Japan’s return to Iranian market ‘complicated’

The Oilholic is back in Tokyo, some 6,000 miles east of London, and is finding Japan Inc. rather content with a crude oil buyers’ market. In fact, if anything, even the relatively higher oil price, has fallen to a third of the level this blogger noted when he was last here (in September 2014).

One outstanding issue – of re-establishing ties with the Iranian market – remains ‘complicated’ to quote analysts and legal professionals in the Japanese capital. Up until 2006, the point of the first wave of stringent UN sanctions on Iran against its nuclear programme, Tokyo enjoyed good ties with Tehran, symbolised first among other things by its stake in the Islamic republic’s Azadegan oilfield. 

However, that was then, and by 2010 matters progressively worsened as the US and European Union moved to impose yet more stringent sanctions on Iran following an escalation of Tehran’s nuclear ambitions, and the West’s wariness of it. 

Subsequently, Japan duly shunned Iran in wake of international sanctions, even if it wasn’t easy for the largest liquefied natural gas importer and third-largest net importer of crude oil and oil products in the world to do so. Following Iran’s return to the international fold and a lifting of international sanctions, unsurprisingly Japan’s government was among the first to follow China in resuming ties with the country’s oil and gas sector, and the wider economy. 

In February, a framework was also put in place under which Tehran would guarantee $10 billion in investment projects financed by the coveted Japan Bank for International Cooperation (JBIC) and insured by Nippon Export and Investment finance. There’s one nagging problem though – the US is yet to fully lift its sanctions on Tehran and that makes Japanese banks, heavily intertwined with American financial system, wary of participating.

Unless commercial banks participate and capital flow mechanisms are established, JBIC cannot finance a project. And in any case an international remittance system needs to work, and major commercial banks, not just Japanese ones, need to resume normal operation before things can get off the ground. Not much of that has happened. 

Experts at law firm Baker & McKenzie’s Tokyo office say the appetite for investment in Iran is definitely there, yet very few Japanese companies have actually signed deals on account of risk associated with falling foul of US sanctions. 

Of course, leading law firms are ever willing to conduct due diligence to protect their clients’ foray into Iran. Furthermore, Washington has lifted sanctions on non-US banks, but nothing is quite so straightforward.

Partial US sanctions require anyone international banks deal with in Iran is not on the US Treasury’s “Specially Designated Nationals” (SDN) roster. The sanctions also cover any company that’s 50% or over 50% owned by an entity or person blocked by the US State Department, even if the company in question is not on the Treasury Department’s SDN roster. 

The only ‘crude’ saving grace is that a stagnant Japanese economy’s demand for oil is at its lowest since 1988, while glut troubled suppliers are queuing up twice over to sell their cargo at discounted prices. Given current oil and gas market permutations, the headache is as much Iran’s to contend with. That’s all from Tokyo for the moment folks. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo: Tokyo Skyline from Sumida River ferry, Tokyo, Japan © Gaurav Sharma, March 2016.

Taiwan’s crude demands & IEA’s latest quip

The Oilholic has ventured further eastwards, some 6080 miles from London, to Taipei – the vibrant capital of Taiwan. On a rain soaked evening, yours truly absorbed splendid views of the city's 101 Tower (once Asia’s tallest building before) and pondered over the island nation’s oil supply-demand dynamic.

Perhaps unsurprisingly, according to government data, the country imports 98% of its domestic fuel requirements mostly from OPEC producers in the Gulf and Angola to the tune of 1 million barrels per day (bpd). It does have tiny proven oil reserves of around 2.3 million but nothing to write home about.

Despite wider historical and geopolitical tension with Beijing, Taiwan’s CPC and China’s state-owned China National Offshore Oil Corporation (or CNOOC) are jointly exploring the Strait of Taiwan for oil and gas. Initial prospection bids in shallow waters turned out to be duds, but deepwater exploration is “encouraging” say insiders.

Given such a setting in an era of low oil prices, the International Energy Agency’s latest quip – that the oil price may well have “bottomed out” – pricked ears both within and well beyond Taiwan. In a recent market update, the agency said, “There are clear signs that market forces... are working their magic and higher-cost producers are cutting output.”

It noted falling oil production stateside, in tandem with a decline in OPEC’s output by 90,000 bpd in February, albeit due to outages in Nigeria, Iraq and the United Arab Emirates, that knocked out a combined 350,000 bpd from the oil cartel's total output.

“Iran's return to the market has been less dramatic than the Iranians said it would be; in February we believe that production increased by 220,000 bpd and provisionally, it appears that Iran's return will be gradual,” the IEA added.

See now all that is well and good, but the Oilholic reckons that at some point crude in storage will need to come into play. That, coupled with lacklustre demand, is the market’s “known known” and how and to what extent it serves as a drag on the price remains to be seen.

The market has indeed been a lot calmer in recent days, but there are likely to be a few more twists and turns. As the IEA itself notes, “For oil prices, there may be light at the end of what has been a long, dark tunnel, but we cannot be precisely sure when in 2017 the oil market will achieve the much-desired balance. It is clear that the current direction of travel is the correct one, although with a long way to go.”

Fairly obvious and no biggie, methinks. That’s all from Taiwan folks. This blogger’s next stop is Tokyo. Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2016. Photo: 101 Tower, Taipei, Taiwan © Gaurav Sharma, March 2016

Trouble at the South Korean mill

The Oilholic finds himself 5,506 miles east of London in Seoul, South Korea, on the first leg of a round the world trek, alongside a fact finding mission for an upcoming Forbes article. 

In tandem with this blogger’s arrival in South Korea, was that of the USS John C. Stennis, the US Navy’s nuclear-powered aircraft carrier as tensions in the Korean Peninsula run high. With neighbouring North Korea’s leader Kim Jong-Un (once again!) promising nuclear armageddon, Seoul and Washington are in the midst of their annual ongoing joint Key Resolve and Foal Eagle exercises to instil regional confidence.

To be perfectly honest, South Koreans have seen it all before – their Northern neighbour’s shenanigans are hardly the stuff that is keeping the intelligentsia occupied or the subject of much chatter in cafés and bars dotted across the capital. The primary concern remains whether recent economic stimulus measures are cutting through or not.

The economic health of South Korea also matters to oil and gas analysts like yours truly, as the country is among the biggest global importers of the crude stuff, relying on the importation of 97% its fuel needs having negligible domestic hydrocarbon resources. Crude oil consumption is currently around 2.5 million barrels per day, almost all of which is imported, making South Korea the fifth largest oil importer in the world.

In wake of the MERS virus outbreak in South Korea last year and increasingly lacklustre consumer confidence, the government unveiled a $20 billion economic stimulus package in July 2015. Among the most eye-catching measures was the introduction of tax cuts on automobiles – the very domestically engineered sort yours truly saw whizzing across Seoul, and ones that happen to be household brands across the world.

However, while the MERS virus might be a thing of the past, the country's economic malaise persists worrying the Bank of Korea and the government alike. Exports contracted 18.5% in January, while the economy grew 2.6% in 2015. It prompted the central bank to revise South Korea’s growth forecast for the current year down to 3.0% from 3.2%.

Nonetheless, petrochemical and refining exports are proceeding at pace, given that three of the 10 largest refining facilities in world happen to be in South Korea. And crude oil imports are – so far – holding firm at current averages of 2.3 to 2.5 million bpd. However, one questions whether the said levels can indeed be maintained. 

That’s despite a further $5 billion in stimulus measures announced by the government in February, including the extension of automobile tax cuts. There’s definitely trouble at the South Korean mill! That’s all from Seoul folks as the Oilholic leaves you with a view of traffic zipping past the city’s Dongdaemun Gate. This blogger’s next stop is Taipei; more from there shortly. Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2016. Photo: Dongdaemun Gate, Seoul, South Korea © Gaurav Sharma, March 2016

Aubrey McClendon (1959 – 2016): A flawed titan?

On Saturday, March 5, a riverfront in USA’s Oklahoma City saw well wishers, former employees, friends and family of controversial energy sector entrepreneur Aubrey McClendon, gather to pay their respects, following his death in a car crash on March 2; a day after being indicted on bid-rigging charges following an antitrust investigation by the US Department of Justice.

In keeping with his swashbuckling life, the end, when it came, was just as dramatic. While a police investigation into the crash is still ongoing, reports said the Chevy Tahoe McClendon was driving slammed straight into a cement wall, despite the driver having had multiple opportunities to avoid the collision. It was also revealed that he was not wearing his seat-belt.  

That was the final act of a glittering, albeit controversial oil and gas industry titan. As the shale bonanza took off stateside, McClendon was one of the poster boys of rising US natural gas production, taking Chesapeake Energy – a company he co-founded in 1989 at the young age of 29 – to the second spot on the country’s top gas producers’ roster by volume.

But in 2013, he was ousted from Chesapeake following damaging revelations that he had personal stakes in wells owned by the company. An accompanying corporate governance crisis tarnished his reputation further.

Yet, McClendon’s penchant for lavish spending never subsided. His investments in property, restaurants and businesses are littered across Oklahoma City. Famously, in 2008, he brought the National Basketball Association's Supersonics franchise to Oklahoma City from Seattle, renaming them Oklahoma City Thunder.

Following the Chesapeake debacle, McClendon marked a return to the industry by setting up a new company – American Energy Partners. Being the wildest of wildcatters, he made bets, not all of them sound, worth billions of dollars buying land with potential for oil and gas drilling.

However, all was not well with the US Justice Department set to haul him to the courts. He was alleged to have put in place a scheme between two “large oil and gas companies” to not bid against each other for leases in northwest Oklahoma from December 2007 to March 2012, to keep the price of leasing drilling rights artificially low, the Department of Justice said a day before his sudden death.

The American antitrust law – Sherman Act – which McClendon was accused of violating carries a maximum prison sentence of 10 years and a $1 million fine. 

None of this mattered to the hundreds who gathered on Saturday at Oklahoma City's Boathouse District to pay their respects to McClendon, with a formal public memorial service due on Monday at a local community church.

For them, the state in general and the city in particular, McClendon was instrumental in reviving the regional economy. As for the US shale industry, his impact in the history books – the good, the bad, the ugly, the unproven and the controversial. However, in his untimely passing, it is McClendon’s ingenuity that ought to be remembered by most.

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© Gaurav Sharma 2016. Photo: A shale drilling site © Chesapeake Energy.

Fitch joins Moody’s in cutting oil price estimates

Barely a month after Moody’s drastically revised its oil price assumptions, rival Fitch Ratings followed suit last week. Writing to clients, Fitch said its new base case is for Brent and WTI oil prices to average $35 per barrel in 2016. 

It had previously expected oil to average $45 per barrel. However, Fitch’s long-term base case price assumptions remain unchanged at $65 per barrel. The ratings agency said its drastic revision was down to a combination of stock build-up over the mild winter, higher-than-expected OPEC production in January and increasing evidence that global economic growth for the year will be weaker than previously forecast.

“This suggests there will still be a supply surplus in the second half of 2016, albeit reduced from current levels, and that markets will probably only reach a balance in 2017. Even then, very high inventories will limit price increases,” Fitch added.

In light of recent volatility, Fitch’s reworking of price assumptions is hardly a surprise, and on Jan 21st rival Moody’s had done likewise. The latter lowered its 2016 price estimate for both Brent WTI to $33 per barrel.

In Moody’s case, for Brent, it marked a $10 per barrel reduction from the rating agency's previous estimate, and for WTI, a $7 reduction. It currently expects both benchmark prices to rise by $5 per barrel on average in 2017 and 2018. The move also represented Moody’s second revision is as many months, having already slashed estimates back in December.

Terry Marshall, Senior Vice President at the ratings agency, said, "OPEC countries continue high levels of production in the battle for market share, contributing to the current oil glut despite moderate consumption growth by key consumers such as China, India and the US.

“In addition, we expect the rise in Iranian oil output this year to offset or exceed production cuts in the US."

So more cheer for the bears it seems, but little else. Volatility is likely to persist until June, but for the record, the Oilholic expects a very gradual climb in the oil price towards $50 per barrel from then onwards, as one wrote in a recent Forbes column. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2016. Photo: Oil production facility © Cairn Energy