Crude price, some results & the odd downgrade

We are well into the quarterly results season with oil and gas companies counting costs of the recent oil price slump on their profit margins among other things. The price itself is a good starting point. 

The Oilholic’s latest 5-day price assessment saw Brent nearly flat above US$86 per barrel at the conclusion of the weekly cycle using each Friday this month as a cut-off point (see left, click on graph to enlarge). 

Concurrently, the WTI stayed above $81 per barrel. It is worth observing the level of both futures benchmarks in tandem with how the OPEC basket of crude oils fared over the period. Discounting kicked-off by OPEC heavyweight Saudi Arabia earlier in the month, saw Iran and Kuwait follow suit. Subsequently, the OPEC basket shed over $6 between October 10 and October 24. If Saudi motives for acting as they are at the moment pique your interest, then here is one’s take in a Forbes article. Simply put, it’s an instinct called self-preservation! 

Recent trading sessions seem to indicate that the price is stabilising where it is rather than climbing back to previous levels. As the Western Hemisphere winter approaches, the December ICE Brent contract is likely to finish higher, and first contract for 2015 will take the cue from it. This year's average price might well be above or just around $100, but betting on a return to three figures early on into next year seems unwise for the moment.

Reverting back to corporate performance, the majors have started admitting the impact of lower oil prices. However, some are facing quite a unique set of circumstances to exasperate negative effects of oil price fluctuations.

For instance, Total tragically and unexpectedly lost its CEO Christophe de Margerie in plane crash last week. BP now has Russian operational woes to add to the ongoing legal and financial fallout of the Gulf of Mexico oil spill. Meanwhile, BG Group has faced persistent operational problems in Egypt but is counting on the appointment of Statoil’s boss as its CEO to turn things around.

On a related note, oilfield services (OFS) companies are putting on a bullish face. The three majors – Baker Hughes, Halliburton and Schlumberger – have all issued upbeat forecasts for 2015, predicated on continued investment by clients including National Oil Companies (NOCs).

In a way it makes sense as drilling projects are about the long-term not the here and now. The only caveat is, falling oil prices postpone (if not terminate) the embarkation of exploration forays into unconventional plays. So while the order books of the trio maybe sound, smaller OFS firms have a lot of strategic thinking to do.

Nonetheless, we ought to pay heed to what the big three are saying, notes Neill Morton, analyst at Investec. “They have unparalleled global operations and unrivalled technological prowess. If nothing else, they dwarf their European peers in terms of market value. As a result, they have crucial insight into industry activity levels. They are the ‘canaries in the coal mine’ for the entire industry. And what they say is worth noting.”

Fair enough, as the three and Schlumberger, in particular, view the supply and demand situation as “relatively well balanced”. The Oilholic couldn’t agree more, hence the current correction in oil prices! The ratings agencies have been busy too over the corporate results season, largely rating and berating companies from sanctions hit Russia.

On October 21, Moody's issued negative outlooks and selected ratings downgrade for several Russian oil, gas and utility infrastructure companies. These include Transneft and Atomenergoprom, who were downgraded to Baa2 from Baa1 and to Baa3 from Baa2 respectively. The agency also downgraded the senior unsecured rating of the outstanding $1.05 billion loan participation notes issued by TransCapitalInvest Limited, Transneft's special purpose vehicle, to Baa2 from Baa1. All were given a negative outlook.

Additionally, Moody's changed the outlooks to negative from stable and affirmed the corporate family ratings and probability of default ratings of RusHydro and Inter RAO Rosseti at Ba1 CFR and Ba1-PD PDR, and RusHydro's senior unsecured rating of its Rouble 20 billion ($500 million) loan participation notes at Ba1. Outlook for Lukoil was also changed to negative from stable.

On October 22, Moody's outlooks for Tatneft and Svyazinvestneftekhim (SINEK) were changed to negative. The actions followed weakening of Russia's credit profile, as reflected by Moody's downgrade of the country’s government bond rating to Baa2 from Baa1 a few days earlier on October 17.

Meanwhile, Fitch Ratings said the liquidity and cash flow of Gazprom (which it rates at BBB/Negative) remains strong. The company’s liquidity at end-June 2014 was a record RUB969 billion, including RUB26 billion in short-term investments. Gazprom also reported strong positive free cash flows over this period.

“We view the record cash pile as a response to the US and EU sanctions announced in March 2014, which have effectively kept Gazprom, a key Russian corporate borrower, away from the international debt capital markets since the spring. We also note that Gazprom currently has arguably the best access to available sources of funding among Russian corporate,” Fitch said in a note to subscribers.

By mid-2015, Gazprom needs to repay or refinance RUB295 billion and then another RUB264 billion by mid-2016. Its subsidiary Gazprom Neft (rated BBB/Negative by Fitch) is prohibited from raising new equity or debt in the West owing to US and EU sanctions, in addition to obtaining any services or equipment that relate to exploration and production from the Arctic shelf or shale oil deposits.

On the other hand, a recent long term deal with the Chinese should keep it going. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma, October, 2014. Graph: Brent, WTI and OPEC Basket prices for October 2014 © Gaurav Sharma, October, 2014.

Maintaining 2014 price predictions for Brent

Since the initial flare-up in Iraq little over a fortnight ago, many commentators have been revising or tweaking their Brent price predictions and guidance for the remainder of 2014. The Oilholic won't be doing so for the moment, having monitored the situation, thought hard, gathered intelligence and discussed the issue at length with various observers at the last OPEC summit and 21st World Petroleum Congress earlier this month.

Based on intel and instinct, yours truly has decided to maintain his 2014 benchmark price assumptions made in January, i.e. a Brent price in the range of US$90 to $105 and WTI price range of $85 to $105. Brent's premium to the WTI should in all likelihood come down and average around $5 barrel. Nonetheless, geopolitical premium might ensure an upper range price for Brent and somewhere in the modest middle for the WTI range come the end of the year.

Why? For starters, all the news coming from Iraq seems to indicate that fears about the structural integrity of the country have eased. While much needed inward investment into Iraq's oil & gas industry will take a hit, majority of the oil production sites are not under ISIS control.

In fact, Oil Minister Abdul Kareem al-Luaibi recently claimed that Iraq's crude exports will increase next month. You can treat that claim with much deserved scepticism, but if anything, production levels aren't materially lower either, according to anecdotal evidence gathered from shipping agents in Southern Iraq.

The situation is in a flux, and who has the upper hand might change on a daily basis, but that the Iraqi Army has finally responded is reducing market fears. Additionally, the need to keep calm is bolstered by some of the supply-side positivity. For instance, of the two major crude oil consumers – US and China – the former is importing less and less crude oil from the Middle East, thereby easing pressure by the tanker load. Had this not been the case, we'd be in $120-plus territory by now, according to more than one City trader.

Some of the market revisions to oil price assumptions, while classified as 'revisions' have been pragmatic enough to reflect this. Many commentators have merely gone to the upper end of their previous forecasts, something which is entirely understandable.

For instance, Moody's increased the Brent crude price assumptions it uses for rating purposes to $105 per barrel for the remainder of 2014 and $95 in 2015. In case of the WTI, the ratings agency increased its price assumptions to $100 per barrel for the rest of 2014, and to $90 in 2015. Both assumptions are within the Oilholic's range, although they represent $10 per barrel increases from Moody's previous assumptions for both WTI and Brent in 2014 and a $5 increase for 2015.

"The new set of price assumptions reflects the agency's sense of firm demand for crude, even as supplies increase as a response to historically high prices. New violence in Iraq coupled with political turmoil in that general region in mid-2014 have led to supply constraints in the Middle East and North Africa," Moody's said.

But while these constraints exist, Moody's echoed vibes the Oilholic caught on at OPEC that Saudi Arabia, which can affect world global prices by adjusting its own production levels, has appeared unwilling to let Brent prices rise much above $110 per barrel on a sustained basis.

Away from pricing matters to some ratings matters with a few noteworthy notes – first off, Moody's has upgraded Schlumberger's issuer rating and the senior unsecured ratings of its guaranteed subsidiaries to Aa3 from A1.

Pete Speer, Senior Vice-President at the agency, said, "Schlumberger's industry leading technologies and dominant market position coupled with its conservative financial policies support the higher Aa3 rating through oilfield services cycles. The company's growing asset base and free cash flow generation also compares well to Aa3-rated peers in other industries."

Meanwhile, Fitch Ratings says the Iraqi situation does not pose an immediate threat to the ratings of its rated Western investment-grade oil companies. However, the agency reckons if conflict spreads and the market begins to doubt whether Iraq can increase its output in line with forecasts there could be a sharp rise in world oil prices because Iraqi oil production expansion is a major contributor to the long-term growth in global oil output.

The conflict is closest to Iraqi Kurdistan, where many Western companies including Afren (rated B+/Stable by Fitch) have production. However, due to ongoing disagreements between Baghdad and the Kurdish regional government, legal hurdles to export of Iraqi crude remain, and therefore production is a fraction of the potential output.

Other companies, such as Lukoil (rated BBB/Negative by Fitch), operate in the southeast near Basra, which is far from the areas of conflict and considered less volatile.

Alex Griffiths, Head of Natural Resources and Commodities at Fitch Ratings, said, "Even if the conflict were to spread throughout Iraq and disrupt other regions, the direct loss of revenues would not affect major investment-grade rated oil companies because Iraqi output is a very small component of their global production."

"In comparison, disruption of gas production in Egypt and oil production in Libya during the "Arab Spring" were potential rating drivers for BG Energy Holdings (A-/Stable) and Eni (A+/Negative), respectively," he added.

On a closing note, here is the Oilholic's latest Forbes article discussing natural gas pricing disparities around the world, and why abundance won't necessarily mitigate this. That's all for the moment folks. Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: Oil drilling site © Shell photo archives

A Russian deal, an Indian election, Libya & more

While the Europeans are busy squabbling about how to diversify their natural gas supplies and reduce reliance on Russia, the country's President Vladimir Putin hedged his bets earlier this week and reacted smartly by inking a 30-year supply deal with China.

No financial details were revealed and the two sides have been haggling over price for better parts of the last decade. However, yet again the Russian president has proved more astute than the duds in Brussels! Nevertheless, the Oilholic feels Russia would have had to make substantial compromises on price levels. By default, the Ukraine standoff has undoubtedly benefitted China National Petroleum Corp (CNPC), and Gazprom has a new gas hungry export destination.

Still there is some good news for the Europeans. Moody's believes that unlike in 2008-09, when gas prices spiked in the middle of the winter due to the cessation of Russian gas supplies to Europe via Ukraine, any temporary disruption via Ukraine would have only have a muted impact.

"This opinion factors in a combination of (1) lower reliance on Ukraine as a transit route, owing to alternative supply channels such as the Nord Stream pipeline which became operational in 2011; (2) low seasonal demand in Europe as winter has come to an end; and (3) gas inventories at high levels covering a full month of consumption," the ratings agency noted in a recent investment note.

Meanwhile, a political tsunami in India swept the country's Congress party led government out of power putting an end to years of fractious and economic stunting coalition politics in favour of a right-wing nationalist BJP government. The party's leader Narendra Modi delivered a thumping majority, which would give him the mandate to revive the country's economic fortunes without bothering to accommodate silly whims of coalition partners.

Modi was the chief minister of Gujarat, one of the country's most prosperous provinces and home to the largest in the refinery in the world in the shape of Jamnagar. In many analysts' eyes, regardless of his politics, the Prime Minister elect is a business friendly face.

Moody's analyst Vikas Halan expects that the new BJP-led government will increase natural gas prices, which would benefit upstream oil & gas companies and provide greater long term incentives for investment. Gas prices were originally scheduled to almost double in April, but the previous government put that increase on hold because of the elections.

This delay has meant that India's upstream companies have been losing large amounts of revenue, and a timely increase in gas prices would therefore cushion revenues and help revive interest in offshore exploration.

"A strong majority government would also increase the likelihood of structural reform in India's ailing power sector. Closer co-ordination between the central and state governments on clearances for mega projects and land use, two proposals outlined in the BJP's manifesto, would address investment delays," Halan added.

The Oilholic agrees with Moody's interpretation of the impact of BJP's victory, and with majority of the Indian masses who gave the Congress party a right royal kick. However, one is sad to see an end to the political career of Dr Manmohan Singh, a good man surrounded by rotten eggheads.

Over a distinguished career, Singh served as the governor of the Reserve Bank of India, and latterly as the country's finance minister credited with liberalising and opening up of the economy. From winning the Adam Smith Prize as a Cambridge University man, to finding his place in Time magazine's 100 most influential people in the world, Singh – whose signature appears on an older series of Indian banknotes (see right) – has always been, and will always be held in high regard.

Still seeing this sad end to a glittering career, almost makes yours truly wish Dr Singh had never entered the murky world of mainstream Indian politics in the first place. Also proves another point, that almost all political careers end in tears.

Away from Indian politics, Libyan oilfields of El Sharara, El Feel and Wafa, having a potential output level 500,000 barrels per day, are pumping out the crude stuff once again. However, this blogger is nonplussed because (a) not sure how long this will last before the next flare up and (b) unless Ras Lanuf and Sidra ports see a complete normalisation of crude exports, the market would remain sceptical. We're a long way away from the latter.

A day after the Libyan news emerged on May 14, the Brent forward month futures contract for June due for expiry the next day actually extended gains for a second day to settle 95 cents higher at US$110.19 a barrel, its highest settlement since April 24.

The July Brent contract, which became the forward-month contract on May 16, rose 77 cents to settle at US$109.31 a barrel. That's market scepticism for you right there? Let's face it; we have to contend with the Libyan risk remaining priced in for some time yet.

Just before taking your leave, a couple of very interesting articles to flag-up for you all. First off, here is Alan R. Elliott's brilliant piece in the Investor’s Business Daily comparing and contrasting fortunes of the WTI versus the LLS (Louisiana Light Sweet), and the whole waterborne crude pricing contrast Stateside.

Secondly, Claudia Cattaneo, a business columnist at The National Post, writes about UK political figures' recent visit to Canada and notes that if the Americans aren't increasing their take-up of Canada's energy resources, the British 'maybe' coming. Indeed, watch this space. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: Pipeline, India © Cairn Energy

Crude reality: Time to short as bulls go lethargic?

Most of the Oilholic's contacts in City trading circles had been maintaining in recent months that a US$106 per barrel price would be the psychological floor to the year-end, barring bearish trends induced by a wider and unforeseen macroeconomic tsunami.

To be quite honest, the global economy is probably where it has been for a while – in a bit of a lull. So even though things are neither materially better nor all that worse, the level was still breached this Monday morning. Methinks there is going to be further selling and yet more shorting either side of the Atlantic.

Our old friends the hedge funds – held responsible by many for the assetization of black gold – certainly seem to think so. That's if you believe data published by ICE Futures Europe. It indicates speculative bets that the Brent price will rise (in futures and options combined), outnumbered short positions by 119,451 lots in the week ended October 29.

The London-based exchange says that's a reduction of 21% (or 30,710 contracts) from the previous week and the biggest drop since the week ended June 25. Concurrently, bearish positions on Brent outnumbered bullish wagers by 321,470; a 3.2% decrease in net-short positions from October 22. So there you have it!

On a related note, albeit for different reasons, the WTI also closed at its lowest since June 26. In fact the forward month futures contract for December shed as much as 55 cents to $94.06 at one point in intraday trading on Monday.

The Oilholic believes the prices aren’t plummeting; rather they are hitting a much more realistic level. Such a sentiment was echoed by two new supply-side contacts this blogger had the pleasure of running into at the UK business lobby group CBI's 2013 annual conference.

As 2014 is nearly upon us, Steven Wood, managing director (corporate finance) at Moody's, says oil prices should stay robust through next year. His and Moody's quantification of robustness for Brent, factoring in Chinese demand and tensions in the Middle East, stands at around $95 per barrel, and West Texas Intermediate "for slightly less, in the next one to two years."

"And with the worst behind the US natural gas industry, prices for benchmark Henry Hub will average about $3.75 per thousand cubic feet next year," he adds.

Additionally, the good folks at Moody's reckon the E&P sector's fortunes will continue to rise over the next year, with big capital spending budgets keeping fundamentals strong (also for the oilfield service and drilling sector).

One minor footnote though, even if it is still some way off – what if international sanctions on Iran get eased should relations between the Islamic Republic and the West improve? We could then see the Iran add over 750,000 barrels per day to the global oil output pool. Undoubtedly, this would be bearish for oil markets, especially so for Brent. The recent dialogue between both sides has made contemplating the possibility possible!

Away from price-related issues, if you needed any further proof of renewed vigour in North Sea E&P activity, then Norway's Statoil has announced it will go ahead with a decision to build a new platform at its Snorre field to extract another 300 million barrels of the crude stuff at an expense of £4.2 billion. This would, according to the Norwegian media, extend the project's lifetime to 2040.

Statoil will take a final decision on engineering aspects in the first quarter of 2015 with the platform scheduled to come onstream in the fourth quarter of 2021. The Norwegian firm owns 33.3% of the exploration project licence. Other shareholders include Petoro (30%), ExxonMobil (17.4%), Idemitsu Petroleum (9.6%), RWE (8.6%) and Core Energy (1.1%). That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2013. Photo: North Sea oil rig © Cairn Energy plc

Speculators make the oil price belie market logic

The fickle crude oil market is yet again giving an indication about how divorced it is from macroeconomic fundamentals and why a concoction of confused geopolitics and canny speculation is behind the recent peaks and troughs. To give a bit of background – the WTI forward month futures contract surpassed the US$106 per barrel level last week; the highest it has been in 16 months. Concurrently, the spread between WTI and Brent crude narrowed to a near 33-month low of US$1.19 in intraday on July 11 [versus a high of US$29.70 in September 2011].

 

Less than a couple of weeks ago Goldman Sachs closed its trading recommendation to buy WTI and sell Brent. In a note to clients, the bank’s analysts said they expected the spread to narrow in the medium term as new pipelines help shift the Cushing, Oklahoma glut, a physical US crude oil delivery point down to the Houston trading hub, thus removing pressure from the WTI forward month futures contract to the waterborne Brent.

 

Goldman Sachs' analysts were by no means alone in their thinking. Such a viewpoint about the spread is shared by many on Wall Street, albeit in a nuanced sort of way. While Cushing's impact in narrowing the spread is a valid one, the response of the WTI to events elsewhere defies market logic.

 

Sadly Egypt is in turmoil, Syria is still burning, Libya’s problems persist and Iraq is not finding its feet as quick as outside-in observers would like it to. However, does this merit a WTI spike to record highs? The Oilholic says no! Agreed, that oil prices were also supported last week by US Federal Reserve Chairman Ben Bernanke's comments that economic stimulus measures were "still" necessary. But most of the upward price pressure is speculators' mischief - pure and simple.

 

Less than two months ago, we were being peddled with the argument that US shale was a game changer – not just by supply-side analysts, but by the IEA as well. So if that is the case, why are rational WTI traders spooked by fears of a wider conflict in the Middle East? Syria and Egypt do not even contribute meaningfully to the global oil market supply train, let alone to the North American market. Furthermore, China and India are both facing tough times if not a downturn.

 

And you know what, give this blogger a break if you really think the US demand for distillates rose so much in 10 days that it merited the WTI spiking by the amount that it has? Let's dissect the supply-side argument. Last week's EIA data showed that US oil stocks fell by about 10 million barrels for a second consecutive week. That marked a total stockpile decline of 20.2 million barrels in two weeks, the biggest since 1982.

 

However, that is still not enough to detract the value of net US inventories which are well above their five-year average. Furthermore, there is nothing to suggest thus far that the equation would alter for the remainder of 2013 with media outlets reporting the same. The latest one, from the BBC, based on IEA figures calmly declares the scare over 'peak oil' subsiding. US crude production rose 1.8% to 7.4 million barrels per day last week, the most since January 1992 and in fact on May 24, US supplies rose to 397.6 million, the highest inventory level since 1931!

 

But for all of that, somehow Bernanke's reassurances on a continuation of Federal stimulus, flare-ups in the Middle East [no longer a big deal from a US supply-side standpoint] and a temporary stockpile decline were enough for the latest spike. Why? Because it is a tried and tested way for those who trade in paper barrels to make money.

 

A very well connected analogy can be drawn between what's happening with the WTI and Brent futures' recent "past". Digging up the Brent data for the last 36 months, you will see mini pretexts akin to the ones we've seen in the last 10 days, being deployed by speculators to push to the futures contract ever higher; in some instances above $110 level by going long. They then rely on publicity hungry politicians to bemoan how consumers are feeling the pinch. Maybe an Ed Markey can come alone and raise the issue of releasing strategic petroleum reserves (SPRs) and put some downward pressure – especially now that he's in the US Senate.

 

Simultaneously, of course the high price starts hurting the economy as survey data factors in the drag of rising oil prices, usually within a three-month timeframe, and most notably on the input/output prices equation. The same speculators then go short, blaming an economic slowdown, some far-fetched reason of "uptick" in supply somewhere somehow and the Chinese not consuming as much as they should! And soon the price starts falling. This latest WTI spike is no different.

Neither the underlying macroeconomic fundamentals nor the supply-demand scenarios have altered significantly over the last two weeks. Even the pretexts used by speculators to make money haven't changed either. The Oilholic suspects a correction is round the corner and the benchmark is a short! (Click graph above to enlarge)

 

Away from crude pricing matters to some significant news for India and Indonesia. It seems both countries are reacting to curb fuel subsidies under plans revealed last month. The Indian government agreed to a new gas pricing formula which doubled domestic natural gas prices to $8.40/million British thermal units (mmbtu) from $4.20/mmbtu.

Meanwhile, the Indonesian government is working on plans to increase the price of petrol by 44% to Rupiah 6,500 ($2.50) per gallon and diesel by 22% to Rupiah 5,500. With the hand of both governments being forced by budgetary constraints, that's good economics but bad politics. In Asia, it's often the other way around, especially with general elections on the horizon - as is the case with both countries.

 

Elsewhere, yours truly recently had the chance to read a Moody's report on the outlook for the global integrated oil and gas industry. According to the ratings agency, the outlook will remain stable over the next 12 to 18 months, reflecting the likelihood of subdued earnings growth during this period.

Analyst Francois Lauras, who authored the report, said, "We expect the net income of the global oil and gas sector to fall within the stable range of minus 10% to 10% well into 2014 as robust oil prices and a slight pick-up in US natural gas prices help offset ongoing fragility in the refining segment." 

 

"Although oil prices may moderate, we expect demand growth in Asia and persistent geopolitical risk to keep prices at elevated levels," he added.

 

The agency anticipates that integrated oil companies will concentrate on reinvesting cash flows into their upstream activities, driven by "robust" oil prices, favourable long-term trends in energy consumption and the prospects of higher returns.

 

However, major projects are exerting pressure on operating and capital efficiency measures as they are often complex, highly capital intensive and have long lead times. In the near term, Moody's expects that industry players will continue to dispose of non-core, peripheral assets to complement operating cash flows and fund large capex programmes, as well as make dividend payouts without impairing their balance sheets.

 

Finally, the agency said it could change its outlook to negative if a substantial drop in oil prices were triggered by a further deterioration in the world economy. It would also consider changing its outlook to positive if its forecast for the sector's net income increased by more than 10% over the next 12-18 months.

Moody's has maintained the stable outlook since September 2011. In the meantime, whatever the macroeconomic climate might be, it hardly ever rains on the speculators' parade. That's all for the moment folks! Keep reading, keep it 'crude'!

 

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© Gaurav Sharma 2013. Photo: Pump Jacks, Perryton, Texas, USA © Joel Sartore / National Geographic. Graph: WTI Crude Futures US$/barrel © BBC / DigitalLook.com

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.

Final ‘crude’ points of 2012

As 2012 draws to a close, a few developments over the last fortnight are worth mulling over, ahead of uncorking the champagne to usher in the New Year. But first, a word on pricing - the final ICE Brent February futures contract price cut-off noted by the Oilholic came in at US$110.96 per barrel with US budget talks in the background.

 

Over the last two weeks, and as expected, the cash market trade was rather uneventful with a number of large players starting the countdown to the closure of their books for the year. However, the ICE’s weekly Commitment of Traders report published on Christmas Eve made for interesting reading.

 

It suggested that money managers raised their net long positions in Brent crude futures (and options) by 11.2% in the week that ended on December 18; a trend that has continued since November-end. Including hedge funds, money managers held a net long position of 106,138 contracts, versus 95,447 contracts the previous week.

 

Away from Brent positions, after due consideration the UK government finally announced that exploration for shale gas will resume albeit with strict safety controls. Overall, it was the right decision for British consumers and the economy. It was announced that there would be a single administrative authority to regulate and oversee shale gas and hydraulic fracking. A tax break may also apply for shale gas producers; further details are due in the New Year.

 

Close on the heels of UK Chancellor George Osborne’s autumn statement and the shale announcement, came a move by Statoil to take a 21-year old oil discovery in the British sector of the North Sea off its shelf.

 

On December 21, the Norwegian company approved a US$7 billion plan to develop its Mariner project, the biggest British offshore development in over a decade. According to Statoil, it could produce around 250 million barrels of oil or more over a 30-year period and could be brought onstream as early as 2017 with a peak output of 55,000 barrels per day.

 

Mariner, which is situated 150 km southeast of the Shetland Islands, was discovered in 1981. The Oilholic thinks Statoil’s move is very much down to the economics of a Brent oil price in excess of US$100 per barrel. Simply put, now would be a good time to develop this field in inhospitable climes and make it economically viable.

 

Being the 65.11% majority stakeholder in Mariner, Statoil would be joined by minority stakeholders JX Nippon E&P (28.89%) and Cairn Energy (via a subsidiary with a 6% stake).

 

Elsewhere, Moody's changed the outlook for Petrobras’ A3 global foreign currency and local currency debt to negative from stable. It said the negative outlook reflects the company's rising debt levels and uncertainty over the timing and delivery of production and cash flow growth in the face of a massive capital budget, rising costs and downstream profit pressures.

 

“We also see increasing linkage between Petrobras and the sovereign, with the government playing a larger role in the offshore development, the company's strategic direction, and policies such as local content requirements that will affect its future development plans,” said Thomas S. Coleman, senior vice president, Corporate Finance Group at Moody’s.

 

That’s all for 2012 folks! A round-up of crude year 2012 to follow early in the New Year; in the interim here’s wishing you all a very Happy New Year. Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo: Vintage Shell pump, San Francisco, USA © Gaurav Sharma.

EIA’s switch to Brent is telling

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BP’s settlement expensive but sound

As BP received the biggest criminal fine in US history to the tune of US$4.5 billion related to the 2010 Gulf of Mexico oil spill, the Oilholic quizzed City analysts over what they made of it. Overriding sentiment of market commentators was that while a move to settle criminal charges in this way was expensive for BP, it was also a sound one for the oil giant.

 

Beginning with what we know, according to the US Department of Justice (DoJ), BP has agreed to plead guilty to eleven felony counts of misconduct or neglect of ships officers relating to the loss of 11 lives, one misdemeanour count under the Clean Water Act, one misdemeanour count under the Migratory Bird Treaty Act and one felony count of obstruction of Congress.

 

Two BP workers - Robert Kaluza and Donald Vidrine - have been indicted on manslaughter charges and an ex-manager David Rainey charged with misleading Congress according to the Associated Press. The resolution is subject to US federal court approval. The DoJ will oversee BP handover US$4 billion, including a US$1.26 billion fine as well as payments to wildlife and science organisations.

 

BP will also pay US$525 million to the US SEC spread over three years. The figure caps the previous highest criminal fine imposed on pharmaceutical firm Pfizer of US$1.2 billion. City analysts believe BP needed this settlement so that it can now focus on defending itself against pending civil cases.

 

“It was an expensive, but necessary closure that BP needed on one legal fronts of several,” said one analyst. The 2010 Deepwater Horizon disaster killed 11 workers and released millions of barrels of crude into the Gulf of Mexico which took 87 days to plug.

 

The company is expected to make a final payment of US$860 million into the US$20 billion Gulf of Mexico compensation fund by the end of the year. BP’s internal investigation about the incident had noted that, “multiple companies, work teams and circumstances were involved over time.”

 

These companies included Transocean, Halliburton, Anadarko, Moex and Weatherford. BP has settled all claims with Anadarko and Moex, its co-owners of the oil well and contractor Weatherford. It received US$5.1 billion in cash settlements from the three firms which was put into the Gulf compensation fund.

 

BP has also reached a US$7.8 billion settlement with the Plaintiffs' Steering Committee, a group of lawyers representing victims of the spill. However, the company is yet to reach a settlement with Transocean, the owner of the Deepwater Horizon rig and engineering firm Halliburton. A civil trial that will determine negligence is due to begin in New Orleans in February 2013.

 

Jeffrey Woodruff, Senior Director at Fitch Ratings, felt that the settlement was a positive move but key areas of uncertainty remained. “Although the settlement removes another aspect of legal uncertainty, it does not address Clean Water Act claims, whose size cannot yet be determined. It is therefore too early for us to consider taking a rating action,” he added.

 

Fitch said in July, when revising the company's Outlook to Positive, that BP should be able to cover its remaining legal costs without impairing its financial profile, and that a comprehensive settlement of remaining liabilities for US$15 billion or less would support an upgrade.

 

Recent asset sales have also strengthened BP's credit profile. Last month, BP posted a third quarter underlying replacement cost profit, adjusted for non-operating items and fair value accounting effects, of US$5.2 billion. The figure is down from US$5.27 billion recorded in the corresponding quarter last year but up on this year's second quarter profit of US$3.7 billion.

 

“The company has realised US$35 billion of its US$38 billion targeted asset disposal programme at end the end of the third quarter of 2012. Proceeds from the sale of its 50% stake in TNK-BP in Russia will further improve its liquidity, supporting our view that the company can meet legal costs without impairing its profile,” Woodruff concluded.

 

Meanwhile, Moody’s noted that the credit rating and outlook for Transocean (currently Baa3 negative), which is yet to settle with BP, was unaffected by the recent development.

 

Stuart Miller, Moody's Senior Credit Officer, said, "The big elephant in the room for Transocean is its potential exposure to Clean Water Act fines and penalties as owner of the Deepwater Horizon rig. The recent agreement between BP and DoJ did not address the claims under the Act."

 

However, he felt that Transocean will ultimately settle with the DoJ, and there was a good chance that the amount may be manageable given the company’s current provision level and cash balances.

 

“But if gross negligence is proven, a very high legal standard, the settlement amount could result in payments by Transocean in excess of its current provision amount,” Miller concluded.

Plenty more to unfold in this saga but that’s all for the moment folks. Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Gulf of Mexico spill containment area © BP Plc.

Oil rich Abu Dhabi’s 'benign' shadow over Dubai

The Oilholic thinks there is certain poignancy about a street sign in the Dubai Marina area. The sign (pictured left) points to different directions for Abu Dhabi and Dubai city centre – while the macroeconomic direction for both Emirates is anything but following on from the 2008-09 domestic real estate crisis. As if with perfect metaphorical symmetry, the sign’s current backdrop is coloured by construction conglomerate EMAAR’s flags, the odd logo of another construction conglomerate Nakheel and ongoing building work; some of which is a little ‘behind schedule’ for good reason.

 

In March this year, the UAE’s oil production came in at 2.7 million barrels per day (bpd) with attempts on track to increase it to 3 million bpd. Of this, Dubai’s production on a standalone basis has never accounted for more than 70,000 bpd at any given point excluding barrels of oil equivalent in offshore gas findings. It is Abu Dhabi that holds 95% of proven oil reserves in the UAE.

 

With Dubai’s oil reserves set to be exhausted within a few decades bar the emergence of a significant find, a decision was taken in the late 1990s, by the powers that be, to diversify towards finance, tourism and manufacturing. The decision made sense but the approach was not sensible. By 2008, construction, real estate, trade and finance and not oil & gas had become the biggest contributors to Dubai’s economy.

 

Dubai was to be the go to capital market of the Middle East, so ran the spiel. Along came the construction of some of the tallest skyscrapers in the world such as – the Burj Dubai (renamed Burj Khalifa later for a reason), Palm Islands, Emirates Towers and the Burj Al Arab hotel. However, the global financial crisis that was to follow laid bare the fact that some of tall buildings downtown were built (or about to be built) on a mountain of debt covered by a cone of opacity. A global credit squeeze hit debt laden Dubai where it hurt – its brash, inflated property market.

 

The Oilholic distinctly remembers a wire flash from December 2008 when Mohammed al-Abbar, CEO of Emaar, told the world’s scribes that his company held US$350 billion in real estate assets and US$70 billion in credits. Concurrently, industry peer Nakheel declared US$16 billion in debts.

 

As speculators ditched the Dubai real estate market, property values tumbled, construction stalled and unemployment spiked. Inevitably, both Nakheel and Emaar were left with a pile of defunct assets, angry investors, homeowners defaulting and many dodging service charges. One contact recollects an instance where a fresh development lost 63% of its marked pre-crisis value. While Emaar was holding firm, Nakheel owned by Dubai World was imploding.

 

Absence of organic growth and the end of a debt fuelled boom had Dubai staring into the abyss. With the credit rating of the entire UAE being threatened, a miffed white knight came along on December 14, 2009 in the shape of Abu Dhabi. The oil rich emirate had decided to bailout its beleaguered neighbour on the day to the tune of US$10 billion.

 

Not only that, Abu Dhabi then went on to provide Dubai with US$25 billion in the shape of buying Dubai bonds. Local independent commentators say the actual figure may never be known but a 2010 calculated guess puts Dubai’s debt to Abu Dhabi in the range of US$80 to US$95 billion. When asking for an official confirmation, yours truly was told to “enjoy the sunshine!”

 

However, a most polite spokesperson on the Abu Dhabi side says it took remedial action needed at the time in good faith and to this day the UAE central bank is firmly committed to domestic banking institutions exposed to the real estate crisis of 2009, bringing about institutional reforms and learning from it.

 

Yet, transparency never comes easy for Dubai even after facing a financial storm it never envisaged. In March this year, Richard Fox, head of Middle East and Africa sovereigns’ ratings at Fitch, summed it up best while speaking in London. “Ratings agencies have no plans to give Dubai a credit rating because its government has not asked to be rated, and the lack of transparency would make a credit assessment difficult,” he said.

 

Three years later both Nakheel and Emaar are thought to be in a much happier place according to local media outlets. This is particularly true of Emaar which builds its domestic projects on land that is provided free in the main and uses migrant labour on little more than US$8 to US$10 a day based on anecdotal evidence and the Oilholic’s own findings! Despite recent attempts by the government to rectify the manner in which Dubai’s property market is hitherto disconnected from conventional market ground rules, not much has changed.

 

One thing is certain, Dubai will never be disconnected from its ‘benevolent’ oil rich neighbour Abu Dhabi. Some complain that Abu Dhabi’s crude help must have come with strings attached; something which was strenuously denied by both sides in 2009.

The Oilholic thinks strings weren’t attached; Abu Dhabi quite simply now holds most of the strings! So it was fitting that on January 4, 2010, when Emaar inaugurated the world tallest building (pictured right) – its name was promptly changed from Burj Dubai to Burj Khalifa in honour of Sheikh Khalifa bin Zayed bin Sultan Al Nahyan, the Emir of Abu Dhabi.

 

For oil producing nations, the challenge has always been to establish a viable non-oil sector which counters the impact of a resource driven windfall on other facets of the economy. Dubai had every chance, not to mention a more pressing need than its neighbour to do this and messed it up spectacularly. Au contraire, Abu Dhabi has managed the challenge rather well as it seems.

 

For an Emirate which holds 9% of global proven oil reserves and 95% of that of the UAE, Sheikh Khalifa’s Abu Dhabi sees around 44% of its revenues come in from non-oil sources. Abu Dhabi Investment Authority, the Emirate’s sovereign wealth fund rumoured to have nearly U$900 billion in managed assets, leads the way.

 

Ratings agencies may grumble about Dubai’s opacity but all three major ones do rate Abu Dhabi. Fitch and Standard & Poor's rate Abu Dhabi 'AA' while Moody's rates it 'Aa2'. Sheikh Khalifa is actively looking to increase the share of non-oil revenue in Abu Dhabi to 60% within this decade if not sooner.

So maybe the several streets signs in Dubai pointing to the route to Abu Dhabi and the imposing Burj Khalifa (a structure that’s hard to miss from practically most parts of Dubai) have a metaphorical message. And probably there is envy and gratitude in equal measure. Cosmopolitan Dubai is now increasing reliant on black gold dust from Abu Dhabi. That’s all for the moment folks; more from Dubai later! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo 1: A street sign on the Dubai Marina, UAE. Photo 2: Burj Khalifa, Dubai, UAE © Gaurav Sharma 2012.