The tussle for OPEC Secretary General’s post

The pre-meeting press scrum (which many scribes rather disingenuously call the ‘g*ng-b*ng’) is over and the Oilholic can tell you the OPEC quota is not the only thing the Hawks and Doves in the cartel are tussling over; it is the post of the new secretary general as well which is adding to the tension.

To being with, rivals Saudi Arabia and Iran have fielded a candidate of their own. The reason given by delegates from both camps is that apart from having the ‘ideal’ candidate, neither country has held the position in just over three decades. Describing the relations between Riyadh and Tehran as tense and rooted in suspicion would be understating the acrimony. Simply put, both hate each others’ guts based on past histories.

Furthermore, the Saudis have put their money where their mouth is by declaring that they will make up for the absence of Iranian crude if sanctions on the latter intensify. Empirical and anecdotal evidence as well as rising Saudi production proves that this is the case to a certain extent. Then again, time and again, irrespective of ‘formal’ OPEC announcements (the latest of which is expected here at 1700CET), Saudis have done whatever they’ve wanted.

The Oilholic is not alone in his belief that neither a Saudi nor an Iranian will occupy the post of Secretary General; but that a compromise candidate in the shape of Ecuador or Iraq would be found. Of the two, Iraq – a founding member of the cartel – would be a better choice.

Even though internal problems persist, its output is rising and it hopes to raise its profile at OPEC; something many here feel it lost in wake of conflict and under the international sanction-laden rule of Saddam Hussein.

Baghdad's man at the table is Thamir Ghadhban, who was was named adviser to Iraq’s interim oil minister before himself becoming the minister in 2004. Pitted against three other candidates, Ghadhban is not a frontrunner – but we’ve been told there isn’t one among the other three either. Since a unanimous deciscion is requirement for the appointment, making predictions over who would win would be tricky.

Since OPEC was former, only one Iraqi has held the office of secretary general - Abdul Rahman al-Bazzaz (1964-65). Another Iraqi - Fadhil al-Chalabi was only an ‘acting’ secretary general from 1983-88.

On a closing note, well there is one more footnote to all of this. While Iraq is a member of OPEC; it does not have a stated individual oil production quota which was suspended in wake of hostilities and later to facilitate a recovery. Negotiations are likely to take place once Iraqi production increases to at least 4 million bpd; this would be by 2015 based on current industry projections.

It’s hectic here, and apart from giving soundbites to the usual suspects, it was a pleasure speaking to Middle Eastern broadcasters, especially MBC. That’s all for the moment folks as we prepare to say goodbye to outgoing Secretary General Abdalla Salem El-Badri! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: OPEC HQ, Vienna, Austria © Gaurav Sharma 2011.

An OPEC seminar & an Indian minister

Indian oil minister S. Jaipal Reddy is rather sought after these days. You would be, if you represented one of the biggest consumers of the crude stuff. So it is just about right that OPEC’s 5th international seminar here in Vienna had Reddy speak at a session titled: “Oil and the World Economy.”

In face of growing international pressure to reduce its dependence on Iranian oil and running out of capital market mechanisms to actually pay for the stuff in wake of US/EU sanctions, the Indian minister certainly had a few things to say and wanted to be heard.

India is the world's fourth-largest oil importer with all of its major suppliers being OPEC member nations, viz. - Saudi Arabia, Iraq and Iran. Given what is afoot from a global macroeconomic standpoint, Reddy has called upon oil producing and consuming countries to work together to build trust and share market data to establish demand certainty in international oil markets.

Unsurprisingly, he admitted that in an oil-importing country like India, higher oil prices lead to domestic inflation, increased input costs, an increase in the budget deficit which invariably drives up interest rates and slows down the economic growth.

“There could not be a more direct cause and effect relation than high oil prices retarding economic growth of oil-importing countries,” Reddy said adding that a sustained US$10 per barrel increase in crude prices reduces growth in developing countries by 1.5%.

“We are meeting in difficult times. The Eurozone crisis, the continuing recession in the global economy, rising geopolitical tensions, a sustained phase of high and volatile international oil prices, extraneous factors continuing to influence the price formation of oil – all these pose serious challenges to the health of the global economy and stability of the world’s financial system. The current global financial crisis, which has lasted longer than we thought in 2008, is the greatest threat faced by the global economy since the Great Depression eight decades ago,” he said further.

Reddy revealed that between the Financial Year 2010-11 and 2011-12, India’s annual average cost of imported crude oil increased by US$27 per barrel, making India’s oil import bill rise from US$100 billion to a whopping US$140 billion.

“Furthermore, since we could not pass on the full impact of high international oil prices, we had to shell out subsidies to consumers amounting to US$25 billion dollars...India’s GDP grew at 6.9% during the last financial year down from the 8% plus growth rate experienced in the past few years,” he continued.

India and perhaps many others see themselves distinguishing two schools of thoughts here in Vienna. One school holds that the global economy has built up enough resilience to absorb oil price hikes due to (a) stronger demand from emerging economies and, (b) more enlightened Central Bank policies; the other school is categorical that high oil prices are one of the primary reasons for the weak conditions in the economies of the US and Europe.

“We subscribe to the latter view and hold that very high and volatile oil prices will continue to weaken global efforts for an expeditious recovery from the ongoing global economic recession and financial crisis,” Reddy concluded.

The viewpoint of an importers’ club member is always welcome at an exporting cartel’s event. For good measure, the representatives of Nigeria, Ecuador and Iran provided the exporters’ perspective and IFC’s spokesperson did the balancing act as a sideshow. As for the word “Iran” and the sanctions it faces; the Oilholic has been told in no uncertain terms by quite a few key people that it’s...er...ahem...a taboo subject at this meeting. That's all for the moment folks. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Indian Gas Station © Indian Oil Corporation Ltd.

OPEC hawks are back in town (too)!

So the crude games have begun, the camera crews have begun arriving and the Saudis have begun throwing down the gauntlet by first suggesting that OPEC actually raise its output and then indicating that they might well be happy with the current production cap at 30 million bpd. However, hawks demanding a cut in production are also in Vienna in full flow.

With benchmark crude futures dipping below US$100, the Venezuelans say they are “concerned” about fellow members violating the agreed production ceiling. In fact, Venezuelan President Hugo Chavez expressed his sentiments directly over the air-waves rather than leave it to his trusted minister at the OPEC table - Rafael Ramirez.

For his part, on arrival in Vienna, Ramirez said, “We are going to make a very strong call in the meeting that the countries that are over-producing cut. We think we need to keep the ceiling on production of 30 million that was agreed at our last meeting in December."

Iraq's Abdul Kareem Luaibi, told a media scrum that a “surplus in OPEC supplies” exists which has led to “this severe decline in prices in a very short time span.” Grumblings also appear to be coming from the Algerian camp, while the Kuwaitis described the market conditions as “strange.”

Speaking to reporters on Monday, Kuwait’s Oil Minister Hani Hussein said, “Some of OPEC members are concerned about the prices and what’s happening…about what direction prices are taking and production.”

However, Hussein refused to be drawn into a discussion over a proposed OPEC production cut by the hawks.

Meanwhile, one cartel member with most to fear from a dip in the crude price – Iran – has also unsurprisingly called for an adherence to the OPEC production quota. Stunted by US and EU sanctions, it has seen its production drop to 3 million bpd - the lowest in eight quarters. Much to its chagrin, regional geopolitical rival Saudi Arabia has lifted its global supply to make-up the absence of Iranian crude in certain global markets.

At the cartel’s last meeting in December, OPEC members agreed to hold ‘official’ output at 30 million bpd. Yet, extra unofficial production came from Saudi Arabia, Iraq and Kuwait. Say what you will, the Oilholic is firmly in the camp that a reintroduction of individual OPEC quotas to help the cartel control its members’ production is highly unlikely. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Broadcast media assembly point outside OPEC HQ, Vienna, Austria © Gaurav Sharma 2011.

First vibes from OPEC, monthly data & Mr. Al-Naimi

The Oilholic is in Vienna ahead of the 161st meeting of OPEC ministers and the 5th OPEC International seminar; the latter being a forum where the great and good of this crude world interact with OPEC ministers and other invited dignitaries once every two years. However, even before the proceedings have begun, the cartel’s Monthly Market Report has stirred things up.

Back dated figures for April suggest, OPEC’s production for the month came in 32.964 million barrels per day (bpd) up 631,000 bpd from March. The figure for May came in lower at 31.58 million bpd; but still well above the cartel’s production cap of 30 million bpd. Such a high level has not been recorded since 2008 when the price of crude rose to a spectacular high only to fall sharply as the global financial crisis took hold. The data would suggest that together with non-OPEC sources, the market remains well supplied. Furthermore, in the face of economic uncertainty demand could drop as the economies of India and China show signs of medium term cooling.

On the subject of demand, OPEC notes, “The upcoming driving season might be affected by movements in retail gasoline prices and economic developments worldwide; hence, world oil demand would show a further decline and might see a cut of between 0.2 and 0.3 million bpd from the current forecast of the year's total growth (0.9 million)."

With leading benchmarks Brent and WTI falling below US$100 a barrel this week along with the OPEC basket price, some would think the Saudis would be keen to support a cut in the cartel’s production quota. Figures suggest OPEC's largest producer did in fact reduce its output to 9.8 million bpd in May from 10.1 million bpd in April. That is still the highest Saudi production rate on record for the last three years and the country recently reclaimed its top spot from Russia as the world’s largest producer of crude oil.

However, ahead of the OPEC meeting on June 14, the country’s inimitable oil minister Ali al-Naimi has jolted a few by actually calling for an increase in OPEC’s output. In an interview with the Gulf Oil Review (published by Bill Farren-Price’s Petroleum Policy Intelligence), he said, “Our actions have helped the oil price drop from US$128 in March to about $100 today which has acted as a type of stimulus to the European and world economy…Our analysis suggests that we will need a higher ceiling than currently exists."

"Given our large crude oil reserve situation, we certainly want to see a sustained market for crude oil over the long term. This calls for moderation, but on the other hand, with the cost of oil production going up...a reasonable price is required to ensure exploration can continue," he added.

Clearly the Saudis are on a collision course with other cartel members but since his interview al-Naimi has said he is “happy with the way things are”. Read what you will; we’ve been here before and such OPEC chatter is nothing new, except for the ‘stimulus’ hypothesis which has a nice ring to it. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: OPEC Logo on building exterior © Gaurav Sharma 2011.

UK & Norway: A ‘crudely’ special relationship

Unconnected to the current systemic financial malaise in Europe, a recent visit to Oslo by British Prime Minister David Cameron for a meeting with his Norwegian counterpart Jens Stoltenberg went largely unnoticed. However, its ‘crude’ significance cannot be understated and Cameron’s visit was the first by a British Prime Minister since Margaret Thatcher’s in 1986.

Beaming before the cameras, Stoltenberg and Cameron announced an "energy partnership" encompassing oil, gas and renewable energy production. As production from established wells has peaked in the Norwegian and British sectors of the North Sea, a lot has changed since 1986. The two principal proponents of exploration in the area are now prospecting in hostile climes of the hitherto unexplored far North – beyond Shetland Islands and in the Barents Sea.

Reading between PR lines, the crux of what emerged from Oslo last week is that both governments want to make it easier for firms to raise money for projects and to develop new technologies bearing potential benefits in terms of energy security. That Cameron is the first British PM to visit Norway in decades also comes as no surprise in wake of media reports that the Norwegian sector of the North Sea is witnessing a second renaissance. So of the growing amount of oil the UK imports since its own production peaked in 1999 – Norway accounts for over 60% of it. The percentage for British gas imports from Norway is nearly the same.

"I hope that my visit to Oslo will help secure affordable energy supplies for decades to come and enhance investment between our two countries. This will mean more collaboration on affordable long-term gas supply, more reciprocal investment in oil, gas and renewable energies and more commercial deals creating thousands of new jobs and adding billions to our economies," Cameron said.

For their part the Norwegians, who export over five times as much energy as they use domestically, told their guest that they see the UK as a reliable energy partner. We hear you sir(s)!

Meanwhile, UK Office for National Statistics’ (ONS) latest production data released this morning shows that extractive industries output fell by 15% on an annualised basis in April with oil & gas production accounting for a sizeable chunk of the decline.

A further break-up of data suggests oil & gas production came in 18.2% lower in April 2012 when compared with the recorded data for April 2011. Statisticians say production would have been higher in April had it not been for the shutdown of Total’s Elgin platform in the North Sea because of a gas leak.

Elsewhere, farcical scenes ensued at the country’s Manchester airport where the airport authority ran out of aviation fuel causing delays and flight cancellations for hours before supplies were restored. Everyone in the UK is asking the same question – how on earth could this happen? Here’s the BBC’s attempt to answer it.

Finally the Oilholic has found time and information to be in a position to re-examine the feisty tussle for Cove Energy. After Shell’s rather mundane attempt to match Thai company PTTEP’s offer for Cove, the Thais upped the stakes late last month with a £1.22 billion takeover offer for the Mozambique-focused oil & gas offshore company.

PTTEP’s 240 pence/share offer improves upon its last offer of 220 pence or £1.12 billion in valuation which Shell had matched to nods of approval from Cove’s board and the Government of Mozambique. The tussle has been going on since February when Shell first came up with a 195 pence/share offer which PTTEP then bettered.

Yours truly believes Cove’s recommendation to shareholders in favour of PTTEP’s latest offer does not guarantee that the tussle is over. After all, Cove recommended Shell’s last offer too which even had a break clause attached. Chris Searle, corporate finance partner at accountants BDO, feels the tussle for control may end up with someone overpaying.

“I’m not surprised that PTTEP have come back in for Cove since the latter’s gas assets are so attractive. Of course the danger is that we now get into a really competitive auction that in the end will lead to one of the bidders overpaying. It will be interesting to see how far this goes and who blinks first,” he concludes.

Cove’s main asset is an 8.5% stake in the Rovuma Offshore Area 1 off the coast of Mozambique where Anadarko projects recoverable reserves of 30 tcf of natural gas. Someone just might end-up overpaying.

On the pricing front, instead of the Spanish rescue calming the markets, a fresh round of volatility has taken hold. One colleague in the City wonders whether it had actually ever left as confusion prevails over what messages to take from the new development. Instead of the positivity lasting, Spain's benchmark 10-year bond yields rose to 6.65% and Italy's 10-year bond yield rose to 6.19%, not seen since May and January respectively.

Last time yours truly checked, Brent forward month futures contract was resisting US$97 while WTI was resisting US$82. That’s all for the moment folks! The Oilholic is off to Vienna for the 161st OPEC meeting of ministers. More from Austria soon; keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil Rig in the North Sea © Royal Dutch Shell.

BP to call time on 9 years of Russian pain & gain?

After market murmurs came the announcement this morning that BP is looking to sell its stake in Russian joint venture TNK-BP; a source of nine years of corporate pain and gain. As the oil major refocuses its priorities elsewhere, finally the pain aspect has made BP call time on the venture as it moves on.

A sale is by no means imminent but a company statement says, it has “received unsolicited indications of interest regarding the potential acquisition of its shareholding in TNK-BP.”

BP has since informed its Russian partners Alfa Access Renova (AAR), a group of Russian billionaire oligarchs fronted by Mikhail Fridman that it intends to pursue the sale in keeping with “its commitment to maximising shareholder value.”

Neither the announcement itself nor that it came over Q2 2012 are a surprise. BP has unquestionably reaped dividends from the partnership which went on to become Russia’s third largest oil producer collating the assets of Fridman and his crew and BP Russia. However, it has also been the source of management debacles, fiascos and politically motivated tiffs as the partners struggled to get along.

Two significant events colour public perception about the venture. When Bob Dudley (current Chief executive of BP) was Chief executive of TNK-BP from 2003-2008, the Russian venture’s output rose 33% to 1.6 million barrels per day. However for all of this, acrimony ensued between BP and AAR which triggered some good old fashioned Russian political interference. In 2008, BP’s technical staff were barred from entering Russia, offices were raided and boardroom arguments with political connotations became the norm.

Then Dudley’s visa to stay in the country was not renewed prompting him to leave in a huff claiming "sustained harassment" from Russian authorities. Fast forward to 2011 and you get the second incident when Fridman and the oligarchs all but scuppered BP’s chances of joining hands with state-owned Rosneft. The Russian state behemoth subsequently lost patience and went along a different route with ExxonMobil leaving stumped faces at BP and perhaps a whole lot of soul searching.

In wake of Macondo, as Dudley and BP refocus on repairing the company’s image in the US and ventures take-off elsewhere from Canada to the Caribbean – it is indeed time to for the partners to apply for a divorce. In truth, BP never really came back from Russia with love and the oligarchs say they have "lost faith in BP as a partner". Fridman has stepped down as TNK-BP chairman and two others Victor Vekselberg and Leonard Blavatnik also seem to have had enough according to a contact in Moscow.

The Oilholic’s Russian friends reliably inform him that holy matrimony in the country can be annulled in a matter of hours. But whether this corporate divorce will be not be messy via a swift stake sale and no political interference remains to be seen. Sadly, it is also a telling indictment of the way foreign direct investment goes in Russia which is seeing a decline in production and badly needs fresh investment and ideas.

Both BP and Shell, courtesy its frustrations with Sakhalin project back in 2006, cannot attest to Russia being a corporate experience they’ll treasure. The market certainly thinks BP’s announcement is for the better with the company’s shares trading up 2.7% (having reached 4% at one point) when the Oilholic last checked.

From BP to the North Sea, where EnQuest – the largest independent oil producer in the UK sector – will farm out a 35% interest in its Alma and Galia oil field developments to the Kuwait Foreign Petroleum Exploration Company (KUFPEC) subject to regulatory approval. According to sources at law firm Clyde & Co., who are acting as advisers to KUFPEC, the Kuwaitis are to invest a total of approximately US$500 million in cash comprising of up to US$182 million in future contributions for past costs and a development carry for EnQuest, and of KUFPEC's direct share of the development costs.

Away from deals and on to pricing, Brent dropped under US$100 for the first time since October while WTI was also at its lowest since October on the back of less than flattering economic data from the US, India and China along with ongoing bearish sentiments courtesy the Eurozone crisis. In this crudely volatile world, today’s trading makes the thoughts expressed at 2012 Reuters Global Energy & Environment Summit barely two weeks ago seem a shade exaggerated.

At the event, IEA chief economist Fatih Birol said he was worried about high oil prices posing a serious risk putting at stake a potential economic recovery in Europe, US, Japan and China. Some were discussing that oil prices had found a floor in the US$90 to US$95 range. Yet, here we are two weeks later, sliding down with the bears! That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: TNK-BP Saratov Refinery, Russia © TNK-BP

Eurozone crisis vs. a US$100/barrel price floor

In the middle of a Eurozone crisis rapidly evolving into a farcical stalemate over Greece’s prospects, on May 13 Saudi Arabia’s oil minister Ali al-Naimi told a Reuters journalist at an event in Adelaide that he sees US$100 per barrel as a “great price” for crude oil. In wake of the comment, widely reported around the world, barely six days later came confirmation that Saudi production had risen from 9.853 million barrels  per day (bpd) in February to 9.923 bpd in March with the kingdom overtaking Russia as the world's largest oil producer for the first time in six years.

In context, International Energy Forum says Russia's output in March dropped to 9.920 million bpd from 9.943 million bpd in February. The Saudis exported 7.704 million bpd in March versus 7.485 million bpd in February but no official figure was forthcoming from the Russians. What al-Naimi says and how much the Saudis export matters in the best of circumstances but more so in the run-up to a July 1 ban by the European Union of imports of Iranian crude and market theories about how it could strain supplies.

Market sources suggest the Saudis have pumped around 10 million bpd for better parts of the year and claim to have 2.5 million bpd of spare capacity. In fact, in November 2011 production marginally capped the 10 million bpd figure at one coming in at 10.047 million bpd, according to official figures. The day al-Naimi said what price he was comfortable with ICE Brent crude was comfortably above US$110 per barrel. At 10:00 GMT today, Brent is resisting US$106 and WTI US$91. With good measure, OPEC’s basket price stood at US$103.49 last evening and Dubai OQD’s forward month (July) post settlement price for today is at US$103.65.

With exception of the NYMEX Light Sweet Crude Oil futures contract, the benchmark prices are just above the level described by al-Naimi as great and well above the breakeven price budgeted by Saudi Arabia for its fiscal balance and domestic expenditure as the Oilholic discussed in July.

Greece or no Greece, most in the City remain convinced that the only way is up. Société Générale CIB’s short term forecast (vs. forward prices) suggests Brent, Dubai and even WTI would remain comfortably above US$100 mark. The current problem, says Sucden Financial analyst Myrto Sokou, is one of nervousness down to mixed oil fundamentals, weak US economic data and of course the on-going uncertainty about the future of Eurozone with Greece remaining the main issue until the next election on June 17.

“WTI crude oil breached the US$90 per barrel level earlier this week and tested a low at US$89.28 per barrel but rebounded on Thursday, climbing above US$91 per barrel. Brent oil also retreated sharply to test a low at US$105 per barrel area but easily recovered and corrected higher toward US$107 per barrel. We continue to expect particularly high volatile conditions across the oil market, despite that oil prices still lingering in oversold territory,” she adds.

Not only the Oilholic, but this has left the inimitable T. Boone Pickens, founder of BP Capital Partners, scratching his head too. Speaking last week on CNBC’s US Squawk Box, the industry veteran said, “I see all the fundamentals which suggest that the price goes up. I am long (a little bit) on oil but not much…I do see a really tight market coming up. Now 91 million bpd is what the long term demand is globally and I don’t think it would be easy for the industry to fulfil that demand.”

Pickens believes supply is likely to be short over the long term and the only way to kill demand would be price. Away from pricing, there are a few noteworthy corporate stories on a closing note, starting with Cairn Energy whose board sustained a two-thirds vote against a report of the committee that sets salaries and bonuses for most of its senior staff at its AGM last week.

Earlier this year, shareholders were awarded a windfall dividend in the region of £2 billion following Cairn's hugely successful Indian venture and its subsequent sale. However, following shareholder revolt a plan to reward the chairman, Sir Bill Gammell, with a bonus of over £3 million has been withdrawn. The move does not affect awards for the past year. Wonder if the Greenland adventure, which has yielded little so far, caused them to be so miffed or is it part of a wider trend of shareholder activism?

Meanwhile the FT reports that UK defence contractor Qinetiq is to supply Royal Dutch Shell with fracking monitors. Rounding things up, BP announced a US$400 million spending plan on Wednesday to install pollution controls at its Whiting, Indiana refinery, to allow it to process heavy crude oil from Canada, in a deal with US authorities.

Finally, more than half (58%) of oil & gas sector respondents to a new survey of large global companies – Cross-border M&A: Perspectives on a changing world – conducted by the Economist Intelligent Unit on behalf of Clifford Chance, indicates that the focus of their M&A strategy is on emerging/high-growth economies as opposed to domestic (14%) and global developed markets (29%). The research surveyed nearly 400 companies with annual revenues in excess of US$1 billion from across a range of regions and industry sectors, including the oil & gas sector. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil worker in Oman © Royal Dutch Shell.

BP fishes, ETP swoops & Chesapeake stumbles

Three corporate stories have caught the Oilholic’s eye over the past fortnight and all are worth talking about for very different reasons. With things improving Stateside and memories of a Russian misadventure fading, oil major BP announced on Tuesday that it had inked two production sharing agreements and aims to begin new deepwater exploration in Atlantic waters off the coast of Trinidad and Tobago. The company is already the Caribbean island nation’s largest oil & gas producer with average production for 2011 coming in the region of 408,000 barrels of oil equivalent per day.

Having been awarded blocks 23(a) and TTDAA14 in the 2010-2011 competitive bid rounds last summer, BP finds itself fishing for crude and gassy stuff in the two blocks which are 2,600 sq km and 1,000 sq km in area respectively. Local sources see the company as a ‘good corporate citizen’ and that ought to be comforting for BP in its march to rebuild trust under Bob Dudley.

While BP’s fishing, Energy Transfer Partners LP (ETP) is smiling having won plaudits around the crude world for its US$5.3 billion acquisition of Sunoco on April 30. A fortnight hence, market commentators are still raving on about the move especially as ETP’s swoop for Sunoco follows on from a clever buyout of Southern Union for US$5.7 billion. These acquisitions make ETP the USA’s second-biggest owner of pipeline assets behind Kinder Morgan whose merger with El Paso is imminent.

Most importantly, the Oilholic believes a swoop for Sunoco diversifies ETP’s pipeline portfolio adding around 9,700 km of oil and refined products pipelines to its existing network of 28,160 km of natural gas and natural gas liquids pipelines. With the move, oil revenues will account for over a quarter of its income. A Moody’s report prior to announcement of the deal suggested that together with Enterprise Production Partners, ONEOK Partners and Williams Partners, ETP was currently in a good place and among those best positioned for organic growth.

Growing production of oil, natural gas and natural gas liquids and higher margins are driving increased earnings and cash flow for midstream companies, especially those with existing gathering and processing or pipeline infrastructure near booming shale plays says the agency. While ETP’s smiling, the situation at Chesapeake Energy is anything but smiles. Under Aubrey McClendon, who co-founded the firm in 1989 in Oklahoma, it grew from strength to strength becoming the USA’s second largest natural gas producer and a company synonymous with the country’s shale gas bonanza. However, in a troubling economic climate with the price of natural gas plummeting to historic lows, Chesapeake has endured terrible headlines many of which were self-triggered.

Two weeks ago activist shareholders forced McClendon’s hand by making him relinquish the post of Chairman which he held along with that of Chief Executive over an arrangement which allows him to buy a 2.5% stake in all new wells drilled by Chesapeake. The arrangement itself will also be negotiated by 2014. The Oilholic finds the way McClendon has been treated to be daft for a number of reasons.

The arrangement has been in place since 1993 when the firm went public so neither the company’s Board nor its shareholders can claim they did not know. Two decades ago Chesapeake drilled around 20 wells per annum on average but by 2011 the average had risen to well above 1500 wells. That McClendon kept putting his money where his mouth is for so long is itself astonishing which is what the attention should focus on rather than on the man himself.

In later years this was largely achieved by borrowing at a personal level to the tune of US$850 million; Reuters reckons the figure is more in the region of US$1.1 billion. However, sections of the US media are currently busy sensationalising the Oklahoma man’s tussles within the company and as if this arrangement has emerged out of the blue.

Furthermore, the macroclimate and falling gas prices are now forcing the energy company’s hand with analysts at Fitch Ratings noting that it faces a funding shortfall of US$10 billion this year. In response, Chesapeake says it plans to sell US$9.0 billion to US$11.5 billion in assets this year. Word from Houston is that the sales of its Permian Basin property in West Texas and Mississippi Lime joint venture are a given by September. Some analysts believe asset sales may cap the figure of US$14 billion; though the view is not unanimous.

While this would help with liquidity issues, a sell-off of those assets currently producing oil & gas would most certainly reduce Chesapeake’s cash flow needed to meet requirements of its existing US$4 billion corporate credit facility secured earlier this week from Goldman Sachs and Jeffries Group. It matures in December 2017, with an interest rate of around 8.5% and can be repaid at any time over 2012 without penalty at par value.

As expected, Chesapeake has suffered a ratings downgrade; Standard & Poor's lowered its credit rating to "BB-" from "BB" citing corporate governance matters and a widening gap between capex and operating cash flow as the primary reasons. There is clear evidence of hedge funds short-selling Chesapeake’s shares.

Industry veteran and founder of BP Capital Partners – T. Boone Pickens – launched a strange albeit very vocal defence of McClendon on CNBC’s US Squawk Box on Wednesday which made yours truly smile. Pickens admitted that he had sold his position on Chesapeake – not because of what is going on but rather that he was very concerned about natural gas prices full stop.

“We got out of natural gas stocks and Chesapeake was one of them. We’re not long on Chesapeake now. Aubrey (McClendon) is a great Oklahoman and Chesapeake is a great company for Oklahoma City generating jobs and investment. Aubrey is a visionary…don’t bet against him…They’ll pull it off. You bet against Aubrey and you’ll scratch your loser’s ass,” said the industry veteran.

You have got to hand it to Pickens! If he's got something to say, there is no minding of the "Ps" and "Qs" – so what if its live television! As a former CNBC employee, the Oilholic wholeheartedly enjoyed Pickens’ soundbite and agrees that Chesapeake should make it out of this mess! However, bad headlines won’t go away anytime soon and its partly their own fault. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Pipeline warning sign, Fairfax, Virginia, USA © O. Louis Mazzatenta/National Geographic. Photo 2: Chesapeake well drilling site © Chesapeake Energy.

Clinton in Crudeland, Ghanem’s death & Cressier

US secretary of state Hillary Clinton has been clocking up air miles trying to persuade India and China to import less of the crude stuff from Iran. While diplomatic issues dominated the headlines during her visit, Clinton is understood to have impressed upon the Chinese to lower Iranian imports. However, recent media reports suggest that instead of seeking alternative supplies away from Iran, the economic powerhouse is seeking alternative modes of payment to Tehran away from the US Dollar. First, Reuters cited Mohammed Reza Fayyad, Iran's ambassador to the United Arab Emirates, acknowledging that his country was accepting Yuan payments in kind for oil exports to China. Then the FT reported that China has been providing the Yuan to Iran via Russian banks rather than its own international banks.

Arriving next in India, Clinton had a similar message for New Delhi. She “commended” India for lowering its reliance on Iranian imports urging it to do more. However, as the Oilholic noted on his non-state visit to India earlier this year - Indian policymakers openly admit this is easier said than done. Meanwhile conspiracy theories about the death on April 29 of former Libyan Oil Minister Shokri Ghanem, whose body was found in the River Danube in Vienna, are unlikely to go away with his funeral held four days ago.

In June 2011, his defection from the Gaddafi regime was the epicentre of media gossip – both in the run-up to the 159th OPEC meeting as well as during the event itself where his defection relieved some and riled others. Some doubted his intentions while others doubted that he’d even defected.

All in public domain was that since his defection he had been living in Vienna with his family and working as a consultant. It seemed to be a natural choice since Ghanem’s connection with the city went back a few decades. He had held a number of posts at the old OPEC HQ in Vienna rising to its head of research in 1993 before joining the Gaddafi government first as Prime Minister and then Oil minister which marked his regular return to Vienna until last year.

The Oilholic’s sources in Vienna suggest the Austrian authorities have ruled out foul play. All yours truly knows is that a passer-by saw his body in the river and called the police who found no other documents on him other than business cards of his consultancy. There were no signs of violence on the body and it is thought that he died of natural causes. At the time of his death, he was setting up a business with another OPEC veteran - Algeria's Chakib Khelil and other investors.

However back home, the new government in Tripoli never trusted him despite his defection and was in fact preparing a court case against him for making illegal gains during his time in the Gaddafi regime. Regardless of its circumstances, the void left by his death would be felt in Viennese diplomatic circles and at OPEC HQ where he began his career in earnest.

Going back to 2008, the Oilholic remembers his first interaction with Ghanem from press scrums at a meeting of ministers where journalists jostled to receive his answers in fluent English. His audience in Vienna had grown, more so as his boss Gaddafi had denounced terrorism and come back from the cold to rejoin the international community. Whether Ghanem himself was a saint or a sinner will now never be known.

Away from crude politics, troubled refiner Petroplus’ administrators have found a buyer for its Swiss asset – the Cressier Refinery – in the shape of Varo Holding, a joint venture between trading firm Vitol and AltasInvest. Under the sale agreement, cash strapped Petroplus would transfer Cressier and allied Swiss marketing and logistics assets - Petroplus Tankstorage, Oléoduc du Jura Neuchâtelois and Société Française du Pipeline du Jura to Varo.

Sources suggest Varo hopes to close the deal before the end of June with plans of restarting the 68,000 barrels per day refining facility thereafter. Finally, fresh economic headwinds are bringing about a price correction in the crude markets as recent elections in Greece and France have triggered a Greek Tragedy (Part II) and a Geek Tragedy (a.k.a. Francois Hollande) respectively.

A hung parliament and political stalemate with fears of the terms of the last Greek bailout not being met is impacting market sentiment on the one hand. On the other, newly elected Socialist President of France – Francois Hollande – sees his less than convincing mandate as one of the French public voting against ‘austerity’ and perhaps uncosted grandiose spending plans. On Tuesday, oil trading sessions either side of the pond remained volatile in light of the situation.

Summing up the nerviness in the markets following events of the past few days, Sucden Financial analyst Myrto Sokou notes, “Spain has confirmed that it will provide with additional money for the bank rescue of Bankia, the country's third largest bank in terms of assets. In Greece, the political situation is still uncertain as the country remains without a government after Sunday’s elections…The parties which signed the EU bailout memorandum are now in a minority as Greek voters rejected further austerity plans.”

Concurrently, analysts at Société Générale believe that generally bearish sentiments and still weak fundamentals should continue to combine and prevail and that the entire energy complex seems to be headed for a continued correction downwards. “Oil has performed better than other European energy commodities in 2012, but this seems to have changed during the first week of May. Oil price behaviour will be the key to avoid further slides in European energy prices,” they note.

As if that was not crude enough, an investment note by Citibank just hitting the wires suggests there is now a 75% possibility that Greece would be forced to leave the Eurozone within 12 to 18 months. With no swift Eurozone solution in sight, be prepared to expect further volatility and perceptively bearing trends in the crude markets. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil Rig © Cairn Energy Plc.

Out of its ‘Shell’ & into the ‘Cove’ plus ‘Providence’

Many analysts thought supermajor Royal Dutch Shell which was embroiled in a bidding war for London-listed Cove Energy for better parts of Q1 this year, would emerge out of its conservative shell and trump rival bids from Thailand’s PTTEP and a couple of interested parties from India outright.

In the end the deal was sealed by a conservative, albeit apparently successful, counter offer by Shell for the East Africa focussed E&P company. Having seen its offer for US$1.6 billion back in February trumped by PTTEP, the Anglo-Dutch major returned to the table with a bid of US$1.81 billion which matched rather than bettered the Thai state company’s offer.

On April 24, Cove’s directors accepted and recommended Shell's offer which the Oilholic thinks had much to do with Mozambique as a nation wanting Shell’s expertise as well as its investment. The possibility of a bid battle has now receded; more so as the agreement includes a break fee clause, under which Cove Energy will have to pay Shell US$18 million if it now accepts a rival bid.

An approval from the government of Mozambique is awaited as Shell eyes Cove’s main asset – an 8.5% stake in the Rovuma Offshore Area 1 in the country where Anadarko projects recoverable reserves of 30 tcf of natural gas. Shell as a company continues to be in good nick having recently announced a rise in Q1 profits while rival ExxonMobil saw its profits dip. On an annualised basis, Shell Q1 profits were up 11% at US$7.66 billion while in a strange coincidence Exxon’s profits fell 11% to US$9.45 billion. Both majors said oil prices would be ‘volatile’ in the coming months.

Talking about the luck of the Irish, London and Dublin listed Providence Resources’ quest for Black Gold off the coast of Ireland appears to be on song. The company, which dug Ireland’s first oil prospection well that might be anywhere near profitability, looks good for its 520pence plus share price on the AIM when the Oilholic last checked.

This accolade of Ireland’s first profitable oil well goes to Barryroe prospection field, some 70km off Cork, where a future full-scale extraction to the tune of nearly 4000 barrels per day – which makes a lot of commercial sense – is within relative touching distance. Providence Resources also holds drilling permits in Northern Ireland. Since Irish crude prospection has been riddled with disappointments, Providence deserves a pat on the back and its current share price for its effort.

Finally, the Oilholic is a bit miffed about being told by people that the UK now has the most expensive petrol price in the world, which it clearly does not. Yours truly knows that prices at the pump bite everyone, but we Brits aren’t the worst off.

However, to argue otherwise often results in farcically loud arguments especially with people who think the more inexpert they are, the more valid their opinion is! Thankfully, experts at Staveley Head – a provider of specialist insurance products – have some handy figures to back up the Oilholic which suggest that while UK is almost always on the list of the most expensive countries to buy petrol – it is not the most expensive (yet).

Click on their infographic - the Global Petrol Price Index (above right) - to compare the UK with the others. It would suggest that current price per litre is the highest in Norway, followed by Turkey, Netherlands, Italy and Greece. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Shell Gas Station © Royal Dutch Shell. Infographic: Global Petrol Price Index © Staveley Head.

Oh drat! Brits ask what the ‘Frack’!

The Oilholic arrived back home from Texas last week to the sound of fellow Brits discussing ‘fracks’ and figures in favour of shale gas prospection here. All UK activity ground to a halt last year, when a couple of minor quakes majorly spooked dwellers of Lancashire where a company – Cuadrilla – was test fracking.

Fast forward to April 2012, and a UK government appointed panel of experts including one from the British Geological Survey now says, "There was a very low probability of other earthquakes during future treatments of other wells. We believe that (last year's) events are attributable to the existence of an adjacent geological fault that had not been identified. There might be other comparable faults, (and) we believe it's not possible to categorically reject the possibility of further quakes."

However, it added that while the tremors may be felt in areas where fracking is conducted, they won’t be above magnitude 3 on the Richter scale and were unlikely to cause any significant damage. The panel’s report has now been sent for a six-week consultation period.

The British Department of Energy and Climate Change (DECC) is expected to issue a set of regulations soon and ahead of that a verbal melee has ensued with everyone for or against wanting a say and environmental groups crying foul. However, there was near unanimous approval for a control mechanism which would halt fracking activity as soon as seismic levels rise above 0.5 on the Richter scale. The engineers wanted in too.

Dr. Tim Fox, Head of Energy and Environment at the Institution of Mechanical Engineers, says, “The recommendations that any shale gas operations should be more closely monitored are welcome. UK and European environmental regulations are already some of the most stringent in the world; and these proposed precautions are a good example of how to help mitigate the risk of any damage caused by seismic activity as a result of shale gas activity.”

City energy analysts also gave the panel’s conclusions a cautious thumbs-up as there is a long way to go before a meaningful extraction of the gassy stuff occurs in any case. Jim Pearce, Energy and Process Industries practice partner at global management consultancy A.T. Kearney, says, “Shale developments offer the UK an opportunity to exploit a relatively clean resource and fill the energy gap that is opening up once again as nuclear projects come under threat. If the UK is going to use gas we should look for the best available source, which is arguably shale gas. Moreover, shale developments may also provide the UK’s chemical industry with a much needed boost if ethane and other NGL’s (natural gas liquids) are also found.”

He opines that UK and the rest of Europe are falling rapidly behind on gas supply security and cost. “Our key industries will be coming under increasing threat if we do not react to the new order that shale has created. We have a great opportunity here to take the lessons learned from the US and benefit from them,” Pearce adds.

Oh what the ‘frack’, that’s surely reason enough to tolerate a few quakes providing the security of the water table is preserved and concerns over water pollution are addressed. Yikes, that’s another quaky one! Away from shale, the 30th anniversary of the Falkland Islands war between the UK and Argentina came and went earlier this month marked by remembrance services for the fallen, but accompanied by the usual nonsensical rhetoric from British and Argentine officials, more so from the latter irked by oil prospection off the Islands’ shores which it claims as its own.

Five independent British oil companies are exploring four areas for oil in Falkland Islands’ waters, but only one of these – Rockhopper – claims to have struck meaningful reserves of the crude stuff. It says it could get 350 million barrels in the Sea Lion field to the north of the islands, which it plans to bring onstream by 2016. However, analysts at Edison Investment Research noted in March that a total of 8.3 billion barrels could lie offshore. So expect each anniversary and the run up to it from here on to be accompanied by ‘crude’ rhetoric and much frothing from Buenos Aires.

When it comes to being ‘crude’, the Argentines are in a class of their own. Just ask Repsol! On Wednesday, the country’s Senate approved the controversial decision, announced last week by President Cristina Fernandez de Kirchner, to nationalise Repsol YPF thereby stripping Spanish giant Repsol’s controlling stake in YPF.

Following the bizarre but locally popular announcement last week, while its stock plummeted, rating agencies scrambled to downgrade Repsol YPF’s ratings with Fitch Ratings and Moody’s doing so in tandem. Warnings to Argentina from the Spanish government, EU Trade Commission and last but not the least Repsol itself have since followed.

Repsol wants around US$10 billion for its 57.4% stake in YPF, but Argentina has said it does not recognise that valuation. There also one more thing they don’t possibly recognise - it’s called ‘sound economics’ which often gets trumped by ‘good politics’ in that jurisdiction. A number of analysts’ notes have been doing the rounds since April 17th when Kirchner went down the route towards nationalisation. Most had the same dire forecast for Repsol, but for the Oilholic, one issued by the inimitable Stuart Joyner, head of oil and gas at Investec, stood out.

In it he notes, “The apparent decision to nationalise YPF means we move to a worst case for the value of Repsol's 57.4% stake. The Argentine Tango is the consummate dance of love, but there was little affection for the country's largest foreign investor in Buenos Aires yesterday.”

Well said sir! Meanwhile with near perfect symmetry while the Argentines were being crudely castigated, Time magazine decided to name Brazilian behemoth Petrobras' CEO Maria das Graças Silva Foster one of the most influential people in the world. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Gas pipeline © National Geographic photo stock.

On Oilfield services co’s & a Texan Goodbye

Last two days have been about chatter on oilfield services and drilling companies at a pan global level based on Houstonian feedback, an interesting editorial and an investment note – all of which suggest that things are stable, growth will occur but that 2012-2013 may not be as good as 2011.

The reason is tied-in to the Oilholic’s last few blog posts that natural gas price is low and crude oil price is relatively high. So gains are to be made on one side of the business and the other side – while not necessarily countering all gains – would still stunt growth to a degree according to those in the know. Furthermore, growing competition within the services and drilling industry also means the biggest companies will still grow over the next 12 months, but not by the 10%-or-higher range that would warrant a continued positive outlook according to Moody’s.

“We foresee lower operating margins and slower EBITDA growth in 2012-2013 for the three companies that offer the best barometer of industry conditions – Schlumberger, Halliburton and Baker Hughes,” says Stuart Miller, Vice President & Senior Analyst at the ratings agency.

“We would move our outlook to positive if we projected that sector’s EBITDA would grow by more than 10% (annualised) over the next 12-18 months, while a drop of more than 10% would translate to a negative outlook,” he concludes.

The US rig count is also expected stabilise in 2012-2013. Oil-directed drilling will continue to outperform, but natural gas drilling will remain depressed into the foreseeable future, leading to a slower upward curve according to the agency.

(Click on graph - above right - to enlarge; for the latest Baker Hughes Rig Count click here). Nonetheless, drilling and associated services in unconventional plays continues as an area of strength for the industry.

The technical difficulty of developing unconventional resources will support a robust demand for sophisticated (also read expensive) horizontal well services. Companies such as Superior Energy Services, Key Energy Services and Basic Energy Services all stand to gain from their increasing exposure to unconventional plays, says Moody’s.

This ties-in nicely to an editorial in the latest (Apr 13, 2012) issue of the Houston Business Journal by Deon Daugherty in which she notes that private equity funding is being pumped in to oilfield services firms as 2012 unfolds alongside the usual investment in other traditional E&P components of the business.

Based on feedback from key local players, Daugherty writes that the technology and technical expertise needed to drill complex horizontal wells, hydraulic fracturing and expensive equipment is partly behind Houston private equity funds pouring investments in to oilfield services companies, alongside a high price of black gold driving investment into traditional E&P activity.

Speaking of editorials, there is another interesting and controversial one in The New Yorker (Apr 9, 2012) which makes a comment on ExxonMobil – the world’s largest “non-state-owned” corporation with annual revenues exceeding the GDP of Norway – and its ties with the US Republican Party.

While Democrats love to loathe the Irving, Texas headquartered IOC, columnist Steve Coll, splendidly notes that ExxonMobil CEO Rex Tillerson and President Obama "appear to share at least one understanding about energy policy and the 2012 (presidential) campaign: they are both aware that the partisan and media-amplified war over where to place the blame for rising (US) gasoline prices is largely a phony one."

The Oilholic couldn’t have put it better himself that being an E&P behemoth and that in itself being the area where its core interests are, "ExxonMobil can neither control prices at the pump nor make high profits there."

On a related R&M note, a Bloomberg report suggests that Delta Airlines is possibly in talks with ConocoPhillips about purchasing the Houston-based oil and gas major’s Trainer Refinery in Pennsylvania. Citing anonymous sources, the newswire says Delta would use the fuel from the Trainer refinery and other refineries in exchange for other products made there that it would not use.

While ConocoPhillips has said it would close the Trainer facility if it could not find a buyer by the end of May, its spokesman Rich Johnson told Bloomberg it is "still in the process of seeking a buyer for the refinery” and that the process was confidential. If it goes through, the move would be a remarkable one for a privately listed international airline.

Lastly on a crude pricing note, local media outlets suggest Enterprise Product Partners and Enbridge plan to reverse the flow of the Seaway oil pipeline two weeks ahead of schedule by mid-May pending US regulatory approval, thereby starting a much-needed reduction of excess crude from the US Midwest down and dispatch it to the Gulf Coast.

While the crude fetches a premium in the Gulf Coast, high inventory levels at the Cushing, Oklahoma – the delivery point for WTI oil futures contracts – have impacted WTI pricing relative to Brent. Reports suggest a mid-May (May 17) start date for the pipeline flow reversal will initially carry about 150,000 barrels per day of crude from the Midwest to the Gulf Coast. The news had an immediate impact as the arbitrage between transatlantic Brent and Gulf coast crudes on one hand and WTI on the other contracted sharply.

At 18:15 GMT, Light Louisiana Sweet (LLS) traded at US$19.40 a barrel premium over WTI, down US$1.65 from Friday's, Mars Sour (MRS) traded at US$12.25 a barrel over WTI down US$1.75, Poseidon (PSD) traded at US$11.55 over WTI down US$1.55.

Meanwhile, the ICE Brent futures contract for June traded at US$118.60 down US$2.61. Hitherto Brent crude and Gulf Coast crudes were moving up in tandem for the last 18 months, so this is certainly welcome news for those hoping for a return to more traditional levels stateside between WTI and Gulf Coast crudes.

Sadly, it is now time to bid another goodbye to Houston – a city which the Oilholic loves to visit more than any other. Yours truly leaves you with a view of the Minute Maid Park in downtown Houston. It is home to the local baseball team – the Houston Astros.

The stadium has a capacity of 40,963 spectators according to a spokesperson with an electronically retractable roof which was developed by Vahle, courtesy of which it can be fully air-conditioned when required – a wise decision given the city’s often hot and humid weather!

A local enthusiast tells the Oilholic that the field is unofficially and lightheartedly known as "The Field Formerly Known As Enron" by fans, locals, critics and scribes alike, acquiring the title in wake of the Enron scandal, as the failed energy company had bought naming rights to the stadium in 2000 before its spectacular and fraud-ridden collapse in November 2001.

Thankfully, on June 5, 2002, Houston-based Minute Maid, the fruit-juice subsidiary of Coca Cola Company, acquired the naming rights to the stadium for 28 years. Unlike Enron, it’s a healthier brand says the Oilholic. That’s all from Texas folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Pump Jacks Perryton, Texas, USA © Joel Sartore/National Geographic. Photo 2: Minute Maid Park - home of the Houston Astros, Texas, USA © Gaurav Sharma 2012. Graph: Land & Offshore rig count and forecast © Baker Hughes/Moody's.

Houston, We have a natural gas price problem!

While oil E&P players here in Houston are optimistic, those in the shale and natural gas businesses have a bit of a worry - for the first time since January 2002, a front-month settlement for natural gas has closed below US$2 on the NYMEX overnight.

The execution in question was for a May delivery which settled at US$1.984 per million Btu, down 2.3% or 4.7 cents, and it has caused a stir down here since majority of players, including independents are involved in both sets of prospection activity.

The reason is simple – there’s just too much of the stuff around, especially in a North American context courtesy shale gas plays which have been resulting in an exponential rise in US production. A relatively mild winter stateside and an abundance of supply has already caused natural gas prices to plummet over 50% on an annualised basis.

Can they plummet further over the next two quarters? Possibly. Will they? Probably not; that’s because the trading community will also take stock of the new low. The price is low enough as it is, but is there an appetite for further bearish punts? Regrettably, the Oilholic has not encountered definitive reasons one way or another. In fact, an unscientific straw poll of five Houston based traders had three anticipating a further fall while two said a temporary bottom had been reached.

Without a shadow of doubt though, over the course of the year, companies with a higher proportion of their production equation leaning towards natural gas will be more at profit risk on a basis relative to their peers having a greater exposure to oil production. Expect a scaling back of budgets or a sale of assets in order to manage leverage ratios by such players.

Coupled with all this is an interesting and somewhat related note on US midstream companies put out by Moody’s on April 2, 2012 which notes that booming demand for new oil and natural gas liquids infrastructure trumps weak natural gas prices. The agency reckons that a robust environment for US midstream energy companies will continue through mid-2013 and possibly beyond and forecasts that EBITDA for the midstream sector will grow by more than 20% in 2012.

Growing production of oil, natural gas and natural gas liquids and higher margins are driving increased earnings and cash flow for midstream companies, especially those with existing gathering and processing or pipeline infrastructure near booming shale plays. The agency names Energy Transfer Partners, Enterprise Production Partners, ONEOK Partners and Williams Partners among those best positioned for organic growth.

In addition, Moody's says that low interest rates and the sector's lower commodity price sensitivity have made the midstream sector very attractive to equity investors, while both high-yield and investment grade midstream companies are able to tap the open capital markets for funding to fuel growth.

Moving away from ‘gassy’ issues and onto the price of the crude stuff, WTI maintained its mildly bullish thrust trading over US$103 per barrel at one point in intraday trading on Thursday aided by a weaker US dollar while Brent was seen more or less holding steady at price levels above US$120 per barrel.

That’s all for the moment folks! The Oilholic leaves you with views (above) of the Christopher C. Kraft Mission Control Center building and its mission control room at NASA’s Johnson Space Center which yours truly took time out to visit this afternoon. While crude oil markets have “lift off”, the natural gas markets have a “problem.” Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Downtown Houston, Photo 2: Mission control room and exterior of the Christopher C. Kraft Mission Control Center building at NASA’s Johnson Space Center, Texas, USA © Gaurav Sharma 2012.

First thoughts from Texas & Macondo bistro

It’s good to be back in Houston, Texas to meet old friends and make yet newer ones – not all of whom have a ‘crude’ side. On this visit, following on from last year and almost two years on from BP’s spill at the Macondo oil well in the Gulf of Mexico and the Deepwater Horizon explosion, the Oilholic finds a lot of positivity around.

Over a chat at Macondo, the Latin Bistro off Travis Street (near intersection with Franklin), not the spill site, most commentators – be they from legal, advisory or financial circles – seem to suggest that the US economy has gradually turned a corner though doubts persist.

While that is price positive for oil futures, some believe Chinese and Indian consumption may not be as trumped up as is being projected in the mass media. That’s not to say the consumption of both burgeoning economies won’t have an impact, only the impact would be felt less as both face economic headwinds. If combined with a dip in crude oil consumption in OECD jurisdictions, the scenario could be price negative but may well be countered by ongoing geopolitical factors.

Brent is holding ground at US$120-plus while WTI is resisting US$100-plus and a comparable forward month futures price differential between both benchmarks is now over US$20 per barrel. Even the most die-hard market commentator is acknowledging (finally) that Brent is more reflective of global price pressures than WTI. From global crude pressures to local price pressures on the refined stuff, which is averaging in downtown Houston at US$3.90 a gallon, well below the San Francisco average of US$4.40 a gallon; still Houstonians remain an unhappy bunch when it comes to prices at the pump.

A few good souls were both lucky and happy as a gas station in Texas made an error and marked the price at under US$2.00 a gallon leading to long queues before the owners could correct the error. One chap told a local radio station that he’d filled his car, his partner car, his mother’s car and his mother-in-law’s car before the error was corrected! Moving on from lucky sons and mother-in-laws to trends for independent upstarts, this state has always encouraged independents right from the heydays of wildcatters. In fact there is a lot of positivity around on that front too, especially if a new report from Moody’s is to be factored in.

The ratings agency believes the risk profile has improved for many small exploration and production (E&P) companies focused on oil and natural gas liquids production (NGL), and companies with technological ability to exploit unconventional resource plays are expected to benefit from rapid production and reserve growth.

Stuart Miller, Vice President & Senior Analyst at Moody’s notes, "Because of recent technological advances, smaller E&P companies that have large positions in newly productive, unconventional resource plays are expected to show rapid reserve and production growth over the next few years.”

“In addition, companies that have a high percentage of their production comprised of oil or natural gas liquids are expected to benefit from increased cash flow and greater liquidity. We believe that smaller, speculative-grade companies are disproportionately, and positively, affected by these developments," he adds.

Technological advances have made it possible to economically access vast new resources that were previously locked in place. New horizontal drilling techniques and the development of multi-stage hydraulic fracturing have unlocked these reserves.

Players who have been successful in applying these new drilling and completion techniques have lowered their finding and development costs, improved their risked return on investment, and enjoyed significant reserve and production growth. Future drilling results and production levels can now be predicted with greater certainty over large acreage positions, due to the improved performance of wells drilled using this new technology, says Moody's.

Over the next few years, Moody’s expects many small E&P companies with a high proportion of oil and natural gas liquids in their production streams are expected to report improving operating cash flow levels, higher capital budgets, declining leverage metrics, and better liquidity.

According to a spokesperson, with their existing ratings in brackets, these are: Alta Mesa Holdings (B2), Antero Resources LLC (B2), Baytex Energy (B1), Berry Petroleum (B1), Chaparral Energy (B3), Clayton Williams Energy (B3), Concho Resources (Ba3), Carrizo Oil & Gas (B2), Energy XXI Gulf Coast (B3), Harvest Operations (Ba2), Hilcorp Energy I (Ba3), Laredo Petroleum (B3) MEG Energy (B1), Oasis Petroleum (B3), PDC Energy (B2), RAAM Global Energy (Caa1), Rosetta Resources (B2), SandRidge Energy (B2), Sheridan Production Partners (B2), Stone Energy (B3), Swift Energy (B2), Unit Corporation (B1), W&T Offshore (B3).

That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Macondo Latin Bistro, Houston, Texas, USA © Gaurav Sharma.