Showing posts with label UK 2013 Budget. Show all posts
Showing posts with label UK 2013 Budget. Show all posts

Friday, October 11, 2013

North Sea & the 'crude' mood in Aberdeen

The Oilholic spent the wee hours of this morning counting the number of North Sea operational support ships docked in Aberdeen Harbour. Interestingly enough, of the nine in the harbour, six were on the Norwegian ships register.

Whether you examine offshore oil & gas activity in the Norwegian sector of the North Sea or the British sector, there is a sense here that the industry is enjoying something of a mini revival if not a full blown renaissance. As production peaked in the late 1990s, empirical evidence that oil majors had begun looking elsewhere for better yields started emerging. Some even openly claimed they’d given up.

Over a decade later, with new extraction techniques and enhanced hydrocarbon recovery mechanisms in vogue – a different set of players have arrived in town from Abu Dhabi National Energy Company (TAQA) to Austria's OMV, from Canada's Talisman Energy to China's Sinopec. Oil recovery from mature fields is now the talk of the town.

Even the old hands at BP, Shell and Statoil – who have divested portions of their North Sea holdings – seem to be optimistic. The reason can be found in the three figure price of Brent! Most commentators the Oilholic has spoken to here, including energy economists, taxation experts, financiers and one roughneck [with 27 years of experience under his belt] are firmly of the view that a US$100 per barrel price or above supports the current level of investment in mature fields.

One contact remarks that the ongoing prospection and work on mature fields can even take an oil price dip to around $90-level. "However, anything below that would make a few project directors nervous. Nonetheless, the connect with between Brent price fluctuation and long term planning is not as linear as is the case between investment in Canadian oil sands projects and the Western Canadian Select (WSC) price."      

To put some context, the WSC was trading at a $30 per barrel discount to the WTI last time yours truly checked. Concurrently, Brent's premium to the WTI, though well below historic highs, is just shy of $10 per barrel. Another contact, who retains faith in the revival of the North Sea hypothesis, says it also bottles down to the UK's growing demand for natural gas.

"It's what'll keep West of Shetland prospection hot. Furthermore, and despite concern about capacity constraints, sound infrastructural support is there in the shape of the West of Shetland Pipeline (WOSP) which transports natural gas from three offshore fields in the area to Sullom Voe Terminal [operated by BP]."

While further hydrocarbon discoveries have been made atop what's already onstream, they are not yet in the process of being developed. That's partially down to prohibitive costs and partially down to concerns about WOSP's capacity. However, that's not dampening the enthusiasm in Aberdeen.

Five years ago, many predicted a rig and infrastructure decommissioning bonanza to be a revenue generator and become a thriving industry itself. "But enhanced oil recovery schemes keep pushing this 'bonanza' back for another day. This in itself bears testimony to what's afoot here," says one contact.

UK Chancellor George Osborne also appears to be listening. In his budget speech on March 20, he said that the government would enter into contracts with companies in the sector to provide "certainty" over tax relief measures. That has certainly cheered industry players in Aberdeen as well the lobby group Oil & Gas UK.

"The move by the Chancellor gives companies the certainty they need over the tax treatment of decommissioning. At no cost to the government, it will speed up asset sales and free up capital for companies to use for investment, extending the productive life of the UK Continental Shelf," a spokesperson says, echoing what many here have opined.

Osborne's budget speech also had one 'non-crude' bit of good news for the region. The Chancellor revealed that one of the two bidders for the UK government's £1 billion support programme for Carbon Capture and Storage (CC&S) is the Peterhead Project here in Aberdeenshire. Overall, the industry sounds optimistic, just don't mention the 'R-word'. Scotland is due to hold a referendum on September 18, 2014 on whether it wants to be independent or remain part of the United Kingdom.

Hardly any contact in a position of authority wants to express his/her opinion on record with the description of political 'hot potato' attributed to the referendum issue by many. The response perhaps is understandable. It's an issue that is dividing colleagues and workforces throughout the length and breadth of Scotland.

General consensus among commentators seems to be that the industry would be better off in a 'United' Kingdom. However, even it were to become a 'Disunited' Kingdom come September 2014, industry veterans believe the global nature of the oil & gas business and the craving for hydrocarbons would imply that the sector itself need not be spooked too much about the result. National opinion polls suggest that most Scots currently prefer a United Kingdom, but also that a huge swathe of the population is as yet undecided and could be swayed either way.

In a bid to conduct an unscientific yet spirited opinion poll of unknown people since known ones were unwilling, the Oilholic quizzed three taxi drivers around town and four bus drivers at Union Square. Result – two were in the 'Yes to independence' camp, four were in the 'No' camp and one said he'd just about had enough of the 'ruddy question' being everywhere from newspapers to radio talk shows, to a stranger like yours truly asking him and that he couldn't give a damn!

Moving away from the politics and the projects to the crude oil price itself, where black gold has had quite a fortnight in the wake of a US political stalemate with regard to the country's debt ceiling. Nervousness about the shenanigans on Capitol Hill and the highest level of US crude oil inventories in a while have pushed WTI’s discount to Brent to its widest in nearly three months by this blogger's estimate.

Should the unthinkable happen and the political stalemate over the US debt ceiling not get resolved, it is the Oilholic's considered viewpoint that Brent is likely to receive much more support at $100-level than the WTI, should bearish trends grip the global commodities market. This blogger has maintained for a while that the WTI price still includes undue froth in any case, thereby making it much more vulnerable to bearish sentiment. 

Just one final footnote, before calling it a day and sampling something brewed in Scotland – according to a recent note put out by the Worldwatch Institute, the global commodity 'supercycle' slowed down in 2012. In its latest Vital Signs Online trends report, the institute noted that global commodity prices dropped by 6% in 2012, a marked change from the dizzying growth during the commodities supercycle of 2002-12, when prices surged an average of 9.5% per annum, or 150% over the stated 10-year period.

Worldwatch Institute says that during the supercycle, the financial sector took advantage of the changing landscape, and the commodities market went from being "little more than a banking service as an input to trading" to a full-fledged asset class; an event that some would choose to describe as "assetization of commodities" and that most certainly includes black gold. Supercycle or not, there is no disguising the fact that large investment banks participate in both financial as well as commercial aspects of commodities trading (and will continue to do so).

Worldwatch Institute notes that at the turn of the century, total commodity assets under management came to just over $10 billion. By 2008 that number had increased to $160 billion, although $57 billion of that left the market that year during the global financial crisis. The decline was short-lived, however, and by the end of the third quarter in 2012, the total commodity assets under management had reached a staggering $439 billion.

Oil averaged $105 per barrel last year and a slowdown in overall commodity price growth was indeed notable, but Worldwatch Institute says it is still not clear if the so-called supercycle is completely over. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2013. Photo 1: North Sea support ships in Aberdeen Harbour. Photo 2: City Plaque near ferry terminal, Aberdeen, Scotland © Gaurav Sharma, October 2013.

Friday, March 22, 2013

By ‘George’! In shale we (Brits) trust?

Delivering his 2013 budget speech on March 20, UK Chancellor of the Exchequer George Osborne told a boisterous bunch of British parliamentarians that "shale gas is part of the future and we will make it happen."
 
He added that the government will publish guidelines by June which would set out how local communities could benefit from “their” unconventional gas resources. The UK lifted a temporary moratorium on shale gas fracking in December 2012 after much procrastination.
 
At the time, it was announced that the government would establish a new Office for Unconventional Gas with an emphasis on shale gas and coal-bed methane and the role they could play in meeting the country's energy demand. If anyone doubted the UK government’s intent when it comes to shale prospection, this is your answer. Sadly, intent alone will not trigger a shale revolution.
 
The Oilholic has always maintained that a swift British replication, or for that matter a wider European replication, of a US fracking heaven is unlikely and not just because there isn’t a one size fits all model to employ.
 
The shale bonanza stateside is no geological fluke; rather it bottles down to a combination of geology, tenacity and inventiveness. Add to that a less dense population than the British Isles, a largely conducive legislative and environmental framework, and a far superior pipeline network and access equation.
 
Furthermore, as Chatham House fellow Prof. Paul Stevens pointed out last week, “The American shale revolution got where it is today through massive investment, commitment towards research and development and over two decades of perseverance. I don’t see that level of commitment here.” Neither does the Oilholic.
 
Agreeing with Stevens is Dr. Tim Fox, head of energy and environment at the UK Institution of Mechanical Engineers, who opined that it was important for government not to see shale gas as the “silver bullet many claim it is”.
 
“Shale gas is unlikely to impact greatly on energy prices in the UK and we must avoid becoming hostage to volatile gas markets by not being over-reliant on gas,” he added.
 
Well at least the Chancellor is trying to do something and you can’t beat a man down for that. Especially as that is not the only thing he’s trying on the energy front. Addressing the subject of decommissioning in the North Sea, Osborne said the government would enter into contracts with companies in the sector operating in the offshore region to provide "certainty" over tax relief measures.
 
The proposals are also designed to allow the tax effect of decommissioning costs to be sufficiently certain to allow companies to move to a post tax calculation in field security agreements. Andrew Lister, energy tax partner at KPMG, notes, "With hundreds of such agreements in the North Sea it will take many months to understand whether the proposals have had the desired result of freeing up capital and making late life assets more attractive for new investors."
 
"Nonetheless, the oil & gas industry in the North Sea – having endured the shock tax announced in the Budget two years ago – will welcome the announcements on decommissioning certainty, which should support extraction of the UK’s precious oil resources to the tune of billions. Certainty on tax relief for decommissioning costs will encourage companies to invest in the North Sea as the proposals should provide the assurance companies have been wanting on the availability of tax deductions," he added.
 
Osborne also revealed the two successful bidders for the government’s £1 billion support for Carbon Capture and Storage (CC&S) projects as – the Peterhead Project in Aberdeenshire and the White Rose Project in Yorkshire. Away from the direct fiscal measures, one particular move made by the Chancellor also has implications for the energy sector.
 
He pledged to abolish the stamp duty levied on small company shares traded on markets such as the London Stock Exchange's AiM, to end what he described as a "perceived bias" in the tax system "favouring debt financing over equity investment". You could hear the cheers in the City within minutes of the announcement.
 
The London Stock Exchange, for its part, described the move as a “bold and decisive growth-orientated policy…” to which the Oilholic would add, “a policy that would improve the take-up of shares in small independent oil & gas upstarts who often list on the AiM.”
 
Finally, moving away from the UK budget, but sticking with Parliament, the Oilholic recently had the pleasure of meeting and interviewing Margaret Hodge MP, chair of the UK public accounts committee, for CFO World (for the full interview click here). This veteran parliamentarian has taken upon herself and her committee to make the issue of corporate tax avoidance a mainstream subject in the UK.
 
Ever since it emerged last year that the likes of Starbucks, Amazon and many others were employing aggressive tax avoidance schemes to mitigate their British tax exposure, Hodge has been on the case. They quipped "we’re not doing anything illegal", she famously quipped back, "we’re not accusing you of being illegal; we’re accusing you of being immoral!"
 
End result, we’ve got everyone from the OECD to the G8 discussing corporate tax avoidance. And oh – Starbucks are 'voluntarily' paying more tax in the UK too! That’s all for the moment folks! Keep reading, keep it ‘crude’! 
 
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© Gaurav Sharma 2013. Photo 1: Big Ben and the Houses of Parliament, London, UK © Gaurav Sharma. Photo 2: Margaret Hodge MP, chair of the UK public accounts committee (left) with the Oilholic (right) © Gaurav Sharma.

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