Out of its ‘Shell’ & into the ‘Cove’ plus ‘Providence’

Many analysts thought supermajor Royal Dutch Shell which was embroiled in a bidding war for London-listed Cove Energy for better parts of Q1 this year, would emerge out of its conservative shell and trump rival bids from Thailand’s PTTEP and a couple of interested parties from India outright.

In the end the deal was sealed by a conservative, albeit apparently successful, counter offer by Shell for the East Africa focussed E&P company. Having seen its offer for US$1.6 billion back in February trumped by PTTEP, the Anglo-Dutch major returned to the table with a bid of US$1.81 billion which matched rather than bettered the Thai state company’s offer.

On April 24, Cove’s directors accepted and recommended Shell's offer which the Oilholic thinks had much to do with Mozambique as a nation wanting Shell’s expertise as well as its investment. The possibility of a bid battle has now receded; more so as the agreement includes a break fee clause, under which Cove Energy will have to pay Shell US$18 million if it now accepts a rival bid.

An approval from the government of Mozambique is awaited as Shell eyes Cove’s main asset – an 8.5% stake in the Rovuma Offshore Area 1 in the country where Anadarko projects recoverable reserves of 30 tcf of natural gas. Shell as a company continues to be in good nick having recently announced a rise in Q1 profits while rival ExxonMobil saw its profits dip. On an annualised basis, Shell Q1 profits were up 11% at US$7.66 billion while in a strange coincidence Exxon’s profits fell 11% to US$9.45 billion. Both majors said oil prices would be ‘volatile’ in the coming months.

Talking about the luck of the Irish, London and Dublin listed Providence Resources’ quest for Black Gold off the coast of Ireland appears to be on song. The company, which dug Ireland’s first oil prospection well that might be anywhere near profitability, looks good for its 520pence plus share price on the AIM when the Oilholic last checked.

This accolade of Ireland’s first profitable oil well goes to Barryroe prospection field, some 70km off Cork, where a future full-scale extraction to the tune of nearly 4000 barrels per day – which makes a lot of commercial sense – is within relative touching distance. Providence Resources also holds drilling permits in Northern Ireland. Since Irish crude prospection has been riddled with disappointments, Providence deserves a pat on the back and its current share price for its effort.

Finally, the Oilholic is a bit miffed about being told by people that the UK now has the most expensive petrol price in the world, which it clearly does not. Yours truly knows that prices at the pump bite everyone, but we Brits aren’t the worst off.

However, to argue otherwise often results in farcically loud arguments especially with people who think the more inexpert they are, the more valid their opinion is! Thankfully, experts at Staveley Head – a provider of specialist insurance products – have some handy figures to back up the Oilholic which suggest that while UK is almost always on the list of the most expensive countries to buy petrol – it is not the most expensive (yet).

Click on their infographic - the Global Petrol Price Index (above right) - to compare the UK with the others. It would suggest that current price per litre is the highest in Norway, followed by Turkey, Netherlands, Italy and Greece. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Shell Gas Station © Royal Dutch Shell. Infographic: Global Petrol Price Index © Staveley Head.

Messrs Voser, Brafau & Tillerson in town

Three heads of IOCs were all under one roof here at the 20th WPC today and all had a fair bit to say. Starting with Tillerson, the chairman and chief executive officer of ExxonMobil told delegates the future growth in world energy demand is a cause for optimism because it will signal economic recovery and progress.

ExxonMobil is forecasting the global economy to more than double in size between 2010 and 2040, and during that time energy demand will grow by more than 30%.

“So the energy and economic challenges the world will face in the decades to come require a business and policy climate that enables investment, innovation and international cooperation. Sound policies and government leadership are critical. When governments perform their roles effectively, the results are extraordinary – bringing enormous benefits in terms of investment enterprise, economic growth and job creation,” Tillerson said.

“By understanding our strengths and proper roles in economic expansion, we can clarify our policy choices, fulfill our core responsibilities and open up economic opportunities for decades to come,” he continued.

Tillerson opined that citizens and consumers need to understand the importance of energy, the vital role it plays in economic and social development, and how sound policy supports responsible energy development and use. “The debates and discussions in society at large need to be informed by the facts and fundamental realities of the challenges before us,’’ he added.

Turning to his hosts, Tillerson said the state of Qatar is a leading example of what can be done when policies are in place to enable investment and innovation. He also feels the current economic challenges will not last forever.

“There is reason for optimism but it is more important than ever that we swiftly take on these challenges with a sound and principled response,” he said. “History proves that energy policies that are efficient and market-based are the best path to economic growth and technological progress,” he concluded.

In his keynote address to the Congress, Peter Voser, CEO, Royal Dutch Shell (pictured left) said a number of interesting things but for the Oilholic, his take on diversity of supply stood out. “Diversity of supply will play a role. Our scenarios team believes that renewable energy sources could supply up to 30% of global energy by 2050, compared with just over 10% today (for the most part traditional biofuel and hydro-electricity). That would be a massive achievement, given the enormous financial and technical hurdles facing new energy sources. But it will also mean that fossil fuels and nuclear will still account for around two-thirds of the world’s energy in 2050,” he told delegates.

Shell sees supply growth coming mostly come from OPEC countries, growing at an average of 2% out to 2030, with an important role for Iraq. “However, we don’t yet know whether the recent developments in the some countries in the Middle East and North Africa region will impact the longer-term picture for OPEC supplies,” Voser said.

Non-OPEC conventional crude supply has been relatively flat over the past years and is projected to remain so. “We will also need to unlock significant additional non-OPEC conventional resources. This could come from offshore Brazil, further growth in Africa, and places like Kazakhstan,” he continued.

Further resources could come from unconventional plays such as the Canadian Heavy oil deposits, light tight oil in North America and, of course, the Arctic offshore, whether in Alaska, Greenland, Norway, or Russia. Much of this will take many decades and huge investments to unlock according to Voser.

Satisfying rising demand will be expensive – the world must invest US$38 trillion on supply infrastructure in energy projects over the period of 2010-2035, according to the most recent IEA’s World Energy Outlook.

“This is significantly higher than past spend trends. That said, although large in absolute terms, this investment is relatively modest to the size of the world’s economy, amounting to about 2.5% of global GDP on average over the next 25 years,” the Shell CEO concluded.

Repsol YPF Chairman Antonio Brufau nailed his colours to the mast declaring his company was certain that there are abundant resources waiting to be discovered and incorporated into production, always with the most demanding environmental and safety standards.

“But we cannot allow that to make us complacent: we must not settle for just that. As I have said, it is imperative to move toward an energy model with a lower carbon intensity. The stability of the planet's climate is at stake, and it is our obligation to be part of the solution,” he added.

“That is part of a further-reaching change in mentality. We are in a global situation in which hundreds of millions of people make up the middle classes in "developing" countries (by the way, we should start changing the terminology, as I would say that, in general, they are already well developed), Brufau continued.

New energy means new ideas and new attitudes according to Brufau. The types of energy used up to now, such as fossil fuels, will need to coexist with the new forms energy, in a complementary balance that the Repsol Chairman said he had no doubt will evolve very quickly.

“I think that in this new situation it is best to put aside unshakable axioms and replace them with imagination and a capacity for innovation,” Brufau concluded. More later; keep reading, keep it ‘crude’!

© Gaurav Sharma 2011. Photo: Peter Voser, CEO, Royal Dutch Shell speaks at the 20th Petroleum Congress © Weber Shandwick, Dec 2011.

Hello Doha! Time for kick-off at 20th WPC

The Oilholic arrived in Doha late last night before the biggest bash in the oil & gas business kicks-off in Qatar – yup its 20th World Petroleum Congress! Sadly a very late arrival at the hotel meant, the first square meal was not a local delicacy – but a visit to Dunkin’ Donuts which was just about the only place open at 12:20 am local time. Still there’ll be plenty of opportunities to savour local delights over the next five days!

As the opening ceremony takes place later this evening, there is lots to discuss already following Shell’s announcement about its withdrawal from the Syrian market in wake of EU sanctions. Other oil companies are simply bound to follow suit. Syrian officials are expected to be in attendance but it is highly doubtful that the Oilholic would gain an attendance with them.

A few more bits before things get going, one hears that Fitch Ratings expects the credit profiles of the European oil majors to remain stable in 2012 despite the risk of a possible slowdown in revenue growth combined with still ambitious investment spending programmes of around US$90 billion over the following four quarters. The agency believes sector revenue growth in 2012 will probably slow to single digits from more than 20% in 2011, according to a new research note.

The Oilholic also had the pleasure of interviewing Eduardo de Cerqueira Leite, the chairman of (currently) the world’s largest law firm by revenue – Baker & McKenzie – on behalf of Infrastructure Journal. Leite does not believe the integrated model of combining upstream, downstream and midstream businesses is dead as far as major oil companies are concerned.

“We saw Marathon Oil Corp split off its refining business and know that ConocoPhillips is planning to do the same. By spinning off R&M infrastructure assets a company can focus on producing oil and gas, particularly in the more innovative areas of offshore oil exploration and unconventional oil and gas production,” he said.

“However, we are not seeing all of the majors spin off their R&M divisions. Many still have a need for refining expertise and processing plants due to the increasing development of liquefied natural gas, natural gas liquids and high-sulphur heavy crudes. So, I wouldn't call the integrated model dead, although we are seeing changes to it,” Leite concludes.

That’s it for now. Keep reading, keep it 'crude'!

© Gaurav Sharma 2011. Photo: Doha Skyline © WPC. Logo: 20th World Petroleum Congress © WPC.

Crude M&A activity, Majors' profits & more

As we approach the end of the year, the Oilholic is convinced that 2011 will see M&A activity in the oil & gas sector returning to, or perhaps even exceeding pre-crisis deal valuation levels. Research for Infrastructure Journal by this blogger suggests that while the year still has a little over two months left the deal valuation figure for acquisition of oil & gas infrastructure assets, using September 30th as a cut-off date, is well above the total valuation for 2008, the year that the global credit squeeze meaningfully constricted capital flows.

In fact, back in 2008, Infrastructure Journal noted 23 oil & gas M&A corporate finance transactions valued at US$19.33 billion. Deal valuation then declined to US$18.14 billion and US$16.70 billion in 2009 and 2010 while the number of transactions first fell to 19 and then rose to 32. In fact 2009 would have been a wretched year in relative terms, had it not been for a US$6.3 billion transaction concerning the acquisition of Stogit & Italgas. Big ticket deals were largely absent in 2010 and while the number of transactions rose, valuation declined. IJ analysts have so far noted 21 transactions and a deal valuation to the tune of US$27.11 billion (and counting) in 2011. (Click on graph to enlarge © Infrastructure Journal)

Michael Byrd, Houston-based partner at Baker & McKenzie feels that conditions for making an oil & gas asset acquisition are quite conducive, more so for upstream assets. “Opportunities exist in all three – Downstream, Midstream and Upstream projects, but in case of the latter, projects in remote offshore and onshore basins have become more economical due to new technologies and more favourable oil prices (long-term),” he said in recent webinar which makes for compelling listening, caveats and all, if asset acquisition is on your mind. You could possibly download a recording here.

Alternatively, Baker & McKenzie have another one of these webinars coming-up on November 16 under their Global Energy Webinar Series. This one would discuss the full cycle of tax planning and compliance issues around permanent establishments for major energy and power projects.

Moving away from IJ’s figures and Baker & McKenzie webinars, financial advisers Ernst & Young’s research on a related note suggests that increases in M&A of London-based AiM-listed oil & gas firms are to be expected following substantial falls in their market valuation.

The firm’s quarterly index shows the value of AiM-listed oil and gas companies fell 26% in the three months to September. The index has been in decline since the start of 2011. Additionally, fundraising by AiM-listed oil and gas companies totalled £168.7 million during the third quarter - a fall of 48% on the same quarter last year.

Jon Clark, oil & gas partner at Ernst & Young, said, "Those companies with weaker balance sheets and particularly those with development projects will be looking towards larger, better capitalised acquirers. The slowdown in the global economic recovery and the market turbulence created by issues including the US credit downgrade and the eurozone sovereign debt crisis will continue to turn investors off riskier assets. This doesn't bode well for the fourth quarter."

All-in-all, the remainder of 2011 would be a good time to swoop for an asset or even an entire mid-cap company. Concurrently, the oil majors are queuing up to announce decent profits. The third quarter’s current cost of supply net income at Shell doubled to US$7.2 billion, compared with US$3.5 billion during the same period a year ago. ExxonMobil saw its quarterly profits rise by 41% to US$10.3 billion.

Earlier in the week, BP said its operations were “regaining momentum” and that it had “turned a corner” reporting third quarter profits of US$5.14 billion, a near tripling of the US$1.85 billion replacement cost profit it made in the same period a year ago. The firm is also increasing its asset selling programme from US$30 billion to US$45 billion.

Meanwhile, the British Energy and Climate Change Select Committee of MPs has criticised the UK Treasury's move earlier this year to increase a levy on the oil & gas industry calling it an "opportunistic raid". On the back of recent good news from the North Sea – they said in a report that the way in which the £2 billion hike was announced may have undermined investor confidence.

The report notes: "If the (UK) government is serious about maximising production from the UK Continental Shelf (UKCS), it needs to consider the long-term impact of changes to the tax regime on investment. The evidence on the impact of 2006 increase in the supplementary tax charge on oil and gas production in the North Sea is inconclusive, but there is a clear need to sustain investor confidence by avoiding surprises, such as the further increase announced in the 2011 Budget. It is not sensible to make opportunistic raids on UKCS producers." Powerful stuff – well delivered!

Finally, in Thursday intraday trading the crude oil price registered a strong rebound of over 2%, accompanied by a rally in the equity markets following the positive vibes from the European leaders’ summit overnight where an agreement to raise the European rescue fund to €1 trillion was finally reached.

Sucden Financial research expects further gains in crude oil prices, as the market seems relieved after the European Summit. The stronger euro provides further support, while most commodity prices enjoying a strong rally. WTI crude oil has further upside potential toward US$95/$96 per barrel, while Brent oil might find modest resistance near the US$115 per barrel area, Sucden analysts note further.

© Gaurav Sharma 2011. Graph: Corporate Finance infrastructure M&A deals 2008-2011 (year to date) © Infrastructure Journal, October 10, 2011. Photo: Shell Gas Station © Royal Dutch Shell

IOC’s bonds, Dragon's shares & Shell’s spill

The Indian Oil Corporation Ltd (IOC) issued its much talked about bonds to the tune of US$500 million last week, with a 5.625% rate due in 2021 to fund ongoing and future domestic projects. Banking on the premise of burgeoning demand among other metrics, ratings agency Moody’s gave it a Baa3 rating with a stable outlook.

Through its 10 refineries with a combined capacity of 1.2 million barrels a day, IOC is India’s largest downstream company with a near 40% market share. While it is a publicly listed company, the Indian government owns 78.92% of it. From an Indian majority state-owned behemoth to a LSE-listed upstream company 51% owned by the government of the Emirate of Dubai – Dragon Oil – which was brought to the Oilholic’s attention recently.

Dragon’s share price is nowhere near its own 52-week high of 609p, but past few trading sessions following its H1 interim results have seen its price rise nearly 4% or 20p on average to about 490p in a decidedly bearish environment. (For the record, it is not the biggest LSE-listed riser of the day – that accolade goes to Heritage Oil but that’s a story for another day).

Question is do you buy it? Examining past performance seems to suggest so and Dragon has recorded a 25% average (gross) production growth for H1 2011. Furthermore, the upstream co has set itself a rather ambitious production growth target of 20% on an annualised basis for the year.

For 2011-2013, the company seeks to maintain target of average annual production growth in the range of 10% to 15%. Away from production projections and by force of habit the Oilholic always looks at the EPS which is up 125% year over year for the first half of this year. Additionally, it remains a takeover target for the majority owners (among others).

The Dragon’s central plank or prized asset is prospection in the Cheleken, an offshore Turkmen jurisdictional area in the eastern section of the Caspian Sea. This can be further narrowed down to an operational focus on the re-development of two oil-producing fields - Dzheitune (Lam) and Dzhygalybeg (Zhdanov).

On the ground Dragon looks promising; on paper it looks a shade one-dimensional. From an investor’s standpoint, that would make its shares a reasonable medium term investment. The Oilholic is always partial to the idea of going long; hence Dragon’s shares are appealing within reason.

Moving on to an offshore story of a grave kind, Royal Dutch Shell confirmed that a leak in a flow line leading to the Gannet Alpha oil platform, east of Aberdeen, Scotland, found on Wednesday is “under control with leakage considerably reduced.” According to local sources, a Remote-Operated Vehicle (ROV) has been deployed for inspection checks and to monitor the subsea leak.

Admittedly not much is coming out in terms of information, except for Shell’s claims that the oil would disperse naturally and not reach the UK coastline. The Oilholic finds the lack of information to be frustrating and sincerely hopes Shell is not doing a BP style “underestimation”. At this point there is no reason to believe that is the case.

Finally, both WTI and Brent are in the green up 1.83% and 1.31% in intraday at 15:15GMT. The bears are still in Crude town, but quite possibly taking a breather after last week’s mauling, or as Commerzbank analysts note, “Even if the short term trough appears to be reached, weak physical demand should keep oil prices in check.”

Update 16:45 GMT: Latest estimates from Shell’s press office suggest 216 tonnes or 1,300 barrels had been spilled.

Update 10:30 GMT, Aug 16: Shell says additional leakage has been discovered in the flow line beneath Gannet Alpha platform

© Gaurav Sharma 2011. Photo: Dzheitune Lam Platform B © Dragon Oil Plc.

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

North Sea murmurs, Q1 profits & Bin Laden

To begin with good riddance to Bin Laden! The tragedy of 9/11 still feels like yesterday. I can never forget that morning as a junior reporter watching the BBC when initial reports began trickling in and we were asked to vacate the Canary Wharf building I was at. Miles away across the pond a great tragedy was unfolding – this brings closure to the many who suffered, many known to me.

Being mechanical, there is a near negligible impact on the wider market or crude market despite brave efforts of the popular press to find connections. How markets fluctuated since morning has no direct connection with Bin Laden being killed and instability premium reflected in the price of crude remains untroubled. The threat of Al-Qaeda remains just as real in a geopolitical sense and a Middle Eastern context.

Moving away from today’s news, ratings agency Moody’s noted last week that sharply higher prices for oil and natural gas liquids have boosted business conditions for the independent exploration and production (E&P) industry, and should remain high well into 2012, offsetting persistently weak natural gas prices. In the same week, ExxonMobil and Royal Dutch Shell reported appreciable rises in Q1 profits.

ExxonMobil posted quarterly profits of US$10.7 billion, up 69% over the corresponding quarter last year. It also announced a spend of US$7.8 billion over the quarter on developing new energy supplies and said its shareholders had benefited to the tune of US$7 billion in Q1 dividends.

Shell for its part reported quarterly profits of US$6.9 billion on a current cost of supply basis, up 41% on an annualised basis. It said cost saving measures as well as higher oil prices had contributed to its Q1 profitability. Earlier, BP reported first quarter profits of US$5.5 billion, down marginally from the corresponding period last year. Its production over the quarter was also down 11% after asset sales to help pay for the cost of Macondo clean-up.

Finally, unhappy murmurs about rising taxation amid the North Sea oil & gas producers are growing. In his Budget tabled in March, UK Chancellor George Osborne raised supplementary tax on production from 20% to 32%. Reports in the British media this morning suggest the owner of British Gas Centrica says it might shut one of its major gas fields because of increased UK taxes. It is closing three fields in Morecambe Bay for a month of maintenance, may not reopen one of them.

A fortnight ago, Chevron warned of possible "unintended consequences" from the UK Budget decision to raise North Sea taxes. Its Chairman John Watson told the Financial Times, “When you increase taxes every few years, particularly without consulting with industry, there will be unintended consequences of that in terms of where we choose to invest."

In 2010, Chevron received UK government’s permission to drill an exploration well to evaluate a major prospect - the deep-water Lagavulin prospect - is 160 miles north of Shetland Islands. All this comes after a report published on April 8th by Deloitte’s Petroleum Services Group noted that North Sea offshore drilling activity fell 25% over Q1 2011.

The North West Europe Review, which documents drilling and licensing in the UK Continental Shelf (UKCS), reveals just five exploration and four appraisal wells were spudded in the UK sector between January 1 and March 31; compared to a total of 12 during the fourth quarter of 2010.

Analysts at Deloitte’s Petroleum Services Group said while the drop cannot be attributed to the recent Budget announcement, which proposed increased tax rates for oil and gas companies, it could set the pattern for activity in the future.

Graham Sadler, managing director of Deloitte’s Petroleum Services Group said, “It is important to clarify that we are talking about a relatively small number of wells that were drilled during the first quarter of the year - the traditionally quieter winter months - so this is not, in itself, an unexpected decrease. The lead-in time on drilling planning cycles can be long – even up to several years - so any impact from the recent changes to fiscal terms are unlikely to be seen until much later in the year.”

“What is clear is that despite the decrease in drilling activity towards the end of last year, and during the first months of 2011, the outlook for exploration and appraisal activity in the North Sea appeared positive. The oil price continued to rise and there were indications that this, combined with earlier UK government tax incentives, was encouraging companies to return to their pre-recession strategies. Since the Budget, a number of companies have announced that they intend to put appraisal and development projects on hold and we will have to wait to see the full effect of this change on North Sea activity levels over the coming months,” he concluded.

Deloitte’s review shows that the Central North Sea has seen the highest level of drilling activity, with the region representing 55% of all exploration and appraisal wells spudded on the UKCS during the first quarter of this year.

It also showed that the price of Brent Crude oil has experienced sustained growth throughout the period, rising 20% between December 2010 and March 2011 to a monthly average of US$114.38. This increase in price is a continuation of a trend that started in 2010, however, so far this year, the rate and pattern of growth has been much more constant with regular increases rather than the rise and dip pattern seen during 2010.

© Gaurav Sharma 2011. Photo: ExxonMobil plaque outside its building, Houston, Texas, USA © Gaurav Sharma, March 2011

Shell Divests, BP Invests and Libya Implodes!

Earlier on Monday, oil giant Shell announced its intentions to sell most of its African downstream businesses to Swiss group Vitol and Helios Investment Partners for US$1 billion adding that it will create two new joint ventures under the proposed deal.

The first of these JVs will own and operate Shell's existing oil products, distribution and retailing businesses in 14 African countries, most notably in Egypt, Morocco, Kenya, Uganda and Madagascar.

The second JV will own and operate Shell's existing lubricants blending plants in seven countries. The move is in line with Shell’s policy of divesting its non-core assets. It sold US$7 billion of non-core assets in 2010. While Shell was divesting in Africa, BP was investing in India via a strategic oil & gas partnership with Reliance Industries.

Both companies will form a 50:50 joint venture for sourcing and marketing hydrocarbons in India. The agreement will give BP a 30% stake in 23 oil and gas blocks owned by Reliance including 19 off the east coast of India. Market feedback suggests the deal is heavily weighted towards gas rather than the crude stuff.

In return for the stake, BP will invest US$7.2 billion in the venture and a further US$1.8 billion in future performance-related investments. The combined capital costs are slated to be in the region of US$20 billon with local media already branding it as the largest foreign direct investment deal in India by a foreign company.

Switching focus to the Middle Eastern unrest, what is happening from Morocco to Bahrain is having a massive bearing on the instability premium factoring in to the price of crude. However, the impact of each country’s regional upheaval on the crude price is not uniform. I summarise it as follows based on the perceived oil endowment (or the lack of it) for each country:

• Morocco (negligible)
• Algeria (marginal)
• Egypt (marginal)
• Iran (difficult to gauge at the moment)
• Tunisia (negligible)
• Bahrain (marginal)
• Libya (substantial)

Of these, it is obvious to the wider market that what is happening in Libya is one of concern. More so as the unrest has become unruly and the future may well be uncertain as the OPEC member country accounts for around 2% of the daily global crude production.

Italian and French oil companies with historic ties to the region are among those most vulnerable, though having said so BP also has substantial assets there. Austria’s OMV and Norway’s Statoil are other notable operators in Libya. A bigger worry could be if Iran erupts in a similar unruly way. Given the international sanctions against Iran, oil majors are not as involved there as they are in Libya. However, the question Iran’s crude oil endowment and its impact on the oil markets is an entirely different matter.

Finally, the ICE Brent crude forward month futures contract stood at US$108.25 per barrel, up 5.6% in intraday trading last time checked. I feel there is at least US$10 worth of instability premium in there, although one city source reckons it could be as high as US$15. The "What if" side analysts (as I call them) are having a field day - having already moved their focus from Iran to Saudi Arabia.

© Gaurav Sharma 2011. Photo: Vintage Shell gasoline pump, Ghirardelli Square, San Francisco, California, USA © Gaurav Sharma, March 2010

Some Crude Chatter from Moody’s & Other Stuff

There’s been some interesting chatter from Moody’s these past seven days on all things crude. Some of these stood out for me. Early last week in a note to clients, the rating agency opined that CNOOC Ltd's Aa3 issuer and senior unsecured ratings would not be immediately affected by the Chinese company's additional equity investment of US$2.47 billion in its 50% joint-venture Bridas Corp.

The investment represents CNOOC's share of funding contributions for Bridas to purchase a remaining 60% interest in Pan American Energy, which is engaged in E&P ops in South America. Bridas plans to fund 70% of its purchase by equity and 30% by debt or additional contributions from shareholders.

CNOOC is funding its equity contribution to Bridas with internal resources on hand. The transaction would give it an additional 429 million BOE of proved reserves and 68,000 bpd daily production in South America, according to Moody’s. Completion of the transaction is expected to take place during H1 2011, that’s of course government and regulatory approvals pending.

However, the crude chatter of the week not just from Moody's, but from the entire market was the agency’s interesting analytical take on oil sands producers’ operating considerations. In a report titled – Analytical Considerations for Oil Sands Producers – the agency notes that while comparing oil sands development and production projects to conventional development and production projects, the former have much larger upfront development costs[1].

Such projects are more likely to incur construction cost overruns, and quite simply take much longer to reach breakeven cash flow. Other features include higher cash operating costs per barrel of oil equivalent, very long reserve life and low maintenance capital expenditures once in production, particularly of mining oil sands operations, the report said.

One might say that parts of the report are predictable but it must be noted that in analysing companies with relatively large oil sands exposure, Moody's balances the negative aspects of the difficult construction period against the anticipated long-term positive contributions from these assets. So well, on balance, I found the principal tenets to be very convincing.

Let us face it, whether peak oil will be here soon or not, “easy oil” (interchangeable with cheap oil) is most certainly gone. Cost overruns are unlikely to deter big oil. So far Shell has invested just under US$10 billion (River Oil Sands), Chevron US$9 billion (Athabasca), ExxonMobil US$5 billion (Kearl Oil sands investment) and BP is said to be catching up via its Sunrise oil sands investment.

Elsewhere, Desire Petroleum’s saga of will they find oil in the Falklands Is. or won't they or worse still when will they give up continues. Its share price saw wild swings and ended in a damp squib (haven’t we heard that before).

On the left, for the umpteenth time, here is Desire’s undesirable share chart (see the day's price nose-dive). To quote The Daily Mail’s inimitable Geoff Foster, “Many professional punters are gluttons for punishment. They continually get suckered into seat-of-your pants oil stocks and more often than not, live to regret it.”

I do not wish to tempt fate, but Desire Petroleum is no Cairn Energy. I do hope for Desire's sake that they do strike black gold in meaningful if not bountiful quantities. However, the market response to a whiff of positive news is nothing short of barmy.

[1] The report is available on Moody's web site.

© Gaurav Sharma 2010. Photo: Oil Sands, Canada © Shell, Graphic: Desire Petroleum Share Chart with stated time frame © Digital Look / BBC

Nigeria is a Crude Spot with Crude Oil, Says Peel

Nigeria is a complicated country - a confused ex-colonial outpost with a complex ethnic and tribal mix turned into a unified nation and given its independence by the British some five decades ago. Having crude oil in abundance complicates things even further.

Some say the history of crude oil extraction has a dark and seedy side; most say nowhere is it more glaringly visible than in Nigeria. On the back of having interviewed Nigeria's petroleum minister - Diezani Kogbeni Alison-Madueke for Infrastructure Journal, I recently read a candid book on the country titled - A Swamp Full of Dollars: Pipelines and Paramilitaries at Nigeria's Oil Frontier written by Michael Peel, a former FT journalist, who spent many-a-year in Nigeria. He presents a warts n' all account about this most chaotic and often fascinating of African countries shaped by oil, driven by oil and in more ways than one - held to ransom by oil.

The author dwells on how the discovery of black gold has not been quite the bonanza for its peoples who remain among the poorest and most deprived in this world. End result is growing dissent and chaos - something which was glaringly visible between 2006-2009 when the oil rich Niger Delta went up in flames.

Peel's book is split into three parts, comprising of nine chapters, containing a firsthand and first rate narration of the violence, confusion, partial anarchy and corruption in Nigeria where its people who deserve better have to contend with depravity and pollution. Some have risen up and abide by their own rule - the rule of force, rather than the law.

If you seek insight into this complex country, Peel provides it. If you seek a travel guide - this is one candid book. If you seek info on what went wrong in Nigeria from a socioeconomic standpoint, the author duly obliges. Hence, this multifaceted work, for which Peel deserves top marks, is a much needed book.

I feel it addresses an information gap about a young nation, its serious challenges, addiction to its oil endowment and the sense of injustice the crude stuff creates for those who observe the oil bonanza from a distance but cannot get their hands into the cookie jar.

Peel notes that the chaos of Niger delta is as much a story of colonial misadventure, as it is about corporate mismanagement, corruption in the bureaucracy and a peculiar and often misplaced sense of entitlement that creates friction between the country's haves and have nots.

Drop into the mix, an unfolding ecological disaster and you get a swamp full of dollars whose inhabitants range from impromptu militias with creative names to Shell, from terrorists to ExxonMobil, from leaking pipelines to illegal crude sales.

© Gaurav Sharma 2010. Book Cover © I.B. Tauris

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

OPEC 'Comfortable' with Oil Prices

OPEC appears to be comfortable with the current price of oil, presently trading at US$ 75+ per barrel, according to the cartel’s Secretary General Abdalla Salem El-Badri.

Speaking to journalists, prior to a meeting with European Union representatives, he said, “Current prices are comfortable. I don't see any change in the production; I don't see any meeting coming before the set-up meeting in October (viz. 14)."

El-Badri added there was plenty of oil in the supply chain and that and discipline was needed among OPEC member countries when it came to compliance with production quotas. He felt compliance was recently around 53%, and said he doesn't see the level falling below that.

His comments, while noteworthy, hardly come as a surprise. The OPEC secretary general also said that oil giant BP was “too big” to be pushed to a Chapter 11 bankruptcy in the US following the Gulf of Mexico oil spill which is yet to be plugged. However, he added that the oil spill may impact crude prices in the long-term if regulation becomes too strict and projects get cancelled or delayed.

On the sidelines of El-Badri’s arrival in Brussels, news emerged that energy giant Total has stopped petrol deliveries to Iran, bowing to pressure over Iran's nuclear programme. A spokeswoman for Total confirmed the move on Monday evening after the US Congress had earlier proposed unilateral sanctions that could punish companies doing business with Iran.

Additionally, Reuters reported that Repsol had withdrawn from a contract it won with Royal Dutch Shell to develop the South Pars gas field in southern Iran. Despite, being a leading member of OPEC and a major oil exporting country Iran suffers from a severe lack of refinery capacity and depends on petrol imports for over 30% of its domestic consumption according to industry estimates.

© Gaurav Sharma 2010. File Photo © Gaurav Sharma 2008 - OPEC Secretary General Abdalla Salem El-Badri (right) with Former OPEC President Chakib Khelil (left)

Shell Q1 2010 Profits up 49%

Following on from BP’s bumper profit announcement on Tuesday, Royal Dutch Shell declared a quarterly profits rise of nearly 50% today. In a corporate announcement, the oil giant said profits for the first quarter of the year came in at $4.9 billion; a 49% appreciation on profit noted over the corresponding quarter of 2009.

A marked improvement in the price of crude, despite current wobbles, meant Q1 2010 profit was also well above the $1.2 billion profit figure noted over Q4 2009. In a statement, Shell chief executive Peter Voser said improved first quarter profits were "driven largely by our own actions," which included new explorations and organic production growth.

Looking ahead, Voser said, "So far in 2010, oil prices have remained firm, and demand for petrochemicals has increased, but refining margins, oil products demand and spot gas prices all remain under pressure. Although there are signs of an improving economic outlook, we are not relying on it."

It goes without saying that the average crude oil price of $75 per barrel seen this year has helped Shell as well as its peers, for it is a far cry from an average price of $41 per barrel seen in wake of the global financial crisis. Furthermore, Voser himself said last month that the era of cheap oil was over. Question is how expensive will it be in the short-term?

© Gaurav Sharma 2010. Photo Courtesy © Royal Dutch Shell

Adios Cheap Oil, Says Shell's CEO

As the crude oil price lurks around its 52-week high of $83.25 a barrel, one cannot but help thinking about what CEO of Royal Dutch Shell Peter Voser said earlier this month. Speaking at the Wall Street Journal’s ECO:nomics conference in California on March 4, Voser told delegates, "I think what is dead is cheap oil. There is sufficient oil around but producers will have to spend more to get it. And I think you'll see that in the end price for consumers."

Debunking the “Peak Oil” hypothesis, Voser said that by 2050 around 40% of cars worldwide will be electric leaving some two-thirds still running on oil. “We will need conventional oil for the foreseeable future,” he added.

Oil futures gained over 2% last week, on the back of positive U.S. jobs data and healthy market feedback on Chinese and Indian economic growth. According to an investors note sent out to clients, analysts at Commerzbank AG believe the price of oil could exceed the current trading circa of $70 to $82 a barrel.

Earlier today, the crude contract for April delivery rose to an intraday high of $82.47 a barrel on the NYMEX before being tempered by a rising U.S. dollar, with the ongoing Greek debt tragedy continuing to weigh on the Euro. At 17:15 GMT, NYMEX crude contract for April delivery was up 10 cents or 0.12% at $81.51 a barrel. Concurrently, London Brent crude contract was trading at $80.35 up 11 cents or 0.14%.

Classic problem for forecasters is that direction of the economy and currency fluctuation aside, ETFs have more or less converted investing in commodities into a pseudo asset class. Hence, retail investors could de facto bet on commodities consumption patterns of emerging economies by investing (or divesting) in commodities, especially oil, via ETFs.

Oil has always been the vanguard of the commodities bubble. Excluding, London and Singapore markets, in 2003, ratio of paper barrels traded to physical barrels traded on NYMEX stood at 6:1. By 2008, the figure had risen to 19:1 and continues to rise, according to industry sources. Now imagine adding London and Singapore markets to the ratios?

It is a no-brainer that anyone who holds a paper barrel hopes to profit from it and few have any intention whatsoever of ever taking an actual delivery of oil. I feel it is prudent to mention that I am not joining the “Hate Speculators Club”. While supply and demand scenarios should (and in most cases do) dictate market movements, there’s more than one reason why cheap oil’s dead.

© Gaurav Sharma 2010. Photo Courtesy © Royal Dutch Shell

Oil Giants' Crude Quarter has a Common Theme

The last quarter was very ‘crude’ for the oil industry’s books. Fourth quarter results of three oil majors – namely Royal Dutch Shell, BP and Exxon Mobil make-up for some interesting reading with one common theme. Beginning with Exxon Mobil, the American oil behemoth reported on February 1st, 2010 that its fourth quarter profit dipped 23%. The decline meant it made a net profit of $6.05 billion over Q4 2009, compared to a $7.82 billion profit noted over the corresponding period last year. For the whole of 2009, Exxon's profit stood at $19.3 billion, less than half of what it made in 2008, and the lowest in seven years.

Then on February 2nd, BP said its Q4 2009 profits were up 33% to $3.45 billion. However, its annual profit was down 45% with the replacement cost profit at $13.96 billion compared to $25.59 billion in 2008. Two days later, on February 4th, Royal Dutch Shell’s profits for Q4 2009 came in at $1.2 billion, down by a whopping 75% from the $4.8 billion the Anglo-Dutch oil giant made over the corresponding quarter last year.

For the whole of 2009, Shell made a dwarfed $9.8 billion in profits, compared to $31.4 billion it made in profits over 2008. All three oil majors found common ground in suggesting that a global slump in demand courtesy of the economic climate and a dip in oil prices were to be blamed for their relatively poor set(s) of quarterly results. All three, in addition to many of their industry peers, added that the outlook for 2010 was uncertain.

In the midst of all this, OPEC secretary general Abdalla Salem El-Badri told the BBC that its members’ compliance with set production targets fell to 55-56% in January compared to 80% noted over the corresponding month last year. He described the development as "worrying".

El-Badri further said, "The risk is you see a lot of oil in the market and no one is buying it. Then the price will come down." At its last meeting in Angola on December 22nd (2009), OPEC held output at 24.84 million barrels per day.

OPEC and oil companies seem to bring up the word “uncertain” with some degree of conviction these days, more so because forecasting consumption patterns is proving to be mighty hard. Chinese and Indian consumption patterns and sluggish recovery in the West complicates drawing an overall global picture even further.

As for the prevailing price of black gold, NYMEX crude contract for March settlement was up 79 cents, or 1.10% trading at $72.67 a barrel and in the circa of $71.32 to $73.04 per barrel at 15:04 GMT. The corresponding Brent crude contract was up 87 cents, or 1.27 %, to $69.98 a barrel, trading in the circa of $69.61 to $71.30 in London. Overall, it’s still a far cry from a $147 per barrel price of July 2008. Many wonder for how long, but for very different reasons.

© Gaurav Sharma 2010. Photo Courtesy © Cairn Energy Plc