! “Canadian crude from the oil sands is coming to the market anyway. So the Democrats on Capitol Hill will say America may as well go for it anyway! Mark my word, that’ll be the argument used to peddle the approval,” he concluded.

Moving away from Keystone XL, but sticking with pipelines, ratings agency Moody’s has given thumbs-up to Enbridge’s capital expenditure programme. In a note to clients this morning, Moody's affirmed Enbridge's Baa1 senior unsecured, Baa1 long term issuer, (P)Baa2 subordinate shelf and Baa3 preferred stock ratings.

“The company has taken timely advantage of opportunities that have developed in the North American liquids market over the last few years as a result of regulatory delays in getting new pipelines approved and a persistent liquids pricing differential attributed to tight takeaway capacity, bottlenecks and an inability for shippers to access tidewater and global markets,” the agency said.

According to Moody’s, Enbridge's announced projects are lower risk because they are generally on existing rights of way as either expansions or reversals. “Once this large programme is completed, Enbridge's business risk should be lower due to even greater liquids network diversity,” it added.

Just one more footnote before a farewell to Toronto, the local networks and newspapers are awash with news that Canada's Information Commission is poised investigate claims the Federal government is "muzzling" its scientists.

According to The Globe and Mail, the Commission is investigating seven government departments. These include Environment, Fisheries and Oceans, Natural Resources, National Defence, the Treasury Board Secretariat, National Research Council of Canada and the Canadian Food Inspection Agency.

A spokesperson said the investigation is in response to a complaint filed by the University of Victoria, BC and the campaign group Democracy Watch. Assistant Information Commissioner Emily McCarthy’s office would be leading the probe. Intriguing story indeed and one to watch out for!

It is almost time to head back home, but before heading up in the air towards London Heathrow, the Oilholic leaves you with a view of a natural wonder which helps Ontario Power and Power Authority of New York harness copious amounts of hydroelectricity – the Niagara Falls.

With even Americans saying the view is better from the Canadian side, the Oilholic simply had to pop over and admire it. So it turned out to be quite a view. Photographed here is the Horseshoe Falls – on the side yours truly has snapped from is Canada and on the other is the USA. Sandwiched between is the Niagara River which drains Lake Erie in to Lake Ontario.

The first known effort to harness these waters for power generation was made by one Daniel Joncaire who built a small canal above the falls to power his sawmill in 1759, according to a local park official. Today, if the US (Robert Moses Niagara Power Plant and the Lewiston Pump Generating Plant) and Canadian (Sir Adam Beck I and II) power generation facilities are pooled, the total power production would be 4.4 gigawatts! That’s all from Toronto folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2013. Photo 1: Toronto’s Skyline and Lake Ontario, Canada. Photo 2: The Niagara Falls, Ontario, Canada © Gaurav Sharma.

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