When BP met…er…nobody!

It’s good to be back in Houston, Texas although the Oilholic could have done without the very British weather we’re having here. Before getting down to cruder brass tacks and gaining market insight in wake of the oil price slump, one decided to probe the ongoing chatter about BP being sized up suitors.

To being with, this blogger does not believe ExxonMobil is going to takeover BP, has said so quite openly on broadcasting outlets back in England. That sentiment is shared by a plethora of senior commentators the Oilholic has met here in Houston over the past 48 hours. Both financial and legal advisers along with industry insiders remain unconvinced. Hell, even BP employees don’t buy the slant.

For starters if you are ExxonMobil, why would you want a company that has quite a lot of baggage no matter how attractive a proposition it is in terms of market valuation. Let us face it BP’s valuation is pretty low, but a damn sight better than 280p circa it was fetching in the immediate aftermath of the Gulf of Mexico oil spill.

However, the valuation is where it is for a reason. BP has scored a few legal victories, but the protracted tussle in US courtrooms resulting from the spill's fallout will continue for sometime yet. Secondly, its 19% stake in Russia’s Rosneft, while widely deemed as a positive move in Houston back in 2012, isn’t look all too attractive right now. BP’s latest financial data bears testimony to that.

Now if you were Rex Tillerson that’s not the most attractive partner out there to put it mildly, say Houston contacts who’ve advised the inimitable ExxonMobil boss on the company's previous forays. There are also regulatory hurdles. A hypothetical ExxonMobil takeover would create an oil and gas major with a cumulative revenue base that’d beat the GDP of a basket of mid-tier economies (using World Bank’s data on economic performance).

Finally, you can’t put monetary value on reputational risk. BP’s brand is considerably less toxic with boss Bob Dudley & co working real hard to mend it. Yet, the toxicity would take a while yet to dissipate. It’s not easy to forget the events of April 2010. Any suitor for BP, not just ExxonMobil, would be only too aware of that.

Another strange theory doing the rounds is that Shell might make an approach. This has been visited several times over the years, not least directly by BP’s former boss Lord Browne. The reason it hasn’t taken off is because the Dutch half of Royal Dutch Shell does not want its influence diluted further, which is guaranteed to happen were Shell and BP to merge.

Moving away from the improbable and the lousy, to something more credible - a theory doing the rounds that BP might find a credible white knight in the shape of Chevron. Such a tangent does make ears prick in Houston and gets the odd nod for experts who have seen many a merger and the odd mega merger. 

The only problem is that in more ways than one, Chevron and BP’s North American ventures overlap which isn’t a problem to such an extent in the case of ExxonMobil and Shell. So a BP and Cheveron merger does stack up in theory. However, there would plenty of regulatory hurdles and both parties would need to divest substantially for the merger to be approved by regulators in more than one jurisdiction.

While everything is possible on the BP front, nothing is worth getting excited about. In the interim, an odd investment banker (or two or possibly more) in New York or London will keep pedalling BP’s vulnerability.  But consider this, were a suitor or suitors turn up for BP, it wont hurt your prospects if you happen to be a BP shareholder!

That’s all for the moment folks from Houston, where there are a few strikes, some trepidation and a whole lot of realism in the air! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo 1: Logo of BP © BP Plc. Photo 2: ExxonMobil office signage, Downtown Houston, USA © Gaurav Sharma.

A seminal moment has arrived for Pemex

For 76 years, Mexico’s state-owned oil and gas company Petroleos Mexicanos (or Pemex) has had a near monopoly over the country’s oil production. However, 2015 would be its 77th and final monopolistic one as Mexico prepares to open up oil exploration and production to foreign and domestic private sector participants.

Declining production levels for the last 10 years seem to have forced the government’s hand to invigorate the sector and shake-up Pemex. Mexico currently produces around 2.5 million barrels per day (bpd), nearly a million less than it did in 2004 when production peaked.

Unlike his predecessors who promised much but delivered little, President Enrique Peña Nieto changed Mexico’s constitution to facilitate private investment in a bid to revive Pemex’s fortune, given that it provides nearly a third of Mexico’s tax revenues. However, desperate to keep the public opinion onside, Peña Nieto vowed that “Pemex itself would never be privatised.”

Some still say the reforms did not go far enough. Yet by Mexican standards, it’ll be one heck of shake-up for a state-owned oil and gas company which has never competed itself to bid for overseas exploration rights (unlike many other state-owned behemoths especially from China and India).  

Pemex will have a new board of directors, procedural overhauls, process streamlining (at least on paper) and for the first time in its history face competition from private sector participants. If all that wasn’t enough, Pemex will allow its petrol stations and forecourts to compete with each other on price at the pump for the first time ever.

However, nothing is ever plain sailing in Mexico. The general public has largely embraced the change so far but some union leaders who carry considerable clout haven’t and are peddling alarmist ideas about an American takeover of Mexico’s precious resource. A negative vote in a referendum on further changes could bring things to a grinding halt. 

While the oil price decline is worrying, commentators say market volatility is not enough to derail things as one noted earlier. As for Pemex, Moody’s seems to suggest it is on the right track. On Friday, it affirmed the ratings of the state-firm and its subsidiaries, including Pemex's A3 and (P)A3 global long-term ratings with a “stable” outlook.

Moody’s notes that despite significant changes arising from the new energy law, Pemex will remain closely linked to the government of Mexico, which will continue to provide strong support, given the company's importance to the government's budget, to the oil sector and to the country's exports.

In the short to medium term, Moody's does not expect any material reduction in Pemex's tax burden and its debt amount is likely to rise to fund higher capital expenditures. “However, its managerial and budgetary autonomy will increase, improving its efficiency,” says Moody’s analyst Nymia Thamara Cortes de Almeida.

While Moody’s reckons Pemex will be able to maintain its production level around 2.5 million bpd level for three years at the very least, the government thinks it’ll be able to do so for the next 15 years! Suitably modest as usual! 

In the so-called “Round Zero” allocation last year, Pemex was still given rights to 83% of all proven and probable reserves in Mexico. But in “Round One”, scheduled to end by September 2015, Peña Nieto administration will put tender 169 blocks covering 28,500 square kilometres open to private participation in (or without) cooperation with Pemex.

A major test will come if an oil major gets drilling without Pemex and it’s not inconceivable given the pace with which things are moving here. The government is seeking oil and gas foreign direct investment in the range of US$50 to 60 billion by 2018.

Over the course of three days, the Oilholic has spoken on and off record to several market participants. Mood here is upbeat to begin with and several commentators also said Pemex had given them direct feedback about wanting to put its house in order. It's early days so lets see how this plays out.

The biggest question in a bearish market, is whether investors, especially foreign investors and IOCs would buy the idea of entering the Mexican oil and gas sector.

The Oilholic intends to explore this in greater detail from Houston and London over the coming weeks and months. However, one thinks it won’t be easy convincing the private sector especially when it comes to bidding for subsequent exploration rights offers. The initial and most lucrative exploration rights were given to Pemex. The next round puts forward exploration rights to areas where there is only a 50% chance of finding and tapping out the crude stuff in an economically viable fashion. In the following round, the probability percentage falls to 10%, and the ultimate round would see potential suitors vie for untested prospects.

If the Oilholic were a bidder, this doesn’t really fill one with confidence from the outset. It’ll all depend on the terms on offer and the jury is still out on that one. One thing is for sure, with Mexico’s proven oil reserves standing falling from 5th to 18th in the global league table, no one is opening that premium tequila bottle just yet. Much will depend on Pemex's capacity to finally embrace change. That’s all from Mexico City folks as an amazing but short trip comes to an end! Next stop, Houston Texas! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo 1: Pemex Petrol Station in Mexico City, Mexico, May 2015. Photo 2: Pemex Signage © Gaurav Sharma.

Oil price vs. investment: A view from Mexico City

The Oilholic has temporarily swapped London for the quaint charms of Mexico City in order to get a perspective on the current oil market melee and its impact on sector investment here.

On the face of it, there’s no panic in policymakers’ ranks and commentators of all description agree that as a major oil producer Mexico could well do without an oil price decline. President Enrique Peña Nieto’s bid to boost economic activity via oil and gas sector reform legislation announced last year remains on track. It has taken 76-years for Mexico to get where it did last year and people are in a buoyant mood.

In fact, Peña Nieto surprised global markets and Mexicans in equal measure by biffing through his pre-election promise of sector reform in a short space of 18 months. In précis, via the said reform package, Sener (Ministry of Energy) gave state-owned Petroleos Mexicanos (or Pemex) 83% of Mexico’s proven and probable hydrocarbon reserves and 21% of the prospective resources. However, new private sector participants, while expected to explore the remaining 17%, would have access to 79% of prospective reserves in the next round. Many prospects are promising according to seismic data and market evidence. 

The move carries massive changes for Pemex, something which the Oilholic will discuss in greater detail shortly. On paper, we’re still in nascent stages of what the government says it is trying to achieve. So does the current volatility constitute a proverbial spanner in the work? No, say most commentators yours truly has spoken to since arrival.

Benjamín Torres-Barrón, Baker & McKenzie's Energy, Mining & Infrastructure Practice Group leader in Mexico, whom the Oilholic first met at the 20th World Petroleum Congress in Doha back in 2011, says the oil and gas sector is better placed than it has ever been in recent years. 

“Timing of the oil price decline could be described as unfortunate. You could say that we’ve waited 76-years for change and when that change arrives, this happens. However, my argument is that there is never a good or bad time for legislative reform; it’s about seizing opportunities. Imagine if we were stuck in the same place as we were in 2011 [with the Felipe Calderón administration promising much with little to show for it] and the oil price nosedived as it has; you would have found the domestic market in a terrible state. Declining production and archaic legislation would have been a double blow.

"Right now Mexico is sending a positive message albeit in a tough climate. A drive has been set in motion and the dampening effect of oil market volatility on the capacity for reform would be negligible," he adds.

Most of Baker & McKenzie's corporate clients are not necessarily put off by the oil price dip. “Current investment is not about the here and now, but rather about the future. Those waiting for market access could [and should] have a broad range of potential concerns from security to politics, corruption to red tape, but not a single client has told us we’re no longer interested in participation singularly on the basis of oil price fluctuations.”

Torres-Barrón’s colleague Carlos Linares-Garcia, the international law firm’s Principal Economist attached to its Latin America Transfer Pricing practice, underscores why Mexico must carry on regardless.

“Royalties and tax takings from private investors might well be lower in the current climate. Stated production level of 2.5 million barrels per day (bpd) still makes Mexico the world’s sixth-largest oil producer. Yet, people long for the days in the not so distant past when production stood at 3.4 million bpd [3.6 mbpd in boepd] in 2004.” 

The subsequent decline made Pemex a familiar figure of farce as far as bloated state entities go and criticism followed in editorials ranging from local media to The Economist. “There is a determination to shake off that image. In my direct interactions with Pemex since August, I’ve noticed a clear recognition of the challenges and a desire for change. Pemex wants things to change, as much as people in legislative circles and the wider public,” Linares Garcia adds.

In fact, most energy sector reforms in any jurisdiction (e.g. shale exploration framework amendments in various EU markets), is accompanied by protests and rabble-rousing. Just ask the Brits. Yet, in Mexico, bar the odd noise made by labour unions, the Oilholic feels the general public has largely embraced sector reforms potentially moving Pemex away from state protectionism that has plagued it for years.

Right now Mexicans have a lot of things to protest about including socio-political mishaps, but oil and gas sector reform isn't one of them. Furthermore, the reform agenda extends beyond Pemex, something which external commentators often forget to take into account, says Ingrid Castillo, Head of Research at Grupo Bursátil Mexicano (GBM).

“Beyond Pemex, Comisión Federal de Electricidad (or CFE - the state-owned electricity firm) and government agencies are likely to feel the effects. For CFE, improved and viable access to natural gas is crucial, and market reform puts it on the agenda. Mexico has its own ambitions for shale exploration and there is clear recognition of the role played by the private sector in bringing shale gas to market across the border in US.”

Castillo also says industry stakeholders are more pragmatic than many of their European partners about a future windfall from shale and the time it takes to materialise. “We have noted the pitfalls, false starts, challenges, time scale and the ultimate success when it comes to US shale exploration. People are under no illusion about the effort required and the private sector’s role in bringing it about in Mexico.”

An unbundled, improved pipeline infrastructure seen in the US also remains a pipedream according to GBM, Baker & McKenzie and commentators from the big four global advisory firms. “The good thing is we’re finally talking about it more seriously than we used to. The chatter has not cooled off despite turmoil in the oil markets,” says a senior financial adviser.

Castillo’s GBM colleague Olaf Sandoval, a Senior Regional Economist, says the Mexican government has handled the oil price decline well so far. “The government recently introduced austerity measures to the tune of MXN124 billion (US$8.26 billion) with implications for Pemex and CFE. However, what's key here is that most cuts will primarily take place in the shape of ordinary expenses rather than capital expenditure on infrastructure with a 65:35 split in favour of the former.”

While the price decline is not an immediate concern this year, subsequent years could prove challenging if bearish sentiments get entrenched. For the current fiscal year, the Peña Nieto administration has already hedged via seven global financial institutions. The price of oil negotiated was $76.4 barrel, which implied a cost of $773 million in line with previous years. So 2015 would see the government largely protected for the spread between its budgeted price of $79 per barrel and currently chaotic spot markets. 

“Yet, in 2016 and 2017, it could be a very different story. Concerns over volatility could be more pronounced then, which could have implications for capital expenditure on infrastructure much more than it is currently having,” Sandoval adds.

But Mexico is undoubtedly in a much better shape than before. “We’re in the middle of intense economic pressure in Greece and talks of a Venezuelan default. Not that long ago, Mexico would be in that club. That the country is not, suggests things while not perfect, are certainly on the right track,” says Linares-Garcia.

As for the viability of oil and gas projects, Torres-Barrón says some would even be profitable at an oil price as low as $30 per barrel. “Additionally, selected shallow water prospects could cope with even $20. The first contracts are expected to be awarded this year and there is no anecdotal indication of delays or lack of investor appetite. Several IOCs will turn-up, and there’s the inevitable interest from Asian, especially Chinese, state-owned firms.”

The sector remains on the cusp of something important. Market reforms could add as much as 1%-1.5% to headline economic growth by 2018. An increase in gas production could boost the nation’s industrial production and grandiose forecasts of Mexico achieving 6% growth are around should you want to believe them.

“But you shouldn’t; for in Mexico we have had many false dawns. If we exceed 3% in 2015, that would be something to cheer about. Energy sector reform is likely to play a part, but there is no point getting ahead of ourselves,” says Castillo.

Linares-Garcia adds that diversification to other oil and gas export markets would be crucial for future prospects. “If China’s economy is not growing as fast and the US is importing less, we should be [and are] looking other markets. Even so, reliance on the US market persists. The next five years would be critical but Mexico is on the right track towards market diversification.”

A return to 2004 oil production levels by 2018 would be more than welcome. For that, welcoming new participants to town seems to be the mantra as oil price fluctuation dominates headlines.

That’s all for the moment folks, as one leaves you with a view of the Monumento a la Independencia (see above right) built in 1910 to commemorate Mexico's war of Independence. It's now a focal point for everything from celebrating a win of the national football team to political protests! The Oilholic spotted a few protests himself but none were of the 'crude' variety. More from Mexico City soon. Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo 1: Mexican Flag at Palacio Nacional, Mexico City. Photo 2: Monumento a la Independencia, Mexico City, Mexico © Gaurav Sharma, February, 2015

Downward revisions of gas price assumptions

While oil markets have grabbed all the headlines in recent weeks, there is something afoot in the natural gas markets that’s telling. Several analysts and rating agencies have revised their short to medium term gas price forecasts downwards over the past six weeks.

Earlier this month, Fitch Ratings revised its base case for Henry Hub down to US$3/mcf from $4/mcf in 2015, while not losing sight of a long-term value of $4.50/mcf. The agency’s stress case for credit ratings purposes this year has been revised to $2.75/mcf from $3.25/mcf, and the long run price to $3.25/mcf from $3.50/mcf.

There is nothing to sensationalise here, we’re not slipping down to April 2012 levels and sub-$2 prices. Yet, there is little to be broadly upbeat about over the medium term for US producers given the current abundance of gas. Alex Griffiths, Managing Director at Fitch Ratings, says the agency has merely reacted to rebounding inventories as noted by the EIA and other sources.

“A warmer US winter, and continued strong growth in domestic shale gas supply, including ongoing efficiency gains in drilling are having a bearing. The drop in forward oil prices is also likely to have a dampening effect on US gas demand over the medium term, as lower oil prices suggest lower profits and reduced economic feasibility for at least some US based LNG projects still at the planning stages,” he adds.

In fact, natural gas abundance could stunt the growth of new nuclear build in the eyes of many contacts. At present, nuclear power share of the overall US market is just shy of 20%. Cheap gas means the level is likely to be severely tested over the coming years. Only two new nuclear plants are currently under construction, with the first not expected to come online before 2018 at the earliest.

Gas producers, unlike their oil counterparts, can at least take some solace now in exporting their proceeds of shale to Europe and Asia as Sabine Pass LNG export terminal kicks into gear in 2017. However, Fitch says while the European gas price is in a much better place than the US, it too is going through testing times.

Fitch uses UK’s National Balancing Point (NBP) gas price as proxy, which it has also revised down to $6/mcf in 2015 from $8/mcf to reflect downward movements in the market price since last year. Overall, the NBP has fallen nearly 20% since a year ago to around $7.50/mcf.

“We believe that due to seasonal factors and the downward impact of oil-linked gas contracts elsewhere in the market, which typically readjust price with a six or nine-month lag, it is appropriate to reflect a weaker market as our base assumption for the rest of the year. From 2016, the base case price deck for NBP sees a gradual improvement back to $8 in the long run,” Griffiths adds.

So should US producers continue to look elsewhere in order to get more bang for their invested bucks? Exporting to Europe and Asia seems to be the answer. Invariably though, as pointed out by opponents of US gas exports, this would lead to a rise in domestic gas prices.

US gas will continue to trade at some discount to European prices and at a considerable discount to Asian prices. As the Oilholic noted last year in a Forbes column, the Henry Hub is not relocating to Wales or Singapore any time soon! Even in a depressed gas market, disparities will persist.

That the European market is the most depressed of all shouldn’t be in any doubt. On February 3, Russia’s Gazprom, still Europe’s leading provider of natural gas (Ukraine-related sanctions or not), said it would reduce gas imports from Turkmenistan and Uzbekistan, which it passes on to end clients, by 60% and 75% respectively, to compensate for weak demand.

Not only does it have heavy implications for both those countries, but Moody’s unsurprisingly views it as a credit negative for Intergas Central Asia (ICA, Baa3 positive), Kazakhstan's gas transmission company operating one of main Central Asian pipelines.

The agency says Gazprom’s move has the potential to trigger a 40% dip in ICA’s profits on an annualised basis. “Such revenue deterioration would weaken the credit metrics of ICA, which generates more than 50% of its revenue from the transportation of Asian gas under contract for Gazprom. It would also reduce the company's ability to generate cash, as well as its resilience to foreign currency risk associated with its predominantly US dollar-denominated debt,” it adds.

In summation, these are serious if not precarious times for the gas markets, and it’s not the just US players who ought to be worried.

On a closing note, here is the Oilholic’s recent chat for Forbes with US Department of Energy CIO Donald Adcock. Additionally, here is one’s take on how oil traders, trading houses and of course hedge funds are looking to play contango. As usual they’ll be winners, losers, sinners and pretty happy shippers.

That’s all for the moment folks! The Oilholic is off to gather fresh intel from Mexico City and Houston. Until next time, keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.
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© Gaurav Sharma 2015. Photo: Offshore rig, USA  © Shell

Oil markets & producers on a tricky skating rink

So we had a crude oil price plunge early January, followed by a spike that promptly "un-spiked", only to rise from the ashes and subsequently go down the path of decline again. Expect further slippage, more so as the last week of profit taking takes place before the March futures contracts close, which in ICE Brent’s case would be February 13.

Amid the ups and downs of the last six weeks, headline writers were left tearing their hair on a daily basis switching from "Brent extends rally" to "Oil slides despite OPEC talk of a floor" to "Falling Premiums" to "Crude oil getting hammered" and back to "Oil jumps". All the while commentators queued up with some predicting a return to a US$100 per barrel Brent price "soon", alongside those sounding warnings about a drop to $10.

The actual market reality is both here and nowhere, as we enter a period of constant slides and spikes between $40 and $60. There are those who say the current oil price level cannot be sustained and supply-side analysts, including the Oilholic, who say the current oil production levels cannot be sustained. Both parties are correct – a price spike and a supply correction will happen in tandem, but not overnight.

It will take at least until the summer for sentiments about lower production levels to feed through, if not longer. More so, as many are gearing up to produce more with less, for example in Western Canada where fewer wells would be dug this year, but the production tally would be higher than the previous year. Taking a macro viewpoint, all the chatter of bull runs, bear attacks and subsequent rallies is just that – chatter. Market fundamentals have not materially altered.

Despite the latest Baker Hughes data showing fewer operational rigs compared to this point last year, the glut persists and there is some way to go before it alters. Roughly around 5% of current global oil production is taking place at a loss. Yet producers are biting the bullet wary of losing market share. It'll take a lot longer than a few weeks of negative rig data in the new year, before someone eventually blinks and makes a substantial impact on production levels. The Oilholic reckons it will be around June.

Until then, expect the market to continue skating in the $40 to $60 rink. In fact, there is some justification in OPEC Secretary General Abdalla Salem El-Badri’s claim that oil prices have bottomed out. While we could have a momentary dip below $40, something which the Western Canadian Select has already faced. However, by and large benchmark prices have indeed found resistance above $40. 

Having said so, the careful thing to do between now and (at least) June would be to not get carried away by useless chatter. When Brent shed 11.44% in the first five trading days of January, only to more than recover the lost ground by the end of the month (see chart on the right, click to enlarge), some called it a mini-bull run.

Percentages are always relative and often misleading in the volatile times we see at the moment, as one noted in a recent Tip TV broadcast. So mini-bull run claims were laughable. As for the eventual supply correction, capex reduction is already afoot. BP, Shell, BG Group and several other large and small companies have announced spending cuts. A recent Genscape study of 95 US exploration and production (E&P) companies noted a cumulative capex decline of 27%, from $44.5 billion last year to a projected $32.5 billion this year.

Meanwhile, Igor Sechin, the boss of Russia’s Rosneft has denied the country would be the first to blink and lower production in a high stakes game. Quite the contrary, Sechin compared the US shale boom to the dotcom bubble and rambled about the American position not being backed up by crude reserves.

He also accused OPEC along familiar lines of conspiring with Western nations, especially the US, to hurt Russia. Moving away from silly conspiracy theories, Sechin does have a point – the impact of a lower oil price on shale is hard to predict and is currently being put to test. We’ll know more over the next two to three quarters.

However, comparing the shale bonanza to the dotcom bubble suggests wilful ignorance of a few basic facts. Unlike the dotcom bubble, where a plethora of so-called technology firms put forward their highly leveraged, unproven, profit lacking ventures pitched to investors by Wall Street as the next big thing, independent shale oil upstarts have a ready, proven product to sell in barrels.

Of course, operational constraints and high levels of leveraging remain burdensome in a bearish oil market. While that might cause difficulties for fringe shale players, established ones will carry on regardless and find ways to mitigate exposure to volatility.

In case of the dotcom bubble, where some had nothing of proven tangible value to sell, independents tipped over like dominos when the bubble burst, apart from those who had a plan. For instance, the likes of Amazon or eBay have survived and thrived to see their stock price recover well above the dotcom boom levels.

Finally, in case of US shale players, ingenuity of the wildcatters catapulted them to where they are with a readily marketable product to sell. There is anecdotal evidence of that same ingenuity kicking in tandem with extraction process advancements thereby making E&P activity viable even at a $40 Brent price for many if not all.

So it's not quite like Pets.com if you know what the Oilholic means. Sechin’s point might be valid but its elucidation is daft. Furthermore, US shale players might have troubling days ahead, but trouble is something the Russian oil producers can see quite clearly on their horizon too. Additionally, shale plays have technological cooperation aimed at lowering costs on their side. Sanctions mean sharing of international technology to sustain or boost production as well as lower costs is off limits for the moment for Russia.

On a closing note, its being hotly disputed these days whether and by how much lower oil prices boost global economic activity, as one noted in a recent World Finance journal video broadcast. Entering the debate this week, Moody’s said lower oil prices might well give the US economy a boost in the next two years, but will fail to lift global growth significantly as headwinds from the Eurozone, China, Brazil and Japan would dent economic activity.

Despite lower oil prices, the agency has maintained its GDP growth forecast for the G20 countries at just under 3% in both 2015 and 2016, broadly unchanged from 2014. Moody's outlook is based on the assumption that Brent will average $55 in 2015, rising to $65 on average in 2016. 

It assumes that oil prices will stay near current levels in 2015 because demand and supply conditions are "unlikely to change markedly" in the near future, as The Oilholic has been banging on many a blog post including this one. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Danger of slipping sign. Graph: Oil Benchmark Prices, January 2015 © Gaurav Sharma

The $40-50 range, CAPP on Capex & Afren's woes

The first month of oil trading in 2015 is coming to a much calmer end compared to how it began. The year did begin with a bang with Brent shedding over 11% in the first week of full trading alone. Since then, the only momentary drama took place when both Brent and WTI levelled at US$48.05 per barrel at one point on January 16. Overall, both benchmarks have largely stayed in the $44 to $49 range with an average Brent premium of $3+ for better parts of January.

There is a growing realisation in City circles that short sellers may have gotten ahead of themselves a bit just as those going long did last summer. Agreed, oil is not down to sub-$40 levels seen during the global financial crisis. However, if the price level seen then is adjusted for the strength of the dollar now, then the levels being seen at the moment are actually below those seen six years ago.

The big question right now is not where the oil price is, but rather that should we get used to the $40 to $50 range? The answer is yes for now because between them the US, Russia and Saudi Arabia are pumping well over 30 million barrels per day (bpd) and everyone from troubled Libya to calm Canada is prodding along despite the pain of lower oil prices as producing nations.

The latter actually provides a case in point, for earlier in January the Western Canadian Select did actually fall below $40 and is just about managing to stay above $31. However, the Oilholic has negligible anecdotal evidence of production being lowered in meaningful volumes.

For what it’s worth, it seems the Canadians are mastering the art of spending less yet producing more relative to last year, according to the Canadian Association of Petroleum Producers (CAPP). The lobby group said last week that production in Western Canada, bulk of which is accounted for by Alberta, would grow by 150,000 bpd to reach 3.6 million bpd in 2015. 

That’s despite the cumulative capex tally of major oil and gas companies seeing an expected decline of 33% on an annualised basis. The headline production figure is actually a downward revision from CAPP’s forecast of 3.7 million bpd, with an earlier expectation of 9,555 wells being drilled also lowered by 30% to 7,350 wells. Yet, the overall production projection is comfortably above 2014 levels and the revision is nowhere near enough (yet) to have a meaningful impact on Canada’s contribution to the total global supply pool. 

Coupled with the said global supply glut, Chinese demand has shown no signs of a pick-up. Unless either the supply side alters fundamentally or the demand side perks up, the Oilholic thinks the current price range for Brent and WTI is about right on the money. 

But change it will, as the current levels of production simply cannot be sustained. Someone has to blink, as yours truly said on Tip TV – it’s likely to be the Russians and US independent upstarts. The new Saudi head of state - King Salman is unlikely to change the course set out by his late predecessor King Abdullah. In fact, among the new King’s first acts was to retain the inimitable Ali Al-Naimi as oil minister. 

Greece too is a non-event from an oil market standpoint in a direct sense. The country does not register meaningfully on the list of either major oil importers or exporters. However, its economic malaise and political upheavals might have an indirect bearing via troubles in the Eurozone. The Oilholic sees $1= €1 around the corner as the dollar strengthens against a basket of currencies. A stronger dollar, of course, will reflect in the price of both benchmarks.

In other news, troubles at London-listed Afren continue and the Oilholic has knocked his target price of 120p for the company down to 20p. First, there was bolt out of the blue last August that the company was investigating “receipt of unauthorised payments potentially for the benefit of the CEO and COO.” 

Following that red flag, just recently Afren revised production estimates at its Barda Rash oilfield in the Kurdistan region of Iraq by 190 million barrels of oil equivalent. The movement in reserves was down to the 2014 reprocessing of 3D seismic shot in 2012 and processed in 2013, as well as results from its drilling campaign, Afren said. 

It is presently thinking about utilising a 30-day grace period under its 2016 bonds with respect to $15 million of interest due on 1 February. That’s after the company confirmed a deferral of a $50 million amortisation payment due at the end of January 2015 was being sought. Yesterday, Fitch Ratings downgraded Afren's Long-term Issuer Default Rating (IDR), as well as its senior secured ratings, to 'C' from 'B-'. It reflects the agency’s view that default was imminent.

Meanwhile, S&P has downgraded Russia’s sovereign rating to junk status. The agency now rates Russia down a notch at BB+. “Russia’s monetary-policy flexibility has become more limited and its economic growth prospects have weakened. We also see a heightened risk that external and fiscal buffers will deteriorate due to rising external pressures and increased government support to the economy,” S&P noted.

Away from ratings agencies notes, here is the Oilholic’s take on what the oil price drop means for airlines and passengers in one’s latest Forbes piece. Plus, here’s another Forbes post touching on the North Sea’s response to a possible oil price drop to $40, incorporating BP’s pessimistic view that oil price is likely to lurk around $50 for the next three years.

For the record, this blogger does not think oil prices will average around $50 for the next three years. One suspects that neither does BP; rather it has more to do with prudent forward planning. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Oil pipeline with Alaska's Brooks Range in the background, USA © Michael S. Quinton / National Geographic

Brent’s premium gets dents as oil price dips

It’s definitely a moment worth recording and the Oilholic was rather glad he was awake earlier today when it happened. For at one point in Asian trading, both Brent and WTI were in perfect sync at US$48.05 per barrel as the oil markets rout continues (see screen grab below, click to enlarge). What's more, for a precious few minutes, the WTI actually traded at a premium of a few cents to Brent marking only the third such occurrence since 2010.

Of course, Brent’s premium has been since been restored back to well over a dollar and rising. However, it is a far cry from 2012 when the premium was averaging around $20 per barrel above the WTI, and did touch $25 at one point if this blogger’s memory serves him well.

The near coming together of both global benchmarks shouldn’t come as a surprise as it was on the horizon. What transpired today was merely for the sake of a record which might not be all that unique over the coming weeks and months of volatility. That said, once the projected supply correction kicks in around midway point of this year, the Oilholic does see Brent’s single digit premium to the WTI climb up to around $5.

As of now, one's 2015 oil price forecast is for a Brent price in the range of $75 to $85 and WTI price range of $65 to $75. Weight on Brent should be to the upside, while weight on WTI should be to the downside of the aforementioned range.

Meanwhile, a Baron’s article is suggesting oil could fall to $20, while industry veteran T. Boone Pickens says he’s seen several slumps in his lifetime and reckons a return to a $100 level within the next “12 to 18 months” is inevitable.

Additionally, the Oilholic has called an end to the so-called “commodities supercycle” in his latest quip for Forbes. On a related note, Goldman Sachs has trimmed its six and 12 month 2015 estimates for Brent to $43 and $70, from $85 and $90, and to $39 and $65, from $75 and $80, for the WTI.

Finally, as talk of a Venezuelan default gains market traction, Moody’s has downgrades ratings of PDVSA and its wholly-owned US-based refining subsidiary Citgo Petroleum. PDVSA’s long term issuer rating and senior unsecured notes were downgraded by the agency to Caa3 from Caa1. Moody’s changed its outlook on the ratings to stable from negative. 

Citgo Petroleum's Corporate Family Rating was downgraded to B3 from B1; its Probability of Default rating to B3-PD from B1-PD; and its senior secured ratings on term loans, notes and industrial revenue bonds to B3 from B1.

Additionally, the rating on Citgo's senior secured revolving credit facility was downgraded to B2 from B1, reflecting a lower expected loss in case of default vis-à-vis other classes of debt in the company's capital structure. The rating outlook was also changed to stable from negative.

The rating actions follow Moody's downgrade of the Venezuelan government's bond ratings to Caa3 from Caa1 with a stable outlook, earlier this week. The principal driver of the decision to downgrade Venezuela's sovereign rating was "a marked increase in default risk owing to lower oil prices," the agency said. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Bloomberg screen grab as Brent and WTI futures achieve parity on January 15, 2015 © Bloomberg

Greens deserve inclusion in UK leaders’ debates

A political kerfuffle has broken out in British political circles about inclusion (or exclusion) of the UK’s Green Party in televised leaders’ debate ahead of the 2015 General Election on May 7.

It all kicked-off on Monday when the country’s broadcasting regulator Ofcom opined that the Green Party did not have the clout to be considered a big enough player on the national stage.

Prime Minister and leader of the Conservative Party David Cameron then said he wouldn’t take part in a televised debate that excludes the Green Party, since UKIP a minor right-wing party that’s eating into his political base had been invited to participate but not the Greens. 

As exposure for the Greens is likely to hurt the opposition Labour party and the Liberal Democrats, Cameron’s desire to have the Greens included might well be driven by his own interests. Labour, Liberal Democrats and UKIP all cried foul at Cameron’s announcement, while he in turn accused opponents of running scared. 

Whatever his reasons might be, the Oilholic feels Cameron is right to demand inclusion of the Greens. Those asking why the Greens should be included must actually ask “Why not?” instead. The Oilholic profoundly disagrees with a lot of what the Greens say and the policies they propose. However, that does mean this blogger should frown upon giving them a voice on a national stage at one of the most important general elections in a generation.

The British Green movement should now be considered sufficiently mature and in sync with some of its counterparts in the wider European Union. In fact, at the recent European elections both the Greens and UKIP got more votes than the Liberal Democrats.

The Greens had their first MP in 2010 as Caroline Lucas entered parliament on her own merit and credentials having fought against mainstream parties with deeper pockets. While UKIP might well have two MPs in parliament at the moment; both are defectors from the Conservative Party who re-entered parliament having been elected on their established political reputations while piggybacking on a populist bandwagon provided by a protest party.

Yet UKIP gets a voice, but the Greens don’t despite being level pegging with the Liberal Democrats in many opinion polls? Some say giving the Greens a nationally televised platform would invite legal challenges from Scottish and Welsh nationalists, and other minor parties. If so, then so be it – let them prove the credentials as a national party.

That the Greens are a national force is beyond dispute. They might well be a fringe party, but unlike Scottish and Welsh nationalists, the Greens are fighting UK-wide not just in pockets of the still United Kingdom. Perhaps we should look to Germany and how its multiparty system has incorporated the Green movement. There are other such examples within the EU.

We should give the Greens a wider platform and leave their electoral performance to the court of public opinion. By that argument, allowing them to participate in a national leaders’ debate would be a good starting point. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Big Ben and the UK parliament, London © Gaurav Sharma

Oil price dip & those tankers on the horizon

Crude year 2015 has well and truly begun with the oil price slipping several notches further, as tankers begin carrying their January cargo that is worth considerably less than it was 12 months ago.

With the full trading week to Jan 9 seeing an uptick in trading volumes back to normal levels after the festive period, the Oilholic spent a day looking at tankers in English Bay on a beautiful sunny afternoon in Vancouver, British Columbia, Canada. Most of these behemoths (see left, click to enlarge photo) ferry Canadian crude to Asian markets finding their way to the vastness of the ocean from Vancouver's Burrard Inlet. 

As tankers disappeared away from eyesight and yet more dotted the landscape, one's first 5-day assessment of this year saw Brent down 11.44% on the week before, WTI -8.2% and the OPEC Basket a whopping -16%. For now, the Canadian oil and gas industry is holding up pretty well and strategically bracing itself for a further drop in price to as low as US$35 per barrel.

Beyond that, of course all bets are off. Whatever the price, local environmental lobby groups don’t quite like these tankers “blotting the coastline of beautiful British Columbia” to quote one. Data suggests traffic has risen seven-fold since 2001. Of course, the oil being shipped isn’t local as British Columbia doesn’t have too much of its own.

Rather, as many of you would know, all of it is piped in from Alberta by Kinder Morgan to its Westport Terminal on the South East shoreline of Burrard Inlet in Burnaby. The company is the middle of a full on bid to increase pipeline capacity. However, standing on the beach, more than one environmentalist would tell you that a spill was inevitable, especially if you happen to declare you are an energy analyst.

Yet, both major incidents over the last ten years have been on land and weren’t down to the crude behemoths of the sea. In 2007, a construction mishap saw a Kinder Morgan pipeline break in Burnaby spilling oil into the Burrard Inlet while dousing some 50 homes in the neighbourhood with the crude stuff. 

Nearly two years later, a storage tank spilt 200,000 litres of oil on Burnaby Mountain. Thankfully, a containment bay prevented spillage into the wider environment. All this might not help Kinder Morgan's medium term public relations drive, but the volume of traffic and cargoes, even with the existing pipeline capacity, isn’t going to ebb over 2015 unless the global economy sees a severe downtown.

If the Russians, Americans and Saudis are in no mood to lower production, the Canadians aren’t going to either, according to anecdotal evidence. The Oilholic’s thoughts on how an oil price below $60 might well hit exploration and production in Canada (and elsewhere) are here in a Forbes piece one wrote earlier. 

This blogger does see an uptick in price from around the halfway point of 2015, as a supply correction is likely to kick-in. For the moment, barring a financial tsunami knocking non-OECD economic activity, the Oilholic's prediction is for a Brent price in the range of $75 to $85 and WTI price range of $65 to $75 for 2015. Weight on Brent should be to the upside, while weight on WTI should be to the downside of the aforementioned range.

Come Christmas, we should be looking at around $80 per Brent barrel. One thing is for sure, the days of a three-figure price aren’t likely to be seen over the next 12 months. That’s all for the moment folks! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2015. Photo: Oil tankers in English Bay, Vancouver, British Columbia, Canada © Gaurav Sharma 2015

Crude year that was & oil price forecasts for 2015

As 2014 comes to a close, it’s time to look back at what the Oilholic was up to and how the oil and gas sector performed in general. The only place to start would be the oil price where those in the business of charting it had a year of two halves.

First six months of the year saw Brent, considered a global proxy benchmark, comfortably over $100 per barrel only to see a dramatic decline over the second half of the year that accelerated rapidly in the face of a global supply glut.

The US went in general retreat from the global oil markets in meaningful volumes, not needing to import as much given rising domestic shale and tight oil production. Global demand didn’t stack-up like it did in 2013, but producers were unrelenting with output rising from Canada to Russia and OPEC’s production quota staying where it was at 30 million barrels per day (bpd).

In fact, make it 30.7 million bpd if you believe in market consensus. End result was (and still is) a buyers’ market with China leading the way, but not importing as much as it used owing to stunted economic activity. From $115 per barrel in the summer, Brent is barely managing to resist a $60 price floor having already breached it once in December. WTI is also plummeted in tandem and is currently trading below $60.

Both OPEC Ministers’ meets for 2014 couldn’t have been held in more divergent circumstances. In June, the quota was held where it was because most in the cartel were happy with a $100-plus Brent price. In November, the quota stayed where it was because the Saudis refused to budge from their position of not wanting a production cut fearing a loss of market share. While Iran and Venezuela did not share their view, the Saudis prevailed as usual for a cut without their backing would have been meaningless.

Quite frankly, by not calling an extraordinary meeting when oil hit $85, OPEC missed a trick. Nonetheless, given the existing glut one doubts whether an OPEC cut in November would have had any tangible medium term impact anyway. Saudi Oil Minister Ali Al-Naimi probably thought the same. But where does the price go from here? One has to admit that for the first time since this blog appeared on cyberspace in 2009; price averages for both Brent and WTI fell below the Oilholic’s median 2014 forecast.

Being a supply-side analyst one has long bemoaned the high oil price right from the days it became manifestly apparent that the US was no longer importing like it used to. And yet net long bets persisted well into the summer of this year courtesy hedge funds and other speculators, until physical traders of the crude stuff refused to buy in to a false spike injected by Iraqi disturbances.

Instead of contango, backwardation set in and price hasn’t recovered since with good reason. However, it wasn’t until October that the decline really took hold with OPEC’s decision not to cut production really accelerating the drop over the fourth quarter. The Oilholic would say the market is undergoing profound change of the sort that only comes around once in 20 years or so.

Given there so much oil out there and importers aren’t importing as much, risk premium has turned to risk fatigue, while a sellers’ market in the most lukewarm of times has become a buyers’ market in uncertain times. Nonetheless, supply correction is inevitable as unprofitable, especially unconventional exploration, takes a hit and non-OECD demand picks up. The Oilholic is fairly certain that come December 2015, we would once again be around the $80 level for Brent.

For the moment, barring a financial tsunami knocking non-OECD economic activity, the Oilholic's prediction is for a Brent price in the range of $75 to $85 and WTI price range of $65 to $75 for 2015. Weight on Brent should be to the upside, while weight on WTI should be to the downside of the aforementioned range. This blogger also does not believe legislative impediments over the US exporting oil are going away anytime soon as the 2016 presidential election draws ever closer.

Moving away from pricing, 2014 also saw the oil and gas world mourn the sad death of Total CEO and Chairman Christophe de Margerie in a plane crash in Moscow. Here is the Oilholic's tribute to one of the industry’s most colourful characters. Wider human tragedies overlapping the crude world including Russia’s bid to influence events in Ukraine and the spectre of ISIS over Iraq loomed large.

The oil price began hurting Russia by the end of the year with the rouble taking a plastering. Meanwhile in Iraq, given that ISIS controlled areas were far removed from the port of Basra and major Iraqi oil production facilities, risk premium from the unfolding events did not have a lasting impact on oil price barring a momentary spike in June.

Nigeria and Libya's troubles continued. In case of the latter, the country now has two oil ministers, two prime ministers but thankfully only one National Oil Company. Yet, geopolitical flare-ups aren't likely to have much of an impact over the first half of 2015 given the amount of oil there is in the market.

Away from it all and on a more personal footing, yours truly started writing for Forbes as well as commentating on Tip TV on a regular basis over 2014, alongside various other ‘crude’ engagements. Going on the road (or air) in pursuit of ‘crude’ intel, saw the Oilholic visit Rotterdam, Istanbul, San Francisco, Zagreb, Tokyo, Hong Kong and Shanghai.

The 21st World Petroleum Congress meant a return to the host city of Moscow after a gap of 10 years. Invariably, the Ukrainian stand-off cast a shadow over an event dubbed the Olympics of the oil and gas business.

One also got a chance to interview ex-Enron whistleblower turned academic Dr Vincent Kaminski in Houston and IEA Chief Economist Dr Fatih Birol more closer to home. Among several senior executives one got a chance to interact with were C-suite executives from EDF, Tethys Petroleum, Frontier Resources, Primagaz and Rompetrol to name but a few.

Many fellow analysts, commentators, traders, academics, legal and financial experts shared their insight and valuable time on on-record while others preferred an off-record chat. Both sets have the Oilholic’s heartfelt thanks. Rather unusually, this blogger found political satirist and comedian Jon Stewart’s take on the farce that’s become of the Keystone XL project bang on the money. Finally, the Oilholic also reviewed some ‘crude’ books to help you decide whether they are for you or not.

It's been a jolly crude year and one that wouldn't have been half as spiffing without the support of you all - the dear readers of this blog. Here goes the look back at Crude Year 2014. As the Oilholic Synonymous Report embarks upon its sixth year on the Worldwide Web and the eighth year of its virtual existence – here's wishing you a very Happy New Year! That’s all for 2014 folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Photo: Oil pipeline, India © Cairn India

On oil windfalls and African progress

Is the discovery of crude oil a blessing or curse for emerging economies? Does it further or hinder democracy and development? Is an oil rich nation’s currency destined to suffer from Dutch Disease?

These are profound questions and nowhere do they need to be answered more than in the continent of Africa. John Heilbrunn’s book Oil, Democracy and Development in Africa published by Cambridge University Press tackles the socioeconomic and political impact of oil in sub-Saharan Africa head on. 

In a somewhat refreshing take, Heilbrunn suggests that should historical and economic situations faced by African petrostates prior to the discovery of their oil be contextualised and discounted, there’s little evidence of a curse. Taking on a more optimistic tone than most, the author sets about a fascinating explanation of why he thinks even the most despotic and least accountable of African heads of state do use some proportion of oil revenues to improve their citizens' living standards.

Improvements have “failed to be uniform”, he admits, but that’s not to say there have been none. In a book of 270 pages, split by six detailed chapters, Heilbrunn writes there is much to be positive about while not losing sight of the biggest puzzle of them all – how the discovery of a natural resource changes the national and political psyche, as it is virtually impossible to predict “how political leaders respond to resource windfalls.”

While sum of all its parts makes this book a great read, Heilbrunn’s take on resource revenues, corruption and contracts in latter stages of the narrative should strike a chord with most readers. It has to be acknowledged that some African producers are pretty high on the corruption scale, but not every producer can be tarred with the same brush. 

All said, as Heilbrunn notes, oil can do nothing, being a mere mineral of variable qualities and marketability. “People choose how to oversee their extractive industries and the effects of oil production are consequences of policy choices.”

These choices alone determine the pace and scale of progress anywhere and not just Africa. Some of the book’s conclusions might surprise many readers, some might find the narrative a bit too optimistic for their linking, but for the Oilholic it’s a book containing some unassailable truths on African progress.

Heilbrunn is not attempting to gloss over what’s wrong at African petrostates. On the contrary, he puts forward what they are doing to get it right, with all their imperfections, following on from decolonisation and the inevitable expectations (plus subsequent windfall) a resource discovery brings with it.

The Oilholic would be happy to recommend it to fellow analysts, those interested in the oil and gas business, African development, politics and the resource curse hypothesis. Last but not the least, that growing chorus of commentators calling upon the wider world to ditch archaic conclusions and reassess the impact of natural resources on developing economies would also enjoy many of Heilbrunn’s conclusions.

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© Gaurav Sharma 2014. Photo: Front Cover – Oil, Democracy and Development in Africa © Cambridge University Press, June, 2014.