Exxon 1 – BP 0 (Ref: Putin, Retired Hurt: Markey)

One has to hand it to ExxonMobil’s inimitable boss – Rex Tillerson – for successfully forging an Arctic tie-up with Rosneft so coveted by beleaguered rival BP. On August 30, beaming alongside Russian Prime Minister Vladimir Putin, Tillerson said the two firms will spend US$3.2 billion on deep sea exploration in the East Prinovozemelsky region of the Kara Sea. Russian portion of the Black Sea has also been thrown in the prospection pie for good measure as has the development of oil fields in Western Siberia.

The US oil giant described the said deal as among the most promising and least explored offshore areas globally “with high potential for liquids and gas.” If hearts at BP sank, so they should, as essentially the deal has components which it so coveted.

The Oilholic is pretty stumped too for harbouring the belief that BP's Arctic deal with Rosneft – originally agreed in January but scuppered by a legal challenge from Russian co-investors in BP's existing Russian joint venture TNK-BP – would be revived. It seems what BP could not manage, ExxonMobil did, and successfully fought off Shell in the process as well if the City rumour mill is to be believed. Some won, some lost, some got stumped but one looked like a moron or hypocrite or possibly both. That is none other than US Congressman Ed Markey, a Massachusetts Democrat on the House Natural Resources Committee.

Remember when BP first announced its proposed tie-up Rosneft back in January? At the time Markey quipped "BP once stood for British Petroleum. With this deal, it now stands for Bolshoi Petroleum." Bolshoi actually means “big” in Russian so it seems while Markey had right context for the slur, he ended up choosing the wrong word.

As the news of the Exxon-Rosneft tie-up emerged, Eben Burnham-Snyder, Markey's spokesman, told the Associated Press that the Congressman's office is looking into the Exxon-Rosneft deal. But he said the deal doesn't appear to involve the same ownership issues that were involved in the BP-Rosneft stock swap. Tut, tut, sir! Of course they don’t – after all this time it is an American firm that’s gone fishing.

As if with impeccable timing, barely a day after Exxon-Rosneft deal was inked, Russian Bailiffs raided the offices of BP in Moscow, seeking documents on its failed deal with Rosneft. According to RIA Novosti, the raid was conducted in line with a ruling by an arbitration court in the Siberian region of Tyumen, which is hearing a case over the Rosneft deal that collapsed in May.

Minority shareholders are claiming that TNK-BP suffered losses of US$3 billion as a result of the wrangling over the now failed BP-Rosneft joint venture. In a statement, BP confirmed that its Russian offices in Moscow were raided by the Russian bailiff's service in relation to an order from the court in Tyumen.

The company said there was no "legitimate basis" for the court case against BP or the raid. The legal entity searched in the raid - BP Exploration Operating Company Ltd - had “no connection to the Tyumen process,” the statement read. Let the games begin! Maybe this time Markey can be the referee!

© Gaurav Sharma 2011. Photo: ExxonMobil office exterior, Houston, Texas, USA © Gaurav Sharma, March 2011

IEA, OPEC & a few more bits on BP

It has been a month of quite a few interesting reports and comments, but first and as usual - a word on pricing. Both Brent crude oil and WTI futures have partially retreated from the highs seen last month, especially in case of the latter. That’s despite the Libyan situation showing no signs of a resolution and its oil minister Shukri Ghanem either having defected or running a secret mission for Col. Gaddafi depending on which news source you rely on! (Graph 1: Historical average annual oil prices. Click on graph to enlarge.)

Either way, the 159th OPEC meeting in Vienna which the Oilholic will be attending in a few weeks promises to be an interesting one; we’re not just talking production quotas here. Iranian President Mahmoud Ahmadinejad is also expected to be in Austrian capital – so it should be fun. The market undoubtedly still craves and will continue to crave the quality of crude that Libya exports but other factors are now at play; despite whatever Gaddafi may or may not be playing at.

Contextualising the Libyan situation, Société Générale CIB analyst Jesper Dannesboe notes that Cushing (Oklahoma), the physical delivery point for WTI crude oil, has recently been oversupplied resulting in contango at the very front end of the WTI forward curve.

“This situation is likely to persist until at least mid-2012 as higher supply to Cushing from Canadian oil sands and from North Dakota should result in high Cushing stocks as new pipelines from Cushing to the coast will not be ready until late 2012 at the earliest. This makes it attractive to put on WTI time spreads further out the forward curve at backwardation as they should over time roll into contango,” he wrote in a note to clients.

Dannesboe also observes that while the entire Brent crude oil forward price curve is currently in backwardation (i.e. near-dated prices higher than further-dated prices) out to about 2017, the front-end of the WTI crude oil forward price curve has remained in contango.

The Brent forward curve flipped from contango to backwardation in late February as a result of the unrest in the Middle East & North Africa (MENA). However, contango at the front-end of the WTI forward curve has persisted because WTI's physical delivery point, Cushing (US midcontinent), has remained oversupplied despite a generally tight global market for sweet crude as a result of the loss of Libyan exports, he concludes.

Meanwhile, ahead of the OPEC meeting, the International Energy Agency (IEA) called for “action” from oil producers that will help avoid the negative global economic consequences which a further sharp market tightening could cause. Its governing board meeting last Thursday expressed “serious concern” that there are growing signs the rise in oil prices since September is affecting the economic recovery. As ever, the IEA said it stood ready to work with producers as well as non-member consumers.

The Oilholic also recently had the pleasure of reading a Fitch Ratings report, authored earlier this month in wake of the Libyan situation, which notes that the airline sector is by far the most vulnerable to rising oil and gas prices of all corporate sectors in the EMEA region given the heavy weight of fuel costs in operating cost structures (20%-30%), execution risks from companies' use of hedging instruments to mitigate their fuel exposure and fierce industry competition. (Graph 2: Price movement - Jet fuel vs. Brent oil. Click on graph to enlarge)

Erwin van Lumich, a Managing Director in Fitch's corporate departments, said, "The gap between the jet fuel price curve and the Brent curve narrowed to approximately 13% during 2010, with airlines in emerging markets generally most exposed to fuel price fluctuations due to a lack of market development for fuel hedging."

It gives food for thought that a temporary impact of the Icelandic volcanic ash can send jitters down the spine of airline investors but the jet fuel pricing spread, airlines’ hedging techniques (or the lack of it) and how it might impact operating margins is mostly raised at their AGMs. Where there are losers, there are bound to be winners but Fitch notes that the ratings of companies in the extractive industries are not expected to benefit from the price increases as the agency uses a mid-cycle pricing approach to avoid cyclical price changes having an impact on ratings. At this stage, Fitch does not anticipate a revision to its mid-cycle price deck to an extent that it would result in rating changes.

Finally, a couple of things about BP. To begin with, BP’s share swap deal with Rosneft failing to meet the May 16th deadline does not imply by default that that deal would not happen. In wake of the objection of AAR – its TNK-BP joint venture partner – there are still issues to be resolved and they will be in the fullness of time contrary to reports on the deal’s demise. A source close to the negotiations (at AAR not Rosneft) says talks are continuing.

Continuing with BP, it finally got recognition that blame for the Macondo incident is not exclusively its. Mitsui (which holds 10% of the well’s licence) and Anadarko (25%) had both blamed accident on BP’s negligence, refusing to pay or bear costs. However, Mitsui finally agreed to settle claims relating to the disaster with BP. It now agrees with BP that it was the result of oversights and mistakes by multiple parties. Undoubtedly, the pressure will now be on Anadarko to settle with BP.

According to US government figures, BP has paid out US$20.8 billion. It has invoiced Mitsui for approximately US$2.0 billion with the Japanese company expected to pay half of that at the present moment in time. A US trial on limitation of liabilities is expected to rule on the issue of gross negligence by parties concerned sometime over Q1 2012. Watch this space!

© Gaurav Sharma 2011. Graphics © Fitch Ratings, May 2011

Valero, BP, Crude price & the week that was!

The seven days that have passed have been ‘crudely’ interesting to say the least. First off, early May saw one of the biggest market sell-offs in recent memory as commodities of all descriptions did a mini battle with price volatility. Brent crude for its part fell nearly 6% before recovering and stabilising above US$110 per barrel.

Macroeconomic factors aside many in the City believe the ongoing conflict in Libya no longer appears to be a key driver of oil prices as the loss of Libyan oil exports were fully discounted by the market some time ago. The profit takers agree! Société Générale CIB analysts noted in a report to clients that they estimate:

“the fair value for the Brent price would be about US$100 if no MENA risk premium were included. It is difficult to see the MENA risk premium rising much further near-term unless significant unrest emerges in countries with substantial oil exports such as Algeria and Saudi Arabia.”

That is not happening and Syria is of peripheral importance from near term instability premium perspective. Société Générale CIB analysts further note that the Brent crude oil price may correct lower over coming weeks as speculative traders may be tempted to take some profit on long positions as:

• recent significant events in the Middle East & North Africa (MENA) have been limited to countries with little oil exports


• tentative signs of demand destruction in the US, and


• growing concerns of a bumpy or hard landing in China.

Moving away from the crude price, heads of the big five oil firms Shell, Exxon, Conoco, BP America and Chevron and some Democrats on the Senate finance committee squared up to each other on May 6^th over the age-old issue of tax subsidies for oil companies. The latter want the tax subsidies removed, but big oil contests that they are benefitting from the subsidies like any other US business does and furthermore they are heavily taxed already.

That same day BP’s shares rallied in the UK following news that an arbitral panel has issued a consent order permitting BP and the AAR consortium to assign an Arctic opportunity to TNK-BP, subject to consent from Russian state-controlled firm Rosneft. The long drawn out saga may finally be reaching a favourable conclusion for BP.

Also last week ratings agency Moody’s changed US refiner Valero Energy's rating outlook to stable from negative and at the same time affirmed Valero's existing Baa2 senior unsecured note ratings. It said the stabilisation in the rating outlook reflects the expectation that Valero's cash flow will remain strong over the short term due to rising industrial activity pushing modest growth in demand for distillates and the expectation of supportive light/heavy spreads.

The stable outlook also reflects the assumption that Valero will maintain investment grade leverage metrics over the next 12-18 months as it continues to pursue organic growth and acquisition opportunities.

Additionally Moody's expects Valero's earnings to remain highly cyclical, and noted that the 2010 sale of the company's secularly weaker US East Coast refining assets, willingness and financial capacity to idle underperforming assets, as well as its recent cost reduction efforts should enhance the company's ability to withstand the inherent cyclicality of the sector. Moody's also expects that Valero will remain acquisitive. In March of this year, Valero announced the purchase of Chevron's Pembroke refinery in the UK for US $1.7 billion.

Rounding off - the Oilholic turned 33 years young today, last seven of which have been a ‘crude’ affair ;-) Thanks for all the birthday messages!

© Gaurav Sharma 2011. Photo: Alaska Pipeline with Brooks Range in background © Michael S. Quinton / National Geographic

ETFs, Brent's Strength & ExxonMobil's Russian Deal

There seem to be more backers of the theory that Brent is winning the crude battle of the indices. I certainly believe Brent provides a much better picture of the global oil markets over WTI. Back in May 2010, I blogged that David Peniket, President and COO of Intercontinental Exchange (ICE) Futures Europe, gave Brent his backing. SocGen joined the ever-growing chorus last week. In a note to clients, the French banking major noted that Brent is a much better barometer of the global oil markets, where both crude and product demand have been strong.

Regarding premium between Brent and WTI, SocGen analysts note: “First, preliminary Euroilstock data showed a 4.2 Mb crude stockdraw in December. When this month-on-month per cent change is applied to the end-November OECD Europe crude stock figures from the IEA, the result in end-December European crude stocks that are below average; this is in sharp contrast to the near-record high stocks at Cushing.”

Additionally, oil field technical problems have caused some supply losses in the North Sea and planned pipeline maintenance at the Gullfaks field, in Norway, was also announced last weekend. Moving away from the North Sea, news has emerged that Roseneft and ExxonMobil have penned a deal for oil and gas exploration in the Black Sea, though intricacies and value of the deal is as yet unknown.

Finally, SocGen’s Mutual Fund & ETF report published last week makes for interesting reading; a sort of a continuation of trends noted by the wider market in general. It notes that the commodity rally was supported by US$23 billion inflows in 2010 (click on graphics to enlarge). Over the past 6 months, the rally in commodity prices has been significant (CRB index +27%) and directly associated with the expected pick-up in demand, but reallocation to protect against inflation has clearly played a role as well.

However, SocGen observed that Precious metals, and not energy, dominated commodity inflows. Precious metals were by far the largest category in commodity ETPs (including ETFs, ETCs and ETNs) accounting for 76% of US$157 billion assets under management and they continue to attract most of the inflows.

© Gaurav Sharma 2011. Graphics © SGCIB Cross Asset Research, Jan 19, 2011

Of IEA, OPEC and the Hoo-Hah over BP & Rosneft

Both the IEA and OPEC are now more upbeat about the global economic recovery over 2011, which could mean only one thing – an upward revision of global crude oil demand. Starting with the IEA, the agency says it now expects global crude demand to rise by 1.4 million barrels a day in year over year terms over 2011 to 89.1 million barrels per day; a revision of 360,000 barrels per day compared to its last forecast.

OPEC also revised its global oil demand forecast putting demand growth at 1.2 million barrels a day for the year; an upward revision of 50,000 barrels per day from its last estimate. In its monthly report, the cartel also noted that demand for its own crude is expected to average 29.4 million barrels of oil per day in 2011; an upward revision of 200,000 barrels over the previous forecast.

Both OPEC and IEA expect the increase in crude oil demand to be driven entirely by emerging markets, while OECD demand is projected to reverse to its "underlying, structural decline in 2011," according to the latter. Their respective response to the forecasts is one of understandable contrasts.

Nobuo Tanaka, head of the IEA, said a subsequent "alarming" rise in the oil price would be damaging. "We are concerned about the speed of the rising oil price, which can harm the growth of economies. If the current price continues, it will have a negative impact," he added. However, OPEC remains unmoved, as the forward month futures spread between Brent and WTI crude continues to widen to US$5-plus in favour of the latter. Both benchmarks lurk close to the US$100-mark.

OPEC’s position unsurprisingly is that the market remains well supplied. Cartel members UAE, Iran, Venezuela and Algeria say they are not concerned about a US$100 per barrel price. In fact, Venezuela's Energy Minister, Rafael Ramirez, described the price of $100 as "fair value" while speaking to the Reuters news agency. There are no prizes for guessing that an emergency meeting of the cartel to raise production is highly unlikely!

Now to the BP-Rosneft tie-up which sent the markets into a tizzy. In a nutshell, news of BP’s acquisition of a 9.5% stake in Rosneft which in turn would bag a 5% stake in BP was good, but it did not quite merit the response it got. Markets cheered it; environmentalists jeered it (given the open invitation to dig in the Arctic).

Rest of the narrative is a bit barmy. First of all, agreed it is a solid deal but given the involvement of a company 75% owned by the Russian government – I am unsure how it would be instrumental or for that matter detrimental to the UK’s petroleum security. Surely, the jury should still be out on that one. Secondly, this in no way implies that BP has turned its back on the US market in light of recent events as some market commentators have opined.

Finally, it is more of a marriage of convenience rather than a historic deal. Rosneft needed technical expertise and does not care much for political rhetoric in western markets about digging deeper and deeper for crude. BP needs access to resources. Both parties should be happy and it is rumoured in the Russian press that TNK-BP would also like a slice of the potentially lucrative Arctic ice cake. Away from the main event, the sideshow was just as engaging.

Curiously city sources revealed that BP did not use its preferred broker JPMorgan Cazenove, but rather opted to go with London-based Lambert Energy Advisory. It did amuse some in the City. All I can say is good luck to Philip Lambert. Finally, talking of the little guys in this crude world – have you heard of AIM-listed Matra Petroleum?

Last I checked, this independent upstart expects to be producing a rather modest 600-700 barrels per day by H1 2011 and its share price is around 3.52p. So assuming, Brent caps US$100-plus by end of H1 2011 and Matra delivers – the share price could treble in theory. I am not making a recommendation – let’s call it an observation!

© Gaurav Sharma 2011. Photo © Adrian R. Gableson

Talking Crude: Of Profits, Tax rebates & Asset Sales

Last week was an eventful one in crude terms. Well it’d have to be if Shell and Exxon Mobil declare bumper profits. Both saw their quarterly profits almost double. Beginning with Shell, the Anglo-Dutch firm reported profits of US$4.5 billion on a current cost (of supply) basis, up from US$2.3 billion noted over the corresponding quarter last year.

Excluding one-off items, Shell's profit was $4.2 billion, compared with $3.1 billion last year. Unlike BP, Shell said it would pay a second quarter dividend of $0.42 per share. The oil giant's restructuring plans also appear to be bearing fruit achieving cost savings of $3.5 billion, beating the stated corporate savings target by about 15% and some six months ahead of schedule.

Furthermore, it is thought that as a result of the restructuring, 7,000 employees would leave Shell nearly 18 months ahead of schedule. It also said it expected to sell $7-$8 billion of assets over 2010-11. Concurrently, oil giant Exxon Mobil reported quarterly profits of $7.6 billion, well above the $4.1 billion it posted over the corresponding quarter last year. Revenue for the quarter rose 23% in year over year terms on annualised basis from $72.5 billion to $92.5 billion.

Meanwhile, rival BP reported a record $17 billion second quarter loss which the market half expected. The figure included funds to the tune of $32 billion set aside to cover the costs of the oil spill in the Gulf of Mexico.

Sticking with BP, it has emerged that the beleaguered oil giant included a tax credit claim of almost $10 billion in its Q2 results as it seeks to take the edge off the impact of the Gulf of Mexico oil spill on its corporate finances. Its income statement for the second quarter carries a pre-tax charge of $32.2 billion related to the oil spill and a tax credit of $9.79 billion.

Under domestic tax laws in the US, BP is entitled to deduct a proportion of its losses against US tax. The issue is likely to turn political – especially in an election year, when much more has been made out of far less. However, legally the US government can do precious little to prevent BP from claiming the tax credit.

Crude asset sales seem to be the order of the day. Following on from BP’s sale of assets and Shell’s announcement that it will sell too, news emerged that the Russian government also wants to join the party.

It plans to sell $29 billion worth of assets (not all which are energy sector assets) on the open markets. In the absence of official confirmation, local media speculation suggests minor stakes in Rosneft and Transneft may be put up for sale.

However, speaking to reporters in Moscow on July 29th, the country’s Finance Minister Alexei Kudrin said, "We will sell significant stakes in state companies on the market. We plan to keep controlling stakes. Assets will be valued publicly, in line with market prices and tenders will be open. We are fully ruling out a situation when somebody sells something to someone at an artificially low price."

According to communiqués, the Russian government wanted to rake in $10 billion next year from asset sales. It has also approved a decision to increase mineral extraction taxes on gas producers by 61% from 2011.

Finally from a macro strandpoint, market consensus and comments from BP, Shell and Exxon officials seem to indicate that the top bosses of all three see mixed signals in the global economy. While their earnings figures, excluding BP for obvious reasons, have improved markedly from the quarterly lows of 2009, the overall industry outlook remains uncertain.

© Gaurav Sharma 2010. Photo courtesy © Shell