Thursday, August 30, 2012

G7’s crude gripe, “Make oil prices dive”

As the Oilholic prepares to bid goodbye to Dubai, the G7 group of finance ministers have griped about rising oil prices and called on oil producing nations to up their production. They would rather have Dubai Mall’s Waterfall with Divers enclosure (pictured left) act as a metaphor for market direction! It is causing some consternation in this OPEC member jurisdiction and so it should.
 
First the facts – in a communiqué released on the US Treasury’s website yesterday, the G7 ministers say they are concerned about the impact of rising oil prices on the global economy and were prepared to act. Going one step further the ministers called on producing nations, most read OPEC, to act and now.
 
"We encourage oil producing countries to increase their output to meet demand. We stand ready to call upon the International Energy Agency (IEA) to take appropriate action to ensure that the market is fully and timely supplied," the statement notes. We have been here before back in March when American motorists were worried about prices at the pump and President Barack Obama was in a political quandary.
 
Now of course he is barely months away from a US Presidential election and here we are again. In fact the Canadians aside, all leaders elsewhere in the G7 are facing political pressure of some kind or the other related to the crude stuff too. Cue the statement and sabre rattling of releasing strategic petroleum reserves (SPRs)!
 
OPEC and non-OPEC producers' viewpoint, and with some reason, is that the market remains well supplied. Unfortunately plays around paper barrels and actual availability of physical barrels have both combined to create uncertainty in recent months.
 
On the face of it, at its last meeting OPEC – largely due to Saudi assertiveness – was seen producing above its set quota. Oil prices have spiked and dived, as the Oilholic noted earlier, but producers’ ability to change that is limited. Fear of the unknown is driving oil prices. As Saadallah Al Fathi, a former OPEC Secretariat staff member, notes in his recent Gulf News column, “prices seem to move against expectations, one way or another.”
 
Al Fathi further notes that the (West/Israel’s) confrontation with Iran is still on, but it is not expected to flare up. “Even the embargo on Iranian oil is slow to show in numbers, but may become more visible later,” he adds. While an oil shock following an Israeli attack on Iran could be made up by spare capacity, the room for another chance geopolitical complication or natural disaster would stretch the market. This is what spooks politicians, a US President in an election year and the market alike.
 
However, rather than talk of releasing SPRs for political ends now and as was the case in June 2011, the Oilholic has always advocated waiting for precisely such an emergency! While it has happened in the past, it is not as if producers have taken their foot off the production pedal to cash in on the prevailing bullish market trends at this particular juncture.
 
Away from G7’s gripe, regional oil futures benchmark – the Dubai Mercantile Exchange (DME) Oman Crude (OQD) – has caught this blogger’s eye. Oman’s production is roughly below 925,000 barrels per day (bpd) at present. For instance, in June it came in at 923,339 bpd. However, this relatively new benchmark is as much about Oman as Brent is about the UK. It is fast acquiring pan-regional acceptance and the November futures contract is seen mirroring Brent and OPEC basket crude prices. Its why the DME created the contract in the first place. Question is will it have global prowess as a 'third alternative' one day?
 
Elsewhere, the UAE has begun using the Abu Dhabi Crude Oil Pipeline (ADCOP). It will ultimately enable Abu Dhabi to export 70% of its crude stuff from Fujairah which is located on the Gulf of Oman bypassing the Strait of Hormuz and Iranian threats to close the passage in the process. However the 400km long pipeline, capable of transporting 1.5 million bpd, comes at a steep price of US$4 billion.
 
Sticking with the region, it seems Beirut is now the most expensive city to live in the Middle East according to Mercer’s 2012 Worldwide Cost of Living survey. It is followed by Abu Dhabi, Dubai (UAE), Amman (Jordan) and Riyadh (Saudi Arabia). On a global footing, Tokyo (Japan) tops the list followed by Luanda (Angola), Osaka (Japan), Moscow (Russia) and Geneva (Switzerland).
 
Meanwhile unlike the ambiguity over Dubai’s ratings status, Kuwait has maintained its AA rating from Fitch with a ‘stable’ outlook supported by rising oil prices and strong sovereign net foreign assets estimated by the agency in the region of US$323 billion in 2011.
 
Finally, on a day when the International Atomic Energy Agency (IAEA) says Iran has doubled production capacity at the Fordo nuclear site, Tehran has called for ridding the world of nuclear weapons at the Non Aligned Movement (NAM) summit claiming it has none and plans none. Yeah right! And  the Oilholic is dating Cindy Crawford! That’s all from Dubai folks; it’s time for the big flying bus home to London! Keep reading, keep it ‘crude’!
 
© Gaurav Sharma 2012. Photo: Waterfall at the Dubai Mall, UAE © Gaurav Sharma

Tuesday, August 28, 2012

The world according to ENOC, Jebel Ali & more

If you could think of one participant in the Dubai economy that exemplifies a bit of a detachment from its debt fuelled construction boom turned bust, then the Emirates National Oil Company (ENOC) is certainly it. The Oilholic has always been one for contrasting Dubai’s debt fuelled growth with neighbour Abu Dhabi’s resource driven organic growth. However, ENOC is a somewhat peculiar exception to the recent Dubai norm or some say form.
 
Since becoming a wholly owned Government of Dubai crown company in 1993, ENOC has continued to diversify its non-fuel operations while playing its role as a custodian of whatever little crude oil reserves the Emirate holds. The history of this NOC dates to 1974. Today it is among the most integrated (and youngest) operators in the business, though not necessarily profitable in a cut throat refining and marketing (R&M) world.
 
While it has no operations in neighbouring Abu Dhabi, ENOC has moved well beyond its Dubai hub establishing a foothold in 20 international markets and other neighbouring Emirates over the years. In case, you didn’t know or had never heard of ENOC, this Dubai crown company has a majority 51.9% stake in Dragon Oil Plc; a London-listed promising upstart. Dragon Oil’s principal producing asset is the Cheleken Contract in the eastern section of the Caspian Sea under Turkmenistan’s jurisdiction.
 
Despite trying times for refiners ENOC’s Jebel Ali Refinery, situated 40km southwest of Dubai City, is the crown company’s crown jewel. Planned in 1996 and completed by 1999, the Jebel Ali refinery’s processing capacity currently stands at 120,000 barrels per day (bpd). It processes condensate or light crude to myriad refined products which get exported as well as feed in to ENOC's own domestic supply chain.
 
ENOC says an upgrade of the refinery was carried in 2010 at a cost of US$850 million. The refinery dominates the landscape of the Jebel Ali free trade zone accompanied by a sprawling industrial estate and an international port. The Oilholic is reliably informed that the latter is among the largest and busiest ports in the region playing host to more ships of the US Navy than any other in the world away from American shores.
 
While being able to host aircraft carriers is impressive, what’s more noteworthy from a macroeconomic standpoint is the fact that the Jebel Ali Free Trade Zone as a destination exempts companies relocating there from corporate tax for fifteen years, personal income tax and excise duties. It’s a privilege to have visited Jebel Ali and also by ‘crude’ coincidence witness ENOC sign a joint venture agreement with Saudi Arabia’s Aldrees Petroleum & Transport Services Company (Aldrees) for setting up service stations in different locations across the latter.
 
The equal-staked venture will see service stations in Saudi Arabia feature ENOC’s regional marquee brand products. The first station is expected to open early next year, with the number of sites rising to 40 in due course. Given that ENOC needs to buy petroleum from international markets as Dubai does not produce enough of the crude stuff, the move has much to do with cost mitigation on the home front.
 
ENOC is forced to sell fuel at Dubai petrol pumps well below the price it pays for crude and refining costs. For instance, over 2011 fuel sales losses at ENOC were thought to be in the US$730-750 million range. So here’s a NOC with profitable non-fuel businesses but troubling fuel businesses looking for ‘crude’ redemption elsewhere. That’s all for the moment folks; a final word from Dubai later! Keep reading, keep it ‘crude’!
 
© Gaurav Sharma 2012. Photo 1: ENOC Bur Dubai Office, UAE. Photo 2: Jebel Ali Refinery and Industrial Estate, Dubai, UAE © Gaurav Sharma 2012.

Sunday, August 26, 2012

Oil rich Abu Dhabi’s 'benign' shadow over Dubai

The Oilholic thinks there is certain poignancy about a street sign in the Dubai Marina area. The sign (pictured left) points to different directions for Abu Dhabi and Dubai city centre – while the macroeconomic direction for both Emirates is anything but following on from the 2008-09 domestic real estate crisis. As if with perfect metaphorical symmetry, the sign’s current backdrop is coloured by construction conglomerate EMAAR’s flags, the odd logo of another construction conglomerate Nakheel and ongoing building work; some of which is a little ‘behind schedule’ for good reason.
 
In March this year, the UAE’s oil production came in at 2.7 million barrels per day (bpd) with attempts on track to increase it to 3 million bpd. Of this, Dubai’s production on a standalone basis has never accounted for more than 70,000 bpd at any given point excluding barrels of oil equivalent in offshore gas findings. It is Abu Dhabi that holds 95% of proven oil reserves in the UAE.
 
With Dubai’s oil reserves set to be exhausted within a few decades bar the emergence of a significant find, a decision was taken in the late 1990s, by the powers that be, to diversify towards finance, tourism and manufacturing. The decision made sense but the approach was not sensible. By 2008, construction, real estate, trade and finance and not oil & gas had become the biggest contributors to Dubai’s economy.
 
Dubai was to be the go to capital market of the Middle East, so ran the spiel. Along came the construction of some of the tallest skyscrapers in the world such as – the Burj Dubai (renamed Burj Khalifa later for a reason), Palm Islands, Emirates Towers and the Burj Al Arab hotel. However, the global financial crisis that was to follow laid bare the fact that some of tall buildings downtown were built (or about to be built) on a mountain of debt covered by a cone of opacity. A global credit squeeze hit debt laden Dubai where it hurt – its brash, inflated property market.
 
The Oilholic distinctly remembers a wire flash from December 2008 when Mohammed al-Abbar, CEO of Emaar, told the world’s scribes that his company held US$350 billion in real estate assets and US$70 billion in credits. Concurrently, industry peer Nakheel declared US$16 billion in debts.
 
As speculators ditched the Dubai real estate market, property values tumbled, construction stalled and unemployment spiked. Inevitably, both Nakheel and Emaar were left with a pile of defunct assets, angry investors, homeowners defaulting and many dodging service charges. One contact recollects an instance where a fresh development lost 63% of its marked pre-crisis value. While Emaar was holding firm, Nakheel owned by Dubai World was imploding.
 
Absence of organic growth and the end of a debt fuelled boom had Dubai staring into the abyss. With the credit rating of the entire UAE being threatened, a miffed white knight came along on December 14, 2009 in the shape of Abu Dhabi. The oil rich emirate had decided to bailout its beleaguered neighbour on the day to the tune of US$10 billion.
 
Not only that, Abu Dhabi then went on to provide Dubai with US$25 billion in the shape of buying Dubai bonds. Local independent commentators say the actual figure may never be known but a 2010 calculated guess puts Dubai’s debt to Abu Dhabi in the range of US$80 to US$95 billion. When asking for an official confirmation, yours truly was told to “enjoy the sunshine!”
 
However, a most polite spokesperson on the Abu Dhabi side says it took remedial action needed at the time in good faith and to this day the UAE central bank is firmly committed to domestic banking institutions exposed to the real estate crisis of 2009, bringing about institutional reforms and learning from it.
 
Yet, transparency never comes easy for Dubai even after facing a financial storm it never envisaged. In March this year, Richard Fox, head of Middle East and Africa sovereigns’ ratings at Fitch, summed it up best while speaking in London. “Ratings agencies have no plans to give Dubai a credit rating because its government has not asked to be rated, and the lack of transparency would make a credit assessment difficult,” he said.
 
Three years later both Nakheel and Emaar are thought to be in a much happier place according to local media outlets. This is particularly true of Emaar which builds its domestic projects on land that is provided free in the main and uses migrant labour on little more than US$8 to US$10 a day based on anecdotal evidence and the Oilholic’s own findings! Despite recent attempts by the government to rectify the manner in which Dubai’s property market is hitherto disconnected from conventional market ground rules, not much has changed.
 
One thing is certain, Dubai will never be disconnected from its ‘benevolent’ oil rich neighbour Abu Dhabi. Some complain that Abu Dhabi’s crude help must have come with strings attached; something which was strenuously denied by both sides in 2009.

The Oilholic thinks strings weren’t attached; Abu Dhabi quite simply now holds most of the strings! So it was fitting that on January 4, 2010, when Emaar inaugurated the world tallest building (pictured right) – its name was promptly changed from Burj Dubai to Burj Khalifa in honour of Sheikh Khalifa bin Zayed bin Sultan Al Nahyan, the Emir of Abu Dhabi.
 
For oil producing nations, the challenge has always been to establish a viable non-oil sector which counters the impact of a resource driven windfall on other facets of the economy. Dubai had every chance, not to mention a more pressing need than its neighbour to do this and messed it up spectacularly. Au contraire, Abu Dhabi has managed the challenge rather well as it seems.
 
For an Emirate which holds 9% of global proven oil reserves and 95% of that of the UAE, Sheikh Khalifa’s Abu Dhabi sees around 44% of its revenues come in from non-oil sources. Abu Dhabi Investment Authority, the Emirate’s sovereign wealth fund rumoured to have nearly U$900 billion in managed assets, leads the way.
 
Ratings agencies may grumble about Dubai’s opacity but all three major ones do rate Abu Dhabi. Fitch and Standard & Poor's rate Abu Dhabi 'AA' while Moody's rates it 'Aa2'. Sheikh Khalifa is actively looking to increase the share of non-oil revenue in Abu Dhabi to 60% within this decade if not sooner.

So maybe the several streets signs in Dubai pointing to the route to Abu Dhabi and the imposing Burj Khalifa (a structure that’s hard to miss from practically most parts of Dubai) have a metaphorical message. And probably there is envy and gratitude in equal measure. Cosmopolitan Dubai is now increasing reliant on black gold dust from Abu Dhabi. That’s all for the moment folks; more from Dubai later! Keep reading, keep it ‘crude’!
 
© Gaurav Sharma 2012. Photo 1: A street sign on the Dubai Marina, UAE. Photo 2: Burj Khalifa, Dubai, UAE © Gaurav Sharma 2012.

Saturday, August 25, 2012

Talking global 'crude' capex in the Emirates

It is good to be back in the Emirate of Dubai to catch-up with old friends and make yet newer ones! In the scorching heat of 41 C, sitting inside an English Pub (sigh…someone tell these guys yours truly just got off the plane from England) at a hotel right next to ENOC’s Bur Dubai office, new research of a ‘crude’ nature has thrown-up plenty of talking points here.
 
It seems that a report published this morning by business intelligence provider GlobalData projects capital expenditure in the global oil & gas business to come in at US$1.039 trillion by the end of December 2012; a rise of 13.4% on an annualised basis. However, no prizes for guessing that E&P activity would be the primary driver.
 
GlobalData predicts Middle Eastern and African capital spend would be in the region of US$229.6 billion. The figure has been met with nods of approval here in Dubai though one contact of the Oilholic’s (at an advisory firm) reckons the figure is on the conservative side and could be exceeded by a billion or two.
 
North America is likely to witness the highest capex with a US$254.3 billion spend; a 24.5% share of the 2012 figure. GlobalData reckons that renewed market confidence is a direct consequence of the increasing number of oil & gas discoveries (which stood at 242 over 2011 alone), high (or rather spiky) oil prices and emerging and cost effective drilling technologies making deep offshore reserves technically and financially viable.
 
So the ‘All hail shale brigade’ and ‘shale gale’ stateside along with Canadian oil sands would be the big contributors to the total North American spend. The Asia Pacific region could pretty much spend in the same region with a capex of US$253.1 billion.
 
However another facet of the GlobalData report fails to surprise punters at the table wherein it notes that National Oil Companies (NOCs) will lead the way in terms of capex. Though there were some “Hear, Hear(s)” from somewhere. (We try not to name names here of loyal NOC employees, especially if they’ve just walked in from a building next door!)
 
Only thing is, while the Middle Eastern and Chinese NOCs are in the predictable data mix, GlobalData notes that for the 2012–2016 period it is Petrobras which ranks first for capex globally amongst NOCs. As a footnote, ExxonMobil will be atop the IOC list. That’s all for the moment folks! More from Dubai later. Keep reading, keep it ‘crude’!
 
© Gaurav Sharma 2012. Photo: View of city skyline from Jumeriah beach, Dubai, UAE © Gaurav Sharma 2012.

Thursday, August 23, 2012

The drivers, the forecasts & the ‘crude’ mood

At times wild swings in the crude market’s mood do not reflect oil supply and demand fundamentals. The fundamentals, barring a geopolitical mishap on a global scale, alter gradually unlike the volatile market sentiment. However, for most parts of Q2 and now Q3 this year, both have seemingly conspired in tandem to take the world’s crude benchmarks for a spike and dive ride.
 
Supply side analysts have had as much food for thought as those geopolitical observers overtly keen to factor in an instability risk premium in the oil price or macroeconomists expressing bearish sentiments courtesy dismal economic data from various crude consuming jurisdictions. For once, no one is wrong.
 
A Brent price nearing US$130 per barrel in mid-March (on the back of Iranian threats to close the Strait of Hormuz) plummeted to under US$90 by late June (following fears of an economic slowdown in China and India affecting consumption patterns). All the while, increasing volumes of Libyan oil was coming back on the crude market and the Saudis, in no mood to compromise at OPEC, were pumping more and more.
 
Then early in July, as the markets were digesting the highest Saudi production rate for nearly three decades, all the talk of Israel attacking Iran resurfaced while EU sanctions against the latter came into place. It also turned out that Chinese demand for the crude stuff was actually up by just under 3% for the first six months of 2012 on an annualised basis. Soon enough, Brent was again above the US$100 threshold (see graph on the right, click to enlarge).
 
Fast forward to the present date and the Syrian situation bears all the hallmarks of spilling over to the wider region. As the West led by the US and UK helps rebels opposed to President Bashar al-Assad, Russia is seen helping the incumbent; not least via a recent announcement concerning exchange of refined oil products from Russia for Syrian crude oil exports desperately needed by the latter.
 
A spread of hostilities to Lebanon, Jordan, Turkey and Iraq could complicate matters with the impact already having been seen in the bombing of Iraq-Turkey oil pipeline. Additionally, anecdotal evidence suggests the Saudis are now turning the taps down a bit in a bid to prop up the oil price and it appears to be working. The Oilholic will be probing this in detail on visit to the Middle East next week.
 
While abysmal economic data from the Old Continent may not provide fuel – no pun intended – to bullish trends, one key component of EU sanctions against Iran most certainly will. A spokesperson told the Oilholic that tankers insured by companies operating in EU jurisdictions will lose their coverage if they continue to carry Iranian oil from July.
 
Since 90% of the world's tanker fleet – including those behemoths called ‘supertankers’ passing through dangerous Gulf of Aden – is insured in Europe, the measure could take out between 0.8 and 1.1 million barrels per day (bpd) of Iranian oil from Q3 onwards according an Istanbul-based contact in the shipping business.
 
In fact OPEC’s output dipped by 70,000 bpd in month over month terms to 31.4 million bpd in July on the back of a 350,000 bpd drop in June over May. No prizes for guessing that of the 420,000 bpd production dip from May to July – 350,000 bpd loss is a direct result of the Iranian squeeze. Although Tehran claims it is a deliberate ploy.

With an average forecast of a rise in consumption by 1 million bpd over 2012 based on statements of various agencies and independent analysts, price spikes are inevitable despite a dire economic climate in Europe or the OECD in general.
 
Cast aside rubbish Iranian rhetoric and throw in momentary geopolitical supply setbacks like the odd Nigerian flare-up, a refinery fire in California or the growing number of attacks on pipeline infrastructure in Columbia. All of these examples have the potential to temporarily upset the apple cart if supply is tight.
 
“Furthermore, traders are wising up to fact that a price nudge upwards these days is contingent upon non-OECD consumption patterns and they hedge their bets accordingly. WTI aside, most global benchmarks look towards the motorist in Shanghai more than his counterpart in San Francisco these days,” says one industry insider of his peers.
 
When the Oilholic last checked at 1215 BST on August 23, the ICE Brent October contract due for expiry on September 13 was trading at US$115.95 while the NYMEX WTI was at US$97.81. It is highly likely that ICE Brent forward futures contracts for the remaining months of the year will end-up closing above US$110 per barrel, and almost certainly in three figures. Nonetheless, prepare for a rocky ride over Q4!
 
Moving away from pricing of the crude stuff, it seems the shutdown of Penglai 19-3 oilfield by the Chinese government in wake of an oil spill last year has hit CNOOC’s output and profits. According to a recent statement issued at Hong Kong Stock Exchange, CNOOC saw its H1 2012 output fall 4.6% on an annualised basis owing to Penglai 19-3 in which it holds 51% of the participating interest for the development and production phase. ConocoPhillips China Inc (COPC) is the junior partner in the venture.
 
This meant H1 2012 net income was down by 19% on an annualised basis from Yuan 39.34 billion to Yuan 31.87 billion (US$5 billion) according to Chief Executive Li Fanrong. CNOOC's US$15.1 billion takeover of Canada’s Nexen, a move which could have massive implications for the North Sea, is awaiting regulatory approval from Ottawa.
 
Away from the “third largest” of the big trio of rapidly expanding Chinese oil companies to a bit of good news, however temporary, for refiners either side of the pond. That’s if you are to believe investment bank UBS and consultancy Wood Mackenzie. UBS believes that for better parts of H1 2012, especially May and June, refining margins were at near “windfall levels” as the price of the crude stuff dipped in double-digit percentiles (25% at one point in the summer) while distillate prices held-up.
 
Wood Mackenzie also adds that given the refiners’ crude raw material was priced lower but petrol, diesel and other distillates remained pricey meant moderately complex refiners in northwest Europe made a profit of US$6.40 per barrel of processed light low sulphur Brent crude in June, compared with the average profit of 10 cents per barrel last year.
 
The June margin for medium, high sulphur Russian Urals crude was a profit of US$13.10 per barrel compared with the 2011 average of US$8.70, the consultancy adds. American refiners had a bit of respite as well over May and June. Having extensively researched refining investment and infrastructure for over two years, the Oilholic is in complete agreement with Société Générale analyst Mike Wittner that such margins are not going to last (see graph above, click to enlarge).
 
To begin with the French investment bank and most in the City expect global refinery runs to drop shortly and sharply to -1.3 million bpd in September versus August and -0.8 million bpd in October versus September. Société Générale also remains neutral on refining margins and expects them to weaken on the US Gulf Coast, Rotterdam and the Mediterranean but strengthen in Singapore. Yours truly will find out more in the Middle East next week. That’s all for the moment from London folks! Keep reading, keep it ‘crude’!
 
© Gaurav Sharma 2012. Photo 1: Russian oil pump jacks © Lukoil. Graph 1: Comparison of world crude oil benchmarks (Source: ICE, NYMEX, SG). Graph 2: World cracking margins (US$/barrel 5 days m.a) © SG Cross Asset Research, August 2012.

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