The Kurdish question & a ‘Dudley’ sin?

The autonomous region of Kurdistan within Iraq's borders is drawing 'crude' headlines yet again. It's that old row about who controls what and gives rights for E&P activity in the region – the Federal administration in Baghdad or the provincial administration in Erbil?

 

The historical context is provided by Gulf War I, when allied forces imposed a no-fly zone, and the Kurds subsequently pushed Saddam Hussein's forces back outside the provincial border. That was 1991, this is 2013 – a lot has changed for Iraq, but one thing hasn't – Iraqi Kurdistan is as autonomous today, as it was back then.

 

In fact, it is more prosperous and an oasis of calm compared to the rest of the Federal state. One simple measure is that the rest of Iraq ravaged by sectarian conflict and Gulf War II still only provides its citizens with about an average of 6 to 7 hours of electricity per day. The average resident of Erbil gets 22 hours and sees infrastructural spending all around, driven by targeted revenue from oil and gas licensing and exports.

Since 2006, the Kurdistan Regional Government (KRG) has been granting rights for exploration within its borders to firms from Norway to the US, with much gusto and on better terms, many say, than the Federal administration in Baghdad. The Iraqi government in turn says KRG has no right to do so.

 

Mutual consternation came to a head in January when BP and Baghdad reached an agreement to revitalise the northern Kirkuk oilfield. Since jurisdictional mandate over the oilfield and the city is hotly contested by both sides, KRG declared the deal to be illegal on grounds that it was not consulted.

 

Firing a return salvo, Iraqi Oil Minister Abdul Kareem al-Luaibi called the production and export of oil from Kurdistan to be an act of "smuggling" and threatened to cut the region's [17%] spending allocation from the federal budget as well as take legal action against Western firms digging up Kurdistan, beginning with London-listed Genel Energy (the first such firm to export from the region).

Neither Genel Energy nor the administration paid heed to that threat. Baghdad and BP did likewise with KRG's moans over Kirkuk. Then the US State Department issued an advisory to all American oil firms operating in Kurdistan that they could be liable for legal damages from Baghdad. Doubtless, the rather handsomely rewarded legal eagles at their end advised them not to worry too much.

An "as-you-were" lull lasted for roughly 10 months, when last week in an extraordinary development, Bob Dudley, CEO of BP, joined al-Luaibi and officials from the Iraqi state-run North Oil Company to pay a controversial visit to the Kirkuk oilfield in a show of support. Why Dudley took the decision to go himself instead of sending a deputy is puzzling and paradoxically a bit obvious as well.

 

In making an appearance himself, Dudley wanted to show how important the Kirkuk deal is. Yet a deputy of his would have drawn a similar two-fingered gesture from KRG, as his visit did. Playing it cool, a source at BP said its only intention is to revive production at Kirkuk, an oilfield which at the turn of millennium saw an output of 900,000 barrels per day (bpd), but can barely manage less than a third of it today.

 

BP has the technical know-how to improve the field's output, but how it will extricate itself from the quagmire of the area's politics is anybody's guess. An Abu Dhabi based source says both sides are entrenched at Kirkuk. BP will have access to the Federally-administered side of the Kirkuk field, namely the Baba and Avana geological formations. But one formation – Khurmala – is inside the Kurdish provincial borders and being is developed by the KAR group.

 

Furthermore, there is another twist in the linear fight between Baghdad and Erbil – Kirkuk's governor Najimeldin Kareem, a man of Kurdish origin, has backed the Federal deal with BP. Dudley left the oilfield without saying anything concrete on record, leaving it to the Iraqis to do most of the talking.

 

The Iraqi Oil Ministry chose to describe Kareem's backing "as securing the complete support from the local government of Kirkuk" in order to commence developing Kirkuk. Hmm…but whose Kirkuk is it anyway? The primary beneficiary of Kurdish oil exports is Turkey; the closest market where the aforementioned Genel Energy delivers most of its output to.

 

Where the tussle will lead to is unpredictable – but it hasn't deterred either BP from signing up a deal with Baghdad or the likes of ExxonMobil, Chevron and Total with Erbil. This brings us back to why Dudley went himself – well, when his peers such as Rex Tillerson, ExxonMobil's boss, have showed-up in Erbil, there was perhaps little choice left. If the regional politics goes out of control, the bosses of oil firms would have only themselves to blame for getting so close to the Iraqi wrangles most say they are least interested in.

 

At the centre of it all is the thirst for black gold. KRG is providing generous production sharing and contract conditions within its autonomous borders, while Baghdad has quite possibly given equally generous terms to BP for Kirkuk. The oil major has already announced a US$100 million investment in the oilfield.

 

Giving KRG the last word in the verbal melee – in September 2012, even before the recent salvos had been fired in earnest and the CEOs had come calling, Ashti Hawrami, Minister for Natural Resources of KRG, said something rather blunt on BBC’s Hard Talk programme which explains it all: "To put it politely, if I have million barrels of oil to produce in two years time, the market needs it, Iraq needs it and at the end of the day we are going to win that battle."

 

There are 50 plus firms already helping him achieve that objective. With geological surveys projecting that Kurdistan potentially has 45 billion barrels of the crude stuff, many of these firms are working with the KRG contrary to advice given by their own governments.

 

And as if to rub it in further into his Federal counterpart, Hawrami quipped, "Kurdistan's investment and spending plans are more structured…Why is Baghdad buying F-16s when Iraqis have little more than 4 hours of electricity per day on average [much worse than the inhabitants of Iraqi Kurdistan]." OUCH!

 

Moving away from Iraqi politics, Brent's $106 per barrel floor has not only been breached, but was smashed big time last week. As noted, hedge funds are indeed feeling the pinch, for instance high-flier Andy Hall's $4 billion baby – Astenbeck Capital Management.

 

According to Reuters, Astenbeck is down 5% as of Oct-end, largely due to the slump in Brent prices. Even though Hall's team have diversified into palladium, platinum and soft commodities, it'd be remarkable if the fund is able to avoid its first annual loss in six years. However, one shouldn't be too hard on Astenbeck as the average energy fund on Chicago's Hedge Fund Research Index, is down 4.45%. That's all for the moment folks! Keep reading, keep it 'crude'!

 

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo: Exploration site in Kurdistan © Genel Energy plc

North Sea & the 'crude' mood in Aberdeen

The Oilholic spent the wee hours of this morning counting the number of North Sea operational support ships docked in Aberdeen Harbour. Interestingly enough, of the nine in the harbour, six were on the Norwegian ships register.

Whether you examine offshore oil & gas activity in the Norwegian sector of the North Sea or the British sector, there is a sense here that the industry is enjoying something of a mini revival if not a full blown renaissance. As production peaked in the late 1990s, empirical evidence that oil majors had begun looking elsewhere for better yields started emerging. Some even openly claimed they’d given up.

Over a decade later, with new extraction techniques and enhanced hydrocarbon recovery mechanisms in vogue – a different set of players have arrived in town from Abu Dhabi National Energy Company (TAQA) to Austria's OMV, from Canada's Talisman Energy to China's Sinopec. Oil recovery from mature fields is now the talk of the town.

Even the old hands at BP, Shell and Statoil – who have divested portions of their North Sea holdings – seem to be optimistic. The reason can be found in the three figure price of Brent! Most commentators the Oilholic has spoken to here, including energy economists, taxation experts, financiers and one roughneck [with 27 years of experience under his belt] are firmly of the view that a US$100 per barrel price or above supports the current level of investment in mature fields.

One contact remarks that the ongoing prospection and work on mature fields can even take an oil price dip to around $90-level. "However, anything below that would make a few project directors nervous. Nonetheless, the connect with between Brent price fluctuation and long term planning is not as linear as is the case between investment in Canadian oil sands projects and the Western Canadian Select (WSC) price."      

To put some context, the WSC was trading at a $30 per barrel discount to the WTI last time yours truly checked. Concurrently, Brent's premium to the WTI, though well below historic highs, is just shy of $10 per barrel. Another contact, who retains faith in the revival of the North Sea hypothesis, says it also bottles down to the UK's growing demand for natural gas.

"It's what'll keep West of Shetland prospection hot. Furthermore, and despite concern about capacity constraints, sound infrastructural support is there in the shape of the West of Shetland Pipeline (WOSP) which transports natural gas from three offshore fields in the area to Sullom Voe Terminal [operated by BP]."

While further hydrocarbon discoveries have been made atop what's already onstream, they are not yet in the process of being developed. That's partially down to prohibitive costs and partially down to concerns about WOSP's capacity. However, that's not dampening the enthusiasm in Aberdeen.

Five years ago, many predicted a rig and infrastructure decommissioning bonanza to be a revenue generator and become a thriving industry itself. "But enhanced oil recovery schemes keep pushing this 'bonanza' back for another day. This in itself bears testimony to what's afoot here," says one contact.

UK Chancellor George Osborne also appears to be listening. In his budget speech on March 20, he said that the government would enter into contracts with companies in the sector to provide "certainty" over tax relief measures. That has certainly cheered industry players in Aberdeen as well the lobby group Oil & Gas UK.

"The move by the Chancellor gives companies the certainty they need over the tax treatment of decommissioning. At no cost to the government, it will speed up asset sales and free up capital for companies to use for investment, extending the productive life of the UK Continental Shelf," a spokesperson says, echoing what many here have opined.

Osborne's budget speech also had one 'non-crude' bit of good news for the region. The Chancellor revealed that one of the two bidders for the UK government's £1 billion support programme for Carbon Capture and Storage (CC&S) is the Peterhead Project here in Aberdeenshire. Overall, the industry sounds optimistic, just don't mention the 'R-word'. Scotland is due to hold a referendum on September 18, 2014 on whether it wants to be independent or remain part of the United Kingdom.

Hardly any contact in a position of authority wants to express his/her opinion on record with the description of political 'hot potato' attributed to the referendum issue by many. The response perhaps is understandable. It's an issue that is dividing colleagues and workforces throughout the length and breadth of Scotland.

General consensus among commentators seems to be that the industry would be better off in a 'United' Kingdom. However, even it were to become a 'Disunited' Kingdom come September 2014, industry veterans believe the global nature of the oil & gas business and the craving for hydrocarbons would imply that the sector itself need not be spooked too much about the result. National opinion polls suggest that most Scots currently prefer a United Kingdom, but also that a huge swathe of the population is as yet undecided and could be swayed either way.

In a bid to conduct an unscientific yet spirited opinion poll of unknown people since known ones were unwilling, the Oilholic quizzed three taxi drivers around town and four bus drivers at Union Square. Result – two were in the 'Yes to independence' camp, four were in the 'No' camp and one said he'd just about had enough of the 'ruddy question' being everywhere from newspapers to radio talk shows, to a stranger like yours truly asking him and that he couldn't give a damn!

Moving away from the politics and the projects to the crude oil price itself, where black gold has had quite a fortnight in the wake of a US political stalemate with regard to the country's debt ceiling. Nervousness about the shenanigans on Capitol Hill and the highest level of US crude oil inventories in a while have pushed WTI’s discount to Brent to its widest in nearly three months by this blogger's estimate.

Should the unthinkable happen and the political stalemate over the US debt ceiling not get resolved, it is the Oilholic's considered viewpoint that Brent is likely to receive much more support at $100-level than the WTI, should bearish trends grip the global commodities market. This blogger has maintained for a while that the WTI price still includes undue froth in any case, thereby making it much more vulnerable to bearish sentiment. 

Just one final footnote, before calling it a day and sampling something brewed in Scotland – according to a recent note put out by the Worldwatch Institute, the global commodity 'supercycle' slowed down in 2012. In its latest Vital Signs Online trends report, the institute noted that global commodity prices dropped by 6% in 2012, a marked change from the dizzying growth during the commodities supercycle of 2002-12, when prices surged an average of 9.5% per annum, or 150% over the stated 10-year period.

Worldwatch Institute says that during the supercycle, the financial sector took advantage of the changing landscape, and the commodities market went from being "little more than a banking service as an input to trading" to a full-fledged asset class; an event that some would choose to describe as "assetization of commodities" and that most certainly includes black gold. Supercycle or not, there is no disguising the fact that large investment banks participate in both financial as well as commercial aspects of commodities trading (and will continue to do so).

Worldwatch Institute notes that at the turn of the century, total commodity assets under management came to just over $10 billion. By 2008 that number had increased to $160 billion, although $57 billion of that left the market that year during the global financial crisis. The decline was short-lived, however, and by the end of the third quarter in 2012, the total commodity assets under management had reached a staggering $439 billion.

Oil averaged $105 per barrel last year and a slowdown in overall commodity price growth was indeed notable, but Worldwatch Institute says it is still not clear if the so-called supercycle is completely over. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2013. Photo 1: North Sea support ships in Aberdeen Harbour. Photo 2: City Plaque near ferry terminal, Aberdeen, Scotland © Gaurav Sharma, October 2013.

On a 'crude' UK raid, IEA & the 'Houston glut'

There was only story in London town last week, when late in the day on May 14, European Commission (EC) regulators swooped down on the offices of major oil companies having R&M operations in the UK, investigating fuel price fixing allegations. While the EC did not name names, BP, Shell and Statoil confirmed their offices had been among those ‘visited’ by the officials.

 

More details emerged overnight, as pricing information provider Platts admitted it was also paid a visit. The EC said the investigation relates to the pricing of oil, refined products and biofuels. As part of its probe, it will be examining whether the companies may have prevented others from participating in the pricing process in order to "distort" published prices.

 

That process, according to sources, is none other than Platts’ Market On Close (MOC) price assessment mechanism. "Any such behaviour, if established, may amount to violations of European antitrust rules that prohibit cartels and restrictive business practices and abuses of a dominant market position," the EC said, but clarified in the same breath that the raids itself did not imply any guilt on part of the companies.

 

The probe extends to alleged trading malpractices dating back almost over 10 years. All oil companies concerned, at least the ones who admitted to have been visited by EC regulators, said they were cooperating with the authorities. Platts issued a similar statement reiterating its cooperation.

 

So what does it mean? For starters, the line of inquiry is nothing new. Following a very vocal campaign led by British parliamentarian Robert Halfon, the UK's Office of Fair Trading (OFT) investigated the issue of price fixing and exonerated the oil companies in January. Not satisfied, Halfon kept up the pressure and here we are.

 

"I have been raising the issue of alleged fuel price fixing time and again in the House of Commons. With the EC raids, I'd say the OFT has been caught cold and simply needs to look at this again. The issue has cross-party support in the UK," he said.

 

In wake of the raids, the OFT merely said that it stood by its original investigation and was assisting the EC in its investigations. Question is, if, and it’s a big if, any wrongdoing is established, then what would the penalties be like and how would they be enforced? Parallels could be drawn between the Libor rate rigging scandal and the fines that followed imposed by US, UK and European authorities. The largest fine (to date) has been CHF1.4 billion (US$1.44 billion) awarded against UBS.

 

So assuming that wrongdoing is established, and fines are of a similar nature, Fitch Ratings reckons the companies involved could cope. "These producers typically have between US$10 billion and US$20 billion of cash on their balance sheets. Significantly bigger fines would still be manageable, as shown by BP's ability to cope with the cost of the Macondo oil spill, but would be more likely to have an impact on ratings," said Jeffrey Woodruff, Senior Director (Corporates) at Fitch Ratings.

 

Other than fines, if an oil company is found to have distorted prices, it could face longer-term risks from damage to its reputation. While these risks are less easy to predict and would depend on the extent of any wrongdoing, scope does exist for commercial damage, even for sectors with polarising positions in the public mind, according to Fitch. Given we are in the 'early days' phase, let's see what happens or rather doesn't.

 

While the EC was busy raiding oil companies, the IEA was telling the world how the US shale bonanza was sending ripples through the oil industry. In its Medium-Term Oil Market Report (MTOMR), it noted: "the effects of continued growth in North American supply – led by US light, tight oil (LTO) and Canadian oil sands – will cascade through the global oil market."

 

While geopolitical risks persist, according to the IEA, market fundamentals were indicative of a more comfortable global oil supply/demand scenario over the next five years at the very least. The MTOMR projected North American supply to grow by 3.9 million barrels per day (mbpd) from 2012 to 2018, or nearly two-thirds of total forecast non-OPEC supply growth of 6 mbpd.

 

World liquid production capacity is expected to grow by 8.4 mbpd – significantly faster than demand – which is projected to expand by 6.9 mbpd. Global refining capacity will post even steeper growth, surging by 9.5 mbpd, led by China and the Middle East. According to the IEA, having helped offset record supply disruptions in 2012, North American supply is expected to continue to compensate for declines and delays elsewhere, but only if necessary infrastructure is put in place. Failing that, bottlenecks could pressure prices lower and slow development.

 

Meanwhile, OPEC oil will remain a key part of the oil mix but its production capacity growth will be adversely affected by "growing insecurity in North and Sub-Saharan Africa", the agency said. OPEC capacity is expected to gain 1.75 mbpd to 36.75 mbpd, about 750,000 bpd less than forecast in the 2012 MTOMR. Iraq, Saudi Arabia and the UAE will lead the growth, but OPEC's lower-than-expected aggregate additions to global capacity will boost the relative share of North America, the agency said.

 

Away from supply-demand scenarios and on to pricing, Morgan Stanley forecasts Brent's premium to the WTI narrow further while progress continues to be made in clearing a supply glut at the US benchamark’s delivery point of Cushing, Oklahoma, over the coming months. It was above the US$8 mark when the Oilholic last checked, well down on the $20 it averaged for much of 2012.However, analysts at the investment bank do attach a caveat.

Have you heard of the Houston glut? There is no disguising the fact that Houston has been the recipient of the vast majority of the "new" inland crude oil supplies in the Gulf Coast [no prizes for guessing where that is coming from]. The state's extraction processes have become ever more efficient accompanied by its own oil boom to complement the existing E&P activity.

 

Lest we forget, North Dakota has overtaken every other US oil producing state in terms of its oil output, but not the great state of Texas. Yet, infrastructural limitations persist when it comes to dispatching the crude eastwards from Texas to the refineries in Louisiana.

 

So Morgan Stanley analysts note: "A growing glut of crude in Houston suggests WTI-Brent is near a trough and should widen again [at least marginally] later this year. Houston lacks a benchmark, but physical traders indicate that Houston is already pricing about $4 per barrel under Brent, given physical limitations in moving crude out of the area."

 

The Oilholic can confirm that anecdotal evidence does seem to indicate this is the case. So it would be fair to say that Morgan Staley is bang-on in its assessment that the "Houston regional pricing" would only erode further as more crude reaches the area, adding that any move in Brent-WTI towards $6-7 a barrel [from the current $8-plus] should prove unsustainable.

 

Capacity to bring incremental crude to St. James refineries in Louisiana is limited, so the Louisiana Light Sweet (LLS) will continue to trade well above Houston pricing; a trend that is likely to continue even after the reversal of the Houston-Houma pipeline – the main crude artery between the Houston physical market and St. James.

 

On a closing note, it seems the 'Bloomberg Snoopgate' affair escalated last week with the Bank of England joining the chorus of indignation. It all began earlier this month when news emerged of Bloomberg's practice of giving its reporters "limited" access to some data considered proprietary, including when a customer looked into broad categories such as equities or bonds.

 

The scoop – first reported by the FT – led to a full apology by Matthew Winkler, Editor-in-chief of Bloomberg News, for allowing journalists "limited" access to sensitive data about how clients used its terminals, saying it was "inexcusable". However, Winkler insisted that important and confidential customer data had been protected. Problem is, they aren't just any customers – they include the leading central banks in the OECD.

 

The US Federal Reserve, the European Central Bank and the Bank of Japan have all said they were examining the use of data by Bloomberg. However, the language used by the Bank of England is the sternest so far. The British central bank described the events at Bloomberg as "reprehensible."

 

A spokesperson said, "The protection of confidential information is vital here at the bank. What seems to have happened at Bloomberg is reprehensible. Bank officials are in close contact with Bloomberg…We will also be liaising with other central banks on this matter."

 

In these past few days there have been signs that 'Bloomberg Snoopgate' is growing bigger as Brazil’s central bank and the Hong Kong Monetary Authority (the Chinese territory's de facto central bank) have also expressed their indignation. Having been a Bank of England and UK Office for National Statistics (ONS) correspondent, yours truly can personally testify how seriously central banks take issue with such things and so they should.

 

Yet, in describing Bloomberg's practice as "reprehensible", the Bank of England has indicated how serious it thinks the breach of confidence was and how miffed it is. The UK central bank has since received assurances from Bloomberg that there would be no repeat of the issue! You bet! That's all for the moment folks! Keep reading, keep it 'crude'!

 

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo: Abandoned gas station © Todd Gipstein / National Geographic 

UK Oil & Gas Inc. - The Thatcher Years!

The Oilholic has patiently waited for the fans and despisers of former British Prime Minister Margaret Thatcher to quieten down, in wake of her death on April 8, 2013, before giving his humble take on what her premiership did (or in many cases didn’t) for the UK oil and gas Inc. and what she got in return.

 

Her influence on the North Sea exploration and production certainly got a mention in passing in all the tributes and brickbats thrown at the Iron Lady, the longest serving (1979-1990) and only female British Prime Minister. The world’s press ranging from The Economist to the local paper in her former parliamentary constituency – The Hendon & Finchley Times (see covers below) – discussed the legacy of the Iron Lady; that legacy is ‘cruder’ than you think.

 

In the run-up to Thatcher's all-but-in-name state funeral on April 17, the British public was bombarded with flashbacks of her time in the corridors of power. In one of the video runs, yours truly glanced at archived footage of Thatcher at a BP production facility and that said it all. Her impact on the industry and the industry’s impact itself on her premiership were profound to say the least.

 

Academic Peter R. Odell, noted at the time in his book  Oil and World Power (c1986) that, “Countries as diverse as Finland, France, Italy, Austria, Spain, Norway and Britain had all decided to place oil partly, at least, in the public sector.” A later footnote observes, “Britain’s Conservative government, under Mrs. Thatcher, subsequently decided [in 1983] to ‘privatize’ the British National Oil Corporation (BNOC) created by an earlier Labour administration.”

 

The virtue of private free enterprise got instilled into the UK oil and gas industry in general and the North Sea innovators in particular thanks to Thatcher. But to say that the industry somehow owed the Iron Lady a debt of gratitude would be a travesty. Rather, the industry repaid that debt not only in full, but with interest.

 

Just as Thatcher was coming to power, more and more of the crude stuff was being sucked out of the North Sea with UK Continental Shelf (UKCS) being much richer in those days than it certainly is these days. The UK Treasury, under her hawk-eyed watch, was quite simply raking it in. According to the Office for National Statistics (ONS) data, government revenue from the oil and gas industry rose from £565 million in fiscal year 1978-79 to £12.04 billion in 1984-85. That is worth over three times as much in 2012 real-terms value, according to a guesstimate provided by a contact at Barclays Capital.

 

Throughout the 1980s, the Iron Lady made sure that the revenue from the [often up to] 90% tax on North Sea oil and gas exploration and production was used as a funding source to balance the economy and pay the costs of economic reform. Over three decades on from the crude boom of the 1980s, Brits do wish she had examined, some say even adopted, the Norwegian model.

 

That she privatised the BNOC does not irk the Oilholic one bit, but that not even a drop of black gold and its proceeds – let alone a full blown Norwegian styled sovereign fund – was put aside for a rainy day is nothing short of short-termism or short-sightedness; quite possibly both. One agrees that both macroeconomic and demographical differences between Norway and the UK complicate the discussion. This humble blogger doubts if the thought of creating a sovereign fund didn’t cross the Iron Lady’s mind.

 

But unquestionably, as oil and gas revenue was helping in feeding the rising state benefits bill at the time – all Thatcher saw in Brent, Piper and Cormorant fields were Petropounds to balance the books. And, if you thought the ‘crude’ influence ended in the sale of BNOC, privatisation drives or channelling revenue for short-term economic rebalancing, then think again. Crude oil, or rather a distillate called diesel, came to Thatcher’s aid in her biggest battle in domestic politics – the Miners’ Strike of 1984.

 

Pitting her wits against Arthur Scargill, the National Union of Mineworkers’ (NUM) hardline, stubborn, ultra-left leader at the time, she prevailed. In March 1984, the National Coal Board (NCB) proposed to close 20 of the 174 state-owned mines resulting in the loss of 20,000 jobs. Led by Scargill, two-thirds of the country's miners went on strike and so began the face-off.

 

But Thatcher, unlike her predecessors, was ready for a prolonged battle having learnt her lesson in an earlier brief confrontation with the miners and knew their union’s clout full well based on past histories. This time around, the government had stockpiled coal to ensure that power plants faced no shortages as was the case with previous confrontations.

 

Tongue-tied in his vanity, Scargill had not only missed the pulse of the stockpiling drive but also failed to realise that many UK power plants had switched to diesel as a back-up. Adding to the overall idiocy of the man, he decided to launch the strike in the summer of 1984, when power consumption is lower, than in the winter.

 

Furthermore, he refused to hold a ballot on the strike, after losing three previous ballots on a national strike (in January 1982, October 1982 and March 1983). The strike was declared illegal and Thatcher eventually won as the NUM conceded a year later in March 1985 without any sizable concessions but with its member having borne considerable hardships. The world was moving away from coal, to a different kind of fossil fuel and Thatcher grasped it better than most. That the country was a net producer of crude stuff at the time was a bonanza; the Treasury’s to begin with as she saw it.

 

The Iron Lady left office with an ‘ism’ in the shape of 'Thatcherism' and bred 'Thatcherites' espousing free market ideas and by default making capitalism the dominant, though recently beleaguered, economic system of our time. Big Bang, the day [October 27, 1986] the London Stock Exchange's rules changed, following deregulation of the financial markets, became the cornerstone of her economic policy.

 

In this world there are no moral absolutes. So the Oilholic does not accept the rambunctious arguments offered by left wingers that she made ‘greed’ acceptable or that the Big Bang caused the global financial crisis of 2007-08. Weren’t militant British unions who, for their own selfish odds and ends, held the whole country to ransom throughout the 1970s (until Thatcher decimated them), greedy too? If the Big Bang was to blame for a global financial crisis, so was banking deregulation in the UK in 1997 (and elsewhere around that time) when she was not around.

 

Equally silly, are the fawning accolades handed out by the right wingers; many of whom – and not the British public – were actually instrumental in booting her out of office and some of whom were her colleagues at the time. Let the wider debate about her legacy be where it is, but were it not for the UK oil and gas Inc., there would have been no legacy. Luck played its part, as it so often does in the lives of great leaders. As The Economist noted:

 

“She was also often outrageously lucky: lucky that the striking miners were led by Arthur Scargill, a hardline Marxist; lucky that the British left fractured and insisted on choosing unelectable leaders; lucky that [Argentine] General Galtieri decided to invade the Falkland Islands when he did; lucky that she was a tough woman in a system dominated by patrician men (the wets never knew how to cope with her); lucky in the flow of North Sea oil; and above all lucky in her timing. The post-war consensus was ripe for destruction, and a host of new forces, from personal computers to private equity, aided her more rumbustious form of capitalism.”

 

They say that the late Venezuelan president Hugo Chavez stage-managed 'Chavismo' and bred 'Chavistas' from the proceeds of black gold. The Oilholic says 'Thatcherism' and 'Thatcherites' have a ‘crude’ dimension too. Choose whatever evidence you like – statistical, empirical or anecdotal – crude oil bankrolled Thatcherism in its infancy. That is the unassailable truth and that’s all for the moment folks! Keep reading, keep it ‘crude’!

 

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo 1: Baroness Margaret Thatcher’s funeral cortege with military honours, April 17, 2013 © Gaurav Sharma. Photo 2: Front page of the Hendon & Finchley Times, April 11, 2013. Photo 3: Front cover of the The Economist, April 13, 2013.

Brent’s liquidity, Nexen, 'crude' Vancouver & more

Last Friday, the Brent forward month futures price plummeted to US$110.65 per barrel thereby losing all of the gains it made in 2013. The WTI price declined in near furious tandem to US$91.92; the  benchmark's lowest intraday price since January 4. An Italian political stalemate and US spending cuts enforced by Congressional gridlock have unleashed the bearish trends. Quite frankly, the troublesome headwinds aren’t going anywhere, anytime soon.

Prior to the onset of recent bearish trends, Bank of America said the upper limit for Brent crude will rise from US$140 per barrel this year to US$175 in 2017 because of constraints on supply. It added that WTI may slip to “US$50 within the next two years” amid booming North American supply. Meanwhile, ratings agency Moody’s expects strong global crude prices in the near term and beyond, with a continued US$15 per barrel premium in favour of Brent versus WTI over 2013.

Moody's still assumes 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. For WTI, the agency leaves its previous assumptions unchanged at US$85 in 2013, 2014 and thereafter. Away from the fickle pricing melee, there was a noteworthy development last month in terms of Brent’s liquidity profile as a benchmark, which is set to be boosted.

On February 19, Platts proposed the introduction of a quality premium for Ekofisk and Oseberg crudes; two of the four grades constituting the Dated Brent marker. A spokesperson said the move would increase transparency and trading volumes in Dated Brent. The proposal came a mere fortnight after Shell’s adjustments to its trading contract for three North Sea blends including Brent.

The oil major said it would change its contract (SUKO 90) for buying and selling to introduce a premium for the delivery of higher quality Brent, Ekofisk and Oseberg grades. Previously, it only used the Forties grade which was typically the cheapest Brent blend and thus used to price the benchmark by default. BP has also agreed to Shell’s amended pricing proposals in principle.

The Oilholic thinks it is prudent to note that even though Platts is the primary provider of price information for North Sea crude(s), actual contracts such as Shell’s SUKO 90 are the industry’s own model. So in more ways than one, a broad alignment of the thinking of both parties (and BP) is a positive development. Platts is requesting industry feedback on the move by March 10 with changes being incorporated with effect from shipments in May.

However, there are some subtle differences. While Shell has proposed an inclusion of Brent, Platts is only suggesting premiums for Oseberg and Ekofisk grades. According to published information, the oil major, with BP’s approval, has proposed a 25% premium for Brent and Oseberg based on their difference to the Forties differential, and a 50% premium for Ekofisk.

But Platts, is seeking feedback on recommending a flat 50% premium for both Oseberg and Ekofisk. Nonetheless, at a time of a dip in North Sea production, a change of pricing status quo aimed at boosting liquidity ought to be welcomed. Furthermore, there is evidence of activity picking up in the UK sector of the North Sea, with Oil and Gas UK (OGUK), a body representing over 320 operators in the area, suggesting last month that investment was at a 30-year high.

OGUK said companies invested £11.4 billion in 2012 towards North Sea prospection and the figure is expected to rise to £13 billion this year. It credited UK Chancellor George Osborne’s new tax relief measures announced last year, which allowed gas fields in shallow waters to be exempt from a 32% tax on the first £500 million of income, as a key factor.

However, OGUK warned that reserves currently coming onstream have not been fully replaced with new discoveries. That is hardly surprising! In fact, UK production fell to the equivalent of 1.55 million barrels per day (bpd) in 2012, down by 14% from 2011 and 30% from 2010. While there may still be 24 billion barrels of oil to be found in the North Sea, the glory days are not coming back. Barrel burnt per barrel extracted or if you prefer Petropounds spent for prospection are only going to rise.

From the North Sea’s future, to the future of a North Sea operator – Canada’s Nexen – the acquisition of which by China’s state-owned CNOOC was finally approved on February 26. It took seven long months for the US$15.1 billion takeover to reach fruition pending regulatory approval in several jurisdictions, not least in Canada.

It was announced that shareholders of the Calgary, Alberta-based Nexen would get US$27.50 in cash for each share, but the conditions imposed by Canadian (and US) regulators for the deal to win approval were not disclosed. More importantly, the Harper administration said that CNOOC-Nexen was the last deal of its kind that the Canadian government would approve.

So it is doubtful that a state-controlled oil company would be taking another majority stake in the oil sands any time soon. The Nexen acquisition makes CNOOC a key operator in the North Sea, along with holdings in the Gulf of Mexico and West Africa, Middle East and of course Canada's Long Lake oil sands project (and others) in Alberta.

Meanwhile, Moody’s said the Aa3 ratings and stable outlooks of CNOOC Ltd and CNOOC Group will remain unchanged after the acquisition of Nexen. The agency would also continue to review for upgrade the Baa3 senior unsecured rating and Ba1 subordinated debt rating of Nexen.

Moving away from Nexen but sticking with the region, the country’s Canadian Business magazine asks, “Is Vancouver the new Calgary?”  (Er…we’re not talking about changing weather patterns here). The answer, in 'crude' terms, is a firm “Yes.” The Oilholic has been pondering over this for a good few years. This humble blogger’s research between 2010 and present day, both in Calgary and Vancouver, has always indicated a growing oil & gas sector presence in BC.

However, what is really astonishing is the pace of it all. Between the time that the Oilholic mulled about the issue last year and February 2013, Canadian Business journalist Blair McBride writes that five new oil & gas firms are already in Vancouver. Reliable anecdotal evidence from across the US border in general, and the great state of Texas in particular, suggests more are on their way! Chevron is a dead certain, ExxonMobil is likely to follow.

One thing is for certain, they’re going to need a lot more direct flights soon between Vancouver International and Houston’s George Bush Intercontinental airport other than the solitary Continental Airlines route. Hello, anyone from Air Canada reading this post?

Continuing with corporate news, Shell has announced the suspension of its offshore drilling programme in the Arctic for the rest of 2013 in order to give it time to “ensure the readiness of equipment and people.” It was widely expected that prospection in the Chukchi and Beaufort Seas off Alaska would be paused while the US Department of Justice is looking into safety failures.

Shell first obtained licences in 2005 to explore the Arctic Ocean off the Alaskan coastline. Since then, £3 billion has been spent with two exploratory wells completed during the short summer drilling season last year. However, it does not mask the fact that the initiative has been beset with problems including a recent fire on a rig.

Meanwhile, Repsol has announced the sale of its LNG assets for a total of US$6.7 billion to Shell. The deal includes Repsol’s minority stakes in Atlantic LNG (Trinidad & Tobago), Peru LNG and Bahia de Bizkaia Electricidad (BBE), as well as the LNG sale contracts and time charters with their associated loans and debt. It’s a positive for Repsol’s credit rating and Shell’s gas reserves.

As BP’s trial over the Gulf of Mexico oil spill began last month, Moody’s said the considerable financial uncertainty will continue to weigh on the company’s credit profile until the size of the ultimate potential financial liabilities arising from the April 2010 spill is known.

Away from the trial, the agency expects BP's cash flows to strengthen from 2014 onwards as the company begins to reap benefits of the large roster of upstream projects that it is working on, many of which are based in high-margin regions. “This would help strengthen the group's credit metrics relative to their weaker positioning expected in 2013,” Moody’s notes.

One final bit of corporate news, Vitol – the world's largest oil trading company –  has posted a 2% rise in its 2012 revenue to US$303 billion even though volumes traded fell and profit margins remained under pressure for much of the year. While not placing too much importance on the number, it must be noted that a US$300 billion-plus revenue is more than what Chevron managed and a first for the trading company.

However, it is more than safe to assume Chevron’s profits would be considerably higher than Vitol’s. Regrettably, other than relying on borderline gossip, the Oilholic cannot conduct a comparison via published sources. That’s because unlike listed oil majors like Chevron, private trading houses like Vitol don’t release their profit figures.

That’s all for the moment folks. But on a closing note, this blogger would like to flag-up research by the UK’s Nottingham Trent University which suggests that Libya could generate approximately five times the amount of energy from solar power than it currently produces in crude oil!

The university’s School of Architecture, Design and the Built Environment found that if the North African country – which is estimated to be 88% desert terrain – used 0.1% of its landmass to harness solar power, it could produce almost 7 million crude oil barrels worth of energy every day. Currently, Libya produces around 1.41 million bpd. Food for thought indeed! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

© Gaurav Sharma 2013. Photo 1: Oil tanker, English Bay, BC, Canada. Photo 2: Downtown Vancouver, BC, Canada © Gaurav Sharma

Brent’s ‘nine-month high’, Aubrey, BP & more

Oh boy, what one round of positive data, especially from China, does to the oil market! The Brent forward month futures contract for March is within touching distance of a US$120 per barrel price and the bulls are out in force. Last Friday’s intraday price of US$119.17 was a nine-month high; a Brent price level last seen in May 2012. The cause – and you have heard this combination before – was healthy economic data from China, coupled with Syrian turmoil and an Iranian nuclear stalemate.

 

The Oilholic has said so before, and will say it again – the last two factors touted by market commentators have been broadly neutral in terms of their impact for the last six months. It is the relatively good macroeconomic news from China which is principally behind the rally that nearly saw the Brent price breach the US$120 level.

 

The bull-chatter is already in full force. In a note to clients, Goldman Sachs advised them last week to maintain a net long position in the S&P GSCI Brent Crude Total Return Index. The investment bank believes this rally is "less driven by supply shocks and instead by improving demand."

 

"Global oil demand has surprised to the upside in recent months, consistent with the pick-up in economic activity," the bank adds in an investment note. Really? This soon – on one set of data? One thing is for sure, with many Asian markets shut for the Chinese New Year, at least trading volumes will be lighter this week.

 

Nonetheless, the ‘nine-month high’ also crept into the headline inflation debate in the UK where the CPI rate has been flat at 2.7% since October, but commentators reckon the oil spike may nudge it higher. Additionally, the Brent-WTI spread is seen widening yet again towards the US$25 per barrel mark. On a related note, Enterprise Product Partners said that capacity on its Seaway pipeline to the US Gulf of Mexico coast from Cushing, Oklahoma will remain limited until much later this year.

 

Moving away from pricing, news arrived end-January that the inimitable Aubrey McClendon will soon vacate the office of the CEO of Chesapeake Energy. It followed intense scrutiny over the last nine months about revelations, which surfaced in May, regarding his borrowings to finance personal stakes in company wells.

 

As McClendon announced his departure on January 29, the company’s board reiterated that it had found no evidence to date of improper conduct by the CEO. McClendon will continue in his post until a successor is found which should be before April 1st – the day he is set to retire. The announcement marks a sad and unspectacular exit for the great pioneer who co-founded and led Chesapeake Energy from its 1989 inception in Oklahoma City and has been a colourful character in the oil and gas business ever since.

 

Whatever the circumstances of his exit may be, let us not forget that before the so called ‘shale gale’ was blowing, it was McClendon and his ilk who first put their faith in horizontal drilling and hydraulic fracturing. The rest, and US’ near self-sufficiency in gas supplies, is history.

Meanwhile, BP has been in the crude news for a number of reasons. First off, an additional US$34 billion in claims filed against BP by four US states earlier this month have provided yet another hurdle for the oil giant to overcome as it continues to address the aftermath of the 2010 Gulf of Mexico oil spill.

 

However, Fitch Ratings not believe that the new round of claims is a game changer. In fact the agency does not think that any final settlement is likely to be enough to interfere with BP's positive medium term credit trajectory. The latest claims come on top of the US$58 billion maximum liability calculated by Fitch. If realised, the cost of the spill could rise up to as much as US$92 billion.

 

The agency said the new claims should be put in the context of an asset sale programme that has raised US$38 billion. “This excludes an additional US$12 billion in cash to come from the sale of TNK-BP this year – upside in our analysis because we gave BP no benefit for the TNK-BP stake. BP had US$19 billion of cash on its balance sheet at 31 December 2012. That is after it has already paid US$38 billion in settlements or into escrow,” it added.

 

Away from the spill, the company announced that it had started production from new facilities at its Valhall field in the Norwegian sector of the North Sea on January 26 with an aim of producing up to 65,000 barrels of oil equivalent per day in the second half of 2013. Valhall's previous output averaged about 42,000 barrels per day (bpd), feeding crude into the Ekofisk oil stream.

 

Earlier this month, BP also said that both consortiums vying to link Azerbaijan's Shah Deniz gas field in the Caspian Sea, into Western European markets have an equal chance of success. BP operates the field which was developed in a consortium partnership with Statoil, Total, Azerbaijan’s Socar, LukAgip (an Eni, LUKoil joint venture) and others.

 

A decision, whether to pipe gas from the field into Austria via the proposed Nabucco (West) pipeline or into Italy through the rival Trans Adriatic Pipeline (TAP) project, is expected to be made by mid-2013. Speaking in Vienna, Al Cook, head of BP's Azeri operations, said, “I genuinely believe both pipelines at the moment have an equal chance. There's certainly no clear-cut answer at the moment.”

 

BP is aiming for the first gas from Shah Deniz II to be delivered to existing customer Turkey in 2018. Early 2019 is the more likely date for the first Azeri gas to reach Western Europe via this major development often touted as one which would reduce European dependence on Russia for its energy supplies.

 

The Shah Deniz consortium owns equity options in both the pipeline projects and Cook did not rule out that both Nabucco (West) and TAP could be built in the long term. Specifically, BP's own equity options, which are part of the Shah Deniz stakes, are pegged at 20% in TAP and 14% in Nabucco. Cook said BP was not “actively seeking” to increase its stake in either project – a wise choice indeed.

 

On February 4, BP said its Q4 2012 net profit, adjusted for non-operating items, currency and accounting effects, fell to US$3.98 billion from US$4.98 billion recorded over the corresponding quarter last year. Moving away from BP, Royal Dutch Shell posted a 6% dip in 2012 profits to US$27 billion on the back of weak oil and gas prices and lower exploration and production (E&P) margins.

 

The Anglo-Dutch oil major reported Q4 earnings of US$7.3 billion, a rise of 13%. However, on an adjusted current cost of supply basis and one-off asset sales, the profit came in at US$5.58 billion. In particular, Shell’s E&P business saw profits dip 14% to US$4.4 billion, notwithstanding an actual 3% increase in oil and gas production levels. However, the company did record stronger refining margins.

 

Ironically, while acknowledging stronger refining margins, Shell confirmed its decision to close most of its Harburg refinery units in Hamburg, Germany. The permanent shutdown of much of its 100,000 bpd refinery is expected next month in line with completing a deal made with Swedish refiner Nynas in 2011.

 

Finally, in a typical Italian muddle, several oil executives in the country are under investigation following a probe into alleged bribery offences related to the awarding of oil services contracts to Saipem in Algeria. Eni has a 43% stake in Saipem which is Europe’s biggest oil services provider. While the company itself denied wrongdoing, the probe was widened last Friday to include Eni CEO Paolo Scaroni.

 

The CEO’s home and office were searched as part of the probe. However, Eni is standing by their man and said it will cooperate fully with the prosecutor’s office in Milan. So far, Pietro Franco Tali (the CEO of Saipem) and Eni’s Chief Financial Officer Alessandro Bernini (who was Saipem’s CFO until 2008) have been the most high profile executives to step down in wake of the probe. Watch this crude space! That’s all for the moment folks! Keep reading, keep it ‘crude’!

 

To follow The Oilholic on Twitter click here.

 

© Gaurav Sharma 2013. Photo 1: Asian oil rig © Cairn Energy. Photo 2: Gas extraction site © Chesapeake Energy.

Algeria’s ‘dark cloud’, PDVSA’s ratings & more

The terrorist strike on Algeria’s In Amenas gas field last week and the bloodbath that followed as the country’s forces attempted to retake the facility has dominated the news headlines. The siege ended on Saturday with at least 40 hostages and 32 terrorists dead, according to newswires. The number is likely to alter as further details emerge. The hostage takers also mined the whole facility and a clear-up is presently underway. The field is operated as a joint venture between Algeria's Sonatrach, Statoil and BP. While an estimated 50,000 barrels per day (bpd) of condensate was lost as production stopped, the damage to Algeria’s oil & gas industry could be a lot worse as foreign oil workers were deliberately targeted.

 

In its assessment of the impact of the terror strike, the IEA said the kidnapping and murder of foreign oil workers at the gas field had cast a ‘dark cloud’ over the outlook for the country's energy sector. The agency said that 'political risk writ large' dominates much of the energy market, 'and not just in Syria, Iran, Iraq, Libya or Venezuela' with Algeria returning to their ranks. Some say it never left in the first place.

 

Reflecting this sentiment, BP said hundred of overseas workers from IOCs had left Algeria and many more were likely to join them. Three of the company’s own workers at the In Amenas facility are unaccounted for.

 

Continuing with the MENA region, news emerged that Saudi Arabia’s output fell 290,000 bpd in December to 9.36 million bpd. Subsequently, OPEC’s output in December also fell to its lowest level in a year at 30.65 million bpd. This coupled, with projections of rising Chinese demand, prompted the IEA to raise its global oil demand forecast for 2013 describing it as a 'sobering, 'morning after' view.'

 

The forecast is now 240,000 bpd more than the IEA estimate published in December, up to 90.8 million bpd; up 1% over 2012. "All of a sudden, the market looks tighter than we thought…OECD inventories are getting tighter - a clean break from the protracted and often counter-seasonal builds that had been a hallmark of 2012," IEA said.

 

However, the agency stressed there was no need for rushed interpretations. "The dip in Saudi supply, for one, seems less driven by price considerations than by the weather. A dip in air conditioning demand - as well as reduced demand from refineries undergoing seasonal maintenance - likely goes a long way towards explaining reduced output. Nothing for the global market to worry about," the IEA said.

 

"The bull market of 2003‐2008 was all about demand growth and perceived supply constraints. The bear market that followed was all about financial meltdown. Today's market, as the latest data underscore, has a lot to do with political risk writ large. Furthermore, changes in tax and trade policies, in China and in Russia, can, at the stroke of a pen, shakeup crude and products markets and redraw the oil trade map," the agency concluded.

 

Simply put, it’s too early for speculators to get excited about a possible bull rally in the first quarter of 2013, something which yours truly doubts as well. However, across the pond, the WTI forward month futures contract cut its Brent discount to less than US$15 at one point last week, the lowest since July. As the glut at Cushing, Oklahoma subsides following the capacity expansion of the Seaway pipeline, the WTI-Brent discount would be an interesting sideshow this year. 

 

The IEA added that non-OPEC production was projected to rise by 980,000 bpd to 54.3 million bpd, the highest growth rate since 2010. Concurrently, BP said that US shale oil production is expected to grow around 5 million bpd by 2030. This, according to the oil major, is likely to be offset by reductions in supply from OPEC, which has been pumping at historical highs led by the Saudis in recent years.

 

BP's chief economist Christof Ruehl said, "This will generate spare capacity of around 6 million bpd, and there's a fault line if there is higher shale production then the consequences would be even stronger." But the shale revolution will remain largely a "North American phenomenon," he added.

 

"No other country outside the US and Canada has yet succeeded in combining these factors to support production growth. While we expect other regions will adapt over time to develop their resources, by 2030 we expect North America still to dominate production of these resources," Ruehl said.

 

Along the same theme, CNN reported that California is sitting on a massive amount of shale oil and could become the next oil boom state. That’s only if the industry can get the stuff out of the ground without upsetting the state's powerful environmental lobby. Yeah, good luck with that!

Returning to Saudi Arabia, Fitch Ratings said earlier this month that an expansionary 2013 budget based on a conservative oil price will support another year of healthy economic growth for the country and a further strengthening of the sovereign's net creditor position. However, overall growth will slow “due to a decline in oil production that was already evident in recent months.”

 

In the full year to December-end 2013, the Saudi budget, unveiled on December 29, projected record spending of US$219 billion (34% of GDP), up by almost 20% on the 2012 budget. Budgeted capital spending is 28% higher than in 2012, though the government has struggled to achieve its capital spending targets in recent years.

 

While an 18% rise in Saudi revenues is projected in the budget, they are based on unstated oil price and production assumptions, with the former well below prevailing market prices. Fitch anticipates Saudi production and prices will be lower in 2013 than 2012.

"With no new revenue-raising measures announced and little scope for higher oil revenues, the revenue projection appears less cautious than usual. However, actual revenues generally substantially exceed budget revenues (by an average of 82% over the past five years) and should do so again in 2013," the agency said.

 

Meanwhile, political uncertainty continues in Venezuela with no clarity about the health of President Hugo Chavez. It has done Petróleos de Venezuela's (PDVSA), the country’s national oil company, no favours. On January 16, ratings agency Moody’s changed PDVSA's rating outlook to negative.

It followed the change in outlook for the Venezuelan government's local and foreign currency bond ratings to negative. "The sovereign rating action reflects increasing uncertainty over President Chavez's political succession, and the impact of a possibly tumultuous transition on civil order, the economy, and an already deteriorating government fiscal position," Moody’s said.

 

On PDVSA, the agency added that as a government-related issuer, the company's ratings reflect a high level of imputed government support and default correlation between the two entities. Hence, a downgrade of the government's local and foreign currency ratings would be likely to result in a downgrade of PDVSA's ratings as well.

 

Away from a Venezuela, two developments in the North Sea – a positive and a negative apiece – are worth taking about. Starting with the positive news first, global advisory firm Deloitte found that 65 exploration and appraisal wells were drilled on the UK Continental Shelf (UKCS), compared with 49 in 2011.

 

The activity, according to Deloitte, was boosted by a broader range of tax allowances and a sustained high oil price. The news came as Dana Petroleum said production had commenced at the Cormorant East field which would produce about 5,500 bpd initially. Production will be processed at the Taqa-operated North Cormorant platform, before being sent to BP's Sullom Voe terminal (pictured above) for sale.

 

Taqa, an Abu Dhabi government-owned energy company, has a majority 60% stake in the field. Alongside Dana Petroleum (20%), its other partners include Antrim Resources (8.4%), First Oil Expro (7.6%) and Granby Enterprises (4%).

 

While Taqa was still absorbing the positives, its Cormorant Alpha platform, about 160 km from the Shetland Islands, reported a leak leading to a production shut-down at 20 other interconnected North Sea oilfields.

 

Cormorant Alpha platform handles an output of about 90,000 bpd of crude which is transported through the Brent pipeline to Sullom Voe for dispatch. Of this only 10,000 bpd is its own output. Thankfully there was no loss of life and Taqa said the minor leak had been contained. It is currently in the process of restoring 80,000 bpd worth of crude back to the Brent pipeline system along with sorting its own output.

 

Finally, as the Oilholic blogged back in October on a visit to Hawaii, Tesoro is to close its Kapolei, O'ahu refinery in the island state in April as a buyer has failed to turn-up (so far). In the interim, it will be converting the facility to a distribution and storage terminal in the hope that a buyer turn up. The Oilholic hopes so too, but in this climate it will prove tricky. Tesoro will continue to fulfil existing supply commitments.

 

That’s all for the moment folks except to inform you that after resisting it for years, yours truly has finally succumbed and opened a Twitter account! Keep reading, keep it ‘crude’!

 

To follow The Oilholic on Twitter click here.

 

© Gaurav Sharma 2013. Photo: Sullom Voe Terminal, BP © BP Plc.

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