The Kurdish question & a ‘Dudley’ sin?

The autonomous region of Kurdistan within Iraq's borders is drawing 'crude' headlines yet again. It's that old row about who controls what and gives rights for E&P activity in the region – the Federal administration in Baghdad or the provincial administration in Erbil?

 

The historical context is provided by Gulf War I, when allied forces imposed a no-fly zone, and the Kurds subsequently pushed Saddam Hussein's forces back outside the provincial border. That was 1991, this is 2013 – a lot has changed for Iraq, but one thing hasn't – Iraqi Kurdistan is as autonomous today, as it was back then.

 

In fact, it is more prosperous and an oasis of calm compared to the rest of the Federal state. One simple measure is that the rest of Iraq ravaged by sectarian conflict and Gulf War II still only provides its citizens with about an average of 6 to 7 hours of electricity per day. The average resident of Erbil gets 22 hours and sees infrastructural spending all around, driven by targeted revenue from oil and gas licensing and exports.

Since 2006, the Kurdistan Regional Government (KRG) has been granting rights for exploration within its borders to firms from Norway to the US, with much gusto and on better terms, many say, than the Federal administration in Baghdad. The Iraqi government in turn says KRG has no right to do so.

 

Mutual consternation came to a head in January when BP and Baghdad reached an agreement to revitalise the northern Kirkuk oilfield. Since jurisdictional mandate over the oilfield and the city is hotly contested by both sides, KRG declared the deal to be illegal on grounds that it was not consulted.

 

Firing a return salvo, Iraqi Oil Minister Abdul Kareem al-Luaibi called the production and export of oil from Kurdistan to be an act of "smuggling" and threatened to cut the region's [17%] spending allocation from the federal budget as well as take legal action against Western firms digging up Kurdistan, beginning with London-listed Genel Energy (the first such firm to export from the region).

Neither Genel Energy nor the administration paid heed to that threat. Baghdad and BP did likewise with KRG's moans over Kirkuk. Then the US State Department issued an advisory to all American oil firms operating in Kurdistan that they could be liable for legal damages from Baghdad. Doubtless, the rather handsomely rewarded legal eagles at their end advised them not to worry too much.

An "as-you-were" lull lasted for roughly 10 months, when last week in an extraordinary development, Bob Dudley, CEO of BP, joined al-Luaibi and officials from the Iraqi state-run North Oil Company to pay a controversial visit to the Kirkuk oilfield in a show of support. Why Dudley took the decision to go himself instead of sending a deputy is puzzling and paradoxically a bit obvious as well.

 

In making an appearance himself, Dudley wanted to show how important the Kirkuk deal is. Yet a deputy of his would have drawn a similar two-fingered gesture from KRG, as his visit did. Playing it cool, a source at BP said its only intention is to revive production at Kirkuk, an oilfield which at the turn of millennium saw an output of 900,000 barrels per day (bpd), but can barely manage less than a third of it today.

 

BP has the technical know-how to improve the field's output, but how it will extricate itself from the quagmire of the area's politics is anybody's guess. An Abu Dhabi based source says both sides are entrenched at Kirkuk. BP will have access to the Federally-administered side of the Kirkuk field, namely the Baba and Avana geological formations. But one formation – Khurmala – is inside the Kurdish provincial borders and being is developed by the KAR group.

 

Furthermore, there is another twist in the linear fight between Baghdad and Erbil – Kirkuk's governor Najimeldin Kareem, a man of Kurdish origin, has backed the Federal deal with BP. Dudley left the oilfield without saying anything concrete on record, leaving it to the Iraqis to do most of the talking.

 

The Iraqi Oil Ministry chose to describe Kareem's backing "as securing the complete support from the local government of Kirkuk" in order to commence developing Kirkuk. Hmm…but whose Kirkuk is it anyway? The primary beneficiary of Kurdish oil exports is Turkey; the closest market where the aforementioned Genel Energy delivers most of its output to.

 

Where the tussle will lead to is unpredictable – but it hasn't deterred either BP from signing up a deal with Baghdad or the likes of ExxonMobil, Chevron and Total with Erbil. This brings us back to why Dudley went himself – well, when his peers such as Rex Tillerson, ExxonMobil's boss, have showed-up in Erbil, there was perhaps little choice left. If the regional politics goes out of control, the bosses of oil firms would have only themselves to blame for getting so close to the Iraqi wrangles most say they are least interested in.

 

At the centre of it all is the thirst for black gold. KRG is providing generous production sharing and contract conditions within its autonomous borders, while Baghdad has quite possibly given equally generous terms to BP for Kirkuk. The oil major has already announced a US$100 million investment in the oilfield.

 

Giving KRG the last word in the verbal melee – in September 2012, even before the recent salvos had been fired in earnest and the CEOs had come calling, Ashti Hawrami, Minister for Natural Resources of KRG, said something rather blunt on BBC’s Hard Talk programme which explains it all: "To put it politely, if I have million barrels of oil to produce in two years time, the market needs it, Iraq needs it and at the end of the day we are going to win that battle."

 

There are 50 plus firms already helping him achieve that objective. With geological surveys projecting that Kurdistan potentially has 45 billion barrels of the crude stuff, many of these firms are working with the KRG contrary to advice given by their own governments.

 

And as if to rub it in further into his Federal counterpart, Hawrami quipped, "Kurdistan's investment and spending plans are more structured…Why is Baghdad buying F-16s when Iraqis have little more than 4 hours of electricity per day on average [much worse than the inhabitants of Iraqi Kurdistan]." OUCH!

 

Moving away from Iraqi politics, Brent's $106 per barrel floor has not only been breached, but was smashed big time last week. As noted, hedge funds are indeed feeling the pinch, for instance high-flier Andy Hall's $4 billion baby – Astenbeck Capital Management.

 

According to Reuters, Astenbeck is down 5% as of Oct-end, largely due to the slump in Brent prices. Even though Hall's team have diversified into palladium, platinum and soft commodities, it'd be remarkable if the fund is able to avoid its first annual loss in six years. However, one shouldn't be too hard on Astenbeck as the average energy fund on Chicago's Hedge Fund Research Index, is down 4.45%. That's all for the moment folks! Keep reading, keep it 'crude'!

 

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© Gaurav Sharma 2013. Photo: Exploration site in Kurdistan © Genel Energy plc

Crude reality: Time to short as bulls go lethargic?

Most of the Oilholic's contacts in City trading circles had been maintaining in recent months that a US$106 per barrel price would be the psychological floor to the year-end, barring bearish trends induced by a wider and unforeseen macroeconomic tsunami.

To be quite honest, the global economy is probably where it has been for a while – in a bit of a lull. So even though things are neither materially better nor all that worse, the level was still breached this Monday morning. Methinks there is going to be further selling and yet more shorting either side of the Atlantic.

Our old friends the hedge funds – held responsible by many for the assetization of black gold – certainly seem to think so. That's if you believe data published by ICE Futures Europe. It indicates speculative bets that the Brent price will rise (in futures and options combined), outnumbered short positions by 119,451 lots in the week ended October 29.

The London-based exchange says that's a reduction of 21% (or 30,710 contracts) from the previous week and the biggest drop since the week ended June 25. Concurrently, bearish positions on Brent outnumbered bullish wagers by 321,470; a 3.2% decrease in net-short positions from October 22. So there you have it!

On a related note, albeit for different reasons, the WTI also closed at its lowest since June 26. In fact the forward month futures contract for December shed as much as 55 cents to $94.06 at one point in intraday trading on Monday.

The Oilholic believes the prices aren’t plummeting; rather they are hitting a much more realistic level. Such a sentiment was echoed by two new supply-side contacts this blogger had the pleasure of running into at the UK business lobby group CBI's 2013 annual conference.

As 2014 is nearly upon us, Steven Wood, managing director (corporate finance) at Moody's, says oil prices should stay robust through next year. His and Moody's quantification of robustness for Brent, factoring in Chinese demand and tensions in the Middle East, stands at around $95 per barrel, and West Texas Intermediate "for slightly less, in the next one to two years."

"And with the worst behind the US natural gas industry, prices for benchmark Henry Hub will average about $3.75 per thousand cubic feet next year," he adds.

Additionally, the good folks at Moody's reckon the E&P sector's fortunes will continue to rise over the next year, with big capital spending budgets keeping fundamentals strong (also for the oilfield service and drilling sector).

One minor footnote though, even if it is still some way off – what if international sanctions on Iran get eased should relations between the Islamic Republic and the West improve? We could then see the Iran add over 750,000 barrels per day to the global oil output pool. Undoubtedly, this would be bearish for oil markets, especially so for Brent. The recent dialogue between both sides has made contemplating the possibility possible!

Away from price-related issues, if you needed any further proof of renewed vigour in North Sea E&P activity, then Norway's Statoil has announced it will go ahead with a decision to build a new platform at its Snorre field to extract another 300 million barrels of the crude stuff at an expense of £4.2 billion. This would, according to the Norwegian media, extend the project's lifetime to 2040.

Statoil will take a final decision on engineering aspects in the first quarter of 2015 with the platform scheduled to come onstream in the fourth quarter of 2021. The Norwegian firm owns 33.3% of the exploration project licence. Other shareholders include Petoro (30%), ExxonMobil (17.4%), Idemitsu Petroleum (9.6%), RWE (8.6%) and Core Energy (1.1%). That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2013. Photo: North Sea oil rig © Cairn Energy plc

An ‘Atlas’ of e-learning for a contact sport

The Oilholic has had the pleasure of visiting quite a few E&P facilities over the years from offshore rigs to onshore gas fields. Going back roughly a decade, it wasn't uncommon [and still isn't] to see roughnecks in hard hats being given instructions ranging from operational to health and safety by a superior.

The mode of communication usually involved barking verbal instructions in highly colourful language with bulky printed training manuals on-hand containing everything from evacuation routes to rules and regulations. All of this has changed and rather dramatically, if one may add. What started as a slow, but sure, transformation at the turn of the millennium came in the form of former roughnecks and rig engineers imparting their wisdom for the benefit of budding on-site professionals via training courses using the electronic medium.

 

By 2006-07, e-learning provided by specialist providers had gained considerable traction in what is largely a contact sport. Among the stalwarts, in this relatively young but highly competitive market, is a part private equity-owned, part employee-owned educator headquartered in Aberdeen, Scotland called Atlas.

 

The firm came on the Oilholic's radar back in 2011 at the 20th World Petroleum Congress in Doha.  A further look into Atlas, at the suggestion of a banking sector contact, revealed a client portfolio of some of the biggest names in the business for a company which is less than 20 years old. IOCs aside, strikingly enough, this blogger found that a number of NOCs had also availed Atlas' service to give their workforces – as the educator's motto states – the "knowledge to perform."

 

For the sake of a crude analogy, the Oilholic quipped to Kevin Short, Director of Sales at Atlas, if they'd in fact become the Rosetta Stone of the oil & gas business. "I don’t think it is that simple, although our e-learning courses and industry solutions are indeed multi-linguistic," he laughs.

 

For Short, it's more about creating, marketing and selling virtual learning solutions aimed at "improving efficiencies while minimising operational and legislative risk". This could range from e-training courses for employees moving dangerous goods by air to a simple training solution for evacuating an E&P facility.

 

"There are industry standard courses available from our library; but more often than not, you'll find clients ordering bespoke solutions or an altered version of an existing training solution to suit their specific needs," Short explains.

 

There is no mystique about what Atlas provides and the company continues to record double-digit growth on an annualised basis, much to the delight of its PE owners [HG Capital] one assumes. Peer-to-peer contact and reviews have certainly been of immense help in achieving this – both in terms of retaining clients and bagging new ones. Over the years, Atlas has expanded to Dubai, Kuala Lumpur and Houston.

 

Understandably, the firm keeps abreast of new emerging techniques in the E&P sector, unconventional prospection activity and allied health and safety issues to come-up with e-learning options for clients.

 

However, the Oilholic put one caveat to Short – pros from Aberdeen who have gained expertise for better parts of four decades, especially on the health and safety front in wake of the Piper Alpha tragedy (1988), are also on the educating circuit from Dubai to Calgary and in great demand. So is Atlas toughing it out with them too?

 

"In a sense, perhaps yes. But in terms of the broader picture no! That's because we also work with some of these professionals a lot of the time and hire them as what we call 'Subject Matter Experts' to work on fresh concepts for courses and bespoke solutions for clients. What's good for them is good for Atlas and by default good for the commissioning client."

 

When it comes to fishing these guys out – networking, events, headhunting those with industry reputation and project-based demand all play a part. Such expertise has helped the company put together its patented Atlas Knowledge Centre – a 3,000 page grab of all of the company's core content. Akin to a virtual oil & gas knowledge encyclopaedia, it is made available to subscribers serving as a "refresher" or instant help-guide to learners.

 

But what about converting new clients around the e-learning viewpoint? Short says competency is key here. "We can help companies by ensuring that their recruits not only just sit the course but based on the information that's been given to them, they become competent to handle the tasks at hand. It is not just about providing reading and reference material but rather ensuring that the candidate is learning."

 

Atlas also has an advisory board to help it test run pilot courses and provide constant feedback. Last time the Oilholic checked, there were around 53 companies on board for such an exercise. Finally, the company is also rather careful in being shall we say 'electronic platform neutral'.

 

"If a client wants an e-learning solution to work on a BlackBerry we wouldn't urge them to adopt an Android OS system, or Apple OS. Ultimately, that's their call. We have a young team here who will tailor a course to the clients' IT requirements and subsequently licence it to them, rather than it being the other way around." A wise line to take indeed! That’s all for the moment folks! Keep reading, keep it 'crude'!

NOTE: November 1, 2013 - To read this blogger's interview with Atlas CFO Graeme Park for CFO World click here.

 

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo: Atlas HQ, Energy Park, Aberdeen, Scotland © Gaurav Sharma, October 2013.

The tale of Alberta's first commercial oilfield

A quaint town called Turner Valley in Alberta, Canada may not mean much to the current crop of oil and gas industry observers. However, it has a special place in British history as well as that of the industry itself. Back in 1914, the town acquired the status of Western Canada's oil hub and had the country's first commercial oilfield which, for a while, was the largest oil and gas production base in the entire British Empire as it stood then.

 

Hell’s Half Acre by David Finch is a meticulously researched and entertaining tale of the townsfolk of Turner Valley, and those who came from further afield to make it all happen back in the day. The author, who has been researching the social history of Western Canada’s oil and gas industry since the 1980s and has no fewer than 15 books about the region to his name, recounts where it all began in earnest for the province.

 

The drilling rigs, processing plants and pipelines are all there, and so are anecdotes of the wildcatters and workers who put it all in place, who made it happen and who lived to tell their tales. In order to make for a lively narration, Finch has gelled archived material and the dozens of interviews he conducted extremely well. But this pragmatic book of just over 200 pages, not only narrates a tale of commercial success, but also what costs were paid by Turner Valley in its (and by default) Canada's historic quest for black gold; an effort, which as fate would have it, was sandwiched between the two World Wars.

 

Hell's Half Acre is a very real place in a coulee just outside of Turner Valley, writes Finch. For two decades, companies piped excess natural gas to the lip of this gorge and burned it – in order to produce valuable gasoline they had to also produce the natural gas for which there were limited markets at the time. In fact, the glowing sky could be seen as far south west as Calgary, the author tells us.

 

Canada's national treasure also became a military target for while. At its height, and before peaking in 1942, the Turner Valley provided 10 million barrels per day towards the Allied War Effort. As you would expect, what was then (and still is) a cyclical industry saw its own booms and busts. The companies and their cast of characters from Turner Valley have also been delved into, and in some detail, by Finch.

 

The Oilholic first came across this book on a visit to Calgary and a chance visit to DeMille Bookstore at the recommendation of a local legal expert. For that, this blogger is truly grateful to all parties concerned, and above all to the author for enriching one's knowledge about this fascinating place. Hence, this review was long overdue!

 

Today Turner Valley, a harbinger of the success of Canada's oil and gas industry, is known for tourism, leisure and for being the hometown of Laureen Harper, the frank and vivacious wife of Prime Minister Stephen Harper. So Finch's colourful book could serve as a timely reminder of the importance of a bygone era as Turner Valley begins the countdown to its centennial celebrations of the 1914 discovery of oil.

 

The Oilholic is happy to recommend this book to all those interested in the history of the oil and gas business, origins of the Canadian energy industry, Alberta's place in the global geopolitical oil and gas equation and last, but not the least, anyone seeking a riveting book about the Great Alberta Oil Patch.

 

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© Gaurav Sharma 2013. Photo: Front Cover – Hell’s Half Acre © Heritage House Publishing

North Sea & the 'crude' mood in Aberdeen

The Oilholic spent the wee hours of this morning counting the number of North Sea operational support ships docked in Aberdeen Harbour. Interestingly enough, of the nine in the harbour, six were on the Norwegian ships register.

Whether you examine offshore oil & gas activity in the Norwegian sector of the North Sea or the British sector, there is a sense here that the industry is enjoying something of a mini revival if not a full blown renaissance. As production peaked in the late 1990s, empirical evidence that oil majors had begun looking elsewhere for better yields started emerging. Some even openly claimed they’d given up.

Over a decade later, with new extraction techniques and enhanced hydrocarbon recovery mechanisms in vogue – a different set of players have arrived in town from Abu Dhabi National Energy Company (TAQA) to Austria's OMV, from Canada's Talisman Energy to China's Sinopec. Oil recovery from mature fields is now the talk of the town.

Even the old hands at BP, Shell and Statoil – who have divested portions of their North Sea holdings – seem to be optimistic. The reason can be found in the three figure price of Brent! Most commentators the Oilholic has spoken to here, including energy economists, taxation experts, financiers and one roughneck [with 27 years of experience under his belt] are firmly of the view that a US$100 per barrel price or above supports the current level of investment in mature fields.

One contact remarks that the ongoing prospection and work on mature fields can even take an oil price dip to around $90-level. "However, anything below that would make a few project directors nervous. Nonetheless, the connect with between Brent price fluctuation and long term planning is not as linear as is the case between investment in Canadian oil sands projects and the Western Canadian Select (WSC) price."      

To put some context, the WSC was trading at a $30 per barrel discount to the WTI last time yours truly checked. Concurrently, Brent's premium to the WTI, though well below historic highs, is just shy of $10 per barrel. Another contact, who retains faith in the revival of the North Sea hypothesis, says it also bottles down to the UK's growing demand for natural gas.

"It's what'll keep West of Shetland prospection hot. Furthermore, and despite concern about capacity constraints, sound infrastructural support is there in the shape of the West of Shetland Pipeline (WOSP) which transports natural gas from three offshore fields in the area to Sullom Voe Terminal [operated by BP]."

While further hydrocarbon discoveries have been made atop what's already onstream, they are not yet in the process of being developed. That's partially down to prohibitive costs and partially down to concerns about WOSP's capacity. However, that's not dampening the enthusiasm in Aberdeen.

Five years ago, many predicted a rig and infrastructure decommissioning bonanza to be a revenue generator and become a thriving industry itself. "But enhanced oil recovery schemes keep pushing this 'bonanza' back for another day. This in itself bears testimony to what's afoot here," says one contact.

UK Chancellor George Osborne also appears to be listening. In his budget speech on March 20, he said that the government would enter into contracts with companies in the sector to provide "certainty" over tax relief measures. That has certainly cheered industry players in Aberdeen as well the lobby group Oil & Gas UK.

"The move by the Chancellor gives companies the certainty they need over the tax treatment of decommissioning. At no cost to the government, it will speed up asset sales and free up capital for companies to use for investment, extending the productive life of the UK Continental Shelf," a spokesperson says, echoing what many here have opined.

Osborne's budget speech also had one 'non-crude' bit of good news for the region. The Chancellor revealed that one of the two bidders for the UK government's £1 billion support programme for Carbon Capture and Storage (CC&S) is the Peterhead Project here in Aberdeenshire. Overall, the industry sounds optimistic, just don't mention the 'R-word'. Scotland is due to hold a referendum on September 18, 2014 on whether it wants to be independent or remain part of the United Kingdom.

Hardly any contact in a position of authority wants to express his/her opinion on record with the description of political 'hot potato' attributed to the referendum issue by many. The response perhaps is understandable. It's an issue that is dividing colleagues and workforces throughout the length and breadth of Scotland.

General consensus among commentators seems to be that the industry would be better off in a 'United' Kingdom. However, even it were to become a 'Disunited' Kingdom come September 2014, industry veterans believe the global nature of the oil & gas business and the craving for hydrocarbons would imply that the sector itself need not be spooked too much about the result. National opinion polls suggest that most Scots currently prefer a United Kingdom, but also that a huge swathe of the population is as yet undecided and could be swayed either way.

In a bid to conduct an unscientific yet spirited opinion poll of unknown people since known ones were unwilling, the Oilholic quizzed three taxi drivers around town and four bus drivers at Union Square. Result – two were in the 'Yes to independence' camp, four were in the 'No' camp and one said he'd just about had enough of the 'ruddy question' being everywhere from newspapers to radio talk shows, to a stranger like yours truly asking him and that he couldn't give a damn!

Moving away from the politics and the projects to the crude oil price itself, where black gold has had quite a fortnight in the wake of a US political stalemate with regard to the country's debt ceiling. Nervousness about the shenanigans on Capitol Hill and the highest level of US crude oil inventories in a while have pushed WTI’s discount to Brent to its widest in nearly three months by this blogger's estimate.

Should the unthinkable happen and the political stalemate over the US debt ceiling not get resolved, it is the Oilholic's considered viewpoint that Brent is likely to receive much more support at $100-level than the WTI, should bearish trends grip the global commodities market. This blogger has maintained for a while that the WTI price still includes undue froth in any case, thereby making it much more vulnerable to bearish sentiment. 

Just one final footnote, before calling it a day and sampling something brewed in Scotland – according to a recent note put out by the Worldwatch Institute, the global commodity 'supercycle' slowed down in 2012. In its latest Vital Signs Online trends report, the institute noted that global commodity prices dropped by 6% in 2012, a marked change from the dizzying growth during the commodities supercycle of 2002-12, when prices surged an average of 9.5% per annum, or 150% over the stated 10-year period.

Worldwatch Institute says that during the supercycle, the financial sector took advantage of the changing landscape, and the commodities market went from being "little more than a banking service as an input to trading" to a full-fledged asset class; an event that some would choose to describe as "assetization of commodities" and that most certainly includes black gold. Supercycle or not, there is no disguising the fact that large investment banks participate in both financial as well as commercial aspects of commodities trading (and will continue to do so).

Worldwatch Institute notes that at the turn of the century, total commodity assets under management came to just over $10 billion. By 2008 that number had increased to $160 billion, although $57 billion of that left the market that year during the global financial crisis. The decline was short-lived, however, and by the end of the third quarter in 2012, the total commodity assets under management had reached a staggering $439 billion.

Oil averaged $105 per barrel last year and a slowdown in overall commodity price growth was indeed notable, but Worldwatch Institute says it is still not clear if the so-called supercycle is completely over. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo 1: North Sea support ships in Aberdeen Harbour. Photo 2: City Plaque near ferry terminal, Aberdeen, Scotland © Gaurav Sharma, October 2013.