Three Months, Three Cities, Three ‘crude’ reports

The three cities being – Delhi, Doha and Vienna, the three reports being Oilholic’s work on Latin American Offshore, Shale Oil & Gas and Refineries projects outlook, research for which was spread over December, January and February from the 20th World Petroleum Congress to the 160th OPEC Meeting to the streets of ‘crude’ Delhi.

The last of the three reports was published by Infrastructure Journal on Feb 29th and while the analysis in the reports remains the preserve of the Journal’s subscribers, the Oilholic is more than happy to share a few snippets starting with the Latin American offshore landscape, which shows no signs of a post ‘Macondo’ hangover [1].

In fact, the month of May, will be a momentous one for the region’s offshore oil & gas projects market in general and Brazil in particular, as the country would dispatch its first shipment of oil from ultradeepwater pre-sal (‘below the salt layer’) sources. The said export consignment of 1 million barrels destined for Chile is a relatively minor one in global crude oil volume terms. However, its significance for offshore prospection off Latin American waters is immense.

When thinking about Latin American offshore projects think Brazil; think Brazil and think Petrobras’ Lula test well in the Santos basin, named after the former president, which is producing 100,000 barrels per day (bpd). Almost over a third of the Chilean consignment originated from the Lula well according to the Oilholic’s sources.

What should excite project financiers, corporate financiers and technical advisers alike is the fact the company expects to pump nearly 5 million bpd by 2020 and its ambitious drive needs investment.

However, ignoring other jurisdictions in the region and focussing only on Brazil, its promise and problems would be a fallacy. Others such as Argentina, Columbia and prospection in Falkland Islands waters are worth examining, the latter especially from the standpoint of corporate financed asset acquisitions.

Data always helps in contextualising the market movements. Using the present Infrastructure Journal data series on project finance, which commenced in 2005, figures certainly suggest the sun is shining on the Brazilian offshore industry. Of the 15 Latin American offshore projects on record which reached financial close between October 2006 and Sept 2011, 13 were Brazilian along with one apiece from Panama and Peru (Click on pie-chart above to enlarge). With a cumulative deal valuation of just under US$9.3 billion, among these Brazil’s Guara FPSO valued at US$1.2 billion led the way reaching financial close in June 2011.

The year 2010, was a particularly good one for Brazil with five projects reaching financial close. Over the last three years, sponsors of offshore projects in the country have been consistent in approaching the debt markets and bringing three to five projects per annum to financial close, with 2011 following that trend.

Moving on to the Oilholic’s second report, for all intents and purposes, Shale oil & gas prospection has been the energy story of the last half decade and Q1 2012 would be an apt time to scrutinise the ‘Fracks’ and figures[2].

To say that shale gas has altered the American energy landscape would be the understatement of the decade, or to be more specific at least half a decade. Courtesy of the process of hydraulic ‘fracking’, shale gas prospection – most of which was initially achieved in the US by independent upstart project developers – has been an epic game changer.

US shale gas production stood at 4.9 trillion cubic feet (tcf) by end-2011, which is 25% of total US production up from 4% in 2005. Concurrently, net production itself is rising exponentially owing to the shale drive according to the EIA.

Project finance aside, it is in the corporate finance data where the shale story is truly reflected – i.e. one of a steady rise both in terms of deal valuation as well as the number of projects. From four corporate infrastructure finance deals valued at US$1.89 billion in 2009, both data metrics posted an uptick to seven deals valued at US$8.35 billion in 2010 and 10 deals valued at US$7.58 billion in 2011 (Click on bar-chart above to enlarge).

However, a short term global replication of a US fracking heaven is unlikely and not just because there isn’t a one size fits all model to employ. While American success with shale projects has not escaped the notice of Europeans; financiers and sponsors in certain quarters of the ‘old continent’ are pragmatic enough to acknowledge that Europe is no USA. The recent shale projects bonanza stateside is no geological fluke; rather it bottles down to a combination of geology, American tenacity and inventiveness.

Europe’s best bet is Poland, but European shale oil & gas projects market is unlikely to record an uptick between 2012 to 2017 on a scale noticed in North America in general and the USA in particular between 2007 and 2012. The financing for shale projects – be it corporate finance or project finance – would be a slow, but steady trickle rather than a stream beyond North America.

Finally, to the Refineries report, given the wider macroeconomic climate, refinery infrastructure investment continues to face severe challenges in developed jurisdictions and Western markets[3]. Concurrently, the balance of power in this subsector of the oil & gas infrastructure market is rapidly tipping in favour of the East.

Even if refinery investment of state-owned Chinese oil & gas behemoths, which rarely approach the debt markets, is ignored – there is a palpable drive in emerging economies elsewhere in favour of refinery investment as they do not have to contend with overcapacity issues hounding the EU and North America.

For some it is a needs-based investment; for others it makes geopolitical sense as their Western peers holdback on investing in this subsector. The need for refined products is often seen superseding concerns about low refining margins, especially in the Indian subcontinent and Asia Pacific.

Industry data, empirical, anecdotal evidence and direct feedback from industry participants do not fundamentally alter the Oilholic’s view of tough times ahead for refinery infrastructure. As cracking crude oil remains a strategic business, investing in refinery infrastructure reflects this sentiment, investor appetite and financiers' attitudes.

According to current IJ data, investment in refinery infrastructure via private or semi-private financing continues to remain muted; a trend which began in 2008. In fact, 2011 has been the most wretched year since the publication began recording refinery project finance data.

Updated figures suggest the year 2010, which saw the artificial fillip of Saudi Arabia’s mega Jubail refinery project (valued at US$14.04 billion) reach financial close, has been the best year so far for refinery project finance valuation despite closing a mere two projects. However, industry pragmatists would look at 2008 which saw ten projects valued at US$9.39 billion as a much better year (Click on bar-chart above to enlarge).

From there on it has been a tale of post global financial crisis woes with the market struggling to show any semblance of a recovery and most of the growth coming from non-OECD jurisdictions. In 2009, three projects valued at US$4.79 billion reached financial close, followed by two projects including Jubail valued at US$15.04 billion in 2010, and another two projects valued at US$1.49 billion in 2011. By contrast, the pre-crisis years of 2005, 2006 and 2007 averaged US$6.71 billion in terms of transaction valuations.

A general market trend in favour of non-OECD project finance investment in refineries is obviously mirrored in the table of the top deals between 2005 and 2011 (above). Of the five, four are in non-OECD countries – led by Jubail Refinery (Saudi Arabia) valued at US$14.04 billion which closed in 2010, followed by Guru Gobind Singh Bhatinda Refinery, India (valued at US$4.69 billion, financial close – 2007), Jamnagar 2 Refinery, India (US$4.50 billion, financial close – 2006) and Paradip refinery, India (US$2.99 billion, financial close – 2009).

Only one deal from an OECD nation, which is a very recent member of the club, made it to the top five, namely Poland’s Grupa Lotos Gdansk Refinery Expansion valued at US$2.85 billion which reached financial close in 2008. Simply put, the future of infrastructure investment in this sub-component of the oil & gas business lies increasingly in the East wherein India could be a key market. That’s all for the moment folks! Keep reading, keep it ‘crude’!

NOTES:

[1] Latin American Offshore O&G Outlook 2012: Brazil’s decade, By Gaurav Sharma, Infrastructure Journal, January 17, 2012. Available here.

[2] Shale Oil & Gas Outlook 2012: The ‘Fracks’ and figures, By Gaurav Sharma, Infrastructure Journal, January 25, 2012. Available here.

[3] Refinery Projects Outlook 2012: ‘Cracking’ times for Eastern markets, By Gaurav Sharma, Infrastructure Journal, February 29, 2012. Available here.

© Gaurav Sharma 2012. Graphics: Pie Chart 1 – Latin American Offshore Project Finance transactions (October 2006 to Sept 2011), Bar Chart 1 – Number of Shale Corporate Finance transactions (2009-2011), Bar Chart 2 – Refinery Project Finance Valuation (2005-2011) © Infrastructure Journal.

BP breathes a sigh; but end of legal woes not nigh!

It has been a crudely British fortnight in terms of Black Gold related news, none more so than BP’s announcement – on March 3 – that it has reached a settlement of US$7.8 billion with the Plaintiffs' Steering Committee (PSC) for civil charges related to the 201 Macondo oil spill in the Gulf of Mexico.

The settlement amount is at the upper end of market conjecture and certainly well above conservative estimates. However, it does not mean that the US government is going to in any way, shape or form, let up on BP – especially in an election year. Everyone knows that, especially BP. However for a second time, the trial case brought against it will have to be delayed as the US Judge in the case – Carl Barbier – noted the settlement would lead to a “realignment of the parties in this litigation and require substantial changes to the current Phase I trial plan, and in order to allow the parties to reassess their respective positions.”

The US government maintains that the US$7.8 billion deal does not address "significant damages" to the environment but PSC-BP agreement is expected to benefit regional 100,000 fishermen, local residents and clean-up workers who suffered following the spill.

BP says it expects the money to come from a US$20 billion compensation fund it had previously set aside and the response of the wider market and ratings agencies to the settlement has been positive. While reaffirming BP’s long term Issuer Default Rating (IDR) at ‘A’, Fitch Ratings notes that BP has adequate financial resources to meet its remaining oil spill related obligations currently estimated by the agency at US$20 billion between 2012 and 2014.

This figure includes the remainder of BP's provisioned costs of US$10.6 billion and approximately US$10 billion of Fitch assumed additional litigation related payments, excluding potential fines for gross negligence. As of end-December 2011, BP had adequate financial resources to meet this obligation with US$14.1 billion of ‘on balance sheet’ cash and US$6.9 billion of undrawn committed stand-by and revolving credit lines. Additionally, the company plans to dispose of assets for about US$18 billion by end-2013 within its US$38 billion asset disposal programme.

Fitch Ratings estimates BP's total Gulf of Mexico spill related payments, net of partner recoveries, will range between US$45 billion and US$50 billion assuming BP was not grossly negligent. BP's cash outflow related to the Gulf of Mexico oil spill amounted to US$26.6 billion by end-2011, net of partner recoveries.

S&P also views the settlement as “somewhat supportive” for its ‘A/A-1/Stable’ ratings on BP and consistent with the agency’s base-case assumptions. “This is because the settlement addresses some material litigation and payment uncertainties, and because we understand that the plaintiffs cannot pursue further punitive damages against BP as a condition of the settlement,” it says.

BP has not admitted liability and still faces other legal claims at State and Federal level. Nonetheless, while the settlement is credit supportive, market commentators in City feel the uncertainty related to the total oil spill liability is not ending any time soon. The Oilholic feels an investigation by US Department of Justice against BP into the oil spill incident encompassing possible violations of US civil or criminal laws could be a potential banana skin as no love has been lost between the two. With several cases still ongoing, a settlement with PSC was a first of many legal hurdles for BP; albeit an important one.

Away from the legal wrangles of “British Petroleum” as US politicians love to call it, Brits themselves had to contend with a record high price of petrol at the pump this week – an average gas station forecourt quote of 137.3 pence per litre on March 5, according to the UK Department of Energy and Climate Change (DECC). The previous record of 137.05p was set on May 9, 2011. However, private research by Experian Catalist says the high is a little “higher” at 137.44p per litre.

And if you thought, the Oilholic’s diesel-powered readership was faring any better, the diesel price is hit a record high of 144.7p per litre, up 0.8p from the previous UK record, which was set the week before! As if that wasn’t enough – the country’s (Markit/CIPS) Purchasing Managers' Index (PMI) for manufacturing slipped to 51.2 in February, down from 52 in January with analysts blaming the high cost oil for manufacturers which rose at the fastest rate in 19 years. It presents another serious quandary for UK Chancellor George Osborne who’s due to table his government’s Union budget on March 21st.

From the price of the refined stuff at British gas station forecourts to the price of a barrel of the crude stuff on the futures market – which saw Brent resisting the US$125 level and WTI resisting the US$106 level for the forward month contract. Myrto Sokou, analyst at Sucden Financial, reckons stronger US economic data brought back risk appetite and improved sentiment this week.

Greece is going to be a main focus for the market with hopes of a positive result on its debt bailout, Sokou adds, but amid renewed rumours whether it would be better for the country to leave the Euro. Cautious optimism is ‘crudely’ warranted indeed.

Elsewhere, the Indian government's attempt divest a 5% stake in one of its NOCs – the Oil and Natural Gas Corporation (ONGC) – via public share offering fell marginally short of expectations last week. Despite tall claims of oversubscription, only 98% of the shares on sale were subscribed. With high hopes of raising something in the region of US$2.5 billion, the government had offered 428 million shares at a price of INR290 per share (approximately US$5.85 and 2% higher than ONGC average share price for February).

However, the Oilholic thinks that even for a company which admittedly has a massive role in a burgeoning domestic market, the price offer was strange at best and overpriced at worst. This probably put off many of the country’s average middle tier investors, especially as many used February’s price as a reference point. Who can blame them and perhaps the Indian government is wiser for the experience too. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Aerial of the Helix Q4000 taken shortly before "Static Kill" procedure began at Macondo (MC 252) site in Gulf of Mexico, August 3, 2010 © BP Plc.

An apt legal book for a complex LNG business!

The LNG business has evolved more over the last ten years than it ever did over the preceding five decades. From a point in time in history when energy majors considered finding gas a disappointment during exploration and production drives to the present multijurisdictional nature of the LNG business; the transformation has been truly unique. All the while, challenges posed by the low price of natural gas, gas-oil price differential, overcapacity in some markets and the perceived US shale gas bonanza lurk in the backdrop. Inevitably, disputes arise and many end up in court.

Currently, in its second edition, the book Liquefied Natural Gas: The Law and Business of LNG, a compendium of thoughts from authors with a legal background, attempts to address the information appetite for legal, regulatory, political and practical elements of the LNG chain. This edition of just fewer than 300 pages split by fourteen chapters – each of which has been authored by a legal industry expert – is a handy reference guide.

Structuring and financing of LNG projects, LNG trading, sale and purchase agreements, shipping, FLNG, import terminals have all been examined and in some detail. Two brilliant chapters specifically dwell on the natural gas price reopeners vis-à-vis English law and Shale gas. Content of this book should sit happily on any legal expert’s bookshelf, especially those involved in the due diligence for LNG projects and allied infrastructure including import and export terminals.

It would be unfair to pick a few favourites as the whole volume is a thoroughly good read, but if asked which ones the Oilholic particularly liked, then they would be Matthew Griffiths’ chapter on Floating LNG, David Gardner’s on LNG Shipping and Paul Griffin’s introduction to the whole volume. The latter beautifully sums up the evolving nature of the LNG business (and indeed the publisher’s commercial reason for bringing out a second edition).

As a regional business has slowly evolved or quickly morphed – depending on your point of view – into a truly global one, it is also perceived as a minefield for disputes, more so in an era of resource nationalism. In such a setting, this book more than fulfils its pragmatic purpose for legal professionals whether you are a private practitioner or one attached to a commercial establishment ranging from utilities to banking.

As with a specialist title of this nature, you will need a mid to high level of industry knowledge to fully appreciate the book, should you have a non-legal remit within the energy business. While envisaged as a written work aimed at legal professionals and industry experts, it is the Oilholic's considered viewpoint that it would be well worth the while of law and energy business students and academics to glance at this title too.

© Gaurav Sharma 2012. Photo: Front Cover (Second Edition) – Liquefied Natural Gas: The Law and Business of LNG © Globe Law and Business.

India’s Iran connection & the crudely high price

Don’t say the Oilholic did not tell you so after his Indian adventure – that India will find it very hard to match Europeans on censuring Iran in ‘crude’ terms! An interesting newswire copy from the Indo-Asian News Service (IANS) as cited by broadcaster NDTV notes that in fact, India is set to step up its energy and business ties with Tehran.

The news emerges in wake of an attack earlier this month on an Israeli diplomat carried out barely yards from the Indian Prime Minister’s residence in Delhi, for which Isreal is blaming Iran. It shows you how ‘crude’ the Delhi-Tehran ties are. The blogosphere is rife with news that it is becoming increasingly difficult for Indian oil companies to pay their Iranian counterparts in wake of international sanctions which hamper processing of international payments and place limits on what the central bank - Reserve Bank of India (RBI) - can or cannot do. Well placed sources suggest that various options from routing payments via Turkey and in suitcases are being trialled.

Pragmatically speaking, few can blame India for not curtailing ties with a country which supplies 10% of its crude imports. The Iranian situation coupled with the geopolitical influence of other events in Nigeria and Sudan alongside a Greek rescue and the Chinese Central bank’s cut of the required reserve ratio of its domestic banks (on Saturday to ease borrowing) have all come together to introduce bullish trends.

The crude price is currently at an 8-month high; when last checked @13:45GMT on Feb 23rd – the ICE Brent forward month futures contract was at US$124.33 per barrel and WTI was at US$106.33 per barrel. Three City analysts told the Oilholic this morning that the strong upside rally in the oil market is likely to continue for some time yet. Additionally, in a note to clients JP Morgan Chase raised its 2012 price forecast for Brent crude by US$6 to US$118 a barrel and its 2013 forecast by US$4 to US$125 a barrel.

Meanwhile, former UK Chancellor of the Exchequer Lord Lamont – who is now the Chairman of the British-Iranian Chamber of Commerce – recently told BBC Radio 4 that imposing economic sanctions on Iran will not work.

"I can only say we are banging our heads against a wall with this approach...Iran will not buckle under these sanctions. The effect of sanctions is to hit the private sector in Iran, drive companies bankrupt and drive them into the arms of the government, or into the hands of the Revolutionary Guards and into alliances with people in the government smuggling the goods they desperately need," he said.

"I'm not sure this will have the right effect. Could this produce regime change? It's possible but in my view it's just as likely that it will bolster the strength of the regime," Lord Lamont concluded. According to the BBC, data compiled by companies exporting to Iran show that direct trade dropped from just under £500 million in 2008 - to an estimated £170 million in 2011. Blimey – didn’t know we had that much bilateral trade in the first place!

Moving away from what a former UK Chancellor said, an Indian wire reported and the Oilholic ranted about, it is time to discuss some interesting bits of reading material. This humble blog’s rapidly rising North American fan base (to put it modestly) would be keen to know that Reuters’ very own resident Oilholic – Tom Bergin’s splendid book on BP’s Macondo fiasco and its corporate culture – Spills and Spin: The Inside Story of BP – saw its US edition launched earlier this week.

Here’s the review, and if you lot in the US haven’t been cheeky and ordered a UK copy from an internet retailer, the Oilholic would recommend that you visit you a friendly neighbourhood bookstore (or library) where you are likely to find a local edition. From Bergin’s book which raises serious questions on corporate ethics to a Pastor who raises a rather pious question for us all really - Where would Jesus Frack?

According to the Pittsburgh Tribune Review, a pastor told environmentalists last month that there is a scriptural basis for opposing Marcellus Shale drilling in the US. The Rev. Leah Schade, pastor of the United in Christ Church in Union County, Pennsylvania, USA, wore a hand-sewn white patch that said, "WWJF - Where Would Jesus Frack?" and dropped to her knees to demonstrate the power of prayer.

Asked later to answer the question on her blouse, Schade said, "I don't believe Jesus would be fracking anywhere." She cited Genesis 2;15: "God put human beings into the Garden to till it and keep it, not drill and poison it." Amen!

Continuing with interesting things to read, finally here is a comparison drawn by BBC journalist Vanessa Barford on what are the competing claims of UK and Argentina over the Falkland Islands – an old diplomatic spat which has recently acquired a crude dimension. Last but not the least, here is a video of yours truly on an OPEC broadcast discussing project investment by the cartel at its 160th meeting of ministers in December. That’s all for the moment folks! Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo I: Veneco Oil Platform © Rich Reid - National Geographic. Photo II: Front Cover (US Edition) – Spills and Spin © Random House Publishers.

Mr. Gabrielli, an IEA revision & the Kuwaiti situation

This Monday, the crude world bid farewell to Petrobras’ inimitable CEO José Sergio Gabrielli de Azevedo who stepped down from his position having been at the Brazilian major's helm since July 2005. Over his tenure, Petrobras took great strides towards ultradeepwater offshore exploration and made several overseas forays. Rumours had been lurking around since January that Gabrielli was in the twilight of his career at Petrobras following differences with Brazilian President Dilma Rouseff – but both the government and the company strenuously denied it.

The reins of Petrobras have now passed on to Maria das Graças Silva Foster (pictured left) a corporate veteran who has worked at Petrobras for 31 years. In addition to occupying various executive level positions in the company, Foster has been CEO of Petroquisa - Petrobras Química, and CEO and CFO of Petrobras Distribuidora. In her career, she was also Secretary of Oil, Natural Gas and Renewable Fuels at the Brazilian Ministry of Mines and Energy from January 2003 to September 2005.

Earlier, Petrobras approved the contract for 21 offline rigs with Sete Brasil, at an average daily rate of US$530,000 and the contract for 5 dual activity rigs with Ocean Rig, at the average day rate of US$548,000, both for a 15-year term. All units, which have local content requirements ranging from 55% to 65%, are to be delivered within 48 to 90 months, according to the schedules established in the contracts.

The project includes the construction of new shipyards in the country and the use of existing infrastructure. Petrobras expects to reduce the average daily rates to US$500,000 for the Sete Brasil contract and to US$535,000 for the Ocean Rig contract. These amounts may suffer further reductions if the parties detect and agree to mechanisms that reduce operating costs.

With these contracts, the plan to contract 28 drilling rigs to be built in Brazil to meet the demands of the long-term drilling program, primarily for use in pre-salt wells has been completed. Based on the conditions submitted by the companies and on the current demand for the development of future projects, Petrobras, in its own words, "chose to take advantage of the negotiated conditions and contract five additional which were not originally planned."

All this is fine and dandy, but since the timelines of construction and delivery are so lengthy, a hike in construction costs is likely – more so because some yards where the rigs are expected to be built, haven’t yet been built themselves. But the Oilholics loathes being too sceptical about what is a reasonably positive agreement.

Meanwhile, the IEA has cut its oil demand forecast again! In an announcement last week, the agency said a weak global economy had prompted its sixth successive monthly revision to forecasts by 250,000 barrels per day (bpd) to 800,000 barrels for 2012. Before the IEA, the US EIA actually made an upward revision of 50,000 barrels to 1.32 million bpd while OPEC cut its forecast by 120,000 bpd to 940,000. All three forecasters are looking towards non-OECD jurisdictions for demand growth.

Elsewhere, the Oilholic would like to highlight two very interesting corporate client notes. In one issued on February 7th, Fitch Ratings observed that following the recent parliamentary elections in Kuwait, marked frictions between an elected Parliament and the appointed government will continue to weigh on the reform agenda and hamper political effectiveness.

The agency feels that difficulties in reaching agreement at the political level will continue to affect economic reforms, including the implementation of a four-year development plan (worth 80% of GDP over 2010-11 and 2013-14), which aims at boosting the country's infrastructure and diversifying the economy away from oil.

Nonetheless, Fitch rates Kuwait as 'AA' with a Stable Outlook. As relatively high oil prices are being forecast, Fitch’s own being at US$100/barrel for 2012, Kuwait’s earnings should continue to ensure double digit current account and fiscal surpluses which lend support to the rating.

Moving on to the second note, on the expected impact of US' QE3 on the commodity market circulated on February 10th, Société Générale analysts Michael Haigh and Jesper Dannesboe opine that an increase of expected inflation during QE3 Stateside coupled with the impact of the EU embargo on Iran could result in the DJ-UBS commodity index rising 20% and Brent prices rising to US$130/barrel.

“Sep12 Brent call spread with strikes at US$117 (long) and US$130 (short). The current net up-front cost: about US$4.6/barrel. This results in a maximum net profit of US$8.4/barrel. If one also sells a Sep12 US$100/barrel put, the overall structure would have zero upfront cost and the maximum net profit would be US$13.7/barrel. We consider a price drop below US$100 to be very unlikely,” they wrote and the Oilholic quotes. That’s all for the moment folks! Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Petrobras CEO Maria das Graças Silva Foster © Petrobras Press Office.

Corporate crude chatter: Xstrata, Glencore & more

There appears to be only one story in town these past few days - the valuation and implication of a Glencore and Xstrata merger. According to communiqués issued yesterday poured over the Oilholic and his peers, the Switzerland based commodities trader and the mining major aim to create a merged natural resources, mining and trading company with a combined equity market value of US$90 billion.

Xstrata’s operating businesses and Glencore’s marketing functions will continue to operate under their existing brands. It is proposed that the combined entity will be called Glencore Xstrata International plc, listed on the London and Hong Kong Stock Exchanges, with its headquarters in Switzerland and will continue as a company incorporated in Jersey. The deal was labelled by the two firms as a "merger of equals" but the Oilholic suspects Glencore would carry the upper hand.

While the new corporate entity will be the world's biggest exporter of coal for power plants and the largest producer of zinc, the ever secretive Glencore’s involvement gives the merger a ‘crude’ dimension. The latter’s Chief Executive Ivan Glasenberg has made a fortune for his company selling crude oil and oil products alongside other commodities. Controversy and Glencore go hand in hand as its Wikipedia page records.

Where from here remains to be seen as ratings agency Moody's has placed all the ratings of Glencore and Xstrata, as well as those of their guaranteed subsidiaries, on review for possible upgrade following the announced all-share merger. The initiation of this review reflects Moody's favourable assessment of the planned merger in terms of diversification and synergies, as well as the uncertainties surrounding the final details and execution of the proposed transaction.

Moving away from the Glencore-Xstrata story but sticking with Moody's, the agency also commented on the completion of Sunoco Inc.'s strategic review. It notes that the American petroleum company is better positioned to focus on midstream logistics and retail product marketing as its core operations, with greater clarity around its plans to re-deploy a sizeable portion of its cash liquidity.

Sunoco announced a number of steps last week to allow it to focus on its large investment in Sunoco Logistics Partners LP and on retail marketing as the drivers of its future growth and returns. It began shuttering the Marcus Hook refinery in December and is likely to do the same with its Philadelphia refinery by July 2012 unless it can conclude a suitable sale. These exposures and the limited sales prospects for the refineries have resulted in an additional pre-tax charge of US$612 million in Q4 2011, including non-cash book charges and provisions for severance and other cash expenses.

Continuing with corporate news, Petrobras announced another discovery of a new oil and natural gas accumulation – this time in the Solimões Basin (Block SOL-T-171), in the State of Amazonas. The discovery took place during drilling of Igarap é Chibata Leste well located in Coari, 25 km from the Urucu Oil Province. The well was drilled to a final depth of 3,295 meters and tests have indicated a production capacity of 1,400 barrels per day of good quality oil (41º API) and 45,000 m3 of natural gas. Obviously, Petrobras holds 100% of the exploration and production rights in the Concession.

The Brazilian major also closed the issuance of global notes in the international capital markets worth US$7 billion on Monday. The transaction was executed in one day, with a demand of approximately US$25 billion as a result of more than 1,600 orders coming from more than 700 investors. The final allocation was more concentrated in the United States (58.4%), Europe (28.1%) and Asia, mostly dedicated to the high grade market. The oversubscription is symptomatic of the huge interest in Brazilian offshore.

Finally, BP raised its dividend payout after quarterly earnings rose on rising crude prices. Replacement cost profit for the three months to December-end 2011 was US$7.6 billion up on US$4.6 billion for the corresponding period in 2010. For FY 2011, BP's profit was US$23.9 billion versus a US$4.9 billion loss in 2010. This meant allowing for a 14% rise in the dividend to 8c (5p) per share, a first increase since the 2010 Gulf of Mexico spill.

Away from corporate matters, the UK government launched its 27th offshore oil and gas licensing round last Wednesday making 2,800 blocks available to prospectors. The last British licensing round set an all-time high at 190 awards with high crude prices enticing exploration companies big and small. Lets see how it all shapes up this time around especially as the British government maintains that some 20 billion barrels of the crude stuff is still to be extracted. The Oilholic cannot possibly dispute the figure with authority, but what one can note with some conviction is that all the easy (to extract) oil has already been found. Extracting the remaining 20 billion would be neither easy nor cheap, especially in a tough macroclimate.

Meanwhile, as tensions mount over Iran, Saudi Arabia’s crown prince has said the Kingdom would not let the price of crude oil stay above US$100 using the WTI as a benchmark. Concurrently, and in order to allay Asian fears about crude oil supplies, the UAE government says it is looking to export more to Asia should there be a need to mitigate the supply gap caused by a ban on Iranian oil by Asian importers. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Offshore oil rig in North Sea © Cairn Energy Plc.

Farewell to India, global spills & crude pricing!

After a short trip to India, the Oilholic bids farewell to Delhi via its swanky impressive new terminal at Indira Gandhi International airport which the city's residents can be justifiably proud of. However, the financial performance of its national carrier – Air India – which is bleeding cash and could not possibly survive without government subsidy leaves a lot to be desired. Just as the Oilholic was checking in thankfully, for his British Airways flight home, news emerged that Air India had been denied jet fuel for almost four hours overnight on account of non-payment of bills.

Doubly embarrassing was the fact that those holding back fuel for the beleaguered national carrier were NOCs - Indian Oil, Bharat Petroleum and Hindustan Petroleum! Who can blame the trio, for Indian newspapers claimed that Air India owed in excess of INR 40 billion (US$812.8 million) in unpaid fuel bills.

So much so that in 2011 Indian NOCs put the airline on a “cash-and-carry” deal, requiring it to pay every time it refuelled its planes, rather than get a 90-day grace period usually given to airlines. Despite a merger with Indian Airlines in 2007, Air India continues to struggle even in a market as busy and vibrant as India where domestic, regional and international carriers are mushrooming (though not all of them successfully; just ask Kingfisher Airlines).

Away from Indian airports and airlines to crude matters, the US Eastern District Court of Louisiana issued a partial summary judgment on January 31, 2012 on BP’s indemnity obligations in wake of the Gulf of Mexico oil spill versus Halliburton’s liability. The summary states that BP must indemnify Halliburton for any third party claims related to pollution and contamination that did not arise from Halliburton's own actions. In addition, the indemnity is valid even if Halliburton is found to be grossly negligent, although the indemnity could be voided if Halliburton committed fraud. Ratings agency Moody's says the ruling is “modestly credit positive” for Halliburton and does not affect it its A2 rating with a stable outlook at this time.

Meanwhile, in an ongoing offshore spill in Nigeria, agency reports suggest that it may take Chevron around 100 days to drill a relief well at the site of a deadly blowout incident off the country’s soiled coastline last month. A Bloomberg report published in Business Week notes that another environmental catastrophe may be unfolding.

Continuing with the depressing subject of spills, Petrobras says that no more traces of oil were found in the sea during overflights carried out on Friday in the Carioca Nordeste spill site, in the Santos Basin. Therefore, in accordance with the procedures laid down in the country’s Emergency Plan, the contingency actions have been demobilised.

Petrobras says it will now only request approval to resume the Carioca Nordeste Extended Well Test after the investigation concerning the causes of the incident has been completed. The company emphasises that the rupture took place in the pipeline connecting the well to the platform. So no oil leaked at the well, which was closed automatically after the pipeline broke. As such, the incident did not take place in the pre-salt layer, which is nestled at a depth of over 2,000 meters under the seabed.

On a crude pricing note before flying home – while in India, the Oilholic notes that none of the main global equity indices have provided market direction as the weekend approaches and the Greek situation weighs heavily on investor sentiment. Amid crudely bearish trends, caution is the byword ahead of US employment data and the continuing Greek tragedy. The fact that both benchmarks - Brent and WTI - are resisting their current levels is down to the rhetoric by and on Iran. Thats all for the moment folks, keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Indira Gandhi International airport Terminal 3, Delhi, India © Gaurav Sharma 2012.

Delhi’s traffic jams, officials & other crude matters

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Crude India & its ‘One Lakh ki Gaadi’!

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

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

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

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

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

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

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

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

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

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

EU’s Iran ban, upcoming Indian adventure & Cairn

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

IEA on demand, Lavrov on Iran plus crude chatter

In its latest monthly report, the IEA confirmed what the Oilholic has been blogging for the past few months on the basis of City feedback – that the likelihood of another global recession will inhibit demand for crude oil this year, a prevalent high oil price might in itself hit demand too and seasonally mild weather already is.

While geopolitical factors such as the Iranian tension and Nigerian strikes have supported bullish trends of late, the IEA notes that Q4 of 2011 saw consumption decline on an annualised basis when compared with the corresponding quarter of 2010. As a consequence, the agency feels inclined to reduce its 2012 demand growth forecast by 220,000 barrels per day (bpd) from its last monthly report to 1.1 million barrels.

"Two inherently destabilising factors are interacting to give an impression of price stability that is more apparent than real. The first is a rising likelihood of sharp economic slowdown, if not outright recession, in 2012. The second factor, which is counteracting bearish pressures, is the physical market tightening evident since mid-2009 and notably since mid-2010," it says in the report.

The IEA also suggests that a one-third downward revision to GDP growth would see this year's oil consumption unchanged at 2011 levels. On the Iranian situation and its threat to disrupt flows in the Strait of Hormuz, through which 20% of global oil output passes, the agency notes, “At least a portion of Iran's 2.5 million bpd crude exports will likely be denied to OECD refiners during second half 2012, although more apocalyptic scenarios for sustained disruption to Strait of Hormuz transits look less likely.”

Meanwhile, Russian foreign minister Sergei Lavrov has weighed in to the Iran debate with his own “chaos theory”. According to the BBC, the minister has warned that a Western military strike against Iran would be "a catastrophe" which would lead to "large flows" of refugees from Iran and would "fan the flames" of sectarian tension in the Middle East. Israeli Defence Minister Ehud Barak earlier said any decision on an Israeli attack on Iran was "very far off".

Meanwhile, one of those companies facing troubles of its own when it comes to procuring light sweet crude for European refiners is Italy’s Eni which saw its long term corporate credit rating lowered by S&P from 'A' from 'A+'. In addition, S&P removed the ratings from CreditWatch, where they were placed with negative implications on December 8, 2011.

Eni’s outlook is negative according to S&P and the downgrade reflects the ratings agency’s view that the Italian oil major’s business risk profile and domestic assets have been impaired by the material exposure of many of its end markets and business units to the deteriorating Italian operating environment. Eni reported consolidated net debt of €28.3 billion as of September 30, 2011. Previously, Moody’s has also reacted to the Italian economy versus Eni situation over Q4 2011.

Elsewhere conflicting reports have emerged about the Obama administration’s decision to deny a permit to Keystone XL project something which the Oilholic has maintained would be a silly move for US interests as Canadians can and will look elsewhere. Some reports said the President has decided to deny a permit to the project while others said a decision was unlikely before late-February. This article from The Montreal Gazette just about sums up Wednesday's conflicting reports.

When the formal rejection by the US state department finally arrived, the President said he had been given insufficient time to review the plans by his Republican opponents. At the end of 2011, Republicans forced a final decision on the plan within 60 days during a legislative standoff.

The Republican Speaker of the US House of Representatives, John Boehner, criticised the Obama administration for its failure over a project that would have created "hundreds of thousands of jobs" while the President responded by starting an online petition so that the general population can express its opposition to the Keystone XL pipeline.

The merits and demerits of the proposal aisde, this whole protracted episode represents the idiocy of American politics. Canadians should now seriously examine alternative export markets; something which they have already hinted at. The Oilholic's timber trade analogy always makes Canadians smile. (Sadly, even Texans agree, though its no laughing matter).

On the crude pricing front, the short term geopolitically influenced bullishness continues to provide resistance to the WTI at the US$100 per barrel level and Brent at US$111. Sucden Financial's Myrto Sokou expects some further consolidation in the oil markets due to the absence of major indicators and mixed signals from the global equity markets, while currency movements might provide some short-term direction. “Investors should remain cautious ahead of any possible news coming out from the Greek debt talks,” Sokou warns.

Finally, global law firm Baker & McKenzie is continuing with its Global Energy Webinar Series 2011-2012 with the latest round – on International Competition Law – to follow on January 25-26 which would be well worth listening in to. Antitrust Rules for Joint Ventures, Strategic Alliances and Other Modes of Cooperation with Competitors would also be under discussion. Thats all for the moment folks. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Oil Refinery, Quebec, Canada © Michael Melford / National Geographic.

Looming embargo on Iran, Nigeria & few other bits

An EU ban on Iranian crude imports in response to the country’s continued nuclear programme is imminent but not immediate or so the City analysts and government sources would have you believe. Furthermore, news agency Bloomberg adds that the planned embargo is likely to be delayed by up to six months as European governments scramble to seek alternative sources.

The Japanese and Indian governments are also looking to reduce dependence on Iranian imports according to broadcasts from both countries while OPEC has indicated that it does not wish to be involved in row. Add the ongoing threats strike threats by Nigeria’s largest oil workers union, the Pengassan, as well the second largest, Nupeng, and political tension in the country to the Iranian situation and you don’t need the Oilholic to tell you that the short term risk premium is going mildly barmy.

It is nearly the end of the week and both benchmarks have rebounded with City analysts forecasting short term bullishness. With everyone scrambling for alternative sources, pressure is rising on already tight supply conditions notes Sucden Financial analyst Jack Pollard. “With the near-term geopolitical risk premium being priced in, Brent’s backwardation looks fairly assured as the front spreads continue to widen. Well-bid Italian and Spanish auctions have no doubt supported risk appetite, as the US dollar tracks back to lend upward pressure on commodities,” he adds.

When the Oilholic checked on Thursday, the Brent forward month futurex contract was resisting the US$110 per barrel level while WTI was resisting the US$99 level sandwiched between a bearish IEA report and geopolitical football. The next few weeks would surely be interesting.

Away from crude pricing, to a few corporate stories, ratings agency Moody’s has affirmed LSE-listed Indian natural resources company Vedanta Resources Plc's Corporate Family Rating of Ba1 but has lowered the Senior Unsecured Bond Rating to Ba3 from Ba2. The outlook on both ratings is maintained at negative following the completion of the acquisition of a controlling stake in Cairn India, on December 8, 2011.

Since announcing the move in August 2010, Vedanta has successfully negotiated the course of approvals, objections and amended production contract arrangements and now holds 38.5% of Cairn India directly, with a further 20% of the company held by Sesa Goa Ltd., Vedanta's 55.1%-owned subsidiary.

Moody’s believes the acquisition of Cairn India should considerably enhance Vedanta's EBITDA, but the agency is concerned with the sharply higher debt burden placed on the Parent company. In order to lift its stake from 28.5% to 58.5%, Vedanta drew US$2.78 billion from its pre-arranged acquisition facilities. Coupled with the issue of US$1.65 billion of bonds in June 2011, debt at the Parent company level is now in excess of US$9 billion on a pro forma basis. This compares with a reported Parent equity of US$1 billion at FYE March 2011.

Moving on, Venezuelan oil minister Rafael Ramírez said earlier this week that his country had decided to compensate ExxonMobil for up to US$250 million after President Hugo Chávez nationalised all resources in 2007. Earlier this month the International Chamber of Commerce in Paris, already stated that the country must pay Exxon Mobil a total of US$907 million, which after numerous reductions results in - well US$250 million.

Elsewhere, law firm Herbert Smith has been advising HSBC Bank Plc and HSBC Bank (Egypt) on a US$50 million financing for the IPR group of companies, to refinance existing facilities and to finance the ongoing development of IPR's petroleum assets in Egypt – one of a limited number of financings in the project finance space in Egypt since the revolution. It follows four other recent financings for oil and gas assets in Egypt on which Herbert Smith has advised namely – Sea Dragon Energy, Pico Petroleum, Perenco Petroleum and TransGlobe Energy.

On a closing note and sticking with law firms, McDermott Will & Emery has launched a new energy business blog – Energy Business Law – which according to a media communiqué will provide updates on energy law developments, and insights into the evolving regulatory, business, tax and legal issues affecting the US and international energy markets and how stakeholders might respond. The Oilholic applauds MWE for entering the energy blogosphere and hopes others in the legal community will follow suit to enliven the debate. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Pipeline, South Asia © Cairn Energy.

Examining a crude 2011 & talking Iran vs. 2012

As the Oilholic conjectured at the end of 2010, the year 2011 did indeed see Brent Crude at “around US$105 to US$110 a barrel”. However there was nothing ‘crudely’ predictable about 2011 itself – the oil markets faced stunted global economic growth, prospect of another few quarters of negative growth (which may still transpire) and a Greek crisis morphing into a full blown Eurozone crisis.

The Arab Spring also understandably had massive implications for the instability / risk premium in the price of crude over much of 2011. However, the impact of each country’s regional upheaval on the price was not uniform. The Oilholic summarised it as follows based on the perceived oil endowment (or the lack of it) for each country: Morocco (negligible), Algeria (marginal), Egypt (marginal), Tunisia (negligible), Bahrain (marginal), Iran and Libya (substantial).

Of the latter, when Libya imploded, Europe faced a serious threat of shortage of the country’s light sweet crude. But with Gaddafi gone and things limping back to normal, Libya has awarded crude oil supply contracts in 2012 to Glencore, Gunvor, Trafigura and Vitol. Of these Vitol helped in selling rebel-held crude during the civil war as the Oilholic noted in June.

Meanwhile Iran remains a troubling place and gives us the first debating point of 2012. It saw protests in 2011 but the regime held firm at the time of the Arab spring. However, in wake of its continued nuclear programme, recent sanctions have triggered a new wave of belligerence from the Iranian government including its intention to blockade the Straits of Hormuz. This raises the risk premium again and if, as expected a blanket ban by the EU on Iranian crude imports is announced, the trend for the crude price for Q1 2012 is decidedly bullish.

Société Générale's oil analyst Michael Wittner believes an EU embargo would possibly prompt an IEA strategic release. The price surge – directly related to the Saudi ability to mitigate the Iran effect – would dampen economic and oil demand growth. Market commentators believe an EU embargo is highly likely, especially after it reached an agreement in principle on an embargo on January 4th.

However, a more serious development would be if Iran carries out its threat to shut down the Straits of Hormuz, disrupting 15 million bpd of crude oil flows and we would expect Brent prices to spike into the US$150-200 range albeit for a limited time period according to Wittner.

“A credible threat from missiles, mines, or fast attack boats is all it would take for tanker insurers to stop coverage, which would halt tanker traffic. However, we believe that Iran would not be able to keep the Straits shut for longer than two weeks, due to a US-led military response. The disruption would definitely result in an IEA strategic release. The severe price spike would sharply hurt economic and oil demand growth, and from that standpoint, be self-correcting,” he adds.

Nonetheless, not many in the City see a “high” probability of such a step by Iran. Anyway, enough about Iran; lets resume our look back at 2011 and the release of strategic reserves would be a good joiner back to events of the past year.

Political pressure, which started building from April 2011, onwards saw the IEA ask its members to release an extra 60 million barrels of their oil stockpiles on to the world markets on June 23rd. The previous two occasions were the first gulf war (1991) and the aftermath of Hurricane Katrina (2005). That it happened given the political clamour for it is no surprise and whether or not one questions the wisdom behind the decision, it was a significant event.

For what it was worth, the market trend was already bearish at the time, Libya or no Libya. Concerns triggered by doubts about the US, EU and Chinese economies were aplenty as well as the end of QE2 liquidity injections coupled with high levels of non-commercial net length in the oil markets.

On the corporate front, refineries continued to struggle as expected with many major NOCs either divesting or planning to divest refining and marketing (R&M) assets. US major ConocoPhillips' announcement in July that it will be pursuing the separation of its exploration and production (E&P) and R&M businesses into two separate publicly traded corporations via a tax-free spin-off R&M co. to shareholders did not surprise the Oilholic – in fact it’s a sign of times.

Upstream remains inherently more attractive than the downstream business and the cliché of “high risk, high reward” resonates in the crude world. Continuing with the corporate theme, one has to hand it to ExxonMobil’s inimitable boss – Rex Tillerson – for successfully forging an Arctic tie-up with Rosneft so coveted by beleaguered rival BP.

On August 30th, 2011, beaming alongside Russian Prime Minister Vladimir Putin, Tillerson said the two firms will spend US$3.2 billion on deep sea exploration in the East Prinovozemelsky region of the Kara Sea. Russian portion of the Black Sea has also been thrown in the prospection pie for good measure as has the development of oil fields in Western Siberia.

The US oil giant described the said deal as among the most promising and least explored offshore areas globally “with high potential for liquids and gas.” If hearts at BP sank, so they should, as essentially the deal had components which it so coveted. However, a dispute with local partner TNK-BP first held up a BP-Rosneft tie-up and then finished it off.

One the pipelines front, the TransCanada Keystone XL project continues to be hit by delays and decision is not expected before the US presidential election; but the Oilholic feels the delay is not necessarily a bad thing. (Click here for thoughts)

The Oilholic saw M&A activity in the oil & gas sector over 2011 – especially corporate financed asset acquisitions – marginally exceeding pre-crisis deal valuation levels. Recent research for Infrastructure Journal – suggests the deal valuation figure for acquisition of oil & gas infrastructure assets, using September 30th as a cut-off date, is well above the total valuation for 2008, the year that the global credit squeeze meaningfully constricted capital flows.

Finally, on the subject of the good old oil benchmarks, since Q1 2009, Brent has been trading at premium to the WTI. This divergence has stood in recent weeks as both global benchmarks plummeted in wake of the recent economic malaise. WTI’s discount reached almost US$26 per barrel at one point in 2011.

Furthermore, waterborne crudes have also been following the general direction of Brent’s price. The Louisiana Light Sweet (LLS) increasingly takes its cue from Brent rather than the WTI, and has been for a while. Hence, Brent continues to reflect global conditions better.

Rounding things up, 2011 was a great year in terms of crude reading, travelling and speaking. Starting with the reading bit, 2011 saw the Oilholic read several books, but three particularly stood out; Daniel Yergin’s weighty volume - The Quest, Dan Dicker’s Oil’s Endless Bid and last but not the least Reuters’ in-house Oilholic Tom Bergin’s Spills & Spin.

Switching to crude travels away from London town, the Oilholic blogged from Calgary, Vancouver, Houston, San Francisco, Vienna, Dusseldorf, Bruges, Manama and Doha; the latter being the host city of the 20th World Petroleum Congress. The Congress itself and other signature events in the 2011 oil & gas calendar duly threw up several tangents for discussion.

Most notable among them were the two OPEC summits, the first in June which saw a complete disharmony among the cartel’s members followed by a calmer less acrimonious one in December where a unanimous decision to hold production at 30 million bpd was reached.

On the speaking circuit front, 2011 saw the Oilholic comment on CNBC, Indian and Chinese networks, OPEC webcasts and industry events, most notable among which was the Baker & McKenzie seminar at the World Petroleum Congress which was a memorable experience. That’s all for the moment folks. Here’s to 2012! Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Oil rig © Cairn Energy.