‘Oh Frack’ for OPEC, ‘Yeah Frack’ for IEA?

In a space of a fortnight this month, both the IEA and OPEC raised “fracks” and figures. Not only that, a newly elected President Barack Obama declared his intentions to rid the USA of “foreign oil” and the media was awash with stories about American energy security permutations in wake of the shale bonanza. Alas, the whole lot forgot to raise one important point; more on that later.

 

Starting with OPEC, its year-end calendar publication – The World Oil Outlook – saw the oil exporters’ bloc acknowledge for the first time on November 8 that fracking and shale oil & gas prospection on a global scale would significantly alter the energy landscape as we know it. OPEC also cut its medium and long term global oil demand estimates and assumed an average crude oil price of US$100 per barrel over the medium term.

 

“Given recent significant increases in North American shale oil and shale gas production, it is now clear that these resources might play an increasingly important role in non-OPEC medium and long term supply prospects,” its report said.

 

The report added that shale oil will contribute 2 million barrels per day (bpd) towards global oil supply by 2020 and 3 million bpd by 2035. If this materialises, then the projected rate of incremental supply is over the daily output of some OPEC members and compares to the ‘official’ daily output (i.e. minus the illegal siphoning / theft) of Nigeria.

 

OPEC’s first acknowledgement of the impact of shale came attached with a caveat that over the medium term, shale oil would continue to come from North America only with other regions making “modest” contributions over the longer term at best. For the record, the Oilholic agrees with the sentiment and has held this belief for a while now based on detailed investigations in a journalistic capacity (about financing shale projects).

 

OPEC admitted that the global economy, especially the US economy, is expected to be less reliant on its members, who at present pump over a third of the world's oil and have around 80% of planet’s conventional crude reserves. Pay particular attention to the ‘conventional’ bit, yours truly will come back to it.

 

According to the exporters’ bloc, global demand would reach 92.9 million bpd by 2016, down over 1 million from its 2011 report. By 2035, it expects consumption to rise to 107.3 million bpd, over 2 million less than previous estimates. To put things into perspective, global demand in 2011 was 87.8 million bpd.

 

Partly, but not only, down to shale oil, non-OPEC output is expected to rise to 56.6 million bpd by 2016, up 4.2 million bpd from 2011, the report added. So OPEC expects demand for its crude to average 29.70 million bpd in 2016; much less than its current output (ex-Iraq).

 

"This downward revision, together with updated estimates of OPEC production capacity over the medium term, implies that OPEC crude oil spare capacity is expected to rise beyond 5 million bpd as early as 2013-14," OPEC said.

 

"Long term oil demand prospects have not only been affected by the medium term downward revisions, but by higher oil prices too…oil demand growth has a notable downside risk, especially in the first half of 2013. Much of this risk is attributed to not only the OECD, but also China and India," it added.

 

So on top of a medium term crude oil price assumption of US$100 per barrel (by its internal measure and OPEC basket of crudes, which usually follows Brent not WTI), the bloc forecasts the price to rise with inflation to US$120 by 2025 and US$155 by 2035.

 

Barely a week later, IEA Chief Economist Fatih Birol – who at this point in 2009 was discussing 'peak oil' – created ripples when he told a news conference in London that in his opinion the USA would overtake Russia as the biggest gas producer by a significant margin by 2015. Not only that, he told scribes here that by 2017, the USA would become the world's largest oil producer ahead of the Saudis and Russians. 

 

Realising the stirrings in the room, Birol added that he realised how “optimistic” the IEA forecasts were sounding given that the shale oil boom was a new phenomenon in relative terms.

 

"Light, tight oil resources are poorly known....If no new resources are discovered after 2020 and plus, if the prices are not as high as today, then we may see Saudi Arabia coming back and being the first producer again," he cautioned.

 

Earlier in the day, the IEA forecasted that US oil production would rise to 10 million bpd by 2015 and 11.1 million bpd in 2020 before slipping to 9.2 million bpd by 2035. It forecasted Saudi Arabia’s oil output to be 10.9 million bpd by 2015, 10.6 million bpd in 2020 but would rise to 12.3 million bpd by 2035.

 

That would see the world relying increasingly on OPEC after 2020 as, in addition to increases from Saudi Arabia, Iraq will account for 45% the growth in global oil production to 2035 and become the second-largest exporter, overtaking Russia.

 

The report also assumes a huge expansion in the Chinese economy, which the IEA said would overtake the USA in purchasing power parity soon after 2015 (and by 2020 using market exchange rates). It added that the share of coal in primary energy demand will fall only slightly by 2035. Fossil fuels in general will remain dominant in the global energy mix, supported by subsidies that, in 2011, rose by 30% to US$523 billion, due mainly to increases in the Middle East and North Africa.

 

Fresh from his re-election, President Obama promised to “rid America of foreign oil” in his victory speech prior to both the IEA and OPEC reports. An acknowledgement of the US shale bonanza by OPEC and a subsequent endorsement by IEA sent ‘crude’ cheers in US circles.

 

The US media, as expected, went into overdrive. One story – by ABC news – stood out in particular claiming to have stumbled on a shale oil find with more potential than all of OPEC. Not to mention, the environmentalists also took to the airwaves letting the great American public know about the dangers of fracking and how they shouldn’t lose sight of the environmental impact.

 

Rhetoric is fine, stats are fine and so are verbal jousts. However, one important question has bypassed several key commentators (bar some environmentalists). That being, just how many barrels are being used, to extract one fresh barrel? You bring that into the equation and unconventional prospection – including US and Canadian shale, Canadian oil sands and Brazil’s ultradeepwater exploration – all seem like expensive prepositions.

 

What’s more OPEC’s grip on conventional oil production, which is inherently cheaper than unconventional and is expected to remain so for sometime, suddenly sounds worthy of concern again.

 

Nonetheless “profound” changes are underway as both OPEC and IEA have acknowledged and those changes are very positive for US energy mix. Maybe, as The Economist noted in an editorial for its latest issue: “The biggest bonanza from all this new (US) energy would be if users paid the real cost of consuming oil and gas.”

 

What? Tax gasoline users more in the US of A? Keep dreaming sir! That’s all for the moment folks! Keep reading, keep it crude!

 

© Gaurav Sharma 2012. Oil prospection site, North Dakota, USA © Phil Schermeister / National Geographic.

G7’s crude gripe, “Make oil prices dive”

As the Oilholic prepares to bid goodbye to Dubai, the G7 group of finance ministers have griped about rising oil prices and called on oil producing nations to up their production. They would rather have Dubai Mall’s Waterfall with Divers enclosure (pictured left) act as a metaphor for market direction! It is causing some consternation in this OPEC member jurisdiction and so it should.

 

First the facts – in a communiqué released on the US Treasury’s website yesterday, the G7 ministers say they are concerned about the impact of rising oil prices on the global economy and were prepared to act. Going one step further the ministers called on producing nations, most read OPEC, to act and now.

 

"We encourage oil producing countries to increase their output to meet demand. We stand ready to call upon the International Energy Agency (IEA) to take appropriate action to ensure that the market is fully and timely supplied," the statement notes. We have been here before back in March when American motorists were worried about prices at the pump and President Barack Obama was in a political quandary.

 

Now of course he is barely months away from a US Presidential election and here we are again. In fact the Canadians aside, all leaders elsewhere in the G7 are facing political pressure of some kind or the other related to the crude stuff too. Cue the statement and sabre rattling of releasing strategic petroleum reserves (SPRs)!

 

OPEC and non-OPEC producers' viewpoint, and with some reason, is that the market remains well supplied. Unfortunately plays around paper barrels and actual availability of physical barrels have both combined to create uncertainty in recent months.

 

On the face of it, at its last meeting OPEC – largely due to Saudi assertiveness – was seen producing above its set quota. Oil prices have spiked and dived, as the Oilholic noted earlier, but producers’ ability to change that is limited. Fear of the unknown is driving oil prices. As Saadallah Al Fathi, a former OPEC Secretariat staff member, notes in his recent Gulf News column, “prices seem to move against expectations, one way or another.”

 

Al Fathi further notes that the (West/Israel’s) confrontation with Iran is still on, but it is not expected to flare up. “Even the embargo on Iranian oil is slow to show in numbers, but may become more visible later,” he adds. While an oil shock following an Israeli attack on Iran could be made up by spare capacity, the room for another chance geopolitical complication or natural disaster would stretch the market. This is what spooks politicians, a US President in an election year and the market alike.

 

However, rather than talk of releasing SPRs for political ends now and as was the case in June 2011, the Oilholic has always advocated waiting for precisely such an emergency! While it has happened in the past, it is not as if producers have taken their foot off the production pedal to cash in on the prevailing bullish market trends at this particular juncture.

 

Away from G7’s gripe, regional oil futures benchmark – the Dubai Mercantile Exchange (DME) Oman Crude (OQD) – has caught this blogger’s eye. Oman’s production is roughly below 925,000 barrels per day (bpd) at present. For instance, in June it came in at 923,339 bpd. However, this relatively new benchmark is as much about Oman as Brent is about the UK. It is fast acquiring pan-regional acceptance and the November futures contract is seen mirroring Brent and OPEC basket crude prices. Its why the DME created the contract in the first place. Question is will it have global prowess as a 'third alternative' one day?

 

Elsewhere, the UAE has begun using the Abu Dhabi Crude Oil Pipeline (ADCOP). It will ultimately enable Abu Dhabi to export 70% of its crude stuff from Fujairah which is located on the Gulf of Oman bypassing the Strait of Hormuz and Iranian threats to close the passage in the process. However the 400km long pipeline, capable of transporting 1.5 million bpd, comes at a steep price of US$4 billion.

 

Sticking with the region, it seems Beirut is now the most expensive city to live in the Middle East according to Mercer’s 2012 Worldwide Cost of Living survey. It is followed by Abu Dhabi, Dubai (UAE), Amman (Jordan) and Riyadh (Saudi Arabia). On a global footing, Tokyo (Japan) tops the list followed by Luanda (Angola), Osaka (Japan), Moscow (Russia) and Geneva (Switzerland).

 

Meanwhile unlike the ambiguity over Dubai’s ratings status, Kuwait has maintained its AA rating from Fitch with a ‘stable’ outlook supported by rising oil prices and strong sovereign net foreign assets estimated by the agency in the region of US$323 billion in 2011.

 

Finally, on a day when the International Atomic Energy Agency (IAEA) says Iran has doubled production capacity at the Fordo nuclear site, Tehran has called for ridding the world of nuclear weapons at the Non Aligned Movement (NAM) summit claiming it has none and plans none. Yeah right! And  the Oilholic is dating Cindy Crawford! That’s all from Dubai folks; it’s time for the big flying bus home to London! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo: Waterfall at the Dubai Mall, UAE © Gaurav Sharma

The world according to ENOC, Jebel Ali & more

If you could think of one participant in the Dubai economy that exemplifies a bit of a detachment from its debt fuelled construction boom turned bust, then the Emirates National Oil Company (ENOC) is certainly it. The Oilholic has always been one for contrasting Dubai’s debt fuelled growth with neighbour Abu Dhabi’s resource driven organic growth. However, ENOC is a somewhat peculiar exception to the recent Dubai norm or some say form.

 

Since becoming a wholly owned Government of Dubai crown company in 1993, ENOC has continued to diversify its non-fuel operations while playing its role as a custodian of whatever little crude oil reserves the Emirate holds. The history of this NOC dates to 1974. Today it is among the most integrated (and youngest) operators in the business, though not necessarily profitable in a cut throat refining and marketing (R&M) world.

 

While it has no operations in neighbouring Abu Dhabi, ENOC has moved well beyond its Dubai hub establishing a foothold in 20 international markets and other neighbouring Emirates over the years. In case, you didn’t know or had never heard of ENOC, this Dubai crown company has a majority 51.9% stake in Dragon Oil Plc; a London-listed promising upstart. Dragon Oil’s principal producing asset is the Cheleken Contract in the eastern section of the Caspian Sea under Turkmenistan’s jurisdiction.

 

Despite trying times for refiners ENOC’s Jebel Ali Refinery, situated 40km southwest of Dubai City, is the crown company’s crown jewel. Planned in 1996 and completed by 1999, the Jebel Ali refinery’s processing capacity currently stands at 120,000 barrels per day (bpd). It processes condensate or light crude to myriad refined products which get exported as well as feed in to ENOC's own domestic supply chain.

 

ENOC says an upgrade of the refinery was carried in 2010 at a cost of US$850 million. The refinery dominates the landscape of the Jebel Ali free trade zone accompanied by a sprawling industrial estate and an international port. The Oilholic is reliably informed that the latter is among the largest and busiest ports in the region playing host to more ships of the US Navy than any other in the world away from American shores.

 

While being able to host aircraft carriers is impressive, what’s more noteworthy from a macroeconomic standpoint is the fact that the Jebel Ali Free Trade Zone as a destination exempts companies relocating there from corporate tax for fifteen years, personal income tax and excise duties. It’s a privilege to have visited Jebel Ali and also by ‘crude’ coincidence witness ENOC sign a joint venture agreement with Saudi Arabia’s Aldrees Petroleum & Transport Services Company (Aldrees) for setting up service stations in different locations across the latter.

 

The equal-staked venture will see service stations in Saudi Arabia feature ENOC’s regional marquee brand products. The first station is expected to open early next year, with the number of sites rising to 40 in due course. Given that ENOC needs to buy petroleum from international markets as Dubai does not produce enough of the crude stuff, the move has much to do with cost mitigation on the home front.

 

ENOC is forced to sell fuel at Dubai petrol pumps well below the price it pays for crude and refining costs. For instance, over 2011 fuel sales losses at ENOC were thought to be in the US$730-750 million range. So here’s a NOC with profitable non-fuel businesses but troubling fuel businesses looking for ‘crude’ redemption elsewhere. That’s all for the moment folks; a final word from Dubai later! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo 1: ENOC Bur Dubai Office, UAE. Photo 2: Jebel Ali Refinery and Industrial Estate, Dubai, UAE © Gaurav Sharma 2012.

The drivers, the forecasts & the ‘crude’ mood

At times wild swings in the crude market’s mood do not reflect oil supply and demand fundamentals. The fundamentals, barring a geopolitical mishap on a global scale, alter gradually unlike the volatile market sentiment. However, for most parts of Q2 and now Q3 this year, both have seemingly conspired in tandem to take the world’s crude benchmarks for a spike and dive ride.

 

Supply side analysts have had as much food for thought as those geopolitical observers overtly keen to factor in an instability risk premium in the oil price or macroeconomists expressing bearish sentiments courtesy dismal economic data from various crude consuming jurisdictions. For once, no one is wrong.

 

A Brent price nearing US$130 per barrel in mid-March (on the back of Iranian threats to close the Strait of Hormuz) plummeted to under US$90 by late June (following fears of an economic slowdown in China and India affecting consumption patterns). All the while, increasing volumes of Libyan oil was coming back on the crude market and the Saudis, in no mood to compromise at OPEC, were pumping more and more.

 

Then early in July, as the markets were digesting the highest Saudi production rate for nearly three decades, all the talk of Israel attacking Iran resurfaced while EU sanctions against the latter came into place. It also turned out that Chinese demand for the crude stuff was actually up by just under 3% for the first six months of 2012 on an annualised basis. Soon enough, Brent was again above the US$100 threshold (see graph on the right, click to enlarge).

 

Fast forward to the present date and the Syrian situation bears all the hallmarks of spilling over to the wider region. As the West led by the US and UK helps rebels opposed to President Bashar al-Assad, Russia is seen helping the incumbent; not least via a recent announcement concerning exchange of refined oil products from Russia for Syrian crude oil exports desperately needed by the latter.

 

A spread of hostilities to Lebanon, Jordan, Turkey and Iraq could complicate matters with the impact already having been seen in the bombing of Iraq-Turkey oil pipeline. Additionally, anecdotal evidence suggests the Saudis are now turning the taps down a bit in a bid to prop up the oil price and it appears to be working. The Oilholic will be probing this in detail on visit to the Middle East next week.

 

While abysmal economic data from the Old Continent may not provide fuel – no pun intended – to bullish trends, one key component of EU sanctions against Iran most certainly will. A spokesperson told the Oilholic that tankers insured by companies operating in EU jurisdictions will lose their coverage if they continue to carry Iranian oil from July.

 

Since 90% of the world's tanker fleet – including those behemoths called ‘supertankers’ passing through dangerous Gulf of Aden – is insured in Europe, the measure could take out between 0.8 and 1.1 million barrels per day (bpd) of Iranian oil from Q3 onwards according an Istanbul-based contact in the shipping business.

 

In fact OPEC’s output dipped by 70,000 bpd in month over month terms to 31.4 million bpd in July on the back of a 350,000 bpd drop in June over May. No prizes for guessing that of the 420,000 bpd production dip from May to July – 350,000 bpd loss is a direct result of the Iranian squeeze. Although Tehran claims it is a deliberate ploy.

With an average forecast of a rise in consumption by 1 million bpd over 2012 based on statements of various agencies and independent analysts, price spikes are inevitable despite a dire economic climate in Europe or the OECD in general.

 

Cast aside rubbish Iranian rhetoric and throw in momentary geopolitical supply setbacks like the odd Nigerian flare-up, a refinery fire in California or the growing number of attacks on pipeline infrastructure in Columbia. All of these examples have the potential to temporarily upset the apple cart if supply is tight.

 

“Furthermore, traders are wising up to fact that a price nudge upwards these days is contingent upon non-OECD consumption patterns and they hedge their bets accordingly. WTI aside, most global benchmarks look towards the motorist in Shanghai more than his counterpart in San Francisco these days,” says one industry insider of his peers.

 

When the Oilholic last checked at 1215 BST on August 23, the ICE Brent October contract due for expiry on September 13 was trading at US$115.95 while the NYMEX WTI was at US$97.81. It is highly likely that ICE Brent forward futures contracts for the remaining months of the year will end-up closing above US$110 per barrel, and almost certainly in three figures. Nonetheless, prepare for a rocky ride over Q4!

 

Moving away from pricing of the crude stuff, it seems the shutdown of Penglai 19-3 oilfield by the Chinese government in wake of an oil spill last year has hit CNOOC’s output and profits. According to a recent statement issued at Hong Kong Stock Exchange, CNOOC saw its H1 2012 output fall 4.6% on an annualised basis owing to Penglai 19-3 in which it holds 51% of the participating interest for the development and production phase. ConocoPhillips China Inc (COPC) is the junior partner in the venture.

 

This meant H1 2012 net income was down by 19% on an annualised basis from Yuan 39.34 billion to Yuan 31.87 billion (US$5 billion) according to Chief Executive Li Fanrong. CNOOC's US$15.1 billion takeover of Canada’s Nexen, a move which could have massive implications for the North Sea, is awaiting regulatory approval from Ottawa.

 

Away from the “third largest” of the big trio of rapidly expanding Chinese oil companies to a bit of good news, however temporary, for refiners either side of the pond. That’s if you are to believe investment bank UBS and consultancy Wood Mackenzie. UBS believes that for better parts of H1 2012, especially May and June, refining margins were at near “windfall levels” as the price of the crude stuff dipped in double-digit percentiles (25% at one point in the summer) while distillate prices held-up.

 

Wood Mackenzie also adds that given the refiners’ crude raw material was priced lower but petrol, diesel and other distillates remained pricey meant moderately complex refiners in northwest Europe made a profit of US$6.40 per barrel of processed light low sulphur Brent crude in June, compared with the average profit of 10 cents per barrel last year.

 

The June margin for medium, high sulphur Russian Urals crude was a profit of US$13.10 per barrel compared with the 2011 average of US$8.70, the consultancy adds. American refiners had a bit of respite as well over May and June. Having extensively researched refining investment and infrastructure for over two years, the Oilholic is in complete agreement with Société Générale analyst Mike Wittner that such margins are not going to last (see graph above, click to enlarge).

 

To begin with the French investment bank and most in the City expect global refinery runs to drop shortly and sharply to -1.3 million bpd in September versus August and -0.8 million bpd in October versus September. Société Générale also remains neutral on refining margins and expects them to weaken on the US Gulf Coast, Rotterdam and the Mediterranean but strengthen in Singapore. Yours truly will find out more in the Middle East next week. That’s all for the moment from London folks! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo 1: Russian oil pump jacks © Lukoil. Graph 1: Comparison of world crude oil benchmarks (Source: ICE, NYMEX, SG). Graph 2: World cracking margins (US$/barrel 5 days m.a) © SG Cross Asset Research, August 2012.

Price correction, Saudis hurt Canada & Russia!

Finally, we have a price correction which saw both global oil benchmarks reflect the wider macroeconomic climate accompanied by a dip in stock markets and a downgrade of 15 of the world’s largest banks by Moody’s. NYMEX WTI forward month futures contract fell below US$80 per barrel on Thursday for the first time since October 2011 while Brent is just about resisting the US$90-level trading at US$90.77 when last checked.

The benchmarks have shown bearish trends for almost three months but they were still not reflecting the wider macroeconomic climate; until yesterday that is. The ‘only way is up’ logic based on a linear supply-demand permutation oversimplifies the argument as the current situation demonstrates. Factors such as the absence of QE3 by the US Federal Reserve, a stronger US Dollar, and weaker Chinese, Indian and European data finally influenced market sentiment – not to provide the perfect storm but to provide the perfect reality! A decline in German business confidence levels reinforces bearish trends which will last for a while yet.

Despite negative sentiments and the possibility of Brent trading below US$100 per barrel for prolonged periods between now and Q1 2013, OPEC did not cut its quota last week. Saudi Arabia, which is so dominant within the cartel, actually wanted to send the price lower as it can contend with Brent falling to US$85 per barrel.

From a geopolitical standpoint, Saudis not only kicked a sanction hit Iran (maybe gleefully) but delivered bad news for Russia (perhaps intentionally) and Canada (almost certainly unwittingly). Saudi rivalry with Iran has more than a ‘crude’ dimension, but one with Russia almost certainly revolves around market dominance. The Oilholic’s hypothesis is that this intensified when Russian production first overtook Saudi production in 2009.

As the world’s leading producer for over two years, Moscow was causing Riyadh some discomfort. So the Saudis raised their game with the Libyan conflict and Iranian sanctions giving them ample excuses to do so. Constantly flouting OPEC production quotas, this February Saudi Arabia regained its top spot from Russia. Now with prices in reverse, it is the Russians who are sweating having rather bizarrely balanced their budget by factoring in an oil price in the circa of US$110 to US$120 per barrel.

Several independents, ratings agencies (for example S&P) and even former finance minister Alexei Kudrin repeatedly warned Russia about overreliance on oil. The sector accounts for nearly 70% of Russian exports and Vladimir Putin has done little to alter that dynamic both as prime minister and president in successive tenures.

Realising the Russian position was not going to change over the short term and with a near 10% (or above) dip in production at some of their major fields; the Saudis ramped up their production. A masterstroke or precisely a deft calculated hand played by Minister Ali Al-Naimi planked on the belief that amid bearish trends the Russians simply do not have the prowess, or in fact the incentive, to pump and dump more crude on the market has worked.

A Russian production rise to 10 million bpd is possible in theory, but very difficult to achieve in practice in this macroeconomic climate. So the markets (and the Saudis) expect Russia to fall back on their US$500 billion in reserves to balance the books over the short to medium term rather than ramp-up production. Furthermore, unless the Russians invest, the Saudis’ hand will only be strengthened and their status as ‘crude’ stimulus providers enhanced.

Canada’s oil sands business while not a direct Saudi target is indeed an accidental victim. The impact of a fall in the price of crude will also be very different as Canada’s economy is far more diversified than Russia’s. Instead of a decline in production, the ongoing oil sands and shale prospection points to a potential rise.

Canadian prospection remains positive for Canadian consumers and exporters alike; provincial and federal governments want it, justice wants it, PM wants it and the public certainly want it. However, developing the Athabasca oil sands and Canadian shale plays (as well as US’ Bakken play) is capital and labour intensive.

For the oil sands – holding the world’s second largest proven oil resource after Saudi Arabia’s Dhahran region – to be profitable, crude price should not plummet below US$60 per barrel. Three visits by the Oilholic to Calgary and interaction with colleagues at CAPP, advisory, legal and energy firms in Alberta between 2008 and 2011 threw up a few points worth reiterating amidst this current crude price correction phase. First of all, anecdotal evidence suggests that while it would rather not, Alberta’s provincial administration can even handle a price dip to US$35 to 40 per barrel.

Secondly, between Q2 2007 and Q1 2008 when the price of crude reached dizzy heights, oilfield services companies and engineering firms hired talent at top dollar only to fire six months later when the price actually did plummet to US$37 per barrel in wake of the financial crisis. Following a wave of redundancies, by 2010 Calgary and Fort McMurray were yet again witnessing a hiring frenzy. The cyclical nature of the industry means this is how things would be. Canadians remain committed to the oil & gas sector and in this blogger’s humble opinion can handle cyclical ups and downs better than the Russians.

Finally, Canada neither has a National Oil Company nor is it a member of any industry cartel; but for the sake of pure economics it too needs a price of about US$80 a barrel. On an even keel, when the price plummets or the Saudis indulge in tactical production manoeuvres, as is the case at present, you’d rather be a Canadian than a Russian.

The Oilholic has long suspected that the Saudis look upon the Canadians as fellow insurers working to prevent ‘oil demand destruction’ and vying for a slice of the American market; for them the Iranians and Russians are just market miscreants. That the market itself is mischievous and Canadians might join the 'miscreants' list if proposed North American pipelines come onstream is another matter! That’s all for the moment folks! Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo 1: Russian pump jacks © Lukoil. Photo 2: Red Square, Moscow, Russia © Gaurav Sharma 2004. Photo 3: Downtown Calgary, Alberta, Canada © Gaurav Sharma 2011.

“Stability, stability, stability,” says El-Badri

So the press briefing room has emptied and the OPEC ministers have left the building for first time after failing to cut the cartel’s official output in face of crude price corrections exceeding 10% over a fiscal quarter. Thanks largely to Saudi Arabia, OPEC output stayed right where it was at 30 million bpd. Given the Eurozone crisis and a US, Indian and Chinese slowdown – OPEC members will invariably see Brent trading below US$100 per barrel for extended periods of time over the medium term.

It is doubtful if the Saudis would be too perturbed before the price of Brent slips below US$85 per barrel. As the Oilholic noted last year, studies suggest that is the price they may have budgeted for. Putting things into perspective analysts polled by the Oilholic here in Vienna suggest Iran would need a Brent price of US$110-plus to come anywhere balancing its budget.

However, with all bar the Saudis sweating already, outgoing OPEC Secretary General Abdalla Salem El-Badri, whose successor is yet to be decided, probably provided the signature quote of 161st meeting of ministers. Given the long term nature of the oil & gas business and a need for clarity and predictability, the Secretary General demanded ‘stability, stability, stability’.

“Stability for investments and expansion to flourish; Stability for economies around the world to grow; And stability for producers that allows them a fair return from the exploitation of their exhaustible natural resources,” he said in a speech at the OPEC seminar ahead of the meeting.

Problem is the Saudis have taken the message a little bit too literally; oil minister Ali Al-Naimi likened his country’s high production level and its insistence that OPEC’s official quota stays right where it is to a kind of an economic ‘stimulus’ which the world needs right now.

Of course on the macro picture, everyone at OPEC would have nodded in approval when El-Badri noted that fossil fuels – which currently account for 87% of the world's energy supply – will still contribute 82% by 2035.

“Oil will retain the largest share (of the energy supply) for most of the period to 2035, although its overall share falls from 34% to 28%. It will remain central to growth in many areas of the global economy, especially the transportation sector. Coal's share remains similar to today, at around 29%, whereas gas increases from 23% to 25%,” he added.

In terms of non-fossil fuels, renewable energy would grow fast according to OPEC. But as it starts from a low base, its share will still be only 3% by 2035. Hydropower will increase only a little – to 3% by 2035. Nuclear power will also witness some expansion, although prospects have been affected by events in Fukushima. However, it is seen as having only a 6% share in 2035.

For oil, conventional as well as non-conventional resources are ‘sufficient’ for the foreseeable future according to El-Badri. The cartel expects significant increases in conventional oil supply from Brazil, the Caspian, and of course from amongst its own members, as well as steady increases in non-conventional oil and natural gas liquids (e.g. Canada and US).

On the investment front, for the five-year period from 2012 to 2016, OPEC's member countries currently have 116 upstream projects in their portfolio, some of which would be project or equity financed but majority won’t. Quite frankly do some of the Middle Eastern members really need to approach the debt markets after all? Moi thinks not; at best only limited recourse financing maybe sought. If all projects are realised, it could translate into an investment figure of close to US$280 billion at current prices.

“Taking into account all OPEC liquids, the net increase is estimated to be close to 7 million bpd above 2012 levels, although investment decisions and plans will obviously be influenced by various factors, such as the global economic situation, policies and the price of oil,” El-Badri concluded.

That’s all from Austria folks where the Oilholic is surrounded by news from the G20, rising cost of borrow for Spain and Italy, European Commission President Jose Manuel Barroso ranting, Fitch downgrading India’s outlook, an impending US Federal Reserve decision and the Greek elections! Phew!

Since it’s time to say Auf Wiedersehen and check-in for the last Austrian Airlines flight out of this Eurozone oasis of ‘relative’ calm to a soggy London, yours truly leaves you with a sunny view of the Church of St. Charles Borromeo (Karlskirche) near Vienna’s Karlsplatz area (see above right, click to enlarge). It was commissioned by Charles VI – penultimate sovereign of the Habsburg monarchy – in 1713. Johann Bernhard Fischer von Erlach, one of Austro-Hungarian Empire’s most renowned architects, came up with the original design with construction beginning in 1716.

However, following Fischer’s death in 1727, it was left to his son Joseph Emanuel to finish the project adding his own concepts and special touches along the way. This place exudes calmness, one which the markets, the crude world and certainly Mr. Barroso could do well with. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Empty OPEC briefing room podium following the end of the 161st meeting of ministers, Vienna, Austria. Photo 2: Church of St. Charles Borromeo (Karlskirche), Vienna, Austria © Gaurav Sharma 2012.

The tussle for OPEC Secretary General’s post

The pre-meeting press scrum (which many scribes rather disingenuously call the ‘g*ng-b*ng’) is over and the Oilholic can tell you the OPEC quota is not the only thing the Hawks and Doves in the cartel are tussling over; it is the post of the new secretary general as well which is adding to the tension.

To being with, rivals Saudi Arabia and Iran have fielded a candidate of their own. The reason given by delegates from both camps is that apart from having the ‘ideal’ candidate, neither country has held the position in just over three decades. Describing the relations between Riyadh and Tehran as tense and rooted in suspicion would be understating the acrimony. Simply put, both hate each others’ guts based on past histories.

Furthermore, the Saudis have put their money where their mouth is by declaring that they will make up for the absence of Iranian crude if sanctions on the latter intensify. Empirical and anecdotal evidence as well as rising Saudi production proves that this is the case to a certain extent. Then again, time and again, irrespective of ‘formal’ OPEC announcements (the latest of which is expected here at 1700CET), Saudis have done whatever they’ve wanted.

The Oilholic is not alone in his belief that neither a Saudi nor an Iranian will occupy the post of Secretary General; but that a compromise candidate in the shape of Ecuador or Iraq would be found. Of the two, Iraq – a founding member of the cartel – would be a better choice.

Even though internal problems persist, its output is rising and it hopes to raise its profile at OPEC; something many here feel it lost in wake of conflict and under the international sanction-laden rule of Saddam Hussein.

Baghdad's man at the table is Thamir Ghadhban, who was was named adviser to Iraq’s interim oil minister before himself becoming the minister in 2004. Pitted against three other candidates, Ghadhban is not a frontrunner – but we’ve been told there isn’t one among the other three either. Since a unanimous deciscion is requirement for the appointment, making predictions over who would win would be tricky.

Since OPEC was former, only one Iraqi has held the office of secretary general - Abdul Rahman al-Bazzaz (1964-65). Another Iraqi - Fadhil al-Chalabi was only an ‘acting’ secretary general from 1983-88.

On a closing note, well there is one more footnote to all of this. While Iraq is a member of OPEC; it does not have a stated individual oil production quota which was suspended in wake of hostilities and later to facilitate a recovery. Negotiations are likely to take place once Iraqi production increases to at least 4 million bpd; this would be by 2015 based on current industry projections.

It’s hectic here, and apart from giving soundbites to the usual suspects, it was a pleasure speaking to Middle Eastern broadcasters, especially MBC. That’s all for the moment folks as we prepare to say goodbye to outgoing Secretary General Abdalla Salem El-Badri! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: OPEC HQ, Vienna, Austria © Gaurav Sharma 2011.

First vibes from OPEC, monthly data & Mr. Al-Naimi

The Oilholic is in Vienna ahead of the 161st meeting of OPEC ministers and the 5th OPEC International seminar; the latter being a forum where the great and good of this crude world interact with OPEC ministers and other invited dignitaries once every two years. However, even before the proceedings have begun, the cartel’s Monthly Market Report has stirred things up.

Back dated figures for April suggest, OPEC’s production for the month came in 32.964 million barrels per day (bpd) up 631,000 bpd from March. The figure for May came in lower at 31.58 million bpd; but still well above the cartel’s production cap of 30 million bpd. Such a high level has not been recorded since 2008 when the price of crude rose to a spectacular high only to fall sharply as the global financial crisis took hold. The data would suggest that together with non-OPEC sources, the market remains well supplied. Furthermore, in the face of economic uncertainty demand could drop as the economies of India and China show signs of medium term cooling.

On the subject of demand, OPEC notes, “The upcoming driving season might be affected by movements in retail gasoline prices and economic developments worldwide; hence, world oil demand would show a further decline and might see a cut of between 0.2 and 0.3 million bpd from the current forecast of the year's total growth (0.9 million)."

With leading benchmarks Brent and WTI falling below US$100 a barrel this week along with the OPEC basket price, some would think the Saudis would be keen to support a cut in the cartel’s production quota. Figures suggest OPEC's largest producer did in fact reduce its output to 9.8 million bpd in May from 10.1 million bpd in April. That is still the highest Saudi production rate on record for the last three years and the country recently reclaimed its top spot from Russia as the world’s largest producer of crude oil.

However, ahead of the OPEC meeting on June 14, the country’s inimitable oil minister Ali al-Naimi has jolted a few by actually calling for an increase in OPEC’s output. In an interview with the Gulf Oil Review (published by Bill Farren-Price’s Petroleum Policy Intelligence), he said, “Our actions have helped the oil price drop from US$128 in March to about $100 today which has acted as a type of stimulus to the European and world economy…Our analysis suggests that we will need a higher ceiling than currently exists."

"Given our large crude oil reserve situation, we certainly want to see a sustained market for crude oil over the long term. This calls for moderation, but on the other hand, with the cost of oil production going up...a reasonable price is required to ensure exploration can continue," he added.

Clearly the Saudis are on a collision course with other cartel members but since his interview al-Naimi has said he is “happy with the way things are”. Read what you will; we’ve been here before and such OPEC chatter is nothing new, except for the ‘stimulus’ hypothesis which has a nice ring to it. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: OPEC Logo on building exterior © Gaurav Sharma 2011.

Eurozone crisis vs. a US$100/barrel price floor

In the middle of a Eurozone crisis rapidly evolving into a farcical stalemate over Greece’s prospects, on May 13 Saudi Arabia’s oil minister Ali al-Naimi told a Reuters journalist at an event in Adelaide that he sees US$100 per barrel as a “great price” for crude oil. In wake of the comment, widely reported around the world, barely six days later came confirmation that Saudi production had risen from 9.853 million barrels  per day (bpd) in February to 9.923 bpd in March with the kingdom overtaking Russia as the world's largest oil producer for the first time in six years.

In context, International Energy Forum says Russia's output in March dropped to 9.920 million bpd from 9.943 million bpd in February. The Saudis exported 7.704 million bpd in March versus 7.485 million bpd in February but no official figure was forthcoming from the Russians. What al-Naimi says and how much the Saudis export matters in the best of circumstances but more so in the run-up to a July 1 ban by the European Union of imports of Iranian crude and market theories about how it could strain supplies.

Market sources suggest the Saudis have pumped around 10 million bpd for better parts of the year and claim to have 2.5 million bpd of spare capacity. In fact, in November 2011 production marginally capped the 10 million bpd figure at one coming in at 10.047 million bpd, according to official figures. The day al-Naimi said what price he was comfortable with ICE Brent crude was comfortably above US$110 per barrel. At 10:00 GMT today, Brent is resisting US$106 and WTI US$91. With good measure, OPEC’s basket price stood at US$103.49 last evening and Dubai OQD’s forward month (July) post settlement price for today is at US$103.65.

With exception of the NYMEX Light Sweet Crude Oil futures contract, the benchmark prices are just above the level described by al-Naimi as great and well above the breakeven price budgeted by Saudi Arabia for its fiscal balance and domestic expenditure as the Oilholic discussed in July.

Greece or no Greece, most in the City remain convinced that the only way is up. Société Générale CIB’s short term forecast (vs. forward prices) suggests Brent, Dubai and even WTI would remain comfortably above US$100 mark. The current problem, says Sucden Financial analyst Myrto Sokou, is one of nervousness down to mixed oil fundamentals, weak US economic data and of course the on-going uncertainty about the future of Eurozone with Greece remaining the main issue until the next election on June 17.

“WTI crude oil breached the US$90 per barrel level earlier this week and tested a low at US$89.28 per barrel but rebounded on Thursday, climbing above US$91 per barrel. Brent oil also retreated sharply to test a low at US$105 per barrel area but easily recovered and corrected higher toward US$107 per barrel. We continue to expect particularly high volatile conditions across the oil market, despite that oil prices still lingering in oversold territory,” she adds.

Not only the Oilholic, but this has left the inimitable T. Boone Pickens, founder of BP Capital Partners, scratching his head too. Speaking last week on CNBC’s US Squawk Box, the industry veteran said, “I see all the fundamentals which suggest that the price goes up. I am long (a little bit) on oil but not much…I do see a really tight market coming up. Now 91 million bpd is what the long term demand is globally and I don’t think it would be easy for the industry to fulfil that demand.”

Pickens believes supply is likely to be short over the long term and the only way to kill demand would be price. Away from pricing, there are a few noteworthy corporate stories on a closing note, starting with Cairn Energy whose board sustained a two-thirds vote against a report of the committee that sets salaries and bonuses for most of its senior staff at its AGM last week.

Earlier this year, shareholders were awarded a windfall dividend in the region of £2 billion following Cairn's hugely successful Indian venture and its subsequent sale. However, following shareholder revolt a plan to reward the chairman, Sir Bill Gammell, with a bonus of over £3 million has been withdrawn. The move does not affect awards for the past year. Wonder if the Greenland adventure, which has yielded little so far, caused them to be so miffed or is it part of a wider trend of shareholder activism?

Meanwhile the FT reports that UK defence contractor Qinetiq is to supply Royal Dutch Shell with fracking monitors. Rounding things up, BP announced a US$400 million spending plan on Wednesday to install pollution controls at its Whiting, Indiana refinery, to allow it to process heavy crude oil from Canada, in a deal with US authorities.

Finally, more than half (58%) of oil & gas sector respondents to a new survey of large global companies – Cross-border M&A: Perspectives on a changing world – conducted by the Economist Intelligent Unit on behalf of Clifford Chance, indicates that the focus of their M&A strategy is on emerging/high-growth economies as opposed to domestic (14%) and global developed markets (29%). The research surveyed nearly 400 companies with annual revenues in excess of US$1 billion from across a range of regions and industry sectors, including the oil & gas sector. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil worker in Oman © Royal Dutch Shell.

Corporate crude chatter: Xstrata, Glencore & more

There appears to be only one story in town these past few days - the valuation and implication of a Glencore and Xstrata merger. According to communiqués issued yesterday poured over the Oilholic and his peers, the Switzerland based commodities trader and the mining major aim to create a merged natural resources, mining and trading company with a combined equity market value of US$90 billion.

Xstrata’s operating businesses and Glencore’s marketing functions will continue to operate under their existing brands. It is proposed that the combined entity will be called Glencore Xstrata International plc, listed on the London and Hong Kong Stock Exchanges, with its headquarters in Switzerland and will continue as a company incorporated in Jersey. The deal was labelled by the two firms as a "merger of equals" but the Oilholic suspects Glencore would carry the upper hand.

While the new corporate entity will be the world's biggest exporter of coal for power plants and the largest producer of zinc, the ever secretive Glencore’s involvement gives the merger a ‘crude’ dimension. The latter’s Chief Executive Ivan Glasenberg has made a fortune for his company selling crude oil and oil products alongside other commodities. Controversy and Glencore go hand in hand as its Wikipedia page records.

Where from here remains to be seen as ratings agency Moody's has placed all the ratings of Glencore and Xstrata, as well as those of their guaranteed subsidiaries, on review for possible upgrade following the announced all-share merger. The initiation of this review reflects Moody's favourable assessment of the planned merger in terms of diversification and synergies, as well as the uncertainties surrounding the final details and execution of the proposed transaction.

Moving away from the Glencore-Xstrata story but sticking with Moody's, the agency also commented on the completion of Sunoco Inc.'s strategic review. It notes that the American petroleum company is better positioned to focus on midstream logistics and retail product marketing as its core operations, with greater clarity around its plans to re-deploy a sizeable portion of its cash liquidity.

Sunoco announced a number of steps last week to allow it to focus on its large investment in Sunoco Logistics Partners LP and on retail marketing as the drivers of its future growth and returns. It began shuttering the Marcus Hook refinery in December and is likely to do the same with its Philadelphia refinery by July 2012 unless it can conclude a suitable sale. These exposures and the limited sales prospects for the refineries have resulted in an additional pre-tax charge of US$612 million in Q4 2011, including non-cash book charges and provisions for severance and other cash expenses.

Continuing with corporate news, Petrobras announced another discovery of a new oil and natural gas accumulation – this time in the Solimões Basin (Block SOL-T-171), in the State of Amazonas. The discovery took place during drilling of Igarap é Chibata Leste well located in Coari, 25 km from the Urucu Oil Province. The well was drilled to a final depth of 3,295 meters and tests have indicated a production capacity of 1,400 barrels per day of good quality oil (41º API) and 45,000 m3 of natural gas. Obviously, Petrobras holds 100% of the exploration and production rights in the Concession.

The Brazilian major also closed the issuance of global notes in the international capital markets worth US$7 billion on Monday. The transaction was executed in one day, with a demand of approximately US$25 billion as a result of more than 1,600 orders coming from more than 700 investors. The final allocation was more concentrated in the United States (58.4%), Europe (28.1%) and Asia, mostly dedicated to the high grade market. The oversubscription is symptomatic of the huge interest in Brazilian offshore.

Finally, BP raised its dividend payout after quarterly earnings rose on rising crude prices. Replacement cost profit for the three months to December-end 2011 was US$7.6 billion up on US$4.6 billion for the corresponding period in 2010. For FY 2011, BP's profit was US$23.9 billion versus a US$4.9 billion loss in 2010. This meant allowing for a 14% rise in the dividend to 8c (5p) per share, a first increase since the 2010 Gulf of Mexico spill.

Away from corporate matters, the UK government launched its 27th offshore oil and gas licensing round last Wednesday making 2,800 blocks available to prospectors. The last British licensing round set an all-time high at 190 awards with high crude prices enticing exploration companies big and small. Lets see how it all shapes up this time around especially as the British government maintains that some 20 billion barrels of the crude stuff is still to be extracted. The Oilholic cannot possibly dispute the figure with authority, but what one can note with some conviction is that all the easy (to extract) oil has already been found. Extracting the remaining 20 billion would be neither easy nor cheap, especially in a tough macroclimate.

Meanwhile, as tensions mount over Iran, Saudi Arabia’s crown prince has said the Kingdom would not let the price of crude oil stay above US$100 using the WTI as a benchmark. Concurrently, and in order to allay Asian fears about crude oil supplies, the UAE government says it is looking to export more to Asia should there be a need to mitigate the supply gap caused by a ban on Iranian oil by Asian importers. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Offshore oil rig in North Sea © Cairn Energy Plc.

On OPEC chatter & Libyans who matter!

Credible information and several statements made on arrival in Vienna by OPEC ministers and member nations’ delegates suggest that price hawks – chiefly Iran – will now accept an 'official' rise in production quota by Saudi Arabia and its allies Kuwait and Qatar.

That would mean the cartel would now legitimise and accept a stated production cap of 30 million barrels per day (bpd) for all members after talks on the issue fell apart in June and OPEC ministers left in a huff without formally outlining the output cap.

Saudi Oil Minister Ali al-Naimi has already been flexing his ‘crude’ muscles. If, as expected, an OPEC agreement puts a 30 million bpd production cap on all 12 OPEC member nations, this would keep the cartel’s production in the region of a 3-year high. The stated volume would meet demand and leave enough surpluses to rebuild lean stocks by 650,000 bpd over the period according to OPEC.

Sucden Financial Research’s Jack Pollard notes that an OPEC production ceiling could provide some upside support if approved; Saudi opposition could suppress calls from Iran. The return of Libyan and Iraqi crude oil should alleviate the market’s tight supply conditions.

“As we come to the year-end, the contrasting tail risks in Europe and the Middle-East seem most likely to dominate sentiment. Increased sanctions on Iran which could cut production by 25%, according to the IEA, could mitigate the worst of the losses if the situation in Europe deteriorates,” he concludes.

Assurances are also being sought here to make room for Libya's supply coming back onstream so that collective production does not exceed 30 million bpd as ministerial delegations from Algeria, Kuwait, Nigeria and the OPEC secretariat met here today, ahead of tomorrow’s proceedings.

Most OPEC producers would be comfortable with an oil price of US$80 per barrel or above, while the Venezuelan and Iranian position of coveting a US$100-plus price is well known. Kuwait Oil Minister Mohammad al-Busairi told reporters, “The market is balanced, there is no shortage and there is no oversupply. We hope there will be an agreement that protects global economic growth.”

As talk of Libyan production coming back onstream gains steam here at OPEC, the Oilholic thinks the key figures on the Libyan side instrumental in bringing that about could or rather would be Abdel Rahim al-Keib (a key politician), Rafik al-Nayed (of Libya’s investment authority) and Abdurahman Benyezza (Minister of Oil and Gas). International companies BP, Eni, Occidental Petroleum, OMV and Repsol will figure too with operations in the country. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2011. Photo: 160th OPEC press conference table © Gaurav Sharma 2011.

We’re nowhere near “Peak oil” er...perhaps!

The 20th World Petroleum Congress could not have possibly gone without a discussion on the Peak Oil hypothesis. In fact, every single day of the Congress saw the topic being discussed in some way, shape or form. So the Oilholic decided to summarise it after the event had ended and before the latest OPEC meeting begins.

Discussing the supply side, starting with the hosts Qatar, Emir Sheikh Hamad bin Khalifa said his country was rising to challenge to secure supplies of oil and gas alongside co-operating with members of the energy organisations to which they were aparty, in order to realise this goal. Close on the Qatari Emir’s heels, Kuwaiti oil minister Mohammed Al-Busairi said his country’s crude production capacity is only expected increase between now and 2015 from the current level of 3 million barrels per day (bpd) to 3.5 million bpd, before rising further to 4 million bpd.

Then came the daddy of all statements from Saudi Aramco chief executive Khalid al-Falih. The top man at the world’s largest oil company by proven reserves of barrel of oil equivalent noted that, “rather than the supply scarcity which many predicted, we have adequate oil and gas supplies, due in large part to the contributions of unconventional resources.”

Rising supplies in al-Falih’s opinion will result in deflating the Peak Oil hypothesis. “In fact, we are on the cusp of what I believe will be a new renaissance for petroleum. This belief emanates from new sweeping realities that are reshaping the world of energy, especially petroleum,” he told WPC delegates.

Meanwhile, in context of the wider debate, Petrobras chief executive Jose Sergio Gabrielli, who knows a thing or two about unconventional told delegates that the speed with which the new sources of oil are entering into production has taken many people by surprise, adding to some of the short-term volatility.

“The productivity of our pre-salt offshore drilling moves is exceeding expectations,” he added. Petrobras now hopes to double its oil production by 2020 to over 6.42 billion barrels of oil equivalent. It seems a veritable who’s-who of the oil and gas business lined up in Doha to implicitly or explicitly suggest that Marion King Hubbert – the patron saint of the Peak Oil hypothesis believers – had always failed to take into account technological advancement in terms of crude prospection and recent developments have proven that to be the case.

But for all that was said and done, there is one inimitable chap who cannot possibly be outdone –Total CEO Christophe de Margerie. When asked if Peak Oil was imminent, de Margerie declared, “There will be sufficient oil and gas and energy as a whole to cover the demand. That’s all! Even using pessimistic assumptions, I cannot see how energy demand will grow less than 25% in twenty years time. Today we have roughly the oil equivalent of 260 million bpd (in total energy production), and our expectation for 2030 is 325 million bpd.”

He forecasts that fossil fuels will continue to make up 76% of the energy supply by 2050. “We have plenty of resources, the problem is how to extract the resources in an acceptable manner, being accepted by people, because today a lot of things are not acceptable,” the Total CEO quipped almost to the point of getting all worked up.

He concluded by saying that if unconventional sources of oil, including heavy oil and oil shale, are exploited, there will be sufficient oil to meet today’s consumption for up to 100 years, and for gas the rough estimate is 135 years. Or enough to make Hubbert stir in his grave.

© Gaurav Sharma 2011. Photo: Total's CEO De Margerie discusses Peak Oil at the 20th World Petroleum Congress © Gaurav Sharma 2011.

Sucden to Soc Gen: The fortnight’s crude chatter

The last two weeks have been tumultuous for the oil market to say the least. This morning, the ICE Brent crude forward month futures price successfully resisted the US$100 level, while WTI’s resistance to US$80 level has long since crumbled. Obviously, the price of crude cannot divorce itself from the global macroeconomic picture which looks pretty grim as it stands, with equity markets plummeting to fresh new lows.

Bearish sentiments will persist as long as there is uncertainty or rather the "Greek tragedy" is playing in the Eurozone. Additionally, there is a lack of consensus about Greece among EU ministers and their next meeting - slated for Oct 13th - has been cancelled even though attempts are afoot to allay fear about a Greek default which hasn’t yet happened on paper.

Sucden Financial Research’s Myrto Sokou notes that following these fragile economic conditions across the Eurozone and weak global equity markets, the energy market is under quite a bit of pressure.

“The stronger US dollar weighs further to the market, while investors remain cautious and are prompted to some profit-taking to lock-in recent gains. We know that there is so much uncertainty and nervous trading across the markets at the moment, as the situation in the Eurozone looks daunting, “ready for an explosion”. So, we expect crude oil prices to remain on a downside momentum for the short-term, with WTI crude oil retesting the US$70-$75 range, while Brent consolidating around the US$98-$100 per barrel,” Sokou adds.

Many in the City opine that some commodities are currently trading below long term total costs, with crude oil being among them. However, in the short-run, operating costs (the short run marginal costs) are more important because they determine when producers might cut supply. Analysts at Société Générale believe costs should not restrict prices from dropping, complementing their current bearish view on the cyclical commodities.

In a note to clients on Sep 29th, they noted that the highest costs of production are associated with the Canadian oil sands projects, which remain the most expensive source of significant new supply in the medium to long term (US$90 represents the full-cycle production costs).

“However global oil supply is also influenced by political factors. It should also be noted that while key Middle East countries have very low long term production costs, social costs also need to be added to these costs. These costs, in total, influence production decisions; consequently, this may cause OPEC countries cutting production first when, in fact textbook economics says they should be the last to do so,” they noted further.

Furthermore, as the Oilholic observed in July – citing a Jadwa Investment report – it is commonly accepted by Société Générale and others in the wider market that Saudi Arabia needs US$90-$100 prices to meet its national budget; and this is particularly true now because of large spending plans put in place earlier this year to pre-empt and counter public discontent as the Arab Spring unfolded.

Therefore, in a declining market, Société Générale expects long-dated crude prices to show resilience around that level but prices are still significantly higher than the short-run marginal costs so their analysts see room for further declines.

Concurrently, in its September monthly oil market report, the International Energy Agency (IEA) cut its forecast for global oil demand by 200,000 barrels per day (bpd) to 89.3 million bpd in 2011, and by 400,000 bpd to 90.7 million bpd in 2012. Factoring in the current macroeconomic malaise and its impact on demand as we’ve commenced the final quarter of 2011, the Oilholic does not need a crystal ball to figure out that IOCs will be in choppy waters for H1 2012 with slower than expected earnings growth.

In fact ratings agency Moody’s changed its outlook for the integrated oil & gas sector from positive to stable in an announcement last week. Francois Lauras, Vice President & Senior Credit Officer - Corporate Finance Group at Moody’s feels that the weakening global macroeconomic conditions will lead to slower growth in oil consumption and an easing in current market tightness over the coming quarters, as Libyan production gradually comes back onto the market.

The Oilholic is particularly keen to stress Mr. Lauras’ latter assertion about Libya and that he is not alone in thinking that earnings growth is likely to slow across the sector in 2012. Moody’s notes that as crude oil prices ease and pressure persists on refining margins and downstream activities slower earnings are all but inevitable. This lends credence to the opinions of those who advocate against the integrated model. After all, dipping prices are not likely to be enjoyed by IOCs in general but among them integrated and R&M players are likely to enjoy the current unwanted screening of the Eurozone “Greek tragedy” the least.

© Gaurav Sharma 2011. Photo: Alaska Pipeline, Brooks Range, USA © Michael S. Quinton / National Geographic

BP’s profit, Saudi price targets & CNOOC in Canada

Its quarterly results time and there is only one place to start – an assessment of how BP’s finances are coping in wake of Macondo. Its quarterly data suggests the oil major made profits of US$5.3 billion in the three months to June-end. This is down marginally from the US$5.5 billion it made in Q1 2011 and a predictable reversal of the US$17 billion loss over the corresponding quarter last year when the cost of the Gulf of Mexico spill weighed on its books.

Elsewhere in the figures, BP's oil production was down 11% for the quarter on an annualised basis and the company has also sold US$25 billion worth of assets to date, partly to offset costs of the clean-up operation in the Gulf. City analysts told the Oilholic that BP should count itself lucky as the crude price has been largely favourable over the last 12 months.

Moving away from BP, it is worth turning our attention to the perennially crude question, what price of black gold is the Saudi Arabian Government comfortable with? An interesting report published by Riyadh-based Jadwa Investment suggests that the “breakeven” price for oil that matches actual revenues with expenditures is currently around US$84 per barrel for the Kingdom, comfortably below the global price.

The Oilholic agrees with the report’s authors - Brad Bourland and Paul Gamble – that it is bit rich to assume the Saudis crave perennially high oil prices. Au contraire, high oil prices actually hurt Saudi Arabia’s long term future. Bourland and Gamble feel the Kingdom would be more comfortable with prices below US$100 per barrel; actually a range of US$70-90 per barrel is more realistic.

Using either benchmark, prices are comfortably above the range and are likely to stay there for the rest of the year, if that is what the Saudis are comfortable with. Analysts at Société Générale CIB maintain their view for Brent prices to be in the US$110-120 range in H2 2011 on mixed fundamental and non-fundamental drivers. They note that there may be some slight upside to their Brent forecast, and some moderate downside to their WTI forecast. At 8:00 GMT, ICE Brent forward month futures contract was trading at US$118.04 and WTI at US$99.56.

Looking from a long term macroeconomic standpoint, the Jadwa Investment report notes that after the benign decade ahead, unless the current spending and oil trends are changed, Saudi Arabia faces a very different environment. For instance, domestic consumption of oil, now sold locally for an average of around US$10 per barrel, will reach 6.5 million barrels per day in 2030, exceeding oil export volumes. Jadwa Investment does not expect total Saudi oil production to rise above 11.5 million barrels per day by 2030.

Even with a projected slowdown in growth of government spending, the breakeven price for oil will be over a whopping US$320 per barrel in 2030. Furthermore, the Saudi government will be running budget deficits from 2014, which become substantial by the 2020s. By 2030, foreign assets will be drawn down to minimal levels and debt will be rising rapidly.

Before you go “Yikes”, preventing this outcome, according to Bourland and Gamble, requires tough policy reforms in areas such as domestic pricing of energy and taxation, an aggressive commitment to alternative energy sources, especially solar and nuclear power, and increasing the Kingdom’s share of global oil production. By no means a foregone conclusion, but not all that easy either.

Continuing with the Middle East, apart from crushing dissent and chastising the US government for interference, the Syrian government is apparently also open for crude business. In an announcement on July 7th, the creatively named General Establishment for Geology and Mineral Resources (GEGMR) under auspices of the Syrian Petroleum and Mineral Resources Ministry invited IOCs to bid and develop oil shale deposits in the Khanser region in the north. The Ministry says total crude reserves at the site are “estimated” at 39 billion tonnes with the oil content rate valuation at 5 to 11%.

While the tender books, costing US$3,000 each were issued on July 1st, the Ministry declined to answer how many were sold, who took them up and how the bid round is supposed to work in face of international condemnation of what is transpiring within its borders.

Elsewhere, Chinese state behemoth CNOOC’s recent acquisition of a 100% stake in OPTI Canada Inc, a TSX-listed oil sands producer, made the headlines. The aggregate consideration for the transaction is about US$2.1 billion. OPTI owns a 35% working interest in four oil sands projects in Canada – Long Lake, Kinosis, Leismer and Cottonwood.

Kai Hu, Vice President and Senior Analyst at Moody’s, says "CNOOC investment in this transaction is in line with the company's strategy of growing reserves, partly through overseas acquisitions. This investment – as well as its the previous investments in Eagle Ford and Niobrara shale gas projects – indicate its strong interest in gaining experience in unconventional oil and gas reserves.”

As such, Moody’s feels CNOOC Aa3 issuer and senior unsecured ratings will not be immediately affected by its acquisition. It also helps that there are no US-style murmurings of dissent in Canadian political circles.

© Gaurav Sharma 2011. Photo: Pipeline in Alaska © Kenneth Garrett, National Geographic