Talking geopolitics & refineries at Platts event

Following on from earlier conversations with contacts in the trading community about the direction of the Brent crude price versus geopolitics, the Oilholic extended his queries to the Platts Energy Risk Forum, held in London earlier this week. At the event, Dave Ernsberger, global editorial director of oil coverage at Platts, summed-up the market mood as we near the final quarter of 2012 (see graphic above, click to enlarge). “This year has been one of two realities, namely the dire economic climate and upward geopolitical risk. H1 2012 saw anxiety about a war in the Middle East and H2 sees renewed fears of a demand slowdown,” he told delegates.

“The oil price is poised to break away from the mean – but which way? So far it has been chained and shackled in the US$15-20 range either way falling below US$90 and rising above US$115 over the course of this year. The threat of an Iran versus Israel conflict which might draw the US in by default has not gone away. On the other hand a European recession could bring a new oil price crash. Additionally, there is a perception that supply-demand and spare capacity scenarios are not what they are made out to be,” Ernsberger added.

Over a break in proceedings, the Oilholic quizzed the Platts man about the actual influence of the geopolitical or instability premium on the price of the crude stuff and market conjecture about it being broadly neutral for 2013.

“I think the current geopolitical dynamic is fairly well understood at this point. The big touching points which are at play for instance, but not limited to, the US-Iran-Israel issue and the China-Japan and Asia Pacific energy politics have been with us for a while. I feel it is hard to see how those geopolitical arenas will evolve significantly in 2013 because we are at a stalemate point. In a sense, if you look forward they should be neutral,” Ernsberger said.

However, both of us were in agreement that one always needs to be careful about a geopolitical trigger as a single tiny flashpoint could offset the placidness. But from where Ernsberger and the Oilholic sit at present – geopolitical influences are in a kind of suspended animation for next year. The Platts Energy Risk Forum also noted that demand forecasts for 2012 have stabilised and that Chinese demand, on a standalone basis, had slowed considerably. As such, the price outlook for 2013 is overwhelmingly bearish.

One unintended result of the European crisis brings us to another area of interest - refining. Platts noted that the EU-wide recession is speeding up refinery closures. It suggested that 3 to 5 million barrels per day (bpd) of oil refining capacity is under immediate threat of closure or actually did close recently. Additionally, an estimated 7 million bpd needs to close to adjust for more efficient refining in Asia and Middle East. But the closures are lifting refining margins over the short-term in a business that remains volatile (see graphic above right, click to enlarge). Ernsberger also brought forth a very valid observation for the readers of this humble blog – the striking similarity between the survival (or vice versa) statistics within the refining and civil aviation sectors.

“Refining and aviation are two industries where it’s a race to the bottom! There is so much competition in both these industries that basically whatever environment you are operating in – even if you are operating in India or China – it’s a race to the bottom…Typically, what you’ll find is that every company would try and stay in the business as long as it can and will only leave when it runs out of money. It’s also why refining and aviation have more bankruptcies than any other sector I can think of,” he said.

At the same forum, it was also a pleasure running into Dr. Vincent Kaminski, a former Enron executive who repeatedly raised strong objections to the financial practices at the company prior to its scandal-ridden collapse in 2002. In the aftermath of the scandal, Dr. Kaminski was praised for being among the voices of reason at a company riddled with malpractices. (For background read Bethany McLean and Peter Elkind’s brilliant book – The Smartest Guys in the Room)

Dr. Kaminski, who is an academic on the faculty of Houston’s Rice University at present, told the forum that by the time of its collapse Enron had mutated from an energy company to one which traded practically everything and one which was not alone in devising trading strategies based on exploiting geographical constraints.

“Energy markets have evolved over the last 20 years into an integrated global system. Markets for different physical commodities form what can be called a tightly coupled system. While market participants learn and adjust their behaviour in order to survive and prosper in a changing world, the system itself evolves and remains far removed from a stable equilibrium at any point in time,” he added.

Dr. Kaminski also dwelt on the Shale Gas revolution in the US which was decades in the making but transformed the country's energy landscape upon fruition leading to the availability of natural gas in abundance and a dip in gas price-contracts (see graphic on the left, click to enlarge). “As US production sky-rocketed, conventional wisdom about the possibility of LNG shortages barely five years ago was turned on its head. By April 2012 we even noted a sub-US$2/mBtu front-month settlement on the NYMEX,” he added.

Later in the afternoon, Dr. Kaminski told the Oilholic that US LNG import terminals currently being prepped to export gas in wake of the shale bonanza could one day be sending tanker-loads to Europe in direct competition with Qatar and Russia.

“On the flipside for the US consumer, the moment a viable gas export market is established for US gas, the impact on the country’s domestic gas market would be a bullish one. That is the nature of market forces,” he added.

When asked about the prospects of shale prospection in Europe – most notably in Poland, Ukraine, Sweden and the UK – Dr. Kaminski said he was a ‘realist’ rather than a ‘sceptic’. “What happened in the US, did not take place overnight. Technology, legislative facilitation and public will – all played a part and gradually fell into place. I do not see it being replicated in Europe over the short term and certainly not with the speed that some are hoping it would,” he concluded.

Just as the Oilholic was winding down from a discussion on shale with Dr. Kaminski, it seems the UK Institution of Mechanical Engineers (IMechE) was talking up the economic benefits of a British Shale Gale! In a policy statement circulated to parliamentarians, the IMechE said shale gas was ‘no silver bullet’ for UK energy security but will provide long-term economic benefits in the shape of thousands of jobs.

Dr. Tim Fox, Head of Energy and Environment at IMechE and lead author of the shale gas policy statement, said, “Shale gas has the potential to give some of the regions hit hardest by the economic downturn a much-needed economic boost. The engineering jobs created will also help the Government’s efforts to rebalance the UK’s skewed economy.”

However, Dr. Fox added that shale gas "is unlikely to have a major impact on energy prices and the possibility that the UK might ever achieve self-sufficiency in gas is remote." 

IMechE projects that 4,200 jobs would be created per year over a ten-year drill programme. The engineering skills developed could then be sold abroad, just as the oil and gas experience built up in North Sea oilfields is now being sold across the world. Well, we shall see but that’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Graphic 1: Platts dated Brent – January 2011 to August 2012 © Platts September 2012. Graphic 2: International cracking margins snapshot © Platts / Turner Mason & Co. September 2012. Graphic 3: US Natural Gas futures contract © Dr. Vincent Kaminski, Rice University, Texas, USA /Bloomberg.

On Brent's direction, OPEC, China & more

Several conversations last week with contacts in the trading community, either side of the pond, seem to point to a market consensus that this summer’s rally in the price of Brent and other waterborne crudes was largely driven by geopolitical concerns. Tight North Sea supply scenarios in September owing to planned maintenance issues, the nagging question of Iran versus Israel and Syrian conflict continue to prop-up the so called ‘risk premium’; a sentiment always difficult to quantify but omnipresent in a volatile geopolitically sensitive climate.

 

However, prior to the announcement of the US Federal Reserve’s economic stimulus measures, contacts at BofAML, Lloyds, Sucden Financial, Société Générale and Barclays seemed to opine that the current Brent prices are nearing the top of their projected trading range. Then of course last Thursday, following the actual announcement of the Fed’s plan – to buy and keep buying US$40 billion in mortgage-backed securities every month until the US job market improves – Brent settled 0.7% higher or 78 cents more at US$116.66 per barrel.

 

Unsurprisingly, the move did briefly send the WTI forward month futures contract above the US$100 per barrel mark before settling around US$99 on the NYMEX; its highest close since May 4. But reverting back to Brent, as North Sea supply increases after September maintenance and refinery crude demand witnesses a seasonal drop, the benchmark is likely to slide back downwards. So for Q4 2012 and for 2013 as a whole, Société Générale forecasts prices at US$103. Compared to previous projections, the outlook has been revised up by US$6 for Q4 2012 and by US$3 for 2013 by the French investment back.

 

Since geopolitical concerns in the Middle East are not going to die down anytime soon, many traders regard the risk premium to be neutral through 2013. That seems fair, but what of OPEC production and what soundbites are we likely to get in Vienna in December? Following on from the Oilholic’s visit to the UAE, there is more than just anecdotal evidence that OPEC doves have begun to cut production (See chart above left, click to enlarge).

 

Société Générale analyst Mike Wittner believes OPEC production cuts will continue with the Saudis joining in as well. This would result in a more balanced market, especially for OECD inventories. “Furthermore, moderate demand growth, led – as usual – by emerging markets, should be roughly matched by non-OPEC supply growth, driven by the US and Canada,” Wittner added.

 

Of course, the soundbite of last week on a supply and demand discussion came from none other than the inimitable T. Boone Pickens; albeit in an American context. The veteran oilman and founder of investment firm BP Capital told CNBC that the US has the natural resources to stop importing OPEC crude oil one fine day.

 

Pickens noted that there were 30 US states producing oil and gas; the highest country has ever had. In a Presidential election year, he also took a swipe at politicians saying neither Democrats nor Republicans had shown “leadership” on the issue of energy independence.

 

At the Democratic convention the week before, President Obama boasted that the US had already cut imported oil by one million barrels per day (bpd). However, Pickens said this had little to do with any specific Obama policy and the Oilholic concurs. As Pickens explained, “The economy is poorer and that will get you less imports. You can cut imports further if the economy gets worse.”

 

He also said the US should build the Keystone XL oil pipeline, currently blocked by the Obama administration, to help bring more oil in to the country from Canada. Meanwhile, US Defense Secretary Leon Panetta is in Japan and China to calm tempers on both sides following a face-off in the East China Sea. On Friday, six Chinese surveillance ships briefly entered waters around the Senkaku Islands claimed by Japan, China and Taiwan.

 

After a stand-off with the Japanese Coastguard, the Chinese vessels left but not before the tension level escalated a step or two. The Chinese reacted after Japan sealed a deal to buy three of the islands with resource-rich waters in proximity of the Chunxiao offshore gas field. Broadcaster NHK said the stand-off lasted 90 minutes, something which was confirmed over the weekend by Beijing.

 

With more than just fish at stake and China’s aggressive stance in other maritime disputes over resource-rich waters of the East and South China Sea(s), Panetta has called for “cooler heads to prevail.”

 

Meanwhile some cooler heads in Chinese boardrooms signalled their intent as proactive players in the M&A market by spending close to US$63.1 billion in transactions last year according a new report published by international law firm Squire Sanders. It notes that among the various target sectors for the Chinese, energy & resources with 30% of deal volume and 70% of deal value and chemicals & industrials sectors with 21% of deal volume and 11% of deal value dominated the 2011 data (See pie-chart - courtesy Squire Sanders - above, click to enlarge). In deal value terms, the law firm found that North America dominates as a target market (with a share of 35%) for the Chinese, with oil & gas companies the biggest attraction. However, in volume terms, Western Europe was the top target market with almost a third (29%) of all deals in 2011, and with industrials & chemicals companies being the biggest focus for number of deals (29%) but second to energy & resources in value (at 18% compared to 61%).

 

Big-ticket acquisitions by Chinese buyers were also overwhelmingly concentrated in the energy & resources industries where larger transactions tend to predominate. Sinopec, the country’s largest refiner, brokered a string of the largest transactions. These include the acquisition of a 30% stake in Petrogal Brasil for US$4.8 billion in November last year, a US$2.8 billion deal for Canada's Daylight Energy and the 33.3% stake in five oil & gas projects of Devon Energy for US$2.5 billion.

 

Squire Sanders notes that Sinopec, among other Chinese outbound buyers, often acquires minority stake purchases or assets, in a strategy that allows it to reduce risks and gain familiarity with a given market. This also reduces the likelihood of any political backlash which has been witnessed on some past deals such as CNOOC’s hostile bid for US-based oil & gas producer Unocal in 2005, which was subsequently withdrawn.

 

Since then, CNOOC has found many willing vendors elsewhere. For instance, in July this year, the company announced the US$17.7 billion acquisition of Canadian firm Nexen. To win the deal, which is still pending Ottawa’s approval, CNOOC courted Nexen, offering shareholders a 15.8% premium on the price shares had traded the previous month.

 

Squire Sanders’ Hong Kong-based partner Mao Tong believes clues about direction of Chinese investment may well be found in the Government’s 12th five-year plan (2011-2015).

 

“It lays emphasis on new energy resources, so the need for the technology and know-how to exploit China’s deep shale gas reserves will maintain the country’s interest in US and Canadian companies which are acknowledged leaders in this area,” Tong said at the launch of the report.

 

Away from Chinese moves, Petrobras announced last week that it had commenced production at the Chinook field in the Gulf of Mexico having drilled and completed a well nearly five miles deep. The Cascade-Chinook development is the first in the Gulf of Mexico to prospect for offshore oil using a floating, production, storage and offloading vessel instead of traditional oil platforms.

 

Finally, after the forced nationalisation of YPF in April, the Argentine government and Chevron inked a memorandum of understanding on Friday to explore unconventional energy opportunities. Local media reports also suggest that YPF has reached out to Russia's Gazprom as well since its nationalisation in a quest for new investors after having squeezed Spain’s Repsol out of its stake in YPF.

 

In response, the previous owner of YPF said it would take legal action against the move. A Repsol spokesperson said, “We do not plan to let third parties benefit from illegally confiscated assets. Our legal teams are already studying the agreement."

 

Neither Chevron nor YPF have commented on possible legal action from Repsol. That’s all for the moment folks. Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Graph: OPEC Production 2010-2012 © Société Générale CIB 2012. Chart: Chinese M&A activity per sector by deal valuation and volumes © Squire Sanders. 

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.

Crude profit taking & Browne’s Shale hypothesis

Concerns over a conflict in the Middle East involving Iran did ease off last week but apparently not far enough to prevent a further slide in the price of the crude stuff. A relative strengthening of the US dollar was also seen supporting prices to the upside despite Eurozone woes. So Brent resisted a slide below US$107 on Friday while the WTI resisted a slide below US$91 a barrel.

In fact, the WTI August contract reached a high of US$92.94 while Brent touched US$108.18 at one point; the highest for both benchmarks since May 22. This meant that the end of last week saw some good old fashioned profit taking with conditions being perfect for it.

However, on this crude Monday afternoon, we see both benchmarks dipping again. When the Oilholic last checked, Brent was resisting a slide below US$102 per barrel while the WTI was resisting a US$88 level. With the Middle East risk premium easing marginally, City traders have turned their attention to Spain.

Last week the country’s government predicted that the Spanish recession may well extend into next year. Additionally, the regional administration of Valencia asked for federal help from Madrid to balance its books. So what have we learnt over the last seven or eight trading sessions and what has changed? Well not much except that oil price forecasting often resembles an inexact task based on fickle market conjecture.

The bullish sentiments of last week were an aberration prompted by the perceived risk of a conflict in the Middle East which the Iranians would be incredibly barmy to trigger. Add the temporary lowering of oil production courtesy a Norwegian strike and you provide the legs to a perfect short term prancing bull!

Existing economic fundamentals and current supply demand scenarios did not merit last week’s pricing levels either side of the pond. The Oilholic agrees with the EIA’s opinion that the Brent price would indeed range between US$97.50 and US$99.50 a barrel up until the end of 2013. Analysts at investment banks and ratings agencies are also responding.

For instance, Société Générale has downgraded Brent price estimates by 10% over 2012-14, from US$117 a barrel to US$105. The French bank views oil market fundamentals as neutral for the rest of the year. Nonetheless, should the Brent price weaken below US$90, like others in the City, Société Générale says a Saudi response is to be expected.

For what it is worth, at least Brent’s premium to the WTI has been constantly taking a knock. By some traders' accounts, it is presently below US$15 a barrel for the September settlement contract having been at US$26.75 at one point over Q4 2011. As a direct consequence of the linkage between waterborne light sweet crudes, the Louisiana Light Sweet’s premium to the WTI is down as well to around US$16 a barrel according to Bloomberg.

Moving away from pricing, Lord Browne – the former boss of BP and a director of fracking firm Cuadrilla – believes shale prospection would rid the US of oil imports. Speaking in Oxford at the Resource 2012 forum on water, food and energy scarcity, Browne said the US will not need to import any crude within two decades.

He quipped that the amount of shale gas in the US was effectively “infinite". On a sombre note, Browne said, “Shale gas has a very bad reputation, as a result of the weak players cutting corners. Regulation tightening would be welcome."

His Lordship is known to be a member of the “All hail shale” brigade. Back in March he told The Independent newspaper that if fracking took off meaning fully in the UK, it could generate 50,000 British jobs. The country could very well need its own shale drive especially as a government watchdog recently warned of declining oil and gas revenues.

A consultation period is currently underway in London. All UK fracking activity ground to a halt last year, when a couple of minor quakes majorly spooked dwellers of Lancashire where Cuadrilla was test fracking. Given the incident and environmental constrictions, the Oilholic suspects that Lord Browne knows it is too early to get excited about shale from a British perspective. However, Americans see no cause for curbing their enthusiasm. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil tankers in English Bay, British Columbia, Canada © Gaurav Sharma 2012.

Clinton in Crudeland, Ghanem’s death & Cressier

US secretary of state Hillary Clinton has been clocking up air miles trying to persuade India and China to import less of the crude stuff from Iran. While diplomatic issues dominated the headlines during her visit, Clinton is understood to have impressed upon the Chinese to lower Iranian imports. However, recent media reports suggest that instead of seeking alternative supplies away from Iran, the economic powerhouse is seeking alternative modes of payment to Tehran away from the US Dollar. First, Reuters cited Mohammed Reza Fayyad, Iran's ambassador to the United Arab Emirates, acknowledging that his country was accepting Yuan payments in kind for oil exports to China. Then the FT reported that China has been providing the Yuan to Iran via Russian banks rather than its own international banks.

Arriving next in India, Clinton had a similar message for New Delhi. She “commended” India for lowering its reliance on Iranian imports urging it to do more. However, as the Oilholic noted on his non-state visit to India earlier this year - Indian policymakers openly admit this is easier said than done. Meanwhile conspiracy theories about the death on April 29 of former Libyan Oil Minister Shokri Ghanem, whose body was found in the River Danube in Vienna, are unlikely to go away with his funeral held four days ago.

In June 2011, his defection from the Gaddafi regime was the epicentre of media gossip – both in the run-up to the 159th OPEC meeting as well as during the event itself where his defection relieved some and riled others. Some doubted his intentions while others doubted that he’d even defected.

All in public domain was that since his defection he had been living in Vienna with his family and working as a consultant. It seemed to be a natural choice since Ghanem’s connection with the city went back a few decades. He had held a number of posts at the old OPEC HQ in Vienna rising to its head of research in 1993 before joining the Gaddafi government first as Prime Minister and then Oil minister which marked his regular return to Vienna until last year.

The Oilholic’s sources in Vienna suggest the Austrian authorities have ruled out foul play. All yours truly knows is that a passer-by saw his body in the river and called the police who found no other documents on him other than business cards of his consultancy. There were no signs of violence on the body and it is thought that he died of natural causes. At the time of his death, he was setting up a business with another OPEC veteran - Algeria's Chakib Khelil and other investors.

However back home, the new government in Tripoli never trusted him despite his defection and was in fact preparing a court case against him for making illegal gains during his time in the Gaddafi regime. Regardless of its circumstances, the void left by his death would be felt in Viennese diplomatic circles and at OPEC HQ where he began his career in earnest.

Going back to 2008, the Oilholic remembers his first interaction with Ghanem from press scrums at a meeting of ministers where journalists jostled to receive his answers in fluent English. His audience in Vienna had grown, more so as his boss Gaddafi had denounced terrorism and come back from the cold to rejoin the international community. Whether Ghanem himself was a saint or a sinner will now never be known.

Away from crude politics, troubled refiner Petroplus’ administrators have found a buyer for its Swiss asset – the Cressier Refinery – in the shape of Varo Holding, a joint venture between trading firm Vitol and AltasInvest. Under the sale agreement, cash strapped Petroplus would transfer Cressier and allied Swiss marketing and logistics assets - Petroplus Tankstorage, Oléoduc du Jura Neuchâtelois and Société Française du Pipeline du Jura to Varo.

Sources suggest Varo hopes to close the deal before the end of June with plans of restarting the 68,000 barrels per day refining facility thereafter. Finally, fresh economic headwinds are bringing about a price correction in the crude markets as recent elections in Greece and France have triggered a Greek Tragedy (Part II) and a Geek Tragedy (a.k.a. Francois Hollande) respectively.

A hung parliament and political stalemate with fears of the terms of the last Greek bailout not being met is impacting market sentiment on the one hand. On the other, newly elected Socialist President of France – Francois Hollande – sees his less than convincing mandate as one of the French public voting against ‘austerity’ and perhaps uncosted grandiose spending plans. On Tuesday, oil trading sessions either side of the pond remained volatile in light of the situation.

Summing up the nerviness in the markets following events of the past few days, Sucden Financial analyst Myrto Sokou notes, “Spain has confirmed that it will provide with additional money for the bank rescue of Bankia, the country's third largest bank in terms of assets. In Greece, the political situation is still uncertain as the country remains without a government after Sunday’s elections…The parties which signed the EU bailout memorandum are now in a minority as Greek voters rejected further austerity plans.”

Concurrently, analysts at Société Générale believe that generally bearish sentiments and still weak fundamentals should continue to combine and prevail and that the entire energy complex seems to be headed for a continued correction downwards. “Oil has performed better than other European energy commodities in 2012, but this seems to have changed during the first week of May. Oil price behaviour will be the key to avoid further slides in European energy prices,” they note.

As if that was not crude enough, an investment note by Citibank just hitting the wires suggests there is now a 75% possibility that Greece would be forced to leave the Eurozone within 12 to 18 months. With no swift Eurozone solution in sight, be prepared to expect further volatility and perceptively bearing trends in the crude markets. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil Rig © Cairn Energy Plc.

First thoughts from Texas & Macondo bistro

It’s good to be back in Houston, Texas to meet old friends and make yet newer ones – not all of whom have a ‘crude’ side. On this visit, following on from last year and almost two years on from BP’s spill at the Macondo oil well in the Gulf of Mexico and the Deepwater Horizon explosion, the Oilholic finds a lot of positivity around.

Over a chat at Macondo, the Latin Bistro off Travis Street (near intersection with Franklin), not the spill site, most commentators – be they from legal, advisory or financial circles – seem to suggest that the US economy has gradually turned a corner though doubts persist.

While that is price positive for oil futures, some believe Chinese and Indian consumption may not be as trumped up as is being projected in the mass media. That’s not to say the consumption of both burgeoning economies won’t have an impact, only the impact would be felt less as both face economic headwinds. If combined with a dip in crude oil consumption in OECD jurisdictions, the scenario could be price negative but may well be countered by ongoing geopolitical factors.

Brent is holding ground at US$120-plus while WTI is resisting US$100-plus and a comparable forward month futures price differential between both benchmarks is now over US$20 per barrel. Even the most die-hard market commentator is acknowledging (finally) that Brent is more reflective of global price pressures than WTI. From global crude pressures to local price pressures on the refined stuff, which is averaging in downtown Houston at US$3.90 a gallon, well below the San Francisco average of US$4.40 a gallon; still Houstonians remain an unhappy bunch when it comes to prices at the pump.

A few good souls were both lucky and happy as a gas station in Texas made an error and marked the price at under US$2.00 a gallon leading to long queues before the owners could correct the error. One chap told a local radio station that he’d filled his car, his partner car, his mother’s car and his mother-in-law’s car before the error was corrected! Moving on from lucky sons and mother-in-laws to trends for independent upstarts, this state has always encouraged independents right from the heydays of wildcatters. In fact there is a lot of positivity around on that front too, especially if a new report from Moody’s is to be factored in.

The ratings agency believes the risk profile has improved for many small exploration and production (E&P) companies focused on oil and natural gas liquids production (NGL), and companies with technological ability to exploit unconventional resource plays are expected to benefit from rapid production and reserve growth.

Stuart Miller, Vice President & Senior Analyst at Moody’s notes, "Because of recent technological advances, smaller E&P companies that have large positions in newly productive, unconventional resource plays are expected to show rapid reserve and production growth over the next few years.”

“In addition, companies that have a high percentage of their production comprised of oil or natural gas liquids are expected to benefit from increased cash flow and greater liquidity. We believe that smaller, speculative-grade companies are disproportionately, and positively, affected by these developments," he adds.

Technological advances have made it possible to economically access vast new resources that were previously locked in place. New horizontal drilling techniques and the development of multi-stage hydraulic fracturing have unlocked these reserves.

Players who have been successful in applying these new drilling and completion techniques have lowered their finding and development costs, improved their risked return on investment, and enjoyed significant reserve and production growth. Future drilling results and production levels can now be predicted with greater certainty over large acreage positions, due to the improved performance of wells drilled using this new technology, says Moody's.

Over the next few years, Moody’s expects many small E&P companies with a high proportion of oil and natural gas liquids in their production streams are expected to report improving operating cash flow levels, higher capital budgets, declining leverage metrics, and better liquidity.

According to a spokesperson, with their existing ratings in brackets, these are: Alta Mesa Holdings (B2), Antero Resources LLC (B2), Baytex Energy (B1), Berry Petroleum (B1), Chaparral Energy (B3), Clayton Williams Energy (B3), Concho Resources (Ba3), Carrizo Oil & Gas (B2), Energy XXI Gulf Coast (B3), Harvest Operations (Ba2), Hilcorp Energy I (Ba3), Laredo Petroleum (B3) MEG Energy (B1), Oasis Petroleum (B3), PDC Energy (B2), RAAM Global Energy (Caa1), Rosetta Resources (B2), SandRidge Energy (B2), Sheridan Production Partners (B2), Stone Energy (B3), Swift Energy (B2), Unit Corporation (B1), W&T Offshore (B3).

That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Macondo Latin Bistro, Houston, Texas, USA © Gaurav Sharma.

Canadian & Russian supply risk scenarios

Happy Easter folks! Following on from California, the Oilholic is once again back in Beautiful British Columbia, as vehicle licence plates from the province would point out, should you need reminding in these serene picturesque surroundings. When talking non-OPEC supply of the crude stuff – Russia and Canada always figure prominently in recent discussions, the latter more so than ever.

In fact, when it comes to holding exposure to oil price sensitivity, as recommended by some analysts for the next two quarters, via mixed bag of investments – Russian equities and “natural resources linked” (and not yet showing signs of Dutch disease) Forex including the Russian Rouble and the Canadian dollar are flagged-up more often than ever. In fact the Canadian Dollar, often called south of the border by Americans as the “Loonie” (based on a common bird on the CAD$1 coin), is proving pricier and more worthy than the world’s reserve currency itself in the post-Global financial crisis years.

Between Russia and Canada, given that the latter has a more diverse range of exports, the Russians have a bigger problem when it comes to oil price swings. In fact, ratings agency S&P reckons that a sustained fall in the price of oil could damage the Russian economy and public finances and consequently lead to a cut of the long-term sovereign rating.

"We estimate that a US$10 decline in oil prices will directly and indirectly lead to a 1.4% of GDP decline in government revenues. In a severe stress scenario, where a barrel of Urals oil drops to, and stays at, an average US$60, we would expect the general government to post a deficit above 8% of GDP. In that scenario, the long-term ratings on the Russian Federation could drop by up to three notches," says S&P credit analyst Kai Stukenbrock.

The rise in oil prices over the past decade has supported an expansionary fiscal policy, while still allowing the country to build up fiscal reserves. Still, fiscal expansion, not least significant countercyclical spending during the recent crisis, has led to a significant increase in expenditures relative to GDP.

As a result, despite record revenues from oil in 2011, S&P estimates the general Russian government surplus at merely 0.8% of GDP. To balance the budget in 2012, the agency thinks the government will require an average oil price of US$120 per barrel.

While former Russian finance minister Alexei Kudrin has also expressed fears of Russian over reliance on the price of oil, most analysts have a base price range of US$90 to 100 for 2012. So a fear it may well be; it remains what it is – a fear! Another ratings agency – Moody’s noted last month that as a result of financial flexibility built up over the past two years, rated Russian integrated oil & gas companies will be able to accommodate volatility in oil prices and other emerging challenges in 2012 within their current rating categories.

"In 2011, rated Russian players continued to demonstrate strong operating and financial results, underpinned by elevated oil prices," says Victoria Maisuradze, an Associate Managing Director in Moody's Corporate Finance Group. "Indeed, operating profits are likely to remain stable in 2012 as an increased tax and tariff burden will offset the benefits of high crude oil prices. All issuers have stable outlooks and our outlook for the sector is stable."

Nevertheless, developing reserves in new regions remains a major challenge for Russia as traditional production areas deplete; a problem which the Canadians don’t have to contend with. In 2006, Prime Minister Stephen Harper, whose hand is now politically more stronger than ever, told an audience in London that Canada was ranked third in the world for gas production, seventh in oil production, the market leader in hydroelectricity and uranium. He described it six years ago as “just the beginning.”

Harper’s journey to make Canada an ‘energy superpower’ is well and truly underway. The Oilholic charted the view from Calgary on his visit to Alberta last year and has followed the shenanigans related to the US ‘dis’-approval of Keystone XL pipeline project over the course of 2011-12. Over the coming days, yours truly would revisit the subject with a take on prospective exports to Asia via British Columbia.

Continuing with non-OPEC supplies, the Oilholic’s old contact in Warsaw – Arkadiusz Wicik, Director of Energy, Utilities and Regulation at Fitch Ratings – believes Shale gas in Poland could still be a game changer for the country's energy sector despite the disappointing shale gas reserve estimate published in March by the Polish Geological Institute (PGI).

PGI assessed most likely recoverable shale gas reserves to be between 0.35 and 0.77 trillion cubic meters (tcm), which is about one-tenth the 5.3 tcm estimated by the US Energy Information Administration in April 2011. PGI estimates maximum recoverable shale gas reserves at 1.92 tcm.

Wicik believes it is still too early to make any meaningful assumptions about the future of shale gas in Poland, believed to have one of the highest development potentials in Europe. “Less than 20 exploration wells have been drilled by domestic and foreign companies, in many cases with disappointing results. From a credit perspective, we view shale gas exploration as high risk and capital intensive. Partnerships among domestic companies to share exploration risks and costs, or more participation by foreigners would be positive,” he says.

Exploration by Poland's energy companies at an early stage gives them a chance to become major players should the commercial availability of gas be proven over the next several years. This was not the case in the US, where the shale gas industry was developed by a number of smaller, independent players as the Oilholic noted in a special report for Infrastructure Journal. Large US oil and gas companies have only recently started to be active in the sector, mostly through acquisitions.

Wicik notes, “We do not expect that the success in the US, which led to about a 50% decrease in US gas prices between 2008 and 2011, will be easily replicated in Poland. Commercial production in the first five to 10 years is unlikely to substantially lower gas prices given high breakeven costs. Also, Poland and the US differ both in terms of shale formations and the gas market structure.”

A number of foreign companies already have exploration concessions for shale gas in Poland, including ExxonMobil, Chevron, ConocoPhillips (through a service agreement with Lane Energy), Marathon Oil and Eni. Local players that have been granted exploration concessions include PGNiG, PKN Orlen, Grupa Lotos and Petrolinvest.

Another three large domestic companies - PGE, Tauron, and KGHM - also plan to enter shale gas exploration. In January 2012, they signed three separate letters of intent with PGNiG regarding cooperation in shale gas projects. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil Refinery, Quebec, Canada © Michael Melford / National Geographic.

‘Crude’ views from across the pond

The view on the left is that of the Point Reyes Lighthouse, but more on that later. The Oilholic landed in California on Wednesday to begin yet another North American adventure and instantly noted the annoyance in our American cousins’ voices about rising gasoline prices at the pump.

The extent to which the average American is miffed depends on where he/she buys gasoline which is comfortably in excess of US$4 per gallon with regional and national disparities. For instance in Sunnyvale and Santa Clara CA, gasoline is retailing in the region of US$4.19 to US$4.49 per gallon.

However, head to downtown San Francisco and it jumps by at least 10 cents on average and cross the Golden Gate Bridge towards outlying gas stations and it jumps another 15 cents on top of the Bay Area price. In an election year, President Obama does not want his voters to be miffed, especially as Republican opponents are conjuring up uncosted phantasmal visions of prices at the pump of US$2.50 per gallon.

The President’s answer, based on a credible rumour mill and the US media, might involve diving (again) into the US Strategic Petroleum Reserves (SPR). The signs are all there – grumbling American motorists, Obama discussing releasing strategic stockpiles with British PM David Cameron, Iranians issuing threats about closing the Strait of Hormuz and overall bullish trends in crude markets.

For its worth, when Obama dived into the SPR last summer, he had the IEA’s support – something which he does not have at the moment. The Oilholic believes it was a silly idea then and would be a silly idea now. Although it pains one to say so, grumbling American motorists do not constitute a genuine emergency like the Gulf War(s) or Hurricane Katrina (in 2005); there is no supply shock of a catastrophic proportion or shall we say a ‘strategic’ need. North Sea Maintenance work, Sudanese tiffs, Nigeria and minor market jitters do not qualify were it not for an US presidential election year.

Besides, a release of IEA’s strategic pool of reserves collectively did very little to curb the price rise last summer. In its wake, price dropped momentarily but rose back to previous levels in a relatively short period of time. On this occasion driven by Asian consumption, a drive to seek alternative supplies away from Iran by consuming nations and short term supply constriction will do exactly that - were its SPR to be raided again by the US.

In fact, most contacts in financial circles on the West Coast share the Oilholic’s viewpoint; even though the WTI closed lower at US$103.22 a barrel on persistent talk of strategic reserve releases in the US media on Friday. The price also breached support in the US$104.20 to US$103.78 circa. Respite will be temporary; Moody’s raised its price assumptions for benchmarks WTI and Brent for 2012 and 2013, on Wednesday (while lowering assumptions for the benchmark Henry Hub natural gas).

The agency assumes an average WTI price of US$95 per barrel for crude in 2012, and US$90 per barrel in 2013. Brent will rise by US$10 per barrel from the agency’s previous assumption, with average prices of US$105 per barrel in 2012 and US$100 per barrel in 2013. That – says Moody’s – is due to the higher risk of a potential supply squeeze caused by the Iran embargo and continued strong demand from China.

Meanwhile, with customary aplomb in an election year, President Obama, “authorised” the usage of new sanctions on buyers of Iranian oil with punitive actions against those who continue to trade in Iranian crude. In a nutshell, if a country or one of its banks, trading houses or oil companies tries to source oil from the Iranian central bank then, at least in theory, they could face being cut off from the US banking system should they not comply by June 28.

However, following on from a law signed in December, Obama admitted that the US has had to make exceptions to countries like Japan, who have already made moves to cut back on Iranian oil. Some like India and China will find innovative ways to get around the sanctions as the Oilholic blogged from Delhi earlier in the year.

One does find it rather humorous that in order to defend his stance on Iran, Obama said US allies boycotting Iranian oil would not suffer negative consequences because there was "enough" oil in the world market and that he would continue to monitor the global market closely to ensure it could handle a reduction of oil purchases from Iran.

A statement from the White House acknowledged that "a series of production disruptions in South Sudan, Syria, Yemen, Nigeria and the North Sea have removed oil from the market" over Q1 2012. "Nonetheless, there currently appears to be sufficient supply of non-Iranian oil to permit foreign countries to significantly reduce their import of Iranian oil. In fact, many purchasers of Iranian crude oil have already reduced their purchases or announced they are in productive discussions with alternative suppliers," it adds.

Good, then that settles the argument about the need to raid the SPR (or not?). Meanwhile, Moody’s (and others) also reckon the short term scenario is positive for the E&P industry, at least for the next 12-18 months since the global demand for oil that led to a strong price rally for crude and natural gas liquids (NGLs) shows little sign of abating.

In addition, E&P companies could benefit further from heightened geopolitical risk. Moody's crude assumptions hinge on reduced deliveries in Iran beginning mid-summer, when an embargo takes effect, but crude prices could move even higher if Saudi Arabia fails to fill in the supply shortfall. On the flipside, the industry faces some risk from the fragile European economy and could face lower demand if the euro area destabilises in 2012 and 2013.

Meanwhile, back home in the UK, there have been several crude developments. First panic buying ensued when Government issued advice to British motorists that they ought to stock-up in case oil tanker drivers go on strike leading to long queues at the pump. Then the government issued advice not to “panic.”

Now the petrol station owners’ lobby group is demanding talks, according to the BBC. Seven crude hauliers at the heart of the tanker drivers’ dispute are Wincanton, DHL, BP, Hoyer, JW Suckling, Norbert Dentressangle and Turners. They are responsible for supplying 90% of the UK's petrol stations and some of the country's airports. Workers at DHL and JW Suckling voted against strike action but backed action short of a strike in a dispute over “safety and work conditions”.

The run on petrol retail outlets could continue until Easter Monday according to some sources. Continuing with the UK, Total’s leak from the Elgin gas platform, 150 miles off Aberdeen, which has been leaking gas for the past three days is rumoured to be costing the French giant US$1.5 million per day.

Total is the operator (46.17% stake) of the Elgin/Franklin complex, with Eni and BG Energy holding 21.9% and 14.1% interests respectively. Production on the Elgin, Franklin and West Franklin fields, which averages 130,000 barrel of oil equivalent per day (boepd), is now temporarily shut but ratings agencies Fitch Rating’s and Moody’s believe it is not another “Deepwater Horizon.”

“We have not factored into the company's ratings any catastrophic accident on the platform resulting in an explosion, or a dramatic worsening of the current situation. However, we have considered a "worse-than-base-case" scenario where Total may have to shut down the Elgin field to stop the gas leak. This would imply the loss of a producing field that is worth, in net present value terms, €5.7 billion according to third party valuations. Were the field to become permanently unusable it would cost Total €2.6 billion - its share in Elgin - and the company might have to compensate its partners for the remaining €3.1 billion,” notes a Fitch statement.

Total had around €14 billion in cash on balance sheet at December 2011, and about €10 billion in available unused credit lines. Elsewhere, Petrobras' average oil and natural gas output in Brazil and abroad was 2,700,814 barrels of oil equivalent per day (boepd) in February. Considering only the fields in Brazil, production added up to 2,455,636 boepd. In February, oil output exclusively from domestic fields reached 2,098,064 barrels per day, while natural gas production totaled 56,849,000 cubic meters.

Finally, the Oilholic leaves you with a view of the windiest place on the Pacific Coast and the second foggiest place on the North American continent – Point Reyes and its lighthouse built in 1870.

According to the US National Park Service, weeks of fog, especially during the summer months, frequently reduce visibility to hundreds of feet and the historic lighthouse has warned mariners of danger for more than a hundred years.

A US Park Ranger on duty at the Lighthouse said the lens in the Point Reyes Lighthouse is a "first order" Fresnel lens, the largest size of Fresnel lens courtesy Augustin Jean Fresnel of France who revolutionised optics theories with his new lens design in 1823.

Before Fresnel developed this lens, lighthouses used mirrors to reflect light out to sea. The most effective lighthouses could only be seen eight to twelve miles away. After his invention, the brightest lighthouses – including this one – could be seen all the way to the horizon, about twenty-four miles. The Point Reyes Headlands, which jut 10 miles out to sea, pose a threat to each ship entering or leaving San Francisco Bay (click on map to enlarge).

The Lighthouse was retired from service in 1975 when the US Coast Guard installed an automated light. They then transferred ownership of the lighthouse to the National Park Service, which has taken on the job of preserving this fine specimen of American heritage. It is an amazing site and it was a privilege to have seen it and the famous fog.

The area also has a very British connection. The road leading up the rocky shoreline where the lighthouse is situated is named – Sir Francis Drake Boulevard – after the legendary British Navy Vice Admiral and a Crown explorer of the seas. It is thought that Sir Francis’ ship The Golden Hinde landed somewhere along the Pacific coast of North America in 1579, claiming the area for England as "Nova Albion."

The road itself is an east to west traffic linkage in Marin County, California, running just west of the Richmond-San Rafael Bridge to the trailhead for the Lighthouse right at the end of the Point Reyes Peninsula. His landing place has often been theorised to be at what is now called Drakes Bay on Point Reyes, the western terminus for the boulevard. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Oilholic at the Point Reyes Lighthouse, California, USA. Photo 2: Valero Gas Station Price Board, Sunnyvale, California, USA. Photo 3: Point Reyes Lighthouse © Gaurav Sharma. Photo 4: Archive photo of Point Reyes Lighthouse in 1870. Photo 5: Map of Point Reyes © Point Reyes Visitor Center / US National Parks Service. Photo 6: Oilholic on Sir Francis Drake Boulevard © Gaurav Sharma.

IEA on demand, Lavrov on Iran plus crude chatter

In its latest monthly report, the IEA confirmed what the Oilholic has been blogging for the past few months on the basis of City feedback – that the likelihood of another global recession will inhibit demand for crude oil this year, a prevalent high oil price might in itself hit demand too and seasonally mild weather already is.

While geopolitical factors such as the Iranian tension and Nigerian strikes have supported bullish trends of late, the IEA notes that Q4 of 2011 saw consumption decline on an annualised basis when compared with the corresponding quarter of 2010. As a consequence, the agency feels inclined to reduce its 2012 demand growth forecast by 220,000 barrels per day (bpd) from its last monthly report to 1.1 million barrels.

"Two inherently destabilising factors are interacting to give an impression of price stability that is more apparent than real. The first is a rising likelihood of sharp economic slowdown, if not outright recession, in 2012. The second factor, which is counteracting bearish pressures, is the physical market tightening evident since mid-2009 and notably since mid-2010," it says in the report.

The IEA also suggests that a one-third downward revision to GDP growth would see this year's oil consumption unchanged at 2011 levels. On the Iranian situation and its threat to disrupt flows in the Strait of Hormuz, through which 20% of global oil output passes, the agency notes, “At least a portion of Iran's 2.5 million bpd crude exports will likely be denied to OECD refiners during second half 2012, although more apocalyptic scenarios for sustained disruption to Strait of Hormuz transits look less likely.”

Meanwhile, Russian foreign minister Sergei Lavrov has weighed in to the Iran debate with his own “chaos theory”. According to the BBC, the minister has warned that a Western military strike against Iran would be "a catastrophe" which would lead to "large flows" of refugees from Iran and would "fan the flames" of sectarian tension in the Middle East. Israeli Defence Minister Ehud Barak earlier said any decision on an Israeli attack on Iran was "very far off".

Meanwhile, one of those companies facing troubles of its own when it comes to procuring light sweet crude for European refiners is Italy’s Eni which saw its long term corporate credit rating lowered by S&P from 'A' from 'A+'. In addition, S&P removed the ratings from CreditWatch, where they were placed with negative implications on December 8, 2011.

Eni’s outlook is negative according to S&P and the downgrade reflects the ratings agency’s view that the Italian oil major’s business risk profile and domestic assets have been impaired by the material exposure of many of its end markets and business units to the deteriorating Italian operating environment. Eni reported consolidated net debt of €28.3 billion as of September 30, 2011. Previously, Moody’s has also reacted to the Italian economy versus Eni situation over Q4 2011.

Elsewhere conflicting reports have emerged about the Obama administration’s decision to deny a permit to Keystone XL project something which the Oilholic has maintained would be a silly move for US interests as Canadians can and will look elsewhere. Some reports said the President has decided to deny a permit to the project while others said a decision was unlikely before late-February. This article from The Montreal Gazette just about sums up Wednesday's conflicting reports.

When the formal rejection by the US state department finally arrived, the President said he had been given insufficient time to review the plans by his Republican opponents. At the end of 2011, Republicans forced a final decision on the plan within 60 days during a legislative standoff.

The Republican Speaker of the US House of Representatives, John Boehner, criticised the Obama administration for its failure over a project that would have created "hundreds of thousands of jobs" while the President responded by starting an online petition so that the general population can express its opposition to the Keystone XL pipeline.

The merits and demerits of the proposal aisde, this whole protracted episode represents the idiocy of American politics. Canadians should now seriously examine alternative export markets; something which they have already hinted at. The Oilholic's timber trade analogy always makes Canadians smile. (Sadly, even Texans agree, though its no laughing matter).

On the crude pricing front, the short term geopolitically influenced bullishness continues to provide resistance to the WTI at the US$100 per barrel level and Brent at US$111. Sucden Financial's Myrto Sokou expects some further consolidation in the oil markets due to the absence of major indicators and mixed signals from the global equity markets, while currency movements might provide some short-term direction. “Investors should remain cautious ahead of any possible news coming out from the Greek debt talks,” Sokou warns.

Finally, global law firm Baker & McKenzie is continuing with its Global Energy Webinar Series 2011-2012 with the latest round – on International Competition Law – to follow on January 25-26 which would be well worth listening in to. Antitrust Rules for Joint Ventures, Strategic Alliances and Other Modes of Cooperation with Competitors would also be under discussion. Thats all for the moment folks. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Oil Refinery, Quebec, Canada © Michael Melford / National Geographic.

Looming embargo on Iran, Nigeria & few other bits

An EU ban on Iranian crude imports in response to the country’s continued nuclear programme is imminent but not immediate or so the City analysts and government sources would have you believe. Furthermore, news agency Bloomberg adds that the planned embargo is likely to be delayed by up to six months as European governments scramble to seek alternative sources.

The Japanese and Indian governments are also looking to reduce dependence on Iranian imports according to broadcasts from both countries while OPEC has indicated that it does not wish to be involved in row. Add the ongoing threats strike threats by Nigeria’s largest oil workers union, the Pengassan, as well the second largest, Nupeng, and political tension in the country to the Iranian situation and you don’t need the Oilholic to tell you that the short term risk premium is going mildly barmy.

It is nearly the end of the week and both benchmarks have rebounded with City analysts forecasting short term bullishness. With everyone scrambling for alternative sources, pressure is rising on already tight supply conditions notes Sucden Financial analyst Jack Pollard. “With the near-term geopolitical risk premium being priced in, Brent’s backwardation looks fairly assured as the front spreads continue to widen. Well-bid Italian and Spanish auctions have no doubt supported risk appetite, as the US dollar tracks back to lend upward pressure on commodities,” he adds.

When the Oilholic checked on Thursday, the Brent forward month futurex contract was resisting the US$110 per barrel level while WTI was resisting the US$99 level sandwiched between a bearish IEA report and geopolitical football. The next few weeks would surely be interesting.

Away from crude pricing, to a few corporate stories, ratings agency Moody’s has affirmed LSE-listed Indian natural resources company Vedanta Resources Plc's Corporate Family Rating of Ba1 but has lowered the Senior Unsecured Bond Rating to Ba3 from Ba2. The outlook on both ratings is maintained at negative following the completion of the acquisition of a controlling stake in Cairn India, on December 8, 2011.

Since announcing the move in August 2010, Vedanta has successfully negotiated the course of approvals, objections and amended production contract arrangements and now holds 38.5% of Cairn India directly, with a further 20% of the company held by Sesa Goa Ltd., Vedanta's 55.1%-owned subsidiary.

Moody’s believes the acquisition of Cairn India should considerably enhance Vedanta's EBITDA, but the agency is concerned with the sharply higher debt burden placed on the Parent company. In order to lift its stake from 28.5% to 58.5%, Vedanta drew US$2.78 billion from its pre-arranged acquisition facilities. Coupled with the issue of US$1.65 billion of bonds in June 2011, debt at the Parent company level is now in excess of US$9 billion on a pro forma basis. This compares with a reported Parent equity of US$1 billion at FYE March 2011.

Moving on, Venezuelan oil minister Rafael Ramírez said earlier this week that his country had decided to compensate ExxonMobil for up to US$250 million after President Hugo Chávez nationalised all resources in 2007. Earlier this month the International Chamber of Commerce in Paris, already stated that the country must pay Exxon Mobil a total of US$907 million, which after numerous reductions results in - well US$250 million.

Elsewhere, law firm Herbert Smith has been advising HSBC Bank Plc and HSBC Bank (Egypt) on a US$50 million financing for the IPR group of companies, to refinance existing facilities and to finance the ongoing development of IPR's petroleum assets in Egypt – one of a limited number of financings in the project finance space in Egypt since the revolution. It follows four other recent financings for oil and gas assets in Egypt on which Herbert Smith has advised namely – Sea Dragon Energy, Pico Petroleum, Perenco Petroleum and TransGlobe Energy.

On a closing note and sticking with law firms, McDermott Will & Emery has launched a new energy business blog – Energy Business Law – which according to a media communiqué will provide updates on energy law developments, and insights into the evolving regulatory, business, tax and legal issues affecting the US and international energy markets and how stakeholders might respond. The Oilholic applauds MWE for entering the energy blogosphere and hopes others in the legal community will follow suit to enliven the debate. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Pipeline, South Asia © Cairn Energy.