Wednesday, May 25, 2011
IEA, OPEC & a few more bits on BP
Sunday, May 15, 2011
Valero, BP, Crude price & the week that was!
Macroeconomic factors aside many in the City believe the ongoing conflict in Libya no longer appears to be a key driver of oil prices as the loss of Libyan oil exports were fully discounted by the market some time ago. The profit takers agree! Société Générale CIB analysts noted in a report to clients that they estimate:
That is not happening and Syria is of peripheral importance from near term instability premium perspective. Société Générale CIB analysts further note that the Brent crude oil price may correct lower over coming weeks as speculative traders may be tempted to take some profit on long positions as:
- recent significant events in the Middle East & North Africa (MENA) have been limited to countries with little oil exports
- tentative signs of demand destruction in the US, and
- growing concerns of a bumpy or hard landing in China.
That same day BP’s shares rallied in the UK following news that an arbitral panel has issued a consent order permitting BP and the AAR consortium to assign an Arctic opportunity to TNK-BP, subject to consent from Russian state-controlled firm Rosneft. The long drawn out saga may finally be reaching a favourable conclusion for BP.
Also last week ratings agency Moody’s changed US refiner Valero Energy's rating outlook to stable from negative and at the same time affirmed Valero's existing Baa2 senior unsecured note ratings. It said the stabilisation in the rating outlook reflects the expectation that Valero's cash flow will remain strong over the short term due to rising industrial activity pushing modest growth in demand for distillates and the expectation of supportive light/heavy spreads.
The stable outlook also reflects the assumption that Valero will maintain investment grade leverage metrics over the next 12-18 months as it continues to pursue organic growth and acquisition opportunities.
Additionally Moody's expects Valero's earnings to remain highly cyclical, and noted that the 2010 sale of the company's secularly weaker US East Coast refining assets, willingness and financial capacity to idle underperforming assets, as well as its recent cost reduction efforts should enhance the company's ability to withstand the inherent cyclicality of the sector. Moody's also expects that Valero will remain acquisitive. In March of this year, Valero announced the purchase of Chevron's Pembroke refinery in the UK for US $1.7 billion.
Rounding off - the Oilholic turned 33 years young today, last seven of which have been a ‘crude’ affair ;-) Thanks for all the birthday messages!
© Gaurav Sharma 2011. Photo: Alaska Pipeline with Brooks Range in background © Michael S. Quinton / National Geographic
Tuesday, May 03, 2011
North Sea murmurs, Q1 profits & Bin Laden
Being mechanical, there is a near negligible impact on the wider market or crude market despite brave efforts of the popular press to find connections. How markets fluctuated since morning has no direct connection with Bin Laden being killed and instability premium reflected in the price of crude remains untroubled. The threat of Al-Qaeda remains just as real in a geopolitical sense and a Middle Eastern context.
Moving away from today’s news, ratings agency Moody’s noted last week that sharply higher prices for oil and natural gas liquids have boosted business conditions for the independent exploration and production (E&P) industry, and should remain high well into 2012, offsetting persistently weak natural gas prices. In the same week, ExxonMobil and Royal Dutch Shell reported appreciable rises in Q1 profits.
ExxonMobil posted quarterly profits of US$10.7 billion, up 69% over the corresponding quarter last year. It also announced a spend of US$7.8 billion over the quarter on developing new energy supplies and said its shareholders had benefited to the tune of US$7 billion in Q1 dividends.
Shell for its part reported quarterly profits of US$6.9 billion on a current cost of supply basis, up 41% on an annualised basis. It said cost saving measures as well as higher oil prices had contributed to its Q1 profitability. Earlier, BP reported first quarter profits of US$5.5 billion, down marginally from the corresponding period last year. Its production over the quarter was also down 11% after asset sales to help pay for the cost of Macondo clean-up.
Finally, unhappy murmurs about rising taxation amid the North Sea oil & gas producers are growing. In his Budget tabled in March, UK Chancellor George Osborne raised supplementary tax on production from 20% to 32%. Reports in the British media this morning suggest the owner of British Gas Centrica says it might shut one of its major gas fields because of increased UK taxes. It is closing three fields in Morecambe Bay for a month of maintenance, may not reopen one of them.
A fortnight ago, Chevron warned of possible "unintended consequences" from the UK Budget decision to raise North Sea taxes. Its Chairman John Watson told the Financial Times, “When you increase taxes every few years, particularly without consulting with industry, there will be unintended consequences of that in terms of where we choose to invest."
In 2010, Chevron received UK government’s permission to drill an exploration well to evaluate a major prospect - the deep-water Lagavulin prospect - is 160 miles north of Shetland Islands. All this comes after a report published on April 8th by Deloitte’s Petroleum Services Group noted that North Sea offshore drilling activity fell 25% over Q1 2011.
The North West Europe Review, which documents drilling and licensing in the UK Continental Shelf (UKCS), reveals just five exploration and four appraisal wells were spudded in the UK sector between January 1 and March 31; compared to a total of 12 during the fourth quarter of 2010.
Analysts at Deloitte’s Petroleum Services Group said while the drop cannot be attributed to the recent Budget announcement, which proposed increased tax rates for oil and gas companies, it could set the pattern for activity in the future.
Graham Sadler, managing director of Deloitte’s Petroleum Services Group said, “It is important to clarify that we are talking about a relatively small number of wells that were drilled during the first quarter of the year - the traditionally quieter winter months - so this is not, in itself, an unexpected decrease. The lead-in time on drilling planning cycles can be long – even up to several years - so any impact from the recent changes to fiscal terms are unlikely to be seen until much later in the year.”
“What is clear is that despite the decrease in drilling activity towards the end of last year, and during the first months of 2011, the outlook for exploration and appraisal activity in the North Sea appeared positive. The oil price continued to rise and there were indications that this, combined with earlier UK government tax incentives, was encouraging companies to return to their pre-recession strategies. Since the Budget, a number of companies have announced that they intend to put appraisal and development projects on hold and we will have to wait to see the full effect of this change on North Sea activity levels over the coming months,” he concluded.
Deloitte’s review shows that the Central North Sea has seen the highest level of drilling activity, with the region representing 55% of all exploration and appraisal wells spudded on the UKCS during the first quarter of this year.
It also showed that the price of Brent Crude oil has experienced sustained growth throughout the period, rising 20% between December 2010 and March 2011 to a monthly average of US$114.38. This increase in price is a continuation of a trend that started in 2010, however, so far this year, the rate and pattern of growth has been much more constant with regular increases rather than the rise and dip pattern seen during 2010.
© Gaurav Sharma 2011. Photo: ExxonMobil plaque outside its building, Houston, Texas, USA © Gaurav Sharma, March 2011
Monday, May 02, 2011
Discussing Offshore, BP & all the rest on TV
So over a year on from Apr 20, 2010, on that infamous day when the Deepwater Horizon rig at the Macondo oil well in Gulf of Mexico exploded and oil spewed into the ocean for 87 days until it was sealed by BP on July 15, 2010, the oilholic safely observes that if there was a move away from offshore – its clearly not reflected in the data whether you rely on Smith bits, Baker Hughes or simply look at the offshore project finance figures of Infrastructure Journal.
After publication of my report on the infamous first anniversary of the incident, I commented on various networks, most notably CNBC (click to watch), that (a) while offshore took a temporary hit in the US, that did not affect offshore activity elsewhere, (b) no draconian knee-jerk laws were introduced though the much maligned US Minerals Management Service (MMS) was deservedly replaced by Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) and (c) Brazil is fast becoming the “go to destination” for offshore enthusiasts. Finally as I blogged earlier, the sentiment that BP is somehow giving up or is going to give up on the lucrative US market – serving the world biggest consumers of gasoline – is a load of nonsense!
So what has happened since then? Well we have much more scrutiny of the industry – not just in the US but elsewhere too. This increases what can be described as the diligence time load – i.e. simply put the legal compliance framework for offshore projects. Furthermore, without contingency plans and costly containment systems, the US government is highly unlikely to award offshore permits. So the vibe from Houston is that while the big players can take it; the Gulf may well be out of reach of smaller players.
Now just how deep is 'deepwater' drilling as the term is dropped around quite casually? According a Petrobras engineer with whom I sat down to discuss this over a beer – if we are talking ultra-deepwater drilling – then by average estimates one can hit the ocean floor at 7,000 feet, followed by 9800 feet of rock layer and another 7,000 feet of salt layer before the drillbit hits the deep-sea oil. This is no mean feat – its actually quite a few feet! Yet no one is in a mood to give-up according to financial and legal advisers and the sponsors they advise both here in London and across the pond in Houston.
To cite an example, on Oct 12, 2010 – President Obama lifted the moratorium on offshore drilling in the Gulf. By Oct 21, Chevron had announced its US$7.5 billion offshore investment plans there – a mere 9 days is all it took! Whom are we kidding? Offshore is not dead, it is not even wounded – we are just going to drill deeper and deeper. If the demand is there, the quest for supply will continue.
As for the players involved in Macondo, three of the five involved – BP, Anadarko Petroleum and Transocean – may be hit with severe monetary penalties, but Halliburton and Cameron International look less likely to be hit by long term financial impact.
How Transocean – which owned the Deepwater Horizon rig – manages is the biggest puzzle for me. Moody's currently maintains a negative outlook on Transocean's current Baa3 rating. This makes borrowing for Transocean all that more expensive, but not impossible and perhaps explains its absence from the debt markets. How it will copes may be the most interesting sideshow.
© Gaurav Sharma 2011. Photo: Gaurav Sharma on CNBC, April 20, 2011 © CNBC
Monday, April 11, 2011
Talking SPRs & bidding farewell to North America
Quite frankly, the global markets must prepare for a lengthy supply shortage of the 1.4 million barrels per day exported by Libya. Rest of OPEC is struggling to relieve the market pressure. Yet it is not the time for governments of the world to dig into their strategic petroleum reserves (SPRs) as has been suggested in certain quarters.
The loudest clamour here is coming from Senator Jeff Bingaman – a Democrat from New Mexico and chairman of the US Senate energy committee – who would like to see his country’s SPR raided to relieve price pressures. That SPR is tucked away somewhere in states of Texas and Louisiana and contains 727 million barrels of the crude stuff. The Japanese have stored up 324 million while European Union member nations should have just under 500 million barrels.
The Oilholic would like to tell Senator Bingaman and others making similar calls that such a move would add to the market fear and confirm that a perceptively short term problem is worsening! Long term hope remains that the Libyan supply gap would be plugged. Releasing portions of the SPRs would not alleviate market concerns and could even be a disincentive for the Saudis to pump more oil.
Meanwhile, the IMF also warned about further scarcity of supply, noting: “The increase in the trend component of oil prices suggests that the global oil market has entered a period of increased scarcity.” This does beg one question though – if supplies from the world’s 17th largest oil exporter can cause such market fear, then aren’t we glad it wasn’t an exporting nation further up the 'crude' chain?
Elsewhere, a share exchange agreement between BP and Russia’s Rosneft was blocked again on April 8 as an arbitration panel in London upheld an injunction on the deal following objections by TNK-BP. However, it gave BP until Apr 14 to find a solution. Shareholders of TNK-BP – an earlier Russian joint venture of BP – have argued successfully up until now that the tie-up breaches business agreements BP entered into with them.
The only good news here for BP is that it can ask for Rosneft's consent to keep the agreement alive. If the company bosses wished for an easier 2011, clearly the year has not started as such and as with much else, the injury is largely self-inflicted! And here is BP’s spiel on the Gulf of Mexico restoration work.
Additionally, on April 6 a three-judge panel of the Fifth Circuit Court of Appeals in Houston denied ex-Enron chief executive Jeffrey Skilling a new trial, upholding his conviction on 19 counts of conspiracy and other crimes. It vacated Skilling's 24-year prison sentence and sent it back to a lower court for re-sentencing.
Enron's collapse into bankruptcy in 2001, following years of dodgy business deals and accounting tricks, made over 5,000 people redundant, wiping out over US$2 billion in employee pensions and meant US$60 billion in the company’s stocks were worthless. The city of Houston bore the brunt of it but the Oilholic is happy to observe that it found the strength to move on from it.
Having left London on March 23, it has been an amazing three-week long journey across the pond starting and ending here in Houston, with Calgary, Vancouver, Seattle and San Francisco in between. Completing a full circle and flying back to London from Houston, it is apt to thank friends and colleagues at Deloitte, Barclays Capital (Canada), S&P, Norton Rose Group, Ogilvy Renault LLP, Heenan Blaikie LLP, Mayer Brown LLP, Pillsbury Winthrop Shaw Pittman LLP, Canadian Association of Petroleum Producers (CAPP), Stanford University, Rice University, University of Calgary and several energy sector executives who spared their time and provided invaluable insight for the Oilholic’s work.
© Gaurav Sharma 2011. Photo: Disused Gas Station in Preston, Connecticut, USA © Todd Gipstein/National Geographic Society
Friday, April 08, 2011
Oh the market ‘insouciance’ outside is frightful!
A short-term respite is quite frankly not in sight; more so for Europeans but complaints from North American consumers and change in consumption patterns (in relative terms) have grown in the last five years. Although some in the English town of Bradford, who pay more for their petrol/per litre than North Americans, got a temporary one-off respite according to the BBC, after the station staff put a decimal point in the wrong place. The story is hilarious, aptly timed for April Fools Day and one for the little guy troubled by rising inflation in UK.
US President Obama finally pointed to Canada, Mexico as reliable sources of crude oil and said they could play their part in his consuming nation’s bid to slash imports from unfriendly governments. Both countries rank higher than Saudi Arabia in terms of crude exports to the US, so very welcome quotes – but as with all else about him – a bit late.
The short-term problem – and a global one it is too – is the widening of premium between easier to refine sweet crude oil and sour crude which is the opposite. Anecdotal evidence, either side of the Atlantic is that refiners (either European or European subsidiaries of overseas owners), are paying record physical premiums to secure supplies of sweet crude in wake of the Libyan stand-off.
The quality of Libyan sweet crude is excellent and as a short-term problem starts resembling a longer termed stand-off, the market is getting spooked as no one can make up their minds about who is in charge of the country. That’s despite the on / off media reports of oil being loaded on to tankers both on the rebels’ side and Gaddafi’s side.
End result - Brent Crude forward month futures (May) contract, more reflective of global conditions, has spiked to a 30-month high. Oilholic believes this is no ordinary or linear spike resulting from a geopolitical bias/risk premium to the upside. Rather it is clearly reflective of the rise in price differentials between sweet and sour crude in wake of Libya and hence impacts Brent as a benchmark to a greater extent than the WTI.
As early as a fortnight ago, the IEA rightly warned that we are underestimating the impact of the temporary (or otherwise) loss of Libyan sweet crude on traded paper barrels. In its monthly report for March, it noted, "Market insouciance may change abruptly as April approaches, when global crude demand is expected to increase by around 1 million barrels a day as Atlantic Basin refinery maintenance ends."
Sweet crude varieties are trading at a premium of US$2.80 to US$4.10 per barrel above sour varieties, according to the Oilholic’s sources. This is the highest for some time. Try as they might, Saudis won’t materially alter this; the premium has solid foundations!
Finally before I leave Canada for San Francisco, here is a brilliant editorial in The Economist about European nations trying to forget embarrassing ties in the Middle East and a BBC report on Transocean’s 'crude' announcement of bonuses related to their "best year of safety."
© Gaurav Sharma 2011. Photo: Gas Station, Houston, Texas, USA © Gaurav Sharma, March 2011
Wednesday, April 06, 2011
Crude Oil prices & some governments
Beginning with Canada, since there’s no empirical evidence of the Canadian Dollar having suffered from the Dutch disease, for the oil sands to be profitable – most Canadians remarked that a price circa of US$75 per barrel and not exceeding US$105 in the long term would be ideal. On the other hand, in the event of a price dive, especially an unlikely one that takes the price below US$40 per barrel would be a disaster for petro-investment in Canada. A frozen Bow River (pictured above) is ok for Calgarians, but an investment freeze certainly wont be!
The Americans came up with a slightly lower US$70-90 range based on consumption patterns. They acknowledge that should the price spike over the US$150 per barrel mark and stay in the US$120-150 range over the medium term, a realignment of consumption patterns would occur.
This begs the question – what have Middle Eastern governments budgeted for? Research by commentators at National Commercial Bank of Saudi Arabia, the Oilholics’ feedback from regional commentators and local media suggests the cumulative average would be US$65 per barrel. Iran and Iraq are likely to have budgeted at least US$10 above that, more so in the case of the former while Saudi Arabia (and maybe Kuwait) would have budgeted for US$5 (to US$10) below that.
Problem for the Oilholic is getting access to regional governments’ data. Asking various ministries in the Middle East and expecting a straight forward answer, with the notable exception of the UAE, is as unlikely as getting a Venezuelan official to give accurate inflation figures.
Meanwhile, price is not the only thing holding or promoting investment. For instance, the recent political unrest has meant that the Egypt Petroleum Corp. has delayed the Mostorod refinery construction until at least May. The reason is simple – some 20-odd participating banks, who arranged a US$2.6 billion loan facility want the interim government to reaffirm its commitment to the project, according to a lawyer close to the deal. The government, with all due respect, has quite a few reaffirmations to make.
© Gaurav Sharma 2011. Photo: Bow River, Calgary, Alberta, Canada © Gaurav Sharma, April 2011
Saturday, April 02, 2011
Glimpses of Fort Calgary, 1914 & all that!
For oilholics the world over, the 'crude' bits are very crucial and merit a detailed look. First gas and (as was often the case with hydrocarbon prospecting) then oil was found in May, 1914, just south of Calgary. After the first discovery, there was a long wait of some 33 years before the next meaningful discovery was made.
The rest, as they say, is all history and I am reading up on it thanks to some wonderful books obtained from stores recommended by Rusty Miller, Ogilvy Renault LLP’s managing partner here. He also spared time from his busy schedule to give me some valuable insight on intricacies of the energy business in this part of the world.
Uploaded above are some 'crude' snaps from the Fort, captioned as appropriate. If you happen to be in town – please do visit. For some strange reason, and locals scratch their heads too, this wonderful place does not receive any Federal funding! Even provincial support needs to be applied for and is not a given thing by any means according to an official. Local energy companies have been good though and long may that continue.
Finally, a few crude words on the price and differentials between both benchmarks – WTI & Brent. This weekend, using the Brent forward month (May) futures contract as a benchmark – the crude price is at its highest since August 2008. With the May contract at US$117.36 per barrel, that is an annualised price appreciation of nearly 24% and by my estimation – a week-over-week appreciation of nearly 2.4% plus. Price differential between Brent and WTI also averaged US$10 and shows no sign of narrowing!
The Libyan situation also shows no signs of a resolution. Both in Alberta and Texas – the overwhelming sentiment is that Libya is fast resembling a stand-off and that adds to the upside bias reflected in the risk premium. It seems that for the short term, the market will have to make do without Libyan crude.
Problem is if it becomes a medium term supply concern. Surely, a high price should please Texans and Albertans – but "only to a point" notes one. That tipping point could hurt both the global economy and the profit margins of those in the business.
© Gaurav Sharma 2011. Photos: (Top) Fort Calgary, (Clockwise) Signage charting the first discovery of oil on the exterior of the fort, Turner Valley & Leduc crudes on display, Model of an old Gas station (Click on images to enlarge) © Gaurav Sharma, March 2011
Friday, April 01, 2011
Remembering Eddie Junior
Oilholic believes if any Brit is asked to name a haulage company – there’s 9:1 chance that man, woman or child would say Eddie Stobart; that unmistakable name flashing at us from a green background off the side of a truck zipping past.
For 30 years, Eddie helped to build his dad – Edward senior’s company into the UK largest independent haulage company, retiring from his post at the helm in 2004. By this time, the firm had achieved iconic status – so much so that it had sparked a booming accessories and kids’ model toy trade. I confess to being a proud owner of a miniature Eddie Stobart truck which I refuse to let go at any price.
In a statement issued by the Stobart Group, it said: "With great sadness and regret that Stobart Group shares the news that Edward Stobart, 56, son of Eddie Stobart, passed away at 8.10am this morning [Thursday, March 31st, 2011] at University Hospital Coventry, after heart problems yesterday. Our thoughts are with Edward's wife Mandy, his children and family at this difficult time."
Rest in peace Eddie, you will be missed Sir.
© Gaurav Sharma 2011. Photo: Eddie Stobart truck © Stobart Group, UK
Thursday, March 31, 2011
Goodbye Houston; first thoughts from Calgary
There is also common conjecture that retirement of coal-fired power plants may assist in shifting established gas flow patterns (& prices). However, the Oilholic feels while this is likely to happen at some point, it will not happen in a meaningful way any time soon. Mid West’s problem is akin to that of Australia’s when it comes to power generation – a traditional dependence on coal which is hard to tackle. Gas prices, in any case, are likely to remain low as there are abundant supplies and storage levels are solid.
Given that the US overtook Russia as the leading gas producer courtesy of shale gas, it is not bravado to assume that it could meaningfully export to Europe or that US-bound LNG could well be diverted to Europe.
Moving on to refining, some local analysts are following the “things can only get better” logic for North American refiners – who they feel are well positioned to demonstrate a recovery (or some form of stabilisation) of their margins after six troubled quarters to end-2010. The speed of the economic recovery will have a big say in the state of affairs.
After leaving Houston, the Oilholic has now arrived in its sister Canadian city of Calgary – quite a switch from a sweltering 30 C on a Texan morning to about -4 C on an Albertan evening. While both cities do not share their climate – they do share the same sense of frustration about the delays associated with the expansion project of the Keystone pipeline.
It seems Alberta and Texas are quite keen on the expansion – it’s just that everyone in between is the problem. The politics associated with this pipeline, as with other projects of its ilk is deeply complicated. However, this one involves cross-border politics, some of which has turned ugly especially in relation to the “cleanness” of Canadian oil.
And by the way its “oil sands” not “tar sands” stupid, say the locals! I’ll have more from Calgary shortly when I soak in and refine the local commentators’ viewpoints.
© Gaurav Sharma 2011. Photo: Calgary Tower, Alberta, Canada © Gaurav Sharma, March 2011
Tuesday, March 29, 2011
BP's still going ‘Beyond Petroleum’ in Houston
Many opine that when things were going horribly wrong in the Gulf of Mexico, BP could have done better, sought more cooperation from the government and not insisted it can handle things on its own. Some also blame their government of complacency for not intervening sooner and forcing BP’s hand.
Nearly a year on, while a sense of disappointment has not subsided, no one here seriously believes BP has turned its back on a lucrative American market – a withdrawal from refining and marketing ends of the business is more likely. I think it is a dead certainty from a strategic standpoint.
Now this ties in nicely to the company’s "Beyond Petroleum" campaign from a few years back. There was a fair bit of scepticism about it in England and elsewhere. However, it seems the company continues to go beyond petroleum in Houston. In 2006, BP said it would set up its alternative energy business in Houston on top of an existing solar business in Frederick, Maryland.
Five years hence and despite all what has happened, it is still going or rather has been kept going based on the 33rd floor of this city’s iconic Bank of America Center building on 700 Louisiana Street (see left). Asked about its prospects, the company did not return the Oilholics’ call. However, I visited the iconic building anyway courtesy of other occupants, especially Mayer Brown LLP, for which I am grateful.
The next 12 months are crucial for BP. Americans are a largely forgiving bunch, but as Texans say forgiving is one thing, forgetting is another matter! And many have pointed out their disgust at Transocean and Halliburton too. Unfortunately for BP – the 'crude' muck stops with them.
© Gaurav Sharma 2011. Photo: Bank of America Center, Houston, Texas, USA © Gaurav Sharma, March 2011
Sunday, March 27, 2011
There’s Something about the Chronicle
The content or better still – the coverage is much attuned to crude developments local, global or should we say glocal. You might say that in a town with deep historic ties with the oil & gas business that should not come as a surprise. However, it is how the coverage is slanted and present which I love reading both online and well nothing beats a paper copy when you can get a hold of it.
So on this visit to Houston, I see The Chronicle split as front section, city & state, sports, business (my favourite), the ‘Lone Star’ and classifieds and on Mar 26th there were four ‘crude’ stories. One mute point - the Hearst Corporation has owned it since 1987 and according to local sources it employs over 2000 people including 300 fellow scribes.
The publication will celebrate its 110th anniversary in October this year, and seeped in its rich history is the fact that Jesse Holman Jones, a local politician, US Secretary of Commerce during World War II and President Hoover’s stalwart for reconstruction and development owned/published the publication from 1926-56.
The late Jesse H. Jones' life is celebrated and commemorated in several monuments (and parks) in the city, but The Chronicle’s connection with the great man is a unique component of his legacy to his city & his country. While retaining the title of publisher until his death in 1956, Jones passed on the ownership to a trust in 1937.
Sources suggest it has over 70 million page views in the internet age and amen to that! I had the pleasure of walking past its modern downtown headquarters earlier and couldn’t but help clicking the imposing building.
© Gaurav Sharma 2011. Photo 1: Houston Chronicle, Front Page, Mar 26, 2011, Image - Gaurav Sharma © Houston Chronicle, 2011. Photo 2: Photo: Headquarters, Houston Chronicle, Houston, Texas, USA © Gaurav Sharma, March 2011
Saturday, March 26, 2011
1500 Louisiana Street's journey: Enron to Chevron
Thursday, March 24, 2011
First thoughts from Houston…mine & others'
But first things first, last I checked WTI forward month futures contract was at US$106.35/b and ICE Brent at US$115.60/b. An energy partner at a law firm, a commodities trader, an industry veteran and an oil executive were all in agreement that geopolitical bias for crude prices – well – is almost always to the upside. Recent events in the Middle East and whats going on Libya in particular is having more of an impact on the Brent spread, as it is more reflective of global conditions. WTI is more reflective of conditions in the US mid-west and as such many here believe even US$100-plus does not reflect market demand vs. supply fundamentals.
Only medium term concern here, moving away from the geopolitical bias, is the perceived bottleneck associated with pipeline capacity (from Alberta, Canada) to Cushing and then southwards. This is unlikely to be relieved until 2013 (TCPL Keystone XL) or 2014 (Enbridge) and lets not forget the associated politics of it all.
The Libya situation, most experts here say, may create a short-term spike for both crude benchmarks, more so in Brent’s case – but it is not going to be 2008 all over again – in the words of four experienced Texans and the pragmatic SocGen analyst Mike Wittner.
Furthermore, market commentators here believe that over the next three quarters both speculative activity and investor capital flow in to the crude market (or shall we say the paper crude market) will be highly tactical as the current geopolitical risk premium (hopefully) eases gradually.
As expected, local feedback suggests utilisation rates of refineries and LNG terminals locally is still low. While I attach a caveat that four experts do not speak for the whole state, the belief here in Texas is that refining margins, which have been pathetic for the past six quarters may show some recovery towards the end of 2011.
© Gaurav Sharma 2011. Photo: Pump Jacks, Perryton, Texas © Joel Sartore/National Geographic
Sunday, March 20, 2011
Market Chatter on ‘Crude’ effects of Instability
It is also getting a bit repetitive to suggest that fundamentals do not support such a high price of crude, even if the geopolitics is taken out of it. Thing is even profit taking at some point is not likely to cool the hot prices in the short term and the market has already started chatting about the impact. The tragic earthquake in Japan has added another dimension. Until nuclear power generation gets back on track in Japan, in order to meet their power demand the Japanese will increase the use of hydrocarbons as they have no other choice.
Regarding the latter point, Ratings agency Moody's says that displaced demand from Japan's nuclear shutdown will shift to Asia-Pacific thermal-energy producers such as Australia's upstream Woodside Petroleum (Moody’s rating Baa1 negative), Indonesia's thermal-coal miner Adaro (Ba1 stable), Korea's refiner SK Innovation (Baa3 Stable), and Thailand's petrochemical firm PTT Chemical (Baa3 review for upgrade).
Renee Lam, a Moody's vice president in Hong Kong, says, "These firms and others in the region can capitalise on near- and longer-term displaced demand as Japan must now rely more on non-nuclear fuel." Lam also expects global crude prices to remain high, despite a near-term drop from dislocation in Japan.
She further notes, "Refinery shutdowns in Japan, accounting for 9% of Asian capacity and 2% of global capacity, have pushed up Asian refining margins. Strong margins benefiting non-Japanese, regional refineries should continue at least in the near term. We expect strong results for our rated refiners in the first half of this year."
Additionally, Fitch Ratings says airlines and European Gas-Fired Utilities Unprepared for Current Oil Spike and that the substantial increase in oil prices in a short time frame has caught many corporate energy consumers off guard, as they are not properly hedged to cope with such high oil price levels. In a scenario of sustained high oil prices, corporate issuers that are heavily exposed to oil-related commodities feedstock are likely to face a direct impact on their earnings.
In the agency’s view, management teams may be reluctant to hedge the oil price at these high levels, in anticipation of a softening in the oil price once geopolitical tensions subside. Fitch also considers it possible that banks might be less keen to finance oil option contracts at such high levels, as they do not want to take the risk of a continued rally in the price of crude.
As oil price volatility remained fairly low in 2010, airlines seem to have been hedging less and are now more vulnerable to the current spike. In the current high oil price environment, an increasing number of airlines are taking a wait-and-see approach in anticipation of a softening of the oil price and perhaps due to higher hedging costs. In Fitch's view, sustained oil prices well in excess of US$100 per barrel could negatively affect the operating performance and creditworthiness of high intensity corporate energy consumers and may also hamper the global economic recovery.
Analysts at SocGen CIB note that the forward curve for Brent is currently in backwardation (nearby premium, forward discount) for the next 5 years, reflecting concerns over growing physical tightness in the crude markets. Especially, in light of the NATO/allied forces bombardment of Gaddafi forces last night, the market is pricing in an extended Libyan shutdown of crude exports. About 1 million barrels per day of crude oil production has been cut and Libya’s major exporting ports are now closed.
As Nymex WTI-ICE Brent spreads have been less weak, SocGen analysts note that the front month spread has traded around -US$9.75/b on Tuesday vs -US$15/b one week ago. They opine that the recent strength of the WTI / Brent spreads has not really been due to the decreasing risk-premium of Brent, but more to very strong inflows of money on WTI-linked instruments.
In a note to clients last week, they note and I quote: “Indeed, the last CFTC COT report shows that the net position of the non-leveraged investments on WTI hit a new record high. This is so large that even the swap dealers now have a negative net position on WTI futures.”
I feel it is prudent to mention (again!!!) that this blogger, all main ratings agencies and a substantial chunk of commentators in the City believe that a large portion of the current oil price spike has been driven by speculative activity rather than supply fundamentals. Oil supply has remained more or less balanced as most other oil producing nations have raised their production levels in order to keep overall production largely unaffected – so far that is!
Finally, here’s an interesting segment of CNBC's Mad Money programme, where Jim Cramer talks oil n’ gas in the US state of North Dakota. It’s relatively small from a global standpoint, but could be important from an American one.
Sunday, March 13, 2011
Libya & OPEC’s “Will they, Won’t they” Routine
In a nutshell according to various newswires, Gaddafi militia and rebel fighters are toughing it out near oil terminals over 500km east of the capital Tripoli. Heaviest of the skirmishes have been outside (& within) the oil town Ras Lanuf, with both sides claiming a position of strength. A rebel spokesperson even gave out a statesman like statement, telling the BBC they would “honour” oil contracts.
However, anyone looking towards OPEC to calm the markets got a ‘crude’ response and mixed signals in keeping with the cartel's well practised drill of letting the wider world indulge in a guessing game of whether a production increase was on cards or not. The Saudis sought to calm, the Venezuelans and Iranians tried to confuse and the rest were quite simply confused themselves.
Moving away to a corporate story, pre-tax profits announced last week by UK independent upstart Tullow Oil have jumped 361% to US$152 million with a 19% rise in revenues to US$1 billion in the year to 31 December. In a statement to investors, its chief executive Aidan Heavey said the outlook was "very positive". I’d say its much more than that sir!
Finally, one of UK’s signature refineries – Pembroke – would now be a proud member of San Antonio, Texas-based refining major Valero Energy Corp. That’s after its current owner Chevron announced on March 11 that Valero had agreed to pay US$730 million for the refinery and US$1 billion for the assets. Ratings agency Moody's views Valero's acquisition of Pembroke and associated marketing and logistics assets as credit neutral. It may well be noted that it took Chevron nearly a year to...ahem....get rid of it (??)
© Gaurav Sharma 2011. Photo © Gaurav Sharma 2009
Wednesday, February 23, 2011
In the Realm of Crude “What Ifs”
Given the number of “what if” analysts doing the rounds of the TV stations today, it is worth noting with the Libyan situation that not only are supply concerns propping up the price but the type of crude that the country supplies is also having an impact. I feel it is the latter point which is reflected more in the crude price than supply disruption. Light sweet crude is the most cost effective variety to refine and while Libyan crude is not as good as American light sweet crude, it is still of a very good quality relative to its OPEC peers.
Now, if exporters such as Saudi Arabia talk of making up the short supply, not all of the Libyan export shortfall can be compensated for with a type of crude the country exports. This is what the speculators are factoring in, though it is worth stating the obvious that Libya is the world 12th largest exporter of crude.
Furthermore, the age-old “what if” question is also hounding trading sentiment, i.e. “What if the house of Saud collapses and there is a supply disruption to the Saudi output?” The question is not new and has been around for decades. Problem is that a lot of the “what ifs” in Middle East and North Africa have turned to reality in recent weeks. If the House of Saud were to fall, it will be a geopolitical impact on crude markets of a magnitude that we have not seen since the Arab oil embargo.
Elsewhere at the International Petroleum Week, advisory firm Deloitte revealed its second full year ranking of UK upstream independent oil companies by market capitalisation. The top three are Tullow, Cairn and Premier Oil in that order, a result similar to end-2009. Tullow’s strength in Ghana helped it to maintain top spot in the sector. Its £11 billion market capitalisation is more than twice the valuation of its closest rival Cairn Energy, which in turn is more than twice the size of third placed Premier Oil. (Click on table below to enlarge)
Cairn continues to excite after agreeing to sell its Indian interests to Vedanta last year and concentrating on Arctic exploration. However, its drilling off the coast of Greenland has yet to yield anything ‘crudely’ meaningful. Another noteworthy point is the entry of Rockhopper Exploration, which is prospecting for crude off the coast of the Falkland Islands, into the top ten at 9th (up from 26th at end-2009).
“We have seen a great deal of volatility in the ranking showing the transformational growth achievable through exploration success. Overall, 2010 was a year of recovery for the UK upstream independent oil and gas sector, with rising oil prices and greater access to capital improving investor sentiment in the sector,” says Ian Sperling-Tyler, associate partner of energy transaction services at Deloitte.
“The improved environment was reflected in a 28% increase in the market capitalisation of the 25 biggest companies in the sector from £25.3 billion to £32.2 billion. In contrast, the FTSE 100 posted a 9% gain,” he adds.
The rating action follows the company's recent announcement of a transformational partnership agreement with BP that will see the British major take a 30% stake in RIL's 23 Indian oil and gas blocks, including the substantial KG D6 gas field, for an initial consideration of US$ 7.2 billion plus further performance related payments of up to US$ 1.8 billion.
Philipp Lotter, a Senior Vice President at Moody's in Singapore believes the partnership agreement has generally positive credit implications for RIL, both operationally and financially. "The decision to bring on board BP in support of India's domestic gas market development will benefit RIL from BP's deep-water drilling expertise, as well as allow it to share risks and costs of future exploration and infrastructure projects, thus significantly de-risking its upstream exposure," he adds.
However, according to Moody's it is worth noting that the outlook could revert back to stable, if RIL undertakes transformational debt-funded acquisitions, or allocates material liquidity to finance growth that entails higher business risk. A deterioration of retained cash flow to debt below 30% is also likely to reverse any upward rating pressure.
© Gaurav Sharma 2011. Graphics 1: Brent crude oil chart © Digital Look/BBC Feb 23, 2011, Graphics 2: Leading UK independent oil companies © Deloitte LLP
Tuesday, February 22, 2011
Shell Divests, BP Invests and Libya Implodes!
The first of these JVs will own and operate Shell's existing oil products, distribution and retailing businesses in 14 African countries, most notably in Egypt, Morocco, Kenya, Uganda and Madagascar.
The second JV will own and operate Shell's existing lubricants blending plants in seven countries. The move is in line with Shell’s policy of divesting its non-core assets. It sold US$7 billion of non-core assets in 2010. While Shell was divesting in Africa, BP was investing in India via a strategic oil & gas partnership with Reliance Industries.
Both companies will form a 50:50 joint venture for sourcing and marketing hydrocarbons in India. The agreement will give BP a 30% stake in 23 oil and gas blocks owned by Reliance including 19 off the east coast of India. Market feedback suggests the deal is heavily weighted towards gas rather than the crude stuff.
In return for the stake, BP will invest US$7.2 billion in the venture and a further US$1.8 billion in future performance-related investments. The combined capital costs are slated to be in the region of US$20 billon with local media already branding it as the largest foreign direct investment deal in India by a foreign company.
Switching focus to the Middle Eastern unrest, what is happening from Morocco to Bahrain is having a massive bearing on the instability premium factoring in to the price of crude. However, the impact of each country’s regional upheaval on the crude price is not uniform. I summarise it as follows based on the perceived oil endowment (or the lack of it) for each country:
• Morocco (negligible)
• Algeria (marginal)
• Egypt (marginal)
• Iran (difficult to gauge at the moment)
• Tunisia (negligible)
• Bahrain (marginal)
• Libya (substantial)
Of these, it is obvious to the wider market that what is happening in Libya is one of concern. More so as the unrest has become unruly and the future may well be uncertain as the OPEC member country accounts for around 2% of the daily global crude production.
Italian and French oil companies with historic ties to the region are among those most vulnerable, though having said so BP also has substantial assets there. Austria’s OMV and Norway’s Statoil are other notable operators in Libya. A bigger worry could be if Iran erupts in a similar unruly way. Given the international sanctions against Iran, oil majors are not as involved there as they are in Libya. However, the question Iran’s crude oil endowment and its impact on the oil markets is an entirely different matter.
Finally, the ICE Brent crude forward month futures contract stood at US$108.25 per barrel, up 5.6% in intraday trading last time checked. I feel there is at least US$10 worth of instability premium in there, although one city source reckons it could be as high as US$15. The "What if" side analysts (as I call them) are having a field day - having already moved their focus from Iran to Saudi Arabia.
© Gaurav Sharma 2011. Photo: Vintage Shell gasoline pump, Ghirardelli Square, San Francisco, California, USA © Gaurav Sharma, March 2010
Wednesday, February 16, 2011
Of PetroChina, Gazprom and Hackers!
Moving away from pricing, it emerged last week that Russia’s Gazprom reported a fall in profits from RUR173.5 billion to RUR160.5 billion; an annualised dip of 9% for the quarter from July to Sept 2010 period. The cost of purchasing oil and gas jumped 29% according to the state owned firm while operational costs rose 12%. Dip in profit even prompted Russian PM Putin to “ask” them to raise their game.
Elsewhere, the “All Hail Shale” brigade had to contend with PetroChina – the Chinese state-controlled energy firm – acquiring a 50% stake in a Canadian Shale Gas project run by Encana. The stake cost is pegged at a cool US$5.4 billion. PetroChina already has majority stakes in two oil projects in Canada with Encana. There doesn’t appear to be much of a ruckus about the Chinese shopping in Canada. I guess Canadians are less uptight about Chinese investment in perceived strategic energy assets than the Americans.
Finally, computer security firm McAfee claimed in a report published on February 10th that hackers have attacked networks of a number of oil and gas firms for a good few years now. The full report is available for downloading here and it makes for interesting reading. However, I am not entirely surprised by the revelations.
In a nutshell, McAfee claims that in a series of co-ordinated attempts at least a dozen multinational oil, gas and energy companies were targeted – named by it as Night Dragon attacks – which began in November 2009. Five firms have now confirmed the attacks, it adds.
Tuesday, February 01, 2011
BP's loss, Brent’s Gain & Worries over Suez Traffic
According to wires and international broadcasters, the Suez Canal is still functioning as normal and continues to be heavily guarded by the Egyptian forces. So while the potential of traffic disruption is there, I am not so sure how it can manifest itself so soon in a meaningful way. There are other factors behind, as I noted yesterday, in Brent’s strength.
Elsewhere, if you haven’t heard BP has reported an annual loss of US$4.9 billion for 2010, it’s first, though unsurprising annual loss since 1992. This compares rather unfavourably with a profit of US$13.9 billion the oil major recorded in 2009. The Gulf of Mexico oil spill has blown a Macondo sized whole in its books, though the company said it would restore its dividend payment to shareholders hitherto suspended in wake of the Gulf spill.
Another key announcement was BP’s decision to sell two US oil refineries in Texas and California thereby halving its refining capacity in the US. The sale includes the Texas City refinery, where 15 workers were killed in an explosion in 2005 – the site of BP’s last disaster in the States prior to Macondo.
The announcement vindicates my analysis for Infrastructure Journal back in November. BP is not alone; the oil majors no longer regard refining as central to their business. There’s a part of me that thinks BP would have sold its refinery assets, even if the Gulf of Mexico tragedy had not happened. The incident only brought the sale forward.
© Gaurav Sharma 2011. Photo: Macondo containment, Gulf of Mexico, USA © BP Plc
Monday, January 31, 2011
ETFs, Brent's Strength & ExxonMobil's Russian Deal
Finally, SocGen’s Mutual Fund & ETF report published last week makes for interesting reading; a sort of a continuation of trends noted by the wider market in general. It notes that the commodity rally was supported by US$23 billion inflows in 2010 (click on graphics to enlarge). Over the past 6 months, the rally in commodity prices has been significant (CRB index +27%) and directly associated with the expected pick-up in demand, but reallocation to protect against inflation has clearly played a role as well.
However, SocGen observed that Precious metals, and not energy, dominated commodity inflows. Precious metals were by far the largest category in commodity ETPs (including ETFs, ETCs and ETNs) accounting for 76% of US$157 billion assets under management and they continue to attract most of the inflows.
© Gaurav Sharma 2011. Graphics © SGCIB Cross Asset Research, Jan 19, 2011
Wednesday, January 19, 2011
Of IEA, OPEC and the Hoo-Hah over BP & Rosneft
OPEC also revised its global oil demand forecast putting demand growth at 1.2 million barrels a day for the year; an upward revision of 50,000 barrels per day from its last estimate. In its monthly report, the cartel also noted that demand for its own crude is expected to average 29.4 million barrels of oil per day in 2011; an upward revision of 200,000 barrels over the previous forecast.
Both OPEC and IEA expect the increase in crude oil demand to be driven entirely by emerging markets, while OECD demand is projected to reverse to its "underlying, structural decline in 2011," according to the latter. Their respective response to the forecasts is one of understandable contrasts.
Nobuo Tanaka, head of the IEA, said a subsequent "alarming" rise in the oil price would be damaging. "We are concerned about the speed of the rising oil price, which can harm the growth of economies. If the current price continues, it will have a negative impact," he added. However, OPEC remains unmoved, as the forward month futures spread between Brent and WTI crude continues to widen to US$5-plus in favour of the latter. Both benchmarks lurk close to the US$100-mark.
OPEC’s position unsurprisingly is that the market remains well supplied. Cartel members UAE, Iran, Venezuela and Algeria say they are not concerned about a US$100 per barrel price. In fact, Venezuela's Energy Minister, Rafael Ramirez, described the price of $100 as "fair value" while speaking to the Reuters news agency. There are no prizes for guessing that an emergency meeting of the cartel to raise production is highly unlikely!
Now to the BP-Rosneft tie-up which sent the markets into a tizzy. In a nutshell, news of BP’s acquisition of a 9.5% stake in Rosneft which in turn would bag a 5% stake in BP was good, but it did not quite merit the response it got. Markets cheered it; environmentalists jeered it (given the open invitation to dig in the Arctic).
Rest of the narrative is a bit barmy. First of all, agreed it is a solid deal but given the involvement of a company 75% owned by the Russian government – I am unsure how it would be instrumental or for that matter detrimental to the UK’s petroleum security. Surely, the jury should still be out on that one. Secondly, this in no way implies that BP has turned its back on the US market in light of recent events as some market commentators have opined.
Finally, it is more of a marriage of convenience rather than a historic deal. Rosneft needed technical expertise and does not care much for political rhetoric in western markets about digging deeper and deeper for crude. BP needs access to resources. Both parties should be happy and it is rumoured in the Russian press that TNK-BP would also like a slice of the potentially lucrative Arctic ice cake. Away from the main event, the sideshow was just as engaging.
Curiously city sources revealed that BP did not use its preferred broker JPMorgan Cazenove, but rather opted to go with London-based Lambert Energy Advisory. It did amuse some in the City. All I can say is good luck to Philip Lambert. Finally, talking of the little guys in this crude world – have you heard of AIM-listed Matra Petroleum?
Last I checked, this independent upstart expects to be producing a rather modest 600-700 barrels per day by H1 2011 and its share price is around 3.52p. So assuming, Brent caps US$100-plus by end of H1 2011 and Matra delivers – the share price could treble in theory. I am not making a recommendation – let’s call it an observation!
© Gaurav Sharma 2011. Photo © Adrian R. Gableson
Thursday, January 13, 2011
Crude Year 2011 Begins With a Bang
Speaking to the BBC’s world service, IEA’s Fatih Birol said, "There is definitely a risk of major negative implications for the global economy." I agree and accept this, but truth be told we are some way away from a US$150-plus per barrel high. This morning though, the Brent forward month futures contract was flirting with the US$100 mark. The cold weather we have had either side of the pond does generally tend to support crude prices.
Analysts at SocGen believe the Alaska pipeline shutdown, following a leak, provided only limited support to WTI. Last weekend, a minor leak was discovered at Pump Station 1 on the Trans-Alaska Pipeline System (TAPS) causing a shutdown on the pipeline and prompting Alaska North Slope (ANS) production to be cut from 630,000 bpd to just 37,000 bpd. The pipeline, which carries almost 12% of US crude output, should be restarted "soon", according to its operator Alyeska which is 47% owned by BP, while ConocoPhillips and ExxonMobile have 28% and 20% stakes respectively.
Continuing with forecasts, a new report from ratings agency Moody’s notes that oil prices should stay "moderately high" in 2011, boosting energy companies that produce crude and natural gas liquids, but weak natural gas prices will continue to dog the energy sector this year. More importantly, rather than the volatility of recent years, Moody's expects a continuation of many of the business conditions seen in 2010, despite the Macondo incident.
Steven Wood, managing director of Moody's Oil and Gas/Chemicals group believes that certain business conditions will tighten during the year, and pressures could emerge beyond the near term. Moody's price assumptions – which are not forecasts, but guidelines that the agency uses in its evaluations of credit conditions – call for moderately high crude prices of US$80 per barrel for 2011, along with natural gas prices of US$4.50 per million Btus.
Elsewhere, a US government commission opined in a report that 'bad management' led to BP disaster. Across the pond in London, a parliamentary committee of British MPs raised "serious doubts" about the UK's ability to combat offshore oil spills from deep sea rigs. However, they stopped short of a calling for a moratorium on deep sea drilling noting that it would undermine British energy security.
© Gaurav Sharma 2011. Photo: Veneco Oil Platform, California © Rich Reid / National Geographic