BP breathes a sigh; but end of legal woes not nigh!

It has been a crudely British fortnight in terms of Black Gold related news, none more so than BP’s announcement – on March 3 – that it has reached a settlement of US$7.8 billion with the Plaintiffs' Steering Committee (PSC) for civil charges related to the 201 Macondo oil spill in the Gulf of Mexico.

The settlement amount is at the upper end of market conjecture and certainly well above conservative estimates. However, it does not mean that the US government is going to in any way, shape or form, let up on BP – especially in an election year. Everyone knows that, especially BP. However for a second time, the trial case brought against it will have to be delayed as the US Judge in the case – Carl Barbier – noted the settlement would lead to a “realignment of the parties in this litigation and require substantial changes to the current Phase I trial plan, and in order to allow the parties to reassess their respective positions.”

The US government maintains that the US$7.8 billion deal does not address "significant damages" to the environment but PSC-BP agreement is expected to benefit regional 100,000 fishermen, local residents and clean-up workers who suffered following the spill.

BP says it expects the money to come from a US$20 billion compensation fund it had previously set aside and the response of the wider market and ratings agencies to the settlement has been positive. While reaffirming BP’s long term Issuer Default Rating (IDR) at ‘A’, Fitch Ratings notes that BP has adequate financial resources to meet its remaining oil spill related obligations currently estimated by the agency at US$20 billion between 2012 and 2014.

This figure includes the remainder of BP's provisioned costs of US$10.6 billion and approximately US$10 billion of Fitch assumed additional litigation related payments, excluding potential fines for gross negligence. As of end-December 2011, BP had adequate financial resources to meet this obligation with US$14.1 billion of ‘on balance sheet’ cash and US$6.9 billion of undrawn committed stand-by and revolving credit lines. Additionally, the company plans to dispose of assets for about US$18 billion by end-2013 within its US$38 billion asset disposal programme.

Fitch Ratings estimates BP's total Gulf of Mexico spill related payments, net of partner recoveries, will range between US$45 billion and US$50 billion assuming BP was not grossly negligent. BP's cash outflow related to the Gulf of Mexico oil spill amounted to US$26.6 billion by end-2011, net of partner recoveries.

S&P also views the settlement as “somewhat supportive” for its ‘A/A-1/Stable’ ratings on BP and consistent with the agency’s base-case assumptions. “This is because the settlement addresses some material litigation and payment uncertainties, and because we understand that the plaintiffs cannot pursue further punitive damages against BP as a condition of the settlement,” it says.

BP has not admitted liability and still faces other legal claims at State and Federal level. Nonetheless, while the settlement is credit supportive, market commentators in City feel the uncertainty related to the total oil spill liability is not ending any time soon. The Oilholic feels an investigation by US Department of Justice against BP into the oil spill incident encompassing possible violations of US civil or criminal laws could be a potential banana skin as no love has been lost between the two. With several cases still ongoing, a settlement with PSC was a first of many legal hurdles for BP; albeit an important one.

Away from the legal wrangles of “British Petroleum” as US politicians love to call it, Brits themselves had to contend with a record high price of petrol at the pump this week – an average gas station forecourt quote of 137.3 pence per litre on March 5, according to the UK Department of Energy and Climate Change (DECC). The previous record of 137.05p was set on May 9, 2011. However, private research by Experian Catalist says the high is a little “higher” at 137.44p per litre.

And if you thought, the Oilholic’s diesel-powered readership was faring any better, the diesel price is hit a record high of 144.7p per litre, up 0.8p from the previous UK record, which was set the week before! As if that wasn’t enough – the country’s (Markit/CIPS) Purchasing Managers' Index (PMI) for manufacturing slipped to 51.2 in February, down from 52 in January with analysts blaming the high cost oil for manufacturers which rose at the fastest rate in 19 years. It presents another serious quandary for UK Chancellor George Osborne who’s due to table his government’s Union budget on March 21st.

From the price of the refined stuff at British gas station forecourts to the price of a barrel of the crude stuff on the futures market – which saw Brent resisting the US$125 level and WTI resisting the US$106 level for the forward month contract. Myrto Sokou, analyst at Sucden Financial, reckons stronger US economic data brought back risk appetite and improved sentiment this week.

Greece is going to be a main focus for the market with hopes of a positive result on its debt bailout, Sokou adds, but amid renewed rumours whether it would be better for the country to leave the Euro. Cautious optimism is ‘crudely’ warranted indeed.

Elsewhere, the Indian government's attempt divest a 5% stake in one of its NOCs – the Oil and Natural Gas Corporation (ONGC) – via public share offering fell marginally short of expectations last week. Despite tall claims of oversubscription, only 98% of the shares on sale were subscribed. With high hopes of raising something in the region of US$2.5 billion, the government had offered 428 million shares at a price of INR290 per share (approximately US$5.85 and 2% higher than ONGC average share price for February).

However, the Oilholic thinks that even for a company which admittedly has a massive role in a burgeoning domestic market, the price offer was strange at best and overpriced at worst. This probably put off many of the country’s average middle tier investors, especially as many used February’s price as a reference point. Who can blame them and perhaps the Indian government is wiser for the experience too. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Aerial of the Helix Q4000 taken shortly before "Static Kill" procedure began at Macondo (MC 252) site in Gulf of Mexico, August 3, 2010 © BP Plc.

Col Gaddafi, crude euphoria & last 7 days

The moment Libyan rebels or the National Transitional Council (NTC) as the media loosely describes them, were seen getting a sniff around the Libyan capital Tripoli and Col. Gaddafi’s last bastion, some crude commentators went into euphoric overdrive. Not only did they commit the cardinal sin of discarding cautious optimism, they also belied the fact that they don’t know the Colonel and his cahoots at all. Well, neither does the Oilholic for that matter – at least not personally. However, history tells us that this belligerent, rambling dictator neither has nor will give up that easily. In fact at the moment, everyone is guessing where he is?

To begin, while the end is nigh for the Gaddafi regime, a return to normalcy of oil production outflows will take months if not years as strategic energy infrastructure was damaged, changed hands several times or in some cases both. As a consequence production, which has fallen from 1.5 million barrels per day (bpd) in February to just under 60,000 bpd according to OPEC, cannot be pumped-up with the flick of a switch or some sort of an industrial adrenaline shot.

In a note to clients, analysts at Goldman Sachs maintain their forecast that Libya's oil production will average 250,000 bpd over 2012 if hostilities end as "it will be challenging to bring the shut-in production back online."

These sentiments are being echoed in Italy according to the Oilholic's, a country whose refineries stand to gain the most in the EU if (and when) Libyan production returns to pre-conflict levels. All Italy’s foreign ministry has said so far is that it expects contracts held by Italian companies in Libya to be respected by “whoever” takes over from Gaddafi.

Now, compound this with the fact that a post-Gaddafi Libya is uncharted geopolitical territory and you are likely to get a short term muddle and a medium term riddle. Saudi (sour) crude has indirectly helped offset the Libyan (sweet) shortfall. The Saudis are likely to respond to an uptick in Libyan production when we arrive at that juncture. As such the risk premium in a Libyan context is to the upside for at least another six months, unless there is more clarity and an abrupt end to hostilities.

Moving away from Libya, in a key deal announced last week, Russia’s Lukoil and USA’s Baker Hughes inked a contract on Aug 16th for joint works on 23 new wells at Iraq's promising West Qurna Phase 2 oil field. In a statement, Lukoil noted that drilling will begin in the fourth quarter of this year and that the projected scope of work will be completed “within two years.”

While tech-specs jargon regarding the five rigs Baker Hughes will use to drill the wells at a depth exceeding 4,000 meters was made available, the statement was conspicuously low on the cost of the contract. The key objective is to bring the production in the range of 145,000 to 150,000 bpd by 2013.

Switching tack to commodity ETFs, according to early data for August (until 11th) compiled by Bloomberg and as reported by SGCIB, energy ETPs have attracted their first net inflows in five months with US$9.5 billion under management. This represents a net inflow of US$0.7 billion in August versus an outflow of US$1.5 billion recorded in January. Interest in precious metals continues, even after a very strong July, but base metal ETPs have returned to net outflows. (See adjoining table, click to enlarge)

Meanwhile, Moody’s has raised the Baseline Credit Assessment (BCA) of Russian state behemoth Gazprom to 10 (on a scale of 1 to 21 and equivalent to its Baa3 rating) from 11. Concurrently, the ratings agency affirmed the company's issuer rating at Baa1 with a stable outlook on Aug 17th. The rating announcement does not affect Gazprom's assigned senior unsecured issuer and debt ratings given the already assumed high level of support it receives from the Kremlin.

Moody's de facto regards Gazprom as a government-related issuer (GRI). Thus, the company's ratings incorporate uplift from its BCA of 10 and take into account the agency's assessment of a high level of implied state support and dependence. In fact raising Gazprom's BCA primarily reflects the company's strengthened fundamental credit profile as well as proven resilience to the challenging global economic environment and negative developments on the European gas market in 2009-10.

"Gazprom has a consistent track record of strong operational and financial performance, which was particularly tested in 2009 - a year characterised by lower demand for gas globally and domestically, as well as a generally less favourable pricing environment for hydrocarbons," says Victoria Maisuradze, Senior Credit Officer and lead analyst for Gazprom at Moody's.

Rounding-off closer to home, UK Customs – the HMRC – raided a farm on Aug 17th in Banbridge, County Down in Northern Ireland, where some idiots had set-up a laundering plant with the capacity to produce more than two million litres of illicit diesel per year and evade around £1.5 million in excise duty. Nearly 6,000 litres of fuel was seized and arrests made; but with distillate prices where they are no wonder some take risks both with their lives, that of others and the environment. And finally, Brent and WTI are maintaining US$100 and US$80 plus levels respectively for the last seven days.

© Gaurav Sharma 2011. Photo: Veneco Oil Pumps © National Geographic. Table: Global commodities ETPs © Société Générale CIB/Bloomberg Aug 2011. 

Buzz at Central Bank of Oil Before 1600 CET

Ahead of the OPEC decision, prices for the forward month ICE Brent and NYMEX WTI futures contracts have fallen by US$2-3 on average over two weeks if the last fortnight is taken into consideration. That is largely down to the fact that traders have begun to factor in a possible increase in OPEC crude production quotas in the run up to the meeting here in Vienna today.

For the purposes of a price check, at 11:00am CET, ICE Brent is trading at US$116.26 down 0.5% or 16 cents, while WTI is down 99 cents or 1% at US$98.46. Additionally, the OPEC basket of twelve crudes stood at US$110.66 on Tuesday, compared with US$110.99 the previous day according to OPEC Secretariat calculations this morning.

Mike Wittner of Société Générale notes that if an increase in OPEC quota is made from a starting point of actual production, rather than the previous quota, it is that much more real, that much more serious, and potentially that much more bearish, at least in the short term.

“In contrast, if OPEC were to increase quotas by 1.5 million b/d, but versus previous quotas and not actual production, all they would be doing would be legitimising recent/current overproduction versus the old quota,” he adds.

Most analysts including Wittner and those present here believe a physical increase would be coming our way. Speaking of analysts, it is always a pleasure meeting Jason Schenker, President & Chief Economist of Prestige Economics at these OPEC meetings. He’s to be credited for describing OPEC as the Central Bank of Oil. The Oilholic heartily agrees and could not have put it better. Schenker believes OPEC is looking at the medium term picture and not just the next few months.

“As anticipated if there is a production hike today, the thinking at the “Central Bank of Oil” would be that it could carry them across to the end of Q4 2011 perhaps without facing or acting upon further calls for alterations of production quotas,” he says.

On a somewhat 'crude' but unrelated footnote, hearing about my recent visit to Alberta, Canada, Jason agrees there are a whole lot of crude opportunities for Canadians to be excited about. It would not be easy and it is certainly not cheap. But then cheap oil has long gone – this not so cheap resource is in a safe neutral country. Furthermore, one must never say never, but Canadians are not exactly queuing up to join OPEC any time soon (or ever).

Finally on a totally unrelated footnote, one can see the “Made in UK” label at OPEC HQ – it’s the paper cups near the water dispenser - not something extracted from the North Sea.

© Gaurav Sharma 2011. Photo: Oil well in Oman © Royal Dutch Shell

Eni’s Rating Downgrade & Other News

Moody's Investors Service lowered the long-term senior unsecured ratings of Eni S.p.A. (Eni) and its guaranteed subsidiaries to Aa3 from Aa2 and the senior unsecured rating of Eni USA Inc. to A1 from Aa3. In a note on Monday, it said the outlook for all ratings is stable.

Eni qualifies as a Government-Related Issuer (GRI) under Moody's methodology for such entities, given its 30.3% direct and indirect ownership by the Italian state. The downgrade reflects Moody's expectation that deleveraging process initiated by Eni management and recovery in the group's credit metrics will be gradual and unlikely to restore sufficient headroom to help underpin its business case analysis within the Aa range.

In other news, the U.S. EIA has cut its forecast for global oil demand in light of lower forecasts for global growth. EIA now expects global oil consumption to rise by 1.4 million barrels per day in 2011 against last month's projection of 1.5 million barrels. The consumption growth forecast for 2010 was unchanged at 1.6 million barrels per day.

On the pricing front, the EIA expects spot West Texas Intermediate crude prices to average US$77 a barrel in Q4 2010, down from its previous forecast of US$81. It added that crude prices are likely to climb to US$84 by the end of 2011.

Meanwhile, as you know, BP published its internal report into the Deepwater Horizon rig explosion in the Gulf of Mexico and the resultant oil spill last week. Given the ol’ day job of mine, I wanted to read it cover to cover – all 193 pages of it – before blogging about it. Having finally read it, goes without saying the oil giant is stressing on the fact that a "sequence" of failures caused the tragedy for which a "number of parties" were responsible. (To be read as Transocean and Halliburton)

In the report, conducted by BP's head of safety Mark Bly, the oil giant noted eight key failures that collectively led to the explosion. Most notably, BP said that both its staff as well and Transocean staff interpreted a safety test reading incorrectly "over a 40-minute period" which should have flagged up risks of a blowout and action could have been taken on the influx of hydrocarbons into the well.

BP was also critical of the cementing of the well - carried out by Halliburton - and the well’s blowout preventer. The report also notes that improved engineering rigour, cement testing and communication of risk by Halliburton could have identified flaws in cement design and testing, quality assurance and risk assessment.

It added that a Transocean rig crew and a team working for Halliburton Sperry Sun may have been distracted by "end-of-well activities" and important monitoring was not carried out for more than seven hours as a consequence.

Furthermore, BP said that there were "no indications" Transocean had tested intervention systems at the surface as was required by its company policy before they were deployed on the well. Crew may have had more time to respond before the explosion if they had diverted escaping fluids overboard, the report added.

BP’s outgoing Chief Executive Tony Hayward said, “To put it simply, there was a bad cement job and a failure of the shoe track barrier at the bottom of the well, which let hydrocarbons from the reservoir into the production casing. The negative pressure test was accepted when it should not have been, there were failures in well control procedures and in the blowout preventer; and the rig's fire and gas system did not prevent ignition.”

So there we have it – the oil giant is not absolving itself of the blame, but rather spreading it around. It came as no major surprise that both Halliburton and Transocean criticised and dismissed the report - though not necessarily in that order. The story is unlikely to go away as a national commission is expected to submit a report to President Barack Obama by mid-January 2011 followed by a Congressional investigation. The U.S. Justice department may yet step in as well if evidence of criminal wrongdoing of some sort emerges.

Away from the BP spill saga, French energy giant Total said last week that it could sell its 480 petrol stations in the UK as part of a strategic review of its British downstream operations as it refocuses on its core upstream strength and well something had to give.

© Gaurav Sharma 2010. Photo: US Oil rig © Rich Reid / National Geographic Society

Deloitte’s Take on UK Upstream Independents

A report into activities of UK upstream independent companies published by consulting firm Deloitte this morning makes-up for quite interesting reading. Its ranking of 25 leading independents has the usual suspects – Tullow Oil and Cairn Energy atop, as first and second. However, movements elsewhere in the table narrate a story of their own.

Desire Petroleum Plc, Borders & Southern Petroleum Plc and Rockhopper Exploration Plc rose in market value rankings for London-listed independent production companies as they hold exploration rights near the Falkland Islands. According to the report, Desire, which started exploratory drilling in Falkland Island Waters for the first time since 1998, rose by 10 places to 14th place, Borders & Southern rose 17 places to break into the top 25 at 15th and Rockhopper Exploration Plc rose 23 places to 26 – just outside the top 25.

Desire’s Liz prospection field has estimated resources of between 40 million and 800 million barrels, according to published reports. Meanwhile, Falkland Oil and Gas Plc, another operator, has estimated resources of between 380 million and 2.9 billion barrels at its Tora prospection, according to its Q4 documents.

Argentina and UK went to war over the Falkland Islands in 1982 after the former invaded. UK forces wrested back control of the islands, held by it since 1833, after a week long war that killed 649 Argentine and 255 British service personnel. The Islands have always be a bone of contention between the two countries. The prospect of oil in the region has renewed diplomatic spats with the Argentines complaining to the UN and launching fresh claims of sovereignty.

UK has rejected the claims on the basis of the right of self-government of the people of the Islands "underpinned by the principle of self-determination as set out in the UN charter". Market commentators feel the fresh round of diplomatic salvos are as much about oil as they are about politics. A widely held belief that fresh conflict was highly unlikely could precipitate in independent operators in the region being taken over by oil majors.

Ian Sperling-Tyler, co-head of oil and gas corporate finance at Deloitte, raised some very important points while doing his press rounds. In separate interviews with Bloomberg and CNBC Europe, he opined that the wider market would have to wait and see what effect political risk will have on activity levels in the Falklands. However, he thinks it is highly plausible that operators in the Falklands were not big enough to monetise those assets on their own.

Hence, they could very well be acquired by a bigger company. And well the independents are growing bigger by the month too. The top two in the league table - Tullow Oil, which is developing reserves in Uganda, and Cairn Energy, which focuses on India, accounted for 60% of the market capitalisation of the top 25 companies for 2009, the report shows (click on image).

As for the diplomatic row between the two nations; it’s nothing more than a bit of argy-bargy with an oily dimension and is highly likely to stay there. Meanwhile, the BBC reports that Spanish oil giant Repsol might be about to join the exploration party from the Argentinean side.

© Gaurav Sharma 2010. Table Scan © Deloitte LLP UK