Delhi’s traffic jams, officials & other crude matters

Last few days here have involved getting some really interesting intelligence from selected Indian ministries on investment by the country’s NOCs, India’s possible action against Iranian crude imports, rising consumption patterns and a host of other matters. However, to get to the said officials during rush hour, you have to navigate through one of the worst traffic in any Asian capital. Furthermore, rush hour or no rush hour, it seems Delhi’s roads are constantly cramped.

It takes on average an hour to drive 10 miles, more if you happen to be among those on the road during rush hour. It often pains to see some of the fastest cars on the planet meant to bring the thrill of acceleration to the Indian driver’s foot pedal, doing 15 mph on the Capital’s streets. They say Bangkok has Asia’s worst traffic jams – the Oilholic thinks ‘they’ have not been to Delhi.

Away from the jams, chats with officials threw up some interesting stuff. India currently permits 100% investment by foreign players only in upstream projects. However, the government is putting through legislation which would raise the investment ceiling for other components of the oil & gas business including raising investment cap in gas pipeline infrastructure to 100 per cent.

What India does, matters both to it as well as the wider oil & gas community. The country has some 14 NOCs, with four of them in the Fortune 500. As the Oilholic noted at the 20th World Petroleum Congress, over a period of the last 12 months, Indian NOCs have invested in admirably strategic terms but overseas forays have also seen them in Syria and Sudan which is politically unpalatable for some but perhaps ‘fair game’ for India in its quest for security of supply. It also imports crude from Iran. Together with China, Indian crude consumption heavily influences global consumption patterns.

US EIA figures suggest Indian crude consumption came in at 300,800 barrels per day (bpd) in 2009 while local feedback dating back to 2010 suggests this rose to 311,000 bpd by 2010. Being a massive net importer – sentiment goes right out of the window whether it comes to dealing with Iran or Sudan, and India's NOCs are in 20 international jurisdictions.

Over days of deliberations with umpteen Indian officials, not many, in fact any were keen on joining the European oil embargo on Iran. However, some Indian scribes known to the Oilholic have suggested that in the event of rising pressure, once assurances over sources of alternative supply had been met, the government would turn away from Iran. In the event of financial sanctions, it is in any case becoming increasingly difficult for Indian NOCs to route payments for crude oil to Iran.

No comment was available on the situation in Sudan or for any action on Syria. In case of the latter, many here are secretly hoping for a Russian veto at the UN to prevent any further action against the Assad administration but that view is not universal. Speaking of Sudan, the breakaway South Sudan shut its oil production on Sunday following a row with Sudan. It is a major concern for India’s ONGC Videsh Ltd (OVL) – which has the most exposure of all Indian companies in Sudan. Oil production makes up 98% of newly independent South Sudan's economy and OVL has seen its operations split between North and South Sudan.

Amid rising tension, the real headache for OVL, its Indian peers and Chinese majors is that while South Sudan has most of the crude oil reserves, North Sudan has refineries and port facilities from which exports take place to countries like India and China. It’s no surprise that the latest row is over export fees. If the dispute worsens, Indian analysts, oil companies and the UN Secretary General Ban Ki-moon are near unanimous in their fear that it could become a major threat to stability in the region. The Oilholic notes that while all three have very different reasons for voicing their fears – it is a clear and present danger which could flare up anytime unless sense prevails within the next four weeks.

South Sudan's oil minister Stephen Dhieu Dau told Reuters on Sunday that all production in his landlocked country had been halted and that no oil was now flowing through Sudan. "Oil production will restart when we have a comprehensive agreement and all the deals are signed," he added. Earlier on January 20th, Sudan seized tankers carrying South Sudanese oil, supposedly in lieu of unpaid transit fees. On Saturday, Sudan said it would release the ships as a “goodwill gesture” but South Sudan said this did not go far enough.

UN Secretary General Ban accused the leaders of Sudan and South Sudan of lacking "political will" and specifically urged Sudanese president Omar Al-Bashir to "fully co-operate with the United Nations". Doubtless he’ll respond to it just as he did to the issuance of his arrest warrant by the International Court of Justice in 2009! The world is watching nervously, as is India for its own crude reasons.

On the pricing front, Brent and WTI closed on Monday at US$110.98 and US$98.95 a barrel respectively, with decidedly bearish trends lurking around based on renewed fears of a chaotic default in Greece and EU leaders’ inability to reach a consensus. Unsurprisingly the Euro also lost ground to the US dollar fetching US$1.31 per Euro.

Jack Pollard, analyst at Sucden Financial, says the fear that CDS could be triggered in a hard Greek default could look ominous for crude prices, especially in terms of speculative positions. “Continued Iran tensions should help to maintain the recent tight range, with a breakout only likely when there is a material change in dynamics. Whether Iran or Greece produces this (change) remains to be seen,” he adds.

Last but not the least, reports from Belize – the only English-speaking Central American nation – suggest the country has struck black gold with its very first drill at the onshore Stann Creek prospect currently being handled by Texan firm Treaty Energy. Abuzz with excitement, both the government and Treaty believe the Stann Creek prospect has yet more surprises to offer with two more exploratory wells on the cards fairly soon pending permit requests. That’s all for the moment folks, keep reading keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Glimpses of Delhi's mega traffic Jams © Gaurav Sharma 2012.

Crude India & its ‘One Lakh ki Gaadi’!

After a gap of nearly five years since the Oilholic’s last visit to India, yours truly arrived in Delhi on Friday to witness a ‘crudely’ altered landscape. Every conceivable brand of automobile is now available to Indians for a price. Swanky new shopping malls, new flyovers and never ending housing and commercial construction now grace the Capital’s landscape (and suburbs). All of these are intertwined with a super-congested roads network and a really decent mass transit system.

The Oilholic was particularly keen to spot a ‘One Lakh ki Gaadi’ (INR1 Lakh car) which in other words simply implies a car costing INR10000 (a ‘Lakh’) or US$2000 – the brainchild of Tata Motors. It was launched 2009 amid global headlines. However surprisingly, you’d be hard pressed to locate a Tata Nano (which is its official name) easily in the Indian capital.

It took the Oilholic a good few hours and a walkabout in an underground parking lot to finally locate one to click for his blog. The reason is as clear as the model’s sales data for Tata Motors – the current owners of Jaguar / Land Rover. The company set the Nano’s sales of target at 25,000 per month but in actual fact moves car units well below the target. Its plant which is capable of producing 250,000 Nanos barely manufactures 10,000 a month.

The reason is clearly apparent – the poor man shunned the ‘affordable’ car and status conscious middle and upper class income groups simply did not wish to be associated with it. Safety concerns also hit sales sentiment after news emerged that a number of Nanos saw engine fires.

Furthermore, rising Indian inflation has put paid to the “One Lakh” tag as well. The tag was in any case only applicable to base model - sold rather unintelligently without air conditioning in India’s sweltering heat where temperatures often touch 40 degree centigrade. Even the base model now costs INR1.41 Lakh or approximately US$2810 at current exchange rates. Should you need one with all the trimmings, you’d probably need close to INR2 Lakh.

The company is now trying desperately to repair the Nano’s image. According to a Nano dealer in Noida – a Delhi suburb – Tata Motors is coming up with a scheme to double up the car’s warranty to four years and serve up an INR99 per month maintenance contract. Akin to a model employed by Kia motors in nascent markets, Tata Motors is also looking towards providing cheap car loans with down-payments as low as US$300.

The damage might already have been done, but Tata as a conglomerate has been known to rise to far serious challenges. Reversing Indian acceptance of the Nano is as serious as they come. A word to the wise environmentalists who said the Nano would worsen Indian traffic congestion and raise pollution - the country has managed both quite well without the One Lakh Car's help! 

Moving briefly away from the Nano and speaking of damage, Transocean continues to feel the effects of the BP-Deepwater Horizon Gulf of Mexico spill. On Thursday (Jan 26th), while the Oilholic was up in the air heading to India, a US court ruled that Transocean would be protected under the contract indemnity agreement for claims for compensation by third parties.

While this is positive for Transocean, the Court also ruled the company would not be indemnified for any punitive damages or for any civil penalties and fines assessed to Transocean, if any, under the Clean Water Act (2005). Ratings agency Moody's believes partial summary judgment is credit negative for Transocean with up to US$10 billion of debt affected. That’s all for the moment folks, keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: The Tata Nano © Gaurav Sharma 2012.

EU’s Iran ban, upcoming Indian adventure & Cairn

Earlier on Monday and in line with market expectations, the European Union agreed to impose an embargo on the import of Iranian crude oil. The EU, which accounts for 20% of Iran’s crude exports, now prohibits the import, purchase and transport of Iranian crude oil and petroleum products as well as related finance and insurance. All existing contracts will have to be phased out by July 1st, 2012.

In response, Iran declared the ban as "unfair" and "doomed to fail", said it will not force it to change course on its controversial nuclear programme and renewed threats to blockade the Strait of Hormuz. Going into further details, EU Investment in as well as the export of key equipment and technology for Iran's petrochemical sector is also banned.

A strongly worded joint statement by British Prime Minister David Cameron, French President Nicolas Sarkozy and German Chancellor Angela Merkel says, “Until Iran comes to the table, we will be united behind strong measures to undermine the regime’s ability to fund its nuclear programme, and to demonstrate the cost of a path that threatens the peace and security of us all.”

That’s all fine and yes it will hurt Iran but unless major Asian importing nations such as China, India and Japan decide to ban Iranian imports as well, EU’s ban would not have the desired impact. Of these, China alone imports as much Iranian oil as the EU, Japan accounts for 17% of the country’s exports, followed by India (16%) and South Korea (9%).

So until the major Asian economies join in the embargo, both EU and Iran will end up hurting themselves. As a Sucden Financial note concludes, “Unless a deal can be agreed unilaterally, it is likely that the weak European economies could suffer from firmer crude prices whilst relatively robust Asian economies might benefit from preferential crude trade agreements.”

China is unwilling to follow suit while it is thought that Japan and South Korea are seeking supply assurances from other sources before reacting. India’s response had been lukewarm in the run-up the EU’s decision. Now that the decision has been made, it will be interesting to note how the Indian government responds. The Oilholic is heading to India this week (and for better parts of the next) and will try to sniff out the public and government mood.

Meanwhile, Fitch Ratings has said the EU embargo will increase geopolitical risk in the Middle East region supporting high oil prices. The agency considers blocking the Strait of Hormuz - the world's most important oil chokepoint - to be a low-probability scenario and believes any obstruction to trade routes would have a short duration if it did actually transpire.

Arkadiusz Wicik, Director in Fitch's European Energy, Utilities and Regulation team and an old contact of the Oilholic’s, feels that the EU ban on Iranian oil is largely credit neutral for EU integrated oil and gas companies. "The cash flow impact of the ban may be negative for refining operations, but should be positive or neutral for upstream operations," he says.

The most likely scenario is that the EU embargo will result in higher oil prices. However, prices may not necessarily increase markedly from current levels as some of the risks related to the EU ban on Iranian oil appear factored in already.

A new Fitch report further notes the ban is likely to have a moderately negative impact on EU refiners as high oil prices may further erode demand for refined products in Europe. This would worsen the already weak supply-demand balance in European refining. The embargo may also change oil price spreads in Europe as Iranian crude imports would likely be replaced with alternative crude, which may be priced at a lower discount to Brent than Iranian crude oil.

EU refiners' security of oil supply is unlikely to be substantially affected by an Iran ban. There are alternative suppliers, such as Saudi Arabia (which has said it is able and willing to increase oil production to meet additional demand), Russia and Iraq. Libyan oil production is also recovering. Iranian oil accounted for just 5.7% of total oil imports to the EU in 2010, and 4.4% in Q111. Furthermore, the sanctions will be implemented gradually by July 1st, 2012, which should give companies that use Iranian crude oil time to find alternative suppliers, the report notes.

Southern European countries - Italy, Spain and Greece - are the largest importers of Iranian crude oil in the EU. A rise in oil prices could be further bad news for these countries, which already face a weak economic outlook in 2012.

“The impact of the new US sanctions signed into law late last year against Iran is difficult to predict at this stage. It is not certain whether Asian countries, which are by far the largest importers of Iranian crude, accounting for about 70% of total Iranian oil imports, will substantially reduce supplies from Iran in 2012 and replace them with other OPEC sources as a result of the new US sanctions,” the Fitch report notes further.

The agency’s report does make one very important observation – one that has been doing the rounds in the City ever since news of the ban first emerged – that’s if Asian reduction is substantial, in combination with the EU ban, it could considerably lower OPEC's spare production capacity. In such a scenario, the global oil market would have less flexibility in the event of large unexpected supply interruptions elsewhere, potentially sending oil prices much higher than current levels.

Moving away from the Iranian situation, Cairn Energy has sold a 30% stake in one of its Greenland exploration licences to Norway’s Statoil. The UK independent upstart spent nearly £400 million in exploration costs last year with little to show for it as no commercially exploitable oil or gas discovery was recorded. While the percentage of the stake has been revealed, neither Cairn nor Statoil are saying how much was paid for the stake. Nonetheless, whatever the amount, it would help Cairn mitigate exploration costs and risks as it appears to be in Greenland for the long haul.

Elsewhere, there is positive and negative news on refineries front. Starting with the bad news, shares in Petroplus – Europe’s largest independent refiner – were suspended from trading on the Swiss SIX stock exchange on Monday at the company’s request. As fears rise about Petroplus defaulting on its debt following an S&P downgrade last month and yet another one on January 17th, looks like the refiner is in a fight for its commercial life.

Lenders suspended nearly US$1 billion in credit lines last month which prevented Petroplus from sourcing crude oil for its five refineries. However, it had still managed to keep refineries at Coryton (Essex, UK) and Ingolstadt (Germany) running at reduced capacity. Late on Monday, Bloomberg reported that delivery lorries did not leave the Coryton facility and concerns are rising for the facility’s 1000-odd workforce. PwC, which has been appointed as the administrator of Petroplus' UK business, said on Tuesday that it aims to continue to operate the Coryton facility without disruption. The Oilholic hopes for the best but fears the worst.

Switching to the positive news in the refineries business, China National Petroleum Corp, Qatar Petroleum and Royal Dutch Shell agreed plans on January 20th for a US$12.6 billion refinery and petrochemical complex in eastern China. Quite clearly, hounded by overcapacity and poor margins in Europe, the future of the refineries business increasingly lies in the Far East on the basis of consumption patterns. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil tanker © Michael S. Quinton / National Geographic.

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.