Clinton in Crudeland, Ghanem’s death & Cressier

US secretary of state Hillary Clinton has been clocking up air miles trying to persuade India and China to import less of the crude stuff from Iran. While diplomatic issues dominated the headlines during her visit, Clinton is understood to have impressed upon the Chinese to lower Iranian imports. However, recent media reports suggest that instead of seeking alternative supplies away from Iran, the economic powerhouse is seeking alternative modes of payment to Tehran away from the US Dollar. First, Reuters cited Mohammed Reza Fayyad, Iran's ambassador to the United Arab Emirates, acknowledging that his country was accepting Yuan payments in kind for oil exports to China. Then the FT reported that China has been providing the Yuan to Iran via Russian banks rather than its own international banks.

Arriving next in India, Clinton had a similar message for New Delhi. She “commended” India for lowering its reliance on Iranian imports urging it to do more. However, as the Oilholic noted on his non-state visit to India earlier this year - Indian policymakers openly admit this is easier said than done. Meanwhile conspiracy theories about the death on April 29 of former Libyan Oil Minister Shokri Ghanem, whose body was found in the River Danube in Vienna, are unlikely to go away with his funeral held four days ago.

In June 2011, his defection from the Gaddafi regime was the epicentre of media gossip – both in the run-up to the 159th OPEC meeting as well as during the event itself where his defection relieved some and riled others. Some doubted his intentions while others doubted that he’d even defected.

All in public domain was that since his defection he had been living in Vienna with his family and working as a consultant. It seemed to be a natural choice since Ghanem’s connection with the city went back a few decades. He had held a number of posts at the old OPEC HQ in Vienna rising to its head of research in 1993 before joining the Gaddafi government first as Prime Minister and then Oil minister which marked his regular return to Vienna until last year.

The Oilholic’s sources in Vienna suggest the Austrian authorities have ruled out foul play. All yours truly knows is that a passer-by saw his body in the river and called the police who found no other documents on him other than business cards of his consultancy. There were no signs of violence on the body and it is thought that he died of natural causes. At the time of his death, he was setting up a business with another OPEC veteran - Algeria's Chakib Khelil and other investors.

However back home, the new government in Tripoli never trusted him despite his defection and was in fact preparing a court case against him for making illegal gains during his time in the Gaddafi regime. Regardless of its circumstances, the void left by his death would be felt in Viennese diplomatic circles and at OPEC HQ where he began his career in earnest.

Going back to 2008, the Oilholic remembers his first interaction with Ghanem from press scrums at a meeting of ministers where journalists jostled to receive his answers in fluent English. His audience in Vienna had grown, more so as his boss Gaddafi had denounced terrorism and come back from the cold to rejoin the international community. Whether Ghanem himself was a saint or a sinner will now never be known.

Away from crude politics, troubled refiner Petroplus’ administrators have found a buyer for its Swiss asset – the Cressier Refinery – in the shape of Varo Holding, a joint venture between trading firm Vitol and AltasInvest. Under the sale agreement, cash strapped Petroplus would transfer Cressier and allied Swiss marketing and logistics assets - Petroplus Tankstorage, Oléoduc du Jura Neuchâtelois and Société Française du Pipeline du Jura to Varo.

Sources suggest Varo hopes to close the deal before the end of June with plans of restarting the 68,000 barrels per day refining facility thereafter. Finally, fresh economic headwinds are bringing about a price correction in the crude markets as recent elections in Greece and France have triggered a Greek Tragedy (Part II) and a Geek Tragedy (a.k.a. Francois Hollande) respectively.

A hung parliament and political stalemate with fears of the terms of the last Greek bailout not being met is impacting market sentiment on the one hand. On the other, newly elected Socialist President of France – Francois Hollande – sees his less than convincing mandate as one of the French public voting against ‘austerity’ and perhaps uncosted grandiose spending plans. On Tuesday, oil trading sessions either side of the pond remained volatile in light of the situation.

Summing up the nerviness in the markets following events of the past few days, Sucden Financial analyst Myrto Sokou notes, “Spain has confirmed that it will provide with additional money for the bank rescue of Bankia, the country's third largest bank in terms of assets. In Greece, the political situation is still uncertain as the country remains without a government after Sunday’s elections…The parties which signed the EU bailout memorandum are now in a minority as Greek voters rejected further austerity plans.”

Concurrently, analysts at Société Générale believe that generally bearish sentiments and still weak fundamentals should continue to combine and prevail and that the entire energy complex seems to be headed for a continued correction downwards. “Oil has performed better than other European energy commodities in 2012, but this seems to have changed during the first week of May. Oil price behaviour will be the key to avoid further slides in European energy prices,” they note.

As if that was not crude enough, an investment note by Citibank just hitting the wires suggests there is now a 75% possibility that Greece would be forced to leave the Eurozone within 12 to 18 months. With no swift Eurozone solution in sight, be prepared to expect further volatility and perceptively bearing trends in the crude markets. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil Rig © Cairn Energy Plc.

EU’s Iran ban, upcoming Indian adventure & Cairn

Earlier on Monday and in line with market expectations, the European Union agreed to impose an embargo on the import of Iranian crude oil. The EU, which accounts for 20% of Iran’s crude exports, now prohibits the import, purchase and transport of Iranian crude oil and petroleum products as well as related finance and insurance. All existing contracts will have to be phased out by July 1st, 2012.

In response, Iran declared the ban as "unfair" and "doomed to fail", said it will not force it to change course on its controversial nuclear programme and renewed threats to blockade the Strait of Hormuz. Going into further details, EU Investment in as well as the export of key equipment and technology for Iran's petrochemical sector is also banned.

A strongly worded joint statement by British Prime Minister David Cameron, French President Nicolas Sarkozy and German Chancellor Angela Merkel says, “Until Iran comes to the table, we will be united behind strong measures to undermine the regime’s ability to fund its nuclear programme, and to demonstrate the cost of a path that threatens the peace and security of us all.”

That’s all fine and yes it will hurt Iran but unless major Asian importing nations such as China, India and Japan decide to ban Iranian imports as well, EU’s ban would not have the desired impact. Of these, China alone imports as much Iranian oil as the EU, Japan accounts for 17% of the country’s exports, followed by India (16%) and South Korea (9%).

So until the major Asian economies join in the embargo, both EU and Iran will end up hurting themselves. As a Sucden Financial note concludes, “Unless a deal can be agreed unilaterally, it is likely that the weak European economies could suffer from firmer crude prices whilst relatively robust Asian economies might benefit from preferential crude trade agreements.”

China is unwilling to follow suit while it is thought that Japan and South Korea are seeking supply assurances from other sources before reacting. India’s response had been lukewarm in the run-up the EU’s decision. Now that the decision has been made, it will be interesting to note how the Indian government responds. The Oilholic is heading to India this week (and for better parts of the next) and will try to sniff out the public and government mood.

Meanwhile, Fitch Ratings has said the EU embargo will increase geopolitical risk in the Middle East region supporting high oil prices. The agency considers blocking the Strait of Hormuz - the world's most important oil chokepoint - to be a low-probability scenario and believes any obstruction to trade routes would have a short duration if it did actually transpire.

Arkadiusz Wicik, Director in Fitch's European Energy, Utilities and Regulation team and an old contact of the Oilholic’s, feels that the EU ban on Iranian oil is largely credit neutral for EU integrated oil and gas companies. "The cash flow impact of the ban may be negative for refining operations, but should be positive or neutral for upstream operations," he says.

The most likely scenario is that the EU embargo will result in higher oil prices. However, prices may not necessarily increase markedly from current levels as some of the risks related to the EU ban on Iranian oil appear factored in already.

A new Fitch report further notes the ban is likely to have a moderately negative impact on EU refiners as high oil prices may further erode demand for refined products in Europe. This would worsen the already weak supply-demand balance in European refining. The embargo may also change oil price spreads in Europe as Iranian crude imports would likely be replaced with alternative crude, which may be priced at a lower discount to Brent than Iranian crude oil.

EU refiners' security of oil supply is unlikely to be substantially affected by an Iran ban. There are alternative suppliers, such as Saudi Arabia (which has said it is able and willing to increase oil production to meet additional demand), Russia and Iraq. Libyan oil production is also recovering. Iranian oil accounted for just 5.7% of total oil imports to the EU in 2010, and 4.4% in Q111. Furthermore, the sanctions will be implemented gradually by July 1st, 2012, which should give companies that use Iranian crude oil time to find alternative suppliers, the report notes.

Southern European countries - Italy, Spain and Greece - are the largest importers of Iranian crude oil in the EU. A rise in oil prices could be further bad news for these countries, which already face a weak economic outlook in 2012.

“The impact of the new US sanctions signed into law late last year against Iran is difficult to predict at this stage. It is not certain whether Asian countries, which are by far the largest importers of Iranian crude, accounting for about 70% of total Iranian oil imports, will substantially reduce supplies from Iran in 2012 and replace them with other OPEC sources as a result of the new US sanctions,” the Fitch report notes further.

The agency’s report does make one very important observation – one that has been doing the rounds in the City ever since news of the ban first emerged – that’s if Asian reduction is substantial, in combination with the EU ban, it could considerably lower OPEC's spare production capacity. In such a scenario, the global oil market would have less flexibility in the event of large unexpected supply interruptions elsewhere, potentially sending oil prices much higher than current levels.

Moving away from the Iranian situation, Cairn Energy has sold a 30% stake in one of its Greenland exploration licences to Norway’s Statoil. The UK independent upstart spent nearly £400 million in exploration costs last year with little to show for it as no commercially exploitable oil or gas discovery was recorded. While the percentage of the stake has been revealed, neither Cairn nor Statoil are saying how much was paid for the stake. Nonetheless, whatever the amount, it would help Cairn mitigate exploration costs and risks as it appears to be in Greenland for the long haul.

Elsewhere, there is positive and negative news on refineries front. Starting with the bad news, shares in Petroplus – Europe’s largest independent refiner – were suspended from trading on the Swiss SIX stock exchange on Monday at the company’s request. As fears rise about Petroplus defaulting on its debt following an S&P downgrade last month and yet another one on January 17th, looks like the refiner is in a fight for its commercial life.

Lenders suspended nearly US$1 billion in credit lines last month which prevented Petroplus from sourcing crude oil for its five refineries. However, it had still managed to keep refineries at Coryton (Essex, UK) and Ingolstadt (Germany) running at reduced capacity. Late on Monday, Bloomberg reported that delivery lorries did not leave the Coryton facility and concerns are rising for the facility’s 1000-odd workforce. PwC, which has been appointed as the administrator of Petroplus' UK business, said on Tuesday that it aims to continue to operate the Coryton facility without disruption. The Oilholic hopes for the best but fears the worst.

Switching to the positive news in the refineries business, China National Petroleum Corp, Qatar Petroleum and Royal Dutch Shell agreed plans on January 20th for a US$12.6 billion refinery and petrochemical complex in eastern China. Quite clearly, hounded by overcapacity and poor margins in Europe, the future of the refineries business increasingly lies in the Far East on the basis of consumption patterns. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil tanker © Michael S. Quinton / National Geographic.