Keystone XL, politics & the King’s Speech

Even before the original Keystone cross-border pipeline project aimed at bringing Canadian crude oil to the doorstep of US refineries had been completed, calls were growing for an extension. The original pipeline which links Hardisty (Alberta, Canada) to Cushing (Oklahoma) and Patoka (Illinois) became operational in June 2010, just as another, albeit atypical US-Canadian tussle was brewing.

The extension project – Keystone XL first proposed in 2008, again starting from Hardisty but with a different route and an extension to Houston and Port Arthur (Texas) is still stuck in the quagmire of US politics, environmental reticence, planning laws and bituminous mix of the Canadian oil sands.

The need for extension is exactly what formed the basis of the original Keystone project – Canada is already the biggest supplier of crude oil to the US; and it is only logical that its share should rise and in all likelihood will rise. Keystone XL according to one of its sponsors – TransCanada – would have the capacity to raise the existing capacity by 591,000 barrels per day though the initial dispatch proposal is more likely to be in the range of 510,000 barrels.

Having visited both the proposed ends of the pipeline in Alberta and Texas, the Oilholic finds the sense of frustration only too palpable more so because infrastructural challenges and the merits (or otherwise) of the extension project are not being talked about. To begin with the project has a loud ‘fan’ club and an equally boisterous ‘ban’ club. Since it is a cross-border project, US secretary of State Hillary Clinton has to play the role of referee.

A pattern seems to be emerging. A group of 14 US senators here and 39 there with their counterparts across the border would write to her explaining the merits only for environmental groups, whom I found to be very well funded – rather than the little guys they claim to be – launching a counter representation. That has been the drill since Clinton took office.

One US senator told me, “If we can’t trust the Canadians in this geopolitical climate then who can we trust. Go examine it yourself.” On the other hand, an environmental group which tries to get tourists to boycott Alberta because of its oil sands business tried its best to convince me not to land in Calgary. I did so anyway, not being a tourist in any case.

Since 2008, TransCanada has held nearly 100 open houses and public meetings along the pipeline route; given hundreds of hours of testimony to local, state and federal officials and submitted thousands of pages of information to government agencies in response to questions. The environmentalists did not tell me, but no prizes for guessing who did and with proof. This is the kind of salvo being traded.

Send fools on a fool’s errand!

It is not that TransCanda, its partner ConocoPhillips and their American and Canadian support base know something we do not. It is a fact that for some years yet – and even in light of falling gasoline consumption levels – the US would remain the world’s largest importer of crude oil. China should surpass it, but this will not happen overnight.

The opponents of oil sands have gotten the narrative engrained in a wider debate on the environment and the energy mix. Going forward, they view Keystone XL and other incremental pipeline projects in the US as perpetuating reliance on crude oil and are opposing the project on that basis.

Given the current geopolitical climate, environmental groups in California and British Columbia impressed upon this blogger that stunting Alberta’s oil sands – hitherto the second largest proven oil reserve after Saudi Arabia’s Ghawar extraction zone – would somehow send American oilholics to an early bath and force a green age. This is a load of nonsense.

Au contraire, it will increase US dependency on Middle Eastern oil and spike the price. Agreed the connection is neither simple nor linear – but foreign supply will rise not fall. Keystone XL brings this crude foreign product from a friendly source.

Everyone in Alberta admits work needs to be done by the industry to meet environmental concerns. However, a 'wells to wheels' analysis of CO2 emissions, most notably by IHS CERA and many North American institutions has confirmed that oil sands crude is only 5 to 15 per cent ‘dirtier’ than US sweet crude mix.

The figure compares favourably with Nigerian, Mexican and Venezuelan crude which the US already imports. So branding Canadian crude as dirty and holding up Keystone XL on this basis is a bit rich coming from the US. Keystone XL increases US access to Canadian crude. Who would the Americans rather buy from Canada or Venezuela? Surveys suggest the former.

The pragmatists at CAPP

Over a meeting in Calgary, Dave Collyer, President of Canadian Association of Petroleum Producers (CAPP) told the Oilholic that they have always viewed Keystone XL as an opportunity to link up Western Canada to the US Gulf coast market, to replace production that would otherwise be imported by the US from overseas sources most notably Venezuela and Mexico where production is declining according to available data. There are also noticeable political impediments in case of the former.

“We don’t see this pipeline extension as incremental supply into that orbit, rather a replacement of existing production through a relatively straightforward pipeline project, akin to many other pipeline projects and extensions that have been built into the US,” Collyer said.

Energy infrastructure players, market commentators and CAPP make another valid point – why are we not debating scope of the Keystone XL project and its economic impact and focussing on the crude stuff it would deliver across the border? CAPP for its part takes a very pragmatic line.

“Do we think there is legitimacy in the argument that is being made against Keystone? No (for the most part) but the reality is that there has to be due consideration in the US. I would assume the US State Department is in a position where it has no alternative but to employ an abundance of caution to ensure that all due processes are met. What frustrates Canadians and Americans alike is the length of time that it has taken. However, at the end of the day when we get that approval and it is a robust one which withstands a strict level of scrutiny then it’s a good thing,” Collyer said.

T I M B E R!

Canadians and Americans first started bickering about timber, another Canadian resource needed in the US, about taxation, ethics, alleged subsidies and all the rest of it way back in 1981. Thirty years later, not much has changed as they are still at it. But these days it barely makes the local news in Canada each time the Americans take some reactive action or the other against the timber industry. Reason – since 2003 there has been another buyer in town – China.

In 2010, timber sales from Canada to China (and Japan to a lesser extent) exceed those to the US. Over the last half-decade timber exports from the province of British Columbia alone to China rose 10 times over on an annualised basis. Moral of the story, the US is not the only player in town whatever the natural resource. Canadians feel a sense of frustration with the US, and rightly so according to Scott Rusty Miller, managing partner of Ogilvy Renault (soon to be part of Norton Rose) in Calgary.

“We are close to the US, we are secure and we have scruples. Our industry is more open to outside scrutiny and environmental standards than perhaps many or in fact any other country the US imports crude oil from – yet there are these legal impediments. Scrutiny is fine. It’s imperative in this business, but not to such an extent that it starts frustrating a project,” Miller noted.

Ask anyone at CAPP or any Toronto-based market analyst if Canada could look elsewhere – you would get an answer back with a smile; only the Americans probably would not join them. The Oilholic asked Collyer if Americans should fear such moves.

His reply was, “As our crude production grows we would like access to the wider crude oil markets. Historically those markets have almost entirely been in the US and we are optimistic that these would continue to grow. Unquestionably there is increasing interest in the Oil sands from overseas and market diversification to Asia is neither lost on Canadians nor is it a taboo subject for us.”

CAPP has noted increasing interest from Chinese, Korean and other Asian players when it comes to buying in to both crude oil reserves and natural gas in Western Canada. Interest alone does not create a market – but backed up by infrastructure at both ends, it strengthens the relationship between markets Canadians have traditionally not looked at. All of this shifts emphasis on Canadian West coast exports.

“Is it going to be straightforward to get a pipeline to the West coast – we’ll all acknowledge that it’s not. For instance, Enbridge has its challenges with the Gateway pipeline. There is an interest in having an alternative market. There are drivers in trying to pursue that and I would say collectively this raises the “fear” you mention and with some factual basis. However, the US has been a great market and should continue to be a great market...while some caution is warranted,” he concluded.

The King’s speech

We’re not talking about Bertie, (King George VI of England) but Barack (The King of gasoline consumers and the US President). On March 30th, the King rose and told his audience at Georgetown University that he would be targeting a one-third reduction in US crude imports by 2025.

“I set this goal knowing that we’re still going to have to import some oil. And when it comes to the oil we import from other nations, obviously we have got to look at neighbours like Canada and Mexico that are stable, steady and reliable sources,” he added. While I am reliably informed that the speech was not picked up by Chinese state television, the Canadian press went into overdrive. The Globe and Mail, the country’s leading newspaper, declared “Obama signals new reliance on oil sands.”

Shares of Canadian oil and service companies rose the next day on the Toronto Exchange, even gas producers benefited and 'pro-Keystone XL' American senators queued up on networks to de facto say “We love you, we told you so.” Beyond the hyped response, there is a solid reason. Keystone XL bridges both markets – a friendly producer to a friendly consumer with wide ranging economic benefits.

According to Miller, “Refining capacity exists down south. Some refineries on the US Gulf coast could be upgraded at a much lower cost compared to building new infrastructure. There are economic opportunities for both sides courtesy this project – we are not just talking jobs, but an improvement of the regional macro scenario. Furthermore, however short or long, it could be a shot in the arm for the much beleaguered and low-margin haunted refining business.”

The pipeline could also help Canadians export surplus crude using US ports in the Gulf and tax benefits could accrue not just at the Texan end but along the route as well. That the oil sands are in Canada is a geological stroke of luck, given the unpredictability of OPEC and Russian supplies. The US State Department says it will conclude its review of Keystone XL later this year. Subjecting this project to scrutiny is imperative, but bludgeoning it with impediments would be ‘crudely’ unwise.

This post contains excerpts from an article written by the Oilholic for UK's Infrastructure Journal. While the author retains serial rights, the copyright is shared with the publication in question.

Gaurav Sharma 2011 © Gaurav Sharma and Infrastructure Journal 2011. Map: All proposals of Canadian & US Crude Oil Pipelines © CAPP (Click map to enlarge)

OPEC, Libya, Vitol & the “No winners” brigade

Now that the meeting is all over, it is worth noting that the ‘acting’ Iranian oil minister – Mohammad Aliabadi – was not the only one new to the job. It would appear that half of his peers at the OPEC meeting were in fact new to the job as well but Alibadi had to carry the tag of “Conference President”. One question on everybody’s lips was who spoke for Libya at this OPEC meeting.

The man from Tripoli was the right honourable Omran Abukraa, Libya's OPEC delegation leader. His appearance follows the defection last week of a familiar face in these parts – that of Libyan oil minister Shukri Ghanem. The Oilholic is reliably informed that no one was representing the Libyan rebels in a meaningful way here. This, as someone from the Nigerian delegation told the Oilholic, removes a “point of tension.”

In the run up to this meeting, news from Tripoli was that Col. Gaddafi was controlling the oil assets that he could and was destroying those that he could not in order to prevent them from both falling into rebel hands or being used as a revenue generator. Once rebels took control of some of the country’s oil assets, troops loyal to Gaddafi set about knocking out the infrastructure.

Coastal road between Brega and Ras Lanuf, sites of the country’s two biggest refineries was taken out. Then the gas network linking up to rebel controlled areas fell to below 50% capacity. This was followed by Sarir and Mislah oilfields, south of Benghazi being hit by Gaddafi’s troops. While estimates vary, all this has collectively deprived the rebels access to up to 350,000 barrels of oil which they could have sold in open markets.

Now until these facilities can be repaired, the rebels cannot really export much even though the Qataris have volunteered to help them market the oil. Their only success so far, according to sources has been a sale facilitated by Vitol, a Swiss trading house, to the tune of just over one million barrels worth US$118.75 million at the current rate. Additionally, Gaddafi is not in ‘crude’ health either.

A source here suggests Libyan production is in the region of 215,000 b/d but output has ceased as admitted this afternoon by the OPEC Secretary General Abdalla Salem el-Badri. Given international sanctions, the buyers, at least on the open market, are hesitant. Additionally, Libyan consumers are facing shortages everywhere including the capital Tripoli where a litre of petrol is costing up to 6.5 Libyan dinars; about US$5.13 at the current rate. The Oilholic is unable to ascertain how much a litre costs in rebel held areas although it is thought to be a lower rate than Tripoli.

News from behind closed doors is that Col. Gaddafi’s representative did not find himself clashing with the Qatari delegation, who have helped the rebels to their market oil. However, there was an almighty collective clash between the OPEC member nations in which Gaddafi’s man did take the opposing view of what the market felt was right. This understandably overshadowed everything else. On that note its goodbye and goodnight from Vienna - thanks for reading.

© Gaurav Sharma 2011. Photo: Oil pipeline © Cairn Energy, India

OPEC’s 'problem' and Dr. Chalabi’s book

The decision or rather non-decision of not raising the OPEC production quota taken earlier here in Vienna is as damaging for OPEC as it is problematic. A cartel is supposed to show solidarity, but internal sparring awaited the world’s press. The meeting even concluded without a formal production decision or even a communiqué.

It is clear now that those members in favour of a rise in production quota were Saudi Arabia, Kuwait, Qatar and UAE while those against were Algeria, Libya (Gaddafi’s lot), Angola, Venezuela, Iran and Iraq. However, majority of the sparring was between the Saudis on one side and the Iranians and Venezuelans on the other. In the end, it was not only messy but made the cartel look increasingly dysfunctional and an archaic union heading slowly towards geopolitical insignificance. However, what appears on the face of it is not so straightforward.

To followers of crude matters, it is becoming increasingly clear that as in the past, the Saudis will act to raise their production unilaterally, more so because they left Vienna irked by what they saw as Iranian and Venezuelan belligerence. Furthermore, the cartel’s own spare capacity of around 4 million b/d is squarely in the hands of Saudi Arabia, Kuwait and UAE. Of these, the Saudis pumped an extra 200,000 b/d last month. Most analysts expect this to be mirrored in their June output and it would imply that the Saudis would be producing at least 1 m b/d over the now largely theoretic OPEC binding quota of 24.85 million b/d.

Almost 41% of the global crude oil output is in the hands of OPEC. If within this close-knit group, there is sparring between those with spare capacity and those without in full view of the world’s press then the cartel’s central purpose takes a hammering. Mighty worried about the negative impact of high prices on GDP growth of their potential export markets and by default on the growth of crude oil demand, the Saudis appeared to the Oilholic to be firm believers that it was in their interest to increase quotas and actual production – so they will raise their own.

Yet I do not totally agree with market conjecture that the “end of OPEC is nigh”. Neither does veteran market commentator Jason Schenker of Prestige Economics. He notes: “Some market mavens have heralded this event as 'The end of OPEC' or 'The beginning of the end of OPEC', we do not believe it. Although no formal production decision was reached, there are precedents for what has been going on with the organisation’s production. After all, the group quota was suspended at the peak of the last business cycle in 2008.”

“Furthermore, and more recently, the individual member county quotas were suspended last October. On a more practical note, group cohesion for affecting production and crude oil prices is less critical when the price of crude is over US$100 per barrel and the global economy is rising, along with oil demand. The division within OPEC is likely to heal, and we are confident that group cohesion will be seen again when prices fall,” he concludes.

Additionally with half of those at the table being newcomers to the job, the situation in Libya and their representative, and an Iranian ‘acting’ oil minister with no experience of OPEC negotiations or of ‘crude’ affairs (he was previously the country’s minister for sport) all combined to complicate the situation as well as infuriate the Saudis. This situation should not arise at the next meeting.

Now if all this has left you yearning for a slice of OPEC’s history – whether you are an observer, derider or admirer of the cartel – there is no better place to start than Dr. Fadhil Chalabi’s latest book Oil policies, oil myths: Observations of an OPEC insider.

If there is any such thing as a ringside view of the wheeling and dealing inside OPEC then Dr. Chalabi more than anyone else had that view. The Oilholic found his book, which serves as the author’s memoir of his time at OPEC as well as charts the history of OPEC and its policies, to be a thoroughly good read.

He was the deputy secretary general of OPEC from 1979-89 and its acting secretary general from 1983-88. The book is, in more ways than one, a coupling of an account of his time at OPEC and an objective analysis of what has transpired in the energy business over last four decades. Looking through either prism - both the book's "memoir aspect" as well as the author's charting of the history of OPEC and its policies, it comes across as a thoroughly good read.

The book is just over 300 pages split by 16 chapters over which the author offers his thoughts in some detail about why OPEC is relevant. He also sets about exploding a few myths about the cartel, what has shaped it and how it has impacted the wider industry as well as the global economy.

To substantiate his case, he offers facts, figures, graphics, a glossary and a noteworthy and useful chronology of key events affecting the oil industry. The world has come a long way from the days when the “Seven Sisters” simply posted the oil prices in Platt’s Oilgram news bulletins. The era of price volatility-free cheap oil ended with the price shock of 1973 in the author’s opinion, before which the world had scarcely heard of OPEC.

Gaddafi’s Libya, Saddam’s Iraq and Nasser’s Egypt are all there but the Oilholic found Chapter 7 narrating the episode when Carlos the Jackal struck OPEC (in 1975) to be riveting, for among the hostages taken by the Jackal was the author himself. The book understandably has many fans at OPEC and officials from member nations as seen in its endorsements. However, what makes it enjoyable is that it is no glorification or advert of the cartel.

Rather it is an objective analysis of how crude oil has shaped the diplomatic relations of OPEC members with the oil-consuming nations globally and by default how an oil exporting cartel’s presence triggered ancillary developments in the crude business. This includes changing the investment perspective of IOCs who began facing dominant NOCs. In summation, if you would like to probe the supposed opacity of OPEC, Dr. Chalabi’s book would be a good starting point.

© Gaurav Sharma 2011. Photo 1: OPEC Flag © Gaurav Sharma 2011, Photo 2: Cover: Oil Policies Oil Myths © I.B. Tauris Publishers. Book available here.

No consensus at OPEC; quota unchanged

In a surprising announcement here in Vienna, OPEC ministers decided not to change the cartel’s production quota contrary to market expectations. At the conclusion of the meeting, OPEC Secretary General Abdalla Salem el-Badri said the cartel will wait another three months at least before revisiting the subject.

El-Badri also said the crude market was “not in any crisis” and that no extraordinary meeting had been planned. Instead, the ministers would meet as scheduled in December. However, he admitted that there was no consensus at the meeting table with some members in favour of a production hike while some even suggested a cut.

“Waiting (at least) another three months for a review was not to everyone’s liking but the environment around the table was cordial even though it was a difficult decision,” he said after the meeting. However, as expected, he did not reveal which member nations were for or against a decision to hold production at current levels.

El-Badri put OPEC's April production at about 29 million b/d and refused to answer many or rather any questions on Libya except for the conjecture that while Libyan production was not taking place, others can and will make up for the shortfall within and outside of OPEC.

The surprising stalemate at OPEC HQ has seen a near immediate impact on the market. ICE Brent crude oil futures rose to US$118.33, up US$1.55 or 1.3% while WTI futures rose US$1.30 to 100.61 up 1.3% less than 20 minutes after el-Badri spoke.

He added that the environment was cordial, but many suggested that it was anything but. The Saudis left the building in a huff with minister Ali al-Naimi describing it as the "worst meeting they have attended."

The analyst community is surprised but only mildly with many opining that the Saudis may well go it alone. Jason Schenker, President & Chief Economist of Prestige Economics says, “I think that what we have witnessed today is very similar to the group’s quota suspensions in the past. High volatility in the markets is clearly visible and there was no consensus at the meeting table about how to respond. At the end of the day, most OPEC member countries are going to react to what we have seen today as they see fit. Atop the list are the Saudis – the OPEC heavyweights - who will react as they always do and go it alone.”

Ehsan Ul-Haq, an analyst with KBC Energy Economics agrees with Jason. “Quite simply, if the Saudis want more oil on the market, they don’t need the Iranians, they don’t need the Venezuelans; they can and now probably will do it alone."

No wonder the new man at the table – the meeting’s President Mohammad Aliabadi of Iran spoke of a “nervous” two quarters for the oil market. The Oilholic felt this 159th ordinary meeting would be ‘extraordinary’ and so it has turned out to be. Venezuela, Iran and Algeria reportedly refused to raise production with a Gaddafi-leaning Libyan delegation backing their calls.

Meanwhile, the latest Statistical Review of World Energy published by BP earlier today with an impeccable sense of timing, noted that consumption of oil appreciated on an annualised basis at the highest rate seen since 2004. Christof Ruhl, BP group's chief economist, puts the latest growth rate at 3.1%.

According to BP, much of the increased demand for oil continued to come from China where consumption rose by over 10% or 860,000 b/d. The report also notes the continued decline of the North Sea with Norway, followed by the UK, topping the production dip charts. The take hike announced in the recent UK budget is not going to help stem the decline.

© Gaurav Sharma 2011. Photo: OPEC logo © Gaurav Sharma 2008

Buzz at Central Bank of Oil Before 1600 CET

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

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

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

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

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

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

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

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

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