UK PM flags up crude credentials

The Oilholic attended the British lobby group CBI’s annual conference earlier today listening to UK Prime Minister David Cameron flag-up his crude credentials (admittedly among other matters). The PM feels investment in the Oil & Gas sector and British expertise in it could be part of his wider economic rebalancing act.

“In last few weeks alone I have visited an £4.5 billion new investment from BP in the North Sea…And today I hosted Britain and Norway signing a 10-year deal to secure gas supplies and develop together over £1 billion of Norwegian gas fields,” he said.

That deal of course was part of British utility Centrica’s 10-year agreement worth £13 billion to buy natural gas from Norway's Statoil and jointly develop fields.

"Gas plays a central role in powering our economy, and will continue to do so for decades to come. Today's agreement will help to ensure the continued security and competitiveness of gas supplies to Britain, from a trusted and reliable neighbour," the PM concluded.

Admittedly, from a gasoline consumers’ standpoint successive British governments have long lost street cred when it comes to taxing fuel a long while ago; still the present lot fare better in relative terms if the UK ONS is to be relied upon. The British statistics body announced last week that the Government’s Share of petrol pump price dropped to 66p in the pound in 2009/10; from nearly 81p in 2001/02.

The data also show that the poorest 20% of UK households paid almost twice as much of their income in duties on fuel than the richest 20%. In 2009/10, the poorest 20% of households paid 3.5% of their disposable income on duty, compared with only 1.8% for the top 20%. Overall, the average UK household spent 2.3% of its disposable income on duties on fuel.

However, in cash terms, the richest 20% of households paid almost three-times the amount paid by the bottom 20%. In 2009/10 the richest 20% of households spent £1,062 on petrol taxes, compared with £365 for the poorest 20% of households. Overall, the average UK household spent £677 on duties on fuel in 2009/10.

Finally, the UK, US and Canada announced new sanctions against Iran following growing concern over its nuclear programme in wake of the IAEA report. In a statement the US government said that Iran's petrochemical, oil and gas industry (including supply of technical components for Upstream and downstream ops) and its financial sector would be targeted by the sanctions.

Canada will ban all exports for the petrochemical, oil and gas industries without exceptions while the British government would demand that all UK credit and financial institutions had to cease trading with Iran's banks from Monday afternoon. The Oilholic notes that this is first time the UK has cut off a petro-exporting country’s banking sector, in fact any country’s banking sector in this fashion. Its highly doubtful if the move will tame misplaced Iranian belligerence.

© Gaurav Sharma 2011. Photo: British Prime Minister David Cameron speaking at the CBI Conference, November 21^st, 2011 © Gaurav Sharma 2011.

Buzz at Central Bank of Oil Before 1600 CET

Ahead of the OPEC decision, prices for the forward month ICE Brent and NYMEX WTI futures contracts have fallen by US$2-3 on average over two weeks if the last fortnight is taken into consideration. That is largely down to the fact that traders have begun to factor in a possible increase in OPEC crude production quotas in the run up to the meeting here in Vienna today.

For the purposes of a price check, at 11:00am CET, ICE Brent is trading at US$116.26 down 0.5% or 16 cents, while WTI is down 99 cents or 1% at US$98.46. Additionally, the OPEC basket of twelve crudes stood at US$110.66 on Tuesday, compared with US$110.99 the previous day according to OPEC Secretariat calculations this morning.

Mike Wittner of Société Générale notes that if an increase in OPEC quota is made from a starting point of actual production, rather than the previous quota, it is that much more real, that much more serious, and potentially that much more bearish, at least in the short term.

“In contrast, if OPEC were to increase quotas by 1.5 million b/d, but versus previous quotas and not actual production, all they would be doing would be legitimising recent/current overproduction versus the old quota,” he adds.

Most analysts including Wittner and those present here believe a physical increase would be coming our way. Speaking of analysts, it is always a pleasure meeting Jason Schenker, President & Chief Economist of Prestige Economics at these OPEC meetings. He’s to be credited for describing OPEC as the Central Bank of Oil. The Oilholic heartily agrees and could not have put it better. Schenker believes OPEC is looking at the medium term picture and not just the next few months.

“As anticipated if there is a production hike today, the thinking at the “Central Bank of Oil” would be that it could carry them across to the end of Q4 2011 perhaps without facing or acting upon further calls for alterations of production quotas,” he says.

On a somewhat 'crude' but unrelated footnote, hearing about my recent visit to Alberta, Canada, Jason agrees there are a whole lot of crude opportunities for Canadians to be excited about. It would not be easy and it is certainly not cheap. But then cheap oil has long gone – this not so cheap resource is in a safe neutral country. Furthermore, one must never say never, but Canadians are not exactly queuing up to join OPEC any time soon (or ever).

Finally on a totally unrelated footnote, one can see the “Made in UK” label at OPEC HQ – it’s the paper cups near the water dispenser - not something extracted from the North Sea.

© Gaurav Sharma 2011. Photo: Oil well in Oman © Royal Dutch Shell

Oh the market ‘insouciance’ outside is frightful!

It is no longer strange to see Americans and Canadians complain about the rising price of gasoline. After all, it’s the price at the pump which hurts us all – something which has seen a steady rise.

A short-term respite is quite frankly not in sight; more so for Europeans but complaints from North American consumers and change in consumption patterns (in relative terms) have grown in the last five years. Although some in the English town of Bradford, who pay more for their petrol/per litre than North Americans, got a temporary one-off respite according to the BBC, after the station staff put a decimal point in the wrong place. The story is hilarious, aptly timed for April Fools Day and one for the little guy troubled by rising inflation in UK.

US President Obama finally pointed to Canada, Mexico as reliable sources of crude oil and said they could play their part in his consuming nation’s bid to slash imports from unfriendly governments. Both countries rank higher than Saudi Arabia in terms of crude exports to the US, so very welcome quotes – but as with all else about him – a bit late.

The short-term problem – and a global one it is too – is the widening of premium between easier to refine sweet crude oil and sour crude which is the opposite. Anecdotal evidence, either side of the Atlantic is that refiners (either European or European subsidiaries of overseas owners), are paying record physical premiums to secure supplies of sweet crude in wake of the Libyan stand-off.

The quality of Libyan sweet crude is excellent and as a short-term problem starts resembling a longer termed stand-off, the market is getting spooked as no one can make up their minds about who is in charge of the country. That’s despite the on / off media reports of oil being loaded on to tankers both on the rebels’ side and Gaddafi’s side.

End result - Brent Crude forward month futures (May) contract, more reflective of global conditions, has spiked to a 30-month high. Oilholic believes this is no ordinary or linear spike resulting from a geopolitical bias/risk premium to the upside. Rather it is clearly reflective of the rise in price differentials between sweet and sour crude in wake of Libya and hence impacts Brent as a benchmark to a greater extent than the WTI.

As early as a fortnight ago, the IEA rightly warned that we are underestimating the impact of the temporary (or otherwise) loss of Libyan sweet crude on traded paper barrels. In its monthly report for March, it noted, "Market insouciance may change abruptly as April approaches, when global crude demand is expected to increase by around 1 million barrels a day as Atlantic Basin refinery maintenance ends."

Sweet crude varieties are trading at a premium of US$2.80 to US$4.10 per barrel above sour varieties, according to the Oilholic’s sources. This is the highest for some time. Try as they might, Saudis won’t materially alter this; the premium has solid foundations!

Finally before I leave Canada for San Francisco, here is a brilliant editorial in The Economist about European nations trying to forget embarrassing ties in the Middle East and a BBC report on Transocean’s 'crude' announcement of bonuses related to their "best year of safety."

© Gaurav Sharma 2011. Photo: Gas Station, Houston, Texas, USA © Gaurav Sharma, March 2011

Crude Oil prices & some governments

I have spent the last two weeks quizzing key crude commentators in US and Canada about what price of crude oil they feel would be conducive to business investment, sit well within the profitable extraction dynamic and last but certainly not the least won't harm the global economy.

Beginning with Canada, since there’s no empirical evidence of the Canadian Dollar having suffered from the Dutch disease, for the oil sands to be profitable – most Canadians remarked that a price circa of US$75 per barrel and not exceeding US$105 in the long term would be ideal. On the other hand, in the event of a price dive, especially an unlikely one that takes the price below US$40 per barrel would be a disaster for petro-investment in Canada. A frozen Bow River (pictured above) is ok for Calgarians, but an investment freeze certainly wont be!

The Americans came up with a slightly lower US$70-90 range based on consumption patterns. They acknowledge that should the price spike over the US$150 per barrel mark and stay in the US$120-150 range over the medium term, a realignment of consumption patterns would occur.

This begs the question – what have Middle Eastern governments budgeted for? Research by commentators at National Commercial Bank of Saudi Arabia, the Oilholics’ feedback from regional commentators and local media suggests the cumulative average would be US$65 per barrel. Iran and Iraq are likely to have budgeted at least US$10 above that, more so in the case of the former while Saudi Arabia (and maybe Kuwait) would have budgeted for US$5 (to US$10) below that.

Problem for the Oilholic is getting access to regional governments’ data. Asking various ministries in the Middle East and expecting a straight forward answer, with the notable exception of the UAE, is as unlikely as getting a Venezuelan official to give accurate inflation figures.

Meanwhile, price is not the only thing holding or promoting investment. For instance, the recent political unrest has meant that the Egypt Petroleum Corp. has delayed the Mostorod refinery construction until at least May. The reason is simple – some 20-odd participating banks, who arranged a US$2.6 billion loan facility want the interim government to reaffirm its commitment to the project, according to a lawyer close to the deal. The government, with all due respect, has quite a few reaffirmations to make.

© Gaurav Sharma 2011. Photo: Bow River, Calgary, Alberta, Canada © Gaurav Sharma, April 2011

The Veraciously Detailed Analysis of Prof. Gorelick

The debate over the “peak oil” hypothesis used to keep rearing its head from time to time in media and commodities circles – but of late it has become a bit of a permanent mainstream fixture, with regular discussions in the popular press.

No one discounts the fact that oil is a non-renewable and finite hydrocarbon, but the positions people take on either side of the hypothesis often evoke fierce emotions. Enter Prof. Steven M. Gorelick – the author of the brilliant book – Oil Panic and The Global Crisis: Predictions and Myths.

In my years as a journalist who has written on oil and follows crude markets closely, I feel this book is among the most engaging, detailed and well written ones that I have come across in its genre. Gorelick examines both sides of the argument and allied “crude” topics in some detail. He notes that commentators on either side of the peak oil debate, their respective stances and the arguments are not free of some pretty major assumptions. This pertains, but is not limited, to the complex issue of oil endowments and the methodology of working them out.

The author examines data and market conjecture that both supports and rejects the idea that the world is running out of crude oil. Prior to entering the resource depletion debate, Gorelick charts the landscape, outlines the history of the oil trade and crude prospection and exploration.

Following on from that, he discusses the resource depletion argument followed by a refreshingly well backed-up chapter offering arguments against imminent global oil depletion. The veracity of the research is simply unquestionable and the figures are not substantiated by rants or guesswork, but by a methodical analysis which makes the author's argument sound extremely persuasive. If you are taken in by popular discourse or media chatter about the planet running out of oil, this book does indeed explode more than a few myths.

The text is backed-up by ample figures, graphics and forecasts from a variety of industry recognised sources, journals and organisations. Unlike a straight cut bland discourse, the narrative of this book is very engaging. It may well be data intensive, but if the whole point of the book is substantiating an argument - then the data adds value and makes for an informed argument - for which author deserves full credit.

Above anything else, I find myself in agreement with the author that the US, where production peaked a few decades ago, is a “pincushion of exploration relative to other parts of the world.” Backed-up by data, Gorelick explains that the Middle East, Eastern (& Central) Europe and Africa contain 75% of global crude reserves but account for only 13% of exploratory drilling. This must change.

Every key topic from the Malthusian doctrine to M.K. Hubert's approach, from Canadian Oil sands to drilling offshore and the relative cost of imported oil for consuming nations have been discussed in context of the resource depletion debate and in some detail.

Gorelick correctly notes that while the era of "easy" oil may well be over and how much oil is extracted from difficult sources remains to be seen. I quite agree with the author that the next or shall we say the current stage of extraction and prospection would ultimately be dictated by the price of oil.

Many commodities traders believe a US$50 per barrel price or above would ensure extraction from difficult to reach places. However, that is not to say that a high price equates to the planet running out of oil, according to the author. He writes so from a position of strength having spent years analysing industry data and I find it difficult not to be swayed by the force of his honest arguments.

© Gaurav Sharma 2010. Book Cover © Wiley

BP Swoops for (More) Global Assets

Oil major BP has swooped for assets in Brazil, Azerbaijan and U.S. deepwater Gulf of Mexico from Devon Energy for a price tag of $7 billion as well as giving the latter a 50% stake in its Kirby oil sands holdings in Alberta, Canada, for $500 million.

The 50/50 Canadian joint venture, slated to be operated by Devon, will pursue development of the interest. Devon Energy has also committed to fund an additional $150 million in capital costs on BP’s behalf.

Going into further details, BP said the acquired assets include ten exploration blocks in Brazil, seven of which are in the Campos basin, prospects in the U.S. Gulf of Mexico and an interest in the BP-operated Azeri-Chirag-Gunashli (ACG) development in the Caspian Sea, Azerbaijan.

Apart from diversifying in general, the move was as much about strengthening the British oil major’s foothold in the Gulf of Mexico where it has been a key player for decades. BP will now gain a high quality portfolio in the Gulf with interests in some 240 leases, with a particular focus on the emerging Paleogene play in the ultra-deepwater.

The addition of Devon Energy’s 30% interest in the major Paleogene discovery Kaskida will give BP a 100% interest in the project. The assets also include interests in four producing oil fields: Zia, Magnolia, Merganser, and Nansen. Market commentators have already given the deal a thumbs-up.

Furthermore, Andy Inglis, BP's chief executive of Exploration and Production, told the media that BP’s entry into Brazil will add a major position in another attractive deepwater basin. "Together with the additional new access in the Gulf of Mexico, it further underlines our global position as the leading deepwater international oil company," he added.

BP also hopes to count on Devon Energy's first-hand experience in Canada. "Devon is an experienced operator in the Canadian oil sands with a proven track record of in situ development and production. We expect this transaction will accelerate the development of the Kirby assets and, through the associated crude off-take agreement, provide a secure source of Canadian heavy oil for our advantaged Whiting refinery," Inglis noted.

© Gaurav Sharma 2010. Logo Courtesy © BP Plc