Turkey's Russian connection: Bazaars to barrels

The Oilholic finds himself in a soggy Istanbul, with Turkey in the middle of election fever and the Black Sea in the grip of a Cold War style stand-off over Ukraine.

Before landing here, yours truly ran in to a Moody's spokesperson at BA's Heathrow T5 lounge. It seems that the ratings agency predictably sees Gazprom and Russia's banking sector taking a hit, if recent notes to subscribers are anything to go by. With 52% of Gazprom's exports to Europe currently routed through Ukraine and the country contributing up to 8% of its revenues, there is trouble ahead. Nonetheless, it can cope pretty well in the face of an escalation.

When it comes to the banking sector, Moody's reckons the aggregated exposure could be as high as US$30 billion. The Kremlin is likely to step in if needs be but it won't be needed as the figure equates to less than 2% of system assets. Interestingly, just before dashing off to our respective flights, our friend from Moody's gently nudged the Oilholic and quipped, "Wait till you get to Istanbul and see NATO member Turkey's exposure to Russia." And so this blogger came, he saw and he wondered!

We'll come to the barrels later, lets start with the bazaars first. Despite the unusually miserable weather, the city is packed with Russian tourists. From the metro to the tourist spots, you cannot escape Russian chatter in the background. "For sale" signs in retail outlets are up in two languages – Turkish and Russian. In expanding its tourism sector and wider economy, Turkey has welcomed Russian tourists and business investments with open arms including a favourable visa regime for over 10 years now.

The results are tangible. With the Turkish Lira in throes of unpredictability, every big ticket item – from designer stuff and marquee labels to high value Turkish handicrafts – is priced by retailers here in euros; with quite a few Russians around with more than a few euros.

Digressing from retail to banks, the exposure of Turkish banking institutions to Russia is harder to quantify as the current macroclimate in the country [not Ukraine & NATO] has conspired to turn the situation fluid. Unfortunately, no one wants to nail a figure on record as forex permutations are making life difficult extremely difficult for the analysts, but off record it is certainly not "as high as Ukraine."

Excluding exposure of Russian banks to Turkish infrastructure project finance exercises, $5 billion to 10 billion is a reasonable conservative guesstimate. From banks, rather crudely to barrels – Russia is Turkey's 6th largest export market. Mostly consumables, textiles and manufactured goods worth $3 billion were exported by Turkey to Russia in 2012.

What came back from Russian shores was $27 billion worth of imports including crude oil, distillates, natural gas and iron and steel that same year. Of the said figure, $17.26 billion were oil & gas imports! Using a dollar valuation at constant exchange rate (which has been anything but constant), we are looking at a 625% jump in Russian "imports" between 2002 and 2012. The said percentage need not be sensationalised as the starting point was a low base, but it gives you an idea of NATO Turkey's exposure to [and reliance on] Russia.

Furthermore, the Bosphorus is a major maritime artery for oil & gas shipments via the Black Sea. Exports from the Russian loading port of Novorossyisk by tankers via the Turkish straits have been rising steadily over the last 10 years. Recognising this, Turkey even has an embassy in Novorossyisk.

Recently, Poland's Prime Minister Donald Tusk, in sync with the Oilholic, was correctly berating Germany for its exposure to Russian gas and why it would give the EU a weaker hand over the Ukrainian tussle.

"Germany's reliance on Russian gas can effectively limit European sovereignty. I have no doubt," Tusk told reporters, ahead of German Chancellor Angela Merkel’s visit to his country. [Ouch!]

Maybe Tusk ought to look at fellow NATO member Turkey too. If the diplomatic row continues to escalate, Turkey would find it very hard to indulge in verbal or economic jousts with Russia. It took a very vocal stand with Syria, but one suspects it may not be the case this time around. Banks, bazaars and barrels could all feel the squeeze – it's what colleagues in the analyst community down here openly acknowledge.

However, you don't need them or the Oilholic. All you need to do is take the tram from Istanbul's Grand Bazaar through to Kabataş, the last stop on the European shore of the Bosphorus, between Beşiktaş and Karaköy. The journey will help you reach the same conclusions unaided by charts, graphs and economic gobbledegook. And here's hoping, the weather is kinder to you than it has been to the Oilholic. That's all for the moment from Istanbul folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo 1: Eminonu Waterfont, Istanbul, Turkey Photo 2: Greek oil tanker Scorpio passes through the Bosphorus, Turkey. ©  Gaurav Sharma, March 2014.

Crude permutations of the Ukrainian stand-off

When the Russo-Georgian skirmish happened in 2008, European policymakers got a stark reminder of how reliant they were on Russian natural gas. Regardless of the geopolitics of that conflict, many leading voices in the European Union, especially in Germany, vowed to reduce their reliance on Russian gas.

The idea was to prevent one of the world's leading exporters of natural gas from using its resource as a bargaining tool should such an episode occur again. Now that it has, as the Ukrainian crisis brings Russia and West into yet another open confrontation, the Oilholic asks what happened to that vow. Not much given the scheme of things! What's worse, the Fukushima meltdown in Japan and a subsequent haphazard dismissal of the nuclear energy avenue by many European jurisdictions actually increased medium-term reliance on mostly Russian gas.

According to GlobalData, Russian gas exports to Europe grew to a record of 15.6 billion cubic feet per day last year. The US, which is not reliant on Russian natural resources, finds itself in a quandary as EU short-termism will almost certainly result in a toning down of a concerted response by the West against Russia in the shape of economic sanctions.

The human and socioeconomic cost of what's happening in Crimea and wider Ukraine is no laughing matter. However, President Vladimir Putin should be allowed a smirk or two at the idiocy and short-sightedness of the EU bigwigs – reliant on him for natural gas but warning him of repercussions! Therefore, sabre rattling by Brussels is bound to have negligible impact.

Meanwhile, Russia's Gazprom has said it will no longer offer Ukraine discounted gas prices because it is over US$1.5 billion in payment arrears which have been accumulating for over 12 months. Additionally, Rosneft could swoop for a Ukrainian refinery, according to some reports. While economic warfare has already begun, this blogger somehow does not see Russians and Ukrainians shooting at each other; Georgia was different.

Having visited both countries in the past, yours truly sees a deep familial and historic bond between the two nations; sadly that's also what makes the situation queasy. The markets are queasy too. Ukraine was hoping for a shale gas revolution and Crimea – currently in the Kremlin's grip – has its own shale bed. In November 2013, Chevron signed a $10 billion shale gas production sharing agreement with the Ukrainian government to develop the western Olesska field. Shell followed suit with a similar agreement.

Matthew Ingham, lead analyst covering North Sea and Western Europe Upstream at GlobalData, says shale gas production was inching closer. "Together with the UK and Poland, Ukraine could see production within the next three to four years."

However, what will happen from here is anyone's guess. A geopolitical bombshell has been dropped into the conundrum of exploratory and commercial risks.

Away from gas markets, the situation's impact on the wider crude oil market could work in many ways. First off, rather perversely, a mobilisation or an actual armed conflict is price positive for regional oil contracts, but not the wider market. A linear supply shortage dynamic applies here.

An economic tit-for-tat between Russia and the EU, accompanied by a conflict on its borders, would hurt wider economic confidence. So a prolonged escalation would be price negative for the Brent contract as economic activity takes a hit. Russia can withstand a dip in price by as much as $20 per barrel; but worries would surface should the $90-resistance be broken. To put things into perspective, around 85% Russia's oil is sold to EU buyers.

Finally, there is the issue of Ukraine as a major transit point for oil & gas, even though it is not a major producer of either. According to JP Morgan Commodities Research over 70% of Russia's oil & gas flow to Europe passes through Ukrainian territory. In short, all parties would take a hit and the risk premium, could just as well turn into a news sensitive risk discount.

Furthermore, in terms of market sentiment, this blogger notes that 90% of the time all of the risk priced and built into the forward month contract never really materialises. So this then begs the question, whose risk is it anyway? The guy at the end of a pipeline waiting for his crude cargo or the paper trader who actually hasn't ever known what a physical barrel is like!

The situation has also made drawing conclusions from ICE's latest Commitments of Traders report a tad meaningless for this week. Speculative long positions by hedge funds and other money managers that the Brent price will rise (in futures and options combined), outnumbered short positions by 139,921 lots in the week ended February 25, prior to the Ukrainian escalation.

For the record, that is the third weekly gain and the most since October 22. Net-long positions rose by 18,214 contracts, or 15%, from the previous period. ICE also said bearish positions by producers, merchants, processors and users of the North Sea crude outnumbered bullish wagers by 266,017 lots, rising 8.2% from the week before.

Away from Ukraine and on to supply diversity, Norway's Statoil has certainly bought cargo from a land far, far away. According to Reuters, Statoil bought 500,000 barrels of Colombian Vasconia medium crude, offered on the open market in February by Canada's Pacific Rubiales.

When a cargo of Columbian crude is sold by a Canadian company to Norwegian one, you get an idea of the global nature of the crude supply chain. That's if you ever needed reminding. The US remains Pacific Rubiales' largest market, but sources say it is increasing its sales to Europe.

Finally, in the humble opinion of yours truly, Vitol CEO Ian Taylor provided the soundbite of the International Petroleum Week held in London last month.

The boss of the world's largest independent oil trading firm headquartered in serene Geneva opined that Dated Brent ought to broaden its horizons as North Sea production declines. The benchmark, which currently includes Brent, Forties, Oseberg and Ekofisk blend crudes, was becoming "less effective" according to Taylor.

"We are extremely concerned about Brent already not becoming a very efficient or effective benchmark. It’s quite a concern when you see that production profile. Maybe the time has come to really broaden out Dated Brent," he said.

Broadening a benchmark that's used to price over half the world's crude could include Algeria's Saharan Blend, CPC Blend from the Caspian Sea, Nigeria's Bonny Light, Qua Iboe and Forcados crudes and North Sea grades DUC and Troll, the Vitol CEO suggested.

Taylor also said Iran wasn't going to be "solved anytime soon" and would stay just about where it is in terms of exports. The Oilholic couldn't agree more. That's all for the moment folks! Keep reading, keep it 'crude'! 

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© Gaurav Sharma 2014. Photo: Pipelines & gas tank, Russian Federation © Rosneft (TNK-BP archives)

Why Dated Brent is no ‘Libor scandal in waiting’

The Oilholic was asked at a recent industry event whether he thought or had heard any anecdotal evidence about Brent being 'crooked' and susceptible to what we saw with financial benchmarks like Libor. Perhaps much to the annoyance of conspiracy theorists, the answer is no! A probe by the European Commission (EC), which included raids on the London offices of several oil companies and Platts last year, and an ongoing CFTC investigation into trading houses stateside, seems to have triggered the recent wave of questions.

Doubts in the minds of regulators and the public are understandable and very valid, but that an offence on an industry-wide scale can be proved beyond reasonable doubt is another matter. The UK's Office of Fair Trading has already investigated and cleared all parties raided by the EC. Furthermore, it stood by its findings as news of the EC raids surfaced.

As far as price assessment mechanisms go, only Platts' Market on Close (MoC) has faced allegations. It is cooperating with the EC and nothing has emerged so far. Competing methods, for instance ones used by Argus Media, another price reporting agency (PRA), were neither part of the investigation nor have been since.

Let's set all of this aside and start with the basics. A monthly cash-settled future is calculated on the difference between the daily assessment price for Dated Brent (the price assigned on a date when North Sea crude will be loaded onto a tanker) and the ICE daily settlement price for Brent 1st Line Future. Unless loaded as cargo, a North Sea oil barrel – or any barrel for that matter – retains the wider trading metaphor of a paper barrel.

Now as far as the Dated Brent component goes, agreed the PRAs are relying on market sources to give them information about bids, offers and supply-side deals. However, the diversity of sources should mitigate any attempt to manipulate prices by a group of individuals submitting false information. In the case of Libor, the BBA, a single body used to collate the information. In Brent's case, there is more than one PRA. None of these act as some sort of a centralised monopolistic data aggregation body. For what it's worth, anybody with even a minute knowledge of oil & gas markets would know the fierce competition between the two main PRAs.

Don't get the Oilholic wrong – collusion is possible in theory whereby traders gang-up and provide the PRAs with false pre-agreed information to skewer the objectivity of the assessment. However, the supply-side dynamic can wobble on the back of a variety of factors ranging from rig maintenance to an accident, a geopolitical event to actions of other market participants. So how many or how few would be required to fix prices and which PRA would be targeted, when and by how much and so on, and so on!

Then hypothetically let's assume all the price-fixers and factors align, given the size of the market – even if rigging did happen – it'd be localised and cannot be anything on the global scale of fixing that we have seen with the Libor revelations to date. Take it all in, and the allegations look silly at best because the 'collusion dynamic', should there be such a thing, cannot possibly be akin to what went on with Libor.

The EC wants to regulate PRAs via a proposed mandatory code and there is nothing wrong with the idea on the face of it. However, one flaw is that in a global market, buyers and sellers are under no obligation to reveal the price to the PRAs. Many already don't in an ultracompetitive crude world where cents per barrel make a difference depending on the size of the cargo.

If the EC compels traders to reveal information, trading would move elsewhere. Dubai for once would welcome them with open arms and other benchmarks would replace European ones. Anyway, enough said and the last bit is not farfetched! Finally, if fixing on the scale of the Libor scandal is discovered in oil markets and the Oilholic is proved wrong, this blogger would be the first to put his hand up!

Coming on to the current Brent forward month futures price, the last 5-day assessment provided plenty of food for thought. Supply disruptions in Libya (down by 100,000 bpd) and Angola (force majeure by BP potentially impacting 180,000 bpd) kept the contract steady either side of US$109 per barrel level, despite tepid US economic data. That said, stateside the WTI remained stubbornly in three figures on the back of supply side issues at Cushing, Oklahoma. The Oilholic reckons that's the fifth successive week of gains.

Meanwhile, the ICE's latest Commitment of Traders report for the week to February 11 notes that hedge funds and other money managers raised their net long position by 29.6% to 109,223; the highest level since the last week of 2013. The Brent price rose by around $4 a barrel over the stated period. By contrast, the previous week's net long position of 84,276 was the lowest since November 2012.

Away from pricing issues to its impact,  Fitch Ratings said in a recent report that production shortfalls and strategy changes to appease equity holders were a greater threat to the ratings of major Western European oil companies than a prolonged downturn in crude prices.

The ratings agency's stress test of the sector indicated that a Brent price of $55 per barrel would put pressure on credit quality, but compensating movements in cost bases and capex would give most companies a fighting chance at preserving rating levels.

Alex Griffiths, head of natural resources and commodities at Fitch, said, "With equity markets increasingly focussed on returns, bond yields near historical lows and oil prices forecast to soften, the chances of companies increasing leverage to benefit equity holders have risen. The European companies that have reported so far this year have generally resisted this pressure – but it may increase as the year goes on."

Separately, the agency also noted that a fall of the rouble would benefit Russian miners more than oil exporters. For both sectors, the currency's limited decline will strengthen earnings and support their credit profile, but ratings upgrades are unlikely without indications that the currency has settled at a new lower level.

To give the readers some context, the rouble has depreciated by 8% against the US dollar since the first trading day of the year and is down 17% from the end of 2012.

Depreciation of a local currency is generally good news for a country's exporters, but the effect on Russian oil exporters is less pronounced due to taxation and hence is less likely to result in positive rating actions in the future, Fitch said.

From Russia to the US, where there are widespread reports of a flood of public comments arriving at door of the State Department with public consultation on Keystone XL underway in full swing. See here's what yours truly does not get – you can have your comments included in the wider narrative, but are not obliged to give your details even under a confidentiality clause. This begs the question – how do you differentiate the genuine input, both for and against the project, from a bunch of spammers on either side?

Meanwhile, the Department of Energy has approved Sempra Energy's proposal to export LNG to the wider market including export destinations that do not have free trade agreement countries with the US. The company, which has already signed Mitsubishi and Mitsui of Japan and GDF Suez of France, could now spread its net further afield from its proposed export hub in Louisiana.

Elsewhere, Total says its capex budget is $26 billion for 2014, and $24 billion for 2015, down from $28 billion in 2013. No major surprises there, and to quote an analyst at SocGen, the French oil major "is sticking to its guns with more downstream restructuring being a dead certainty."

After accusations of not being too ambitious in its divestment programme, Shell said it could sell-off of its Anasuria, Nelson and Sean platforms in the British sector of the North Sea. The three platforms collectively account for 2% of UK production. Cairn Energy has had a fair few problems of late, but actress Sienna Miller and model Kate Moss weren't among them. That's until they took issue with one of the company's oil rigs blotting the sea off their party resort of Ibiza, Spain, according to this BBC report.

Finally, the pace of reforms and general positivity in the Mexican oil and gas sector is rubbing off on PEMEX. Last week, Moody's placed its Baa1 foreign currency and global local currency ratings on review for an upgrade.

In a note to clients, Tom Coleman, senior vice president at Moody's, wrote: "Mexico's energy reform holds out prospects for the most far ranging changes we have seen to date, benefiting both Mexico's and PEMEX's growth profiles in the medium-to-longer term."

And just before yours truly takes your leave, OPEC says world oil demand will increase by 1.09 million bpd, or 1.2%, to 90.98 million bpd from 89.89 million bpd in 2013. That's an upward revision of 1.05 million bpd in 2014. Non-OPEC supply should more than cover it methinks. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo 1: Oil tankers in English Bay, British Columbia, Canada © Gaurav Sharma, April 2012. Photo 2: Oil exploration site © Lukoil.

Keystone XL revisited, some results & fossil fuels

Despite it having been a mad few days of 'crude' results, the Oilholic feels there is only one place to start this post – the US State Department's recent take on the Keystone XL project.

The Department's review of the project or should you like formalities – its Final Supplemental Environmental Impact Statement – noted that it had "no objections" on any major environmental grounds to the cross-border 1,179 mile-long Alberta to Texas pipeline extension project.

Its take, of course, pertains to 875 miles of proposed pipeline construction across US jurisdictional control which has been the subject of immense controversy with everyone from the American workers' unions [flagging-up job creation] to environmentalists [warning about risk of spillage] weighing in.

So is the end of the saga close with a thumbs-up from the State Department? Sadly, not quite, not yet! A 30-day public comment period has begun and is scheduled to end on March 7. During this time, "members of the public and other interested parties" are encouraged to submit comments on "the national interest determination."

Then the ultimate decision has to be made by the ditherer-in-chief, President Barack Obama, who is yet to make his mind up, pending reviews from "other government agencies" and the public at large.

As expected, the State Department's statement is full of waffle. Hoping not to annoy either those for or against the project, it took no firm stances in the Oilholic's opinion. However, there is one very clear, in fact explicit, conclusion by the department, from this blogger's reading of it – Alberta's oil sands will be developed Keystone XL or not!

In a related development impact assessment, it also noted – perhaps in no small part down to recent incidents and accidents – that using the rail network to transport crude was an even worse option than the pipeline itself, if a carbon footprint was the deciding factor. The so-called "other agencies", most notably the Environmental Protection Agency, now have around 90 days to comment before the State Department finally issues its "final" recommendation to the President.

Then there would be no excuses or reasons for stalling left and we should know either ways by the summer. One thing is for sure, the Americans have formally acknowledged that cancelling the pipeline extension won't stop E&P activity in the oil sands. So if that's what the environmentalists are after, there's some food for thought. One wishes, the State Department read this blog more often. Yours truly could have saved them a lot of time and money in reaching such a blatantly obvious conclusion.

For TransCanada's sake, which first applied for a permit from the US government as far back as 2008, the Oilholic hopes the US$7 billion project does go ahead. Stepping away from pipeline politics, to some 'crude' financial results over the past week, one cannot but feel for BG Group's Chief Executive Chris Finlayson.

In a geopolitically sensitive industry, Finlayson's team could not be apportioned blame when he announced that group earnings would dip by 33% on an annualised basis to around $2.2 billion, owing to unrest in Egypt. In the backdrop of domestic strife, the Egyptian government has not honoured agreements covering BG Group's share of gas from fields in the country, with high levels of gas being diverted to the domestic market.

Unable to fulfil its export obligations, the company had to serve force majeure notices to affected buyers and lenders, in effect releasing all sides from contractual obligations for circumstances beyond their control. Hence, a company deemed to be high-flier in the oil & gas world was - albeit temporarily - made to look like a low-flapper boosted by occasional gusts of gas...er sorry wind!

As Egypt accounts for over 20% of its annual production at present – BG Group's profit warning made its shares take a plastering following the trading update on January 27, dipping 18% at one point. The price is currently in the £10 to £11 range and most analysts are nonplussed. For instance, Liberum Capital cut BG Group to hold from buy, with the target cut from £14.75 to £12.80. Investec analyst Neill Morton cut the group's EPS forecast for 2014 and 2015 by 22% and 16% respectively.

"However, we do not believe that a takeover is likely (or even possible?) for a $60 billion company which is likely to command a substantial takeover premium. The key challenges over the next 18 months are the developments in Brazil and Australia which still run the risk of further issues, in our view (for e.g. the Brazil development is being done by Petrobras)," Morton added.

While BG Group was warning on profits, supermajor Shell wasn't exactly covering itself in glory. Following on from a pretty substantial profits warning, Shell's profits [outstripping the effect of oil price fluctuations came] in at $2.9 billion for the last quarter of 2013, down from $5.6 billion noted over the same period in 2012. The market was already well prepared for a dip in performance from Shell, but much to this blogger's surprise, new chief executive Ben van Beurden said the company's strategy presentation [slated for March 13] would contain no fresh targets on production, capex and asset disposal.

Odd indeed, and if one might humbly add – Shell's asset disposal, especially if similar drives at BP, Chevron and ConocoPhillips are to be used as measuring rods, seems a bit random! The Anglo-Dutch company said it was targeting disposals of $15 billion in the current financial year, and had stopped exploration in Alaska.

Its stake in the Australian Wheatstone project is expected to go, and a 23% stake in the Brazilian Parque das Conchas (BC-10) offshore project already has gone, subject to regulatory approvals. Ratings agency Fitch said such moves were positive, but added: "It remains to be seen whether Shell will take the opportunity that this flexibility affords it to retrench, or be tempted into shareholder friendly actions that could threaten its 'AA' credit rating."

Finally, ExxonMobil – biggest of the publicly traded IOCs by market value – also saw its profits below market expectations after a failure to offset declining production with fresh reserves. For the fourth quarter, it posted a net income of $8.35 billion, or $1.91 per share, compared with $9.95 billion, or $2.20 per share, over the same quarter in 2012. Those picky analysts were hoping for $1.92 to $1.94 per share – some will never be pleased!

Forget the analysts, here's an interesting article on what Warren Buffet sees in ExxonMobil to help draw conclusions on the "quintessential defensive stock." In response to his company's latest financials, chief executive Rex Tillerson promised to move ahead with new exploration projects.

Away from results, oil majors and minors ought to take notice as it seems oil might be overtaken by coal as the dominant primary energy source worldwide by 2017, according to the IEA. Adding further weight to this hypothesis, Worldwatch Institute's recent Vital Signs Online study noted that natural gas increased its share of energy consumption from 23.8% to 23.9% during 2012, coal rose from 29.7% to 29.9%, while oil fell from 33.4% to 33.1%.

Coal, natural gas, and oil, collectively accounted for 87% of global primary energy consumption in 2012. Finally, OPEC's 'long-standing' Secretary General Abdalla Salem El-Badri has said its member nations will be able to handle the extra oil "expected to come from Iran, Iraq and Libya" to head off any oversupply.

We believe you sir, but it'll be kinda hard to keep a trio gagging for an export impetus to toe the line, say us supply-side analysts. Hopefully, oversupply or even the perception of oversupply should bring the price of the crude stuff down a fraction and may be price positive for consumers. Hence, a month into 2014, yours truly stands by his price forecast. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo 1: The White House, Washington DC, USA © Gaurav Sharma, April 2008. Photo 2: Shell tanker truck at Muscat International Airport, Oman © Gaurav Sharma, August 2013.

Notes on a scandal from an ex-Enron pragmatist

When the Enron scandal broke and that icon of corporate America filed for bankruptcy on December 1, 2001, the Oilholic was as stumped by the pace of events as those directly impacted by it. In the months and years that were to follow, bankruptcy proceedings for what was once 'America's Most Innovative Company' according to Fortune, turned out to be the most complex in US history.

It soon emerged that one of Enron's own – Dr Vincent Kaminski – a risk management expert especially headhunted in 1990s from Salomon Brothers and appointed Managing Director for Research, had repeatedly red flagged practices within the energy company's corridors of corporate power.

Alas, in a remarkably stupendous act, Kaminski and his team of 50 analysts, while specifically hired to red flag were often ignored when and where it mattered. Cited cautions ranged from advising against the use of creative accounting, "terminally stupid" structuring of Enron's special purpose vehicles (SPVs) to conceal debt by then CFO Andrew Fastow, and the ultimately disastrous policy of securing Enron's debt against stock in the corporation itself.

What transpired has been the subject of several books – some good (especially Elkind & McLean's), some bad and some opportunistic with little insight despite grandiose pretensions to the contrary. Having lapped all of these up, and covered the scandal in a journalistic capacity, the Oilholic had long wanted to meet the former risk manager of Enron.

At last, a chance encounter in 2012, followed by a visit to Houston last November, finally made it possible. These days Kaminski is an academic at Rice University and has written no less than three books; the latest one being on energy markets. Yet, not a single one on the Enron fiasco, one might inquire, for a man so close to it all?

At peace and reasonably mellow in the Houston suburb of The Woodlands, which he calls home, the former Enron executive says, even though it rankles, the whole episode was "in the past", and despite what was said in the popular press – neither was he the only one warning about impending trouble ahead nor could he have altered Enron's course on his own.

"A single person cannot stop a tanker and I wasn't the only insider who warned that there were problems on the horizon. Looking back, I always approached every problem at Enron in good faith, gave the best answers I could come up with on risk scenarios, based on the information I had and my interpretation of it, even if bosses did not like it.

"If honesty was deemed too candid or crude then so be it! Whatever I did at Enron, the red flags I raised, was what I was paid for. Nothing less could have been expected of me; I saw it as my fiduciary duty."

He agrees that Enron's collapse was a huge blow to Houston's economy and overall wellbeing at the time. "There was a chain reaction that affected other parts of the regional economy. In fact, energy trading and marketing itself went through a crisis which lasted a few years."

To this day, Kaminski says he has no way of knowing whether justice was done or not and isn't alone in thinking that. "By the time of the final winding-up process, Enron had about 3,000 entities created all over the world. It was an extremely complex company."

But does the current generation of Rice University students ask him about Enron? "Right now, I am teaching a different generation. Most of my students are typically 25 to 30 years old. When the Enron scandal unfolded [over a decade ago] they were teenagers. A lot has happened in the corporate world since then, which they have had to take in as they've matured. The financial tsunami that was the global financial crisis, and what emerged in its wake, dwarfed what happened at Enron. For them, Enron is but a footnote in corporate history."

"That scandal devastated public trust in one brand, however big it may have been at the time. But the global financial crisis eroded public trust in an entire sector – investment banking. Perhaps as a result, Enron's collapse has ceased to generate as much interest these days. That's a pity! Depending on one's point of view, the extent of the use [or misuse] of SPVs and the number that was discovered at collapsing financial institutions in 2007-09, was several times over what was eventually catalogued at Enron."

Hence, the ex-Enron executive turned academic doubts whether the world really learnt from the scandal. "Enron was a warning from history, from the energy business to other sectors. I describe my former employer as a canary in a coal mine demonstrating the dangers of excessive leverage, of having a non-transparent accounting system and all those sliced and diced SPVs."

"Pre-crisis, the financial sector was guilty of formally removing 'potentially' bad assets from the parent company to SPVs. However, in real financial terms that wasn't the case. When things took a turn for the worse, all the assets and liabilities put on to SPVs came back to be reabsorbed into the balance sheets."

Formally they were separate and 'special', Kaminski notes, but for all practical reasons there was no effective transfer of risk.

"Rewind the clock back and there was no effective transfer of risk in the case of Enron either when its horror story of SPVs and creative accounting came out in all its unsavoury detail. So if lessons were learnt, where is the evidence? Now, let's forget scruples for a moment and simply take it as a basic mistake. Even so, there is no evidence lessons were learned from the Enron fiasco."

He adds that those who don't have an open mind will never learn. "This is not exclusive to the energy business or financial services. It's perhaps true of everything in life. Arrogance and greed also play a part, especially in the minds of those who think they can somehow extricate themselves when the tide turns."

As early as 2004-05, the Rice University academic says he was debating with colleagues that a financial crisis could be on the horizon as the US property market bubbled up.

"Some people branded me as crazy, some called me pessimistic. They said the world is mature enough to manage the situation and progress in economic and financial sciences had created tools for effective management of market and credit risks. Some even agreed that we'll have a train wreck of a global economy, but to my amazement remarked that they knew how to "get out in time."

Kaminski says while it can be true of individuals who can perhaps get out in time, it cannot be true of large corporations and the entire financial system. "They would invariably take a hit, which in some cases – as the financial crisis showed – was a fatal hit. Furthermore, the financial system itself was scarred on a global scale."

Over the years, this blogger has often heard Kaminski compare chief risk officers (CROs) to food tasters in medieval royal courts.

"Indeed, being a risk manager is a job with limited upside. You cannot slow 'acting poison' and the cooks don’t like you as you always complain that the food tastes funny. So if they catch you in a dark place, they will rough you up!" he laughs.

"I have said time and again that risk managers should be truly independent. In a recent column for Energy Risk, I gave the example of the CRO at Lehman Brothers, who was asked to leave the room when senior executives were talking business. It is both weird and outrageous in equal measure that a CRO would be treated in this way. I would resign on the spot if this happened to me as a matter of principle."

He also thinks CROs should be reporting directly to the board rather than the CEO because they need true independence. "Furthermore, the board should not have excessive or blind confidence in any C-suite executive just because the media has given him or her rock-star status."

A switch from the corporate world to academia has certainly not diminished Kaminski’s sense of humour and knack for being candid.

"Maybe having your CEO on the cover of Business Week [Cue: Enron's then CEO Jeff Skilling] could be the first warning sign of trouble! The second signal could be a new shining tower [see above left - what was once Enron’s is now occupied by a firm Skilling called a 'dinosaur' or legacy oil company – Chevron] and the third could be your company's name on a stadium! Our local baseball team – Houston Astros – called a stadium that was 'Enron Field' their home, then 'Enron Failed'. Thankfully, it's now shaken it off and is simply Minute Maid Park [a drinks brand from Coca-Cola's portfolio]."

"But jokes apart, excessive reliance or confidence in any single individual should be a red flag. I feel it's prudent to mention that I am not suggesting companies should not reward success, that's different. What I am saying is that the future of a company should not rely on one single individual."

Switching to 'crude' matters, Kaminski says trading remains an expensive thing for energy companies and is likely to get even costlier in light of higher capital requirements for registering as a swap dealer and added compliance costs. "So the industry will go through a slowdown and witness consolidation as we are already seeing."

On a more macro footing, he agrees that the assetization of black gold will continue as investors seek diversity in uncertain times. As for the US shale bonanza versus the natural gas exports paradigm, should exports materialise in incremental volumes, the [domestic] price of natural gas will eventually have to go up stateside, he adds.

"Right now, the price [of US natural gas] is low because it is abundant. However, to a large extent that abundance is down to it being cross-subsidised by the oil industry [and natural gas liquids]. I believe in one economic law – nothing can go on forever.

"As far as the LNG business is concerned, it will still be a reasonably good business, but not with the level of profitability that most people expect, once you add the cost of liquefaction, transportation, etc."

The Oilholic and the ex-Enron pragmatist also agreed that there will be a lot of additional capacity coming onstream beyond American shores. "We could be looking at the price of natural gas in the US going up and global LNG prices going down. There will still be a decent profit margin but it's not going to be fantastic," he concludes.

And that's your lot for the moment! It was an absolute pleasure speaking to Dr Kaminski! Keep reading, keep it 'crude'!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2014. Photo 1: Dr Vincent Kaminski at El Paso Trading Room, Rice University, Houston. Photo 2: Chevron Houston, formerly the Enron Towers. Photo 3: Dr Kaminski & the Oilholic, in The Woodlands, Texas, USA © Gaurav Sharma, November 22, 2013.

The year that was & ‘crude’ predictions for 2014

As crude year 2013 came to a close, the Oilholic found himself in Rotterdam gazing at the Cascade sculpture made by Atelier Van Lieshout, a multidisciplinary contemporary arts and design company.

This eight metre high sculpture, in a city that was once the world's busiest port [before Shanghai overtook it in 2004], comprises of 18 stacked oil drums, which give an appearance of having descended from the sky. They combine to form a monumental column from which the life-size drums drip a viscous mass acquiring the shapes of human figures [see left, click to enlarge].

Perhaps these figures and barrels symbolise us and our sticky relationship with the crude oil markets. For all the huffing and puffing, bears and bulls, predictions and forecasts, dips influenced by macroeconomics and spikes triggered by geopolitics – the year-end Brent crude oil price level came in near where it was at the end of 2012; in fact it was 0.3% lower! On the other hand, the WTI reversed its 7 percent annualised reversal recorded at the end of 2012, to finish round about 8 percent higher in year-over-year terms on the last day of trading in 2013.

Was there an exact science in the good and bad predictions about price levels we saw last year – nope! Does the Oilholic feel both benchmark prices are running contrary to supply-side dynamics given the current macroeconomic backdrop – yup! Did paper barrels stuff the actual merchants waiting at the end of  pipelines to collect their crude cargo – you bet!

Watching Bloomberg TV on January 2 brought home the news that money managers raised their net-long positions for WTI by 4.4 percent in the week ended December 24; the fourth consecutive increase and longest streak since July, according to the broadcaster. This side of the pond, money managers followed their friends on the other side and raised net bullish bets on Brent crude to the highest level in 10 weeks, according to ICE Futures Europe.

Speculative bets that prices will rise [in futures and options combined], outnumbered short positions by 136,611 lots in the week ended December 31, according to ICE's weekly Commitments of Traders report. The addition of 7,670 contracts, or 6 percent, brought the net-long positions to the highest level since October 22. It seems for some, the only way is up, because the fine line between pragmatic trading and gambling has long gone in actual fact.

The Oilholic predicted a Brent price in the range of US$105 to $115 in January last year. As Brent came in flat at year-end, yours truly was on the money. The heart said then, as it does now, even that range – despite being proved correct – was in fact overtly bullish but workable in this barmy paper barrel driven market.

For 2014, hoping that some of the supply-side positivity would be factored in to the mindset of traders, the Oilholic's prediction is for a Brent price in the range of $90 to $105 and WTI price range of $85 to $105. Brent's premium to the WTI should in all likelihood come down and average around $5 barrel.

The Oilholic's opinion is in sync with some, but also quite contrary to many of the bullish City forecasts. That's for them to maintain – this blogger is quietly confident that more Iraqi and Iranian crude will come on the market at some point over 2014. The US isn't importing as much and incremental barrels will henceforth come on to the markets. These will hopefully trigger a much needed price correction.

Of all the price prediction notes in this blogger's Inbox over the first week of 2014, one put out by Steven Wood and Terry Marshall of Moody's appears to be the most pragmatic. Their price assumptions, used for "ratings purposes only rather than as predictions", are for Brent to average $95 per barrel in 2014 and $90 in 2015, compared to $90 per barrel in 2014 and $85 in 2015 for WTI. As both analysts noted: "Oversupply will cool oil prices in 2014."

"A drop in Chinese growth and a surge in OPEC production pose the biggest risks to oil prices as we head into the New Year. Prices could fall if Chinese GDP growth slows significantly and OPEC members go above targeted production of 30 million barrels per day (bpd)," they added.

Away from crude price predictions on a standalone basis and reflecting on the year that was, the US EIA said prices of energy commodities decreased only modestly or increased last year, while prices of non-energy commodities like wheat and copper generally fell significantly.

Natural gas, western coal, electricity and WTI crude prices increased, while Brent, petroleum products and eastern coal prices decreased slightly. "In total, the divergence between price trends for energy and non-energy commodities grew after the summer of 2013. This is in contrast to 2012 when metals prices were stable or experienced slight increases, and a severe drought drove prices of some agricultural commodities higher in the second half of the year," it added.

From the EIA to OPEC where both its meetings in lovely Vienna last year, duly attended by the Oilholic, turned out to be predictable affairs with the "official" quota still at 30 million bpd. And we still don't have a long overdue successor to Secretary General Abdalla Salem El-Badri. The Oilholic also managed to grab a moment with Saudi oil minister Ali Al-Naimi at a media scrum in May. Away from the meetings, the year actually began in terrible fashion for OPEC following a terror attack on an Algerian facility, but easing of tensions with Iran towards the end of the year, was a positive development.

It was also the year in which the Brits not only got excited about their own shale exploration prospects, but also inked their first contract to import proceeds of the US shale bonanza via Sabine Pass. Analysts liked it, Brits cheered it, but US politicians and energy intensive industries stateside didn't. The Keystone XL pipeline project, stuck in the quagmire of US politics, also dragged on.

That yours truly moaned about the banality of market forecasts based on short-termism more than once was not unexpected; a blog on the bankrolling of Thatcherism by the oil and gas sector after the Iron Lady's death in May certainly was.

Apart from routine visits to OPEC, ever the intrepid traveller, this blogger blogged from lands far away and some not so far away. The year began with a memorable visit to the Chicago Board of Trade at the kind invitation of Phil Flynn of Price Futures; a friend and analyst who never sits on the fence in any debate and is most likely to be vindicated as the Brent-WTI spread narrows over 2014.

This was followed by a hop across The Lakes to Toronto to gauge opinion on Keystone XL. Jaunts to the G8 2013 Summit in Northern Ireland, crude ol' Norway, Abu Dhabi and a first visit to Muscat and Khasab to profile Oman's oil and gas sector followed thereafter.

Before calling time on 2013 in Rotterdam, the Oilholic headed out to the Oil Capitals of Europe and North America – chasing the uptick in oilfield services sector activity in Aberdeen, and Platts' response to the Houston Glut in the shape of its new Light Houston Sweet (LHS) benchmark. Moving away from travels, yours truly also reviewed another seven books for your consideration.

For all intents and purposes, it's been a crude old year! And it wouldn't have been half as spiffing without the support and feedback of you all - the dear readers of this humble blog. For those of you, who wanted this blogger on Twitter; you are welcome to follow @The_Oilholic

There goes the look back at Crude Year 2013. As the Oilholic Synonymous Report embarks upon its fifth year on the Worldwide Web and the seventh year of its virtual existence – here's to 2014! That's all for the moment folks! Keep reading, keep it 'crude'!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2014. Photo: Cascade sculpture by Atelier Van Lieshout Company, Rotterdam, The Netherlands © Gaurav Sharma, January 1, 2014.

A festive spike, ratings agencies & Omani moves

It's the festive season alright and one to be particularly merry if you'd gone long on the price of black gold these past few weeks. The Brent forward month futures contract is back above US$110 per barrel.

Another (sigh!) breakout of hostilities in South Sudan, a very French strike at Total's refineries, positive US data and stunted movement at Libyan ports, have given the bulls plenty of fodder. It may be the merry season, but it's not the silly season and by that argument, the City traders cannot be blamed for reacting the way they have over the last fortnight. Let's face it – apart from the sudden escalation of events in South Sudan, the other three of the aforementioned events were in the brewing pot for a while. Only some pre-Christmas profit taking has prevented Brent from rising further.

Forget the traders, think of French motorists as three of Total's five refineries in the country are currently strike ridden. We are talking 339,000 barrels per day (bpd) at Gonfreville, 155,000 bpd at La Mede and another 119,000 bpd at Feyzin being offline for the moment – just in case you think the Oilholic is exaggerating a very French affair!

From a French affair, to a French forex analyst's thoughts – Société Générale's Sebastien Galy opines the Dutch disease is spreading. "Commodity boom of the last decade has left commodity producers with an overly expensive non-commodity sector and few of the emerging markets with a sticky inflation problem. Multiple central banks from the Reserve Bank of Australia, to Norges bank or the Bank of Canada have been busy trying to mitigate this problem by guiding down their currencies," he wrote in a note to clients.

Galy adds that the bearish Aussie dollar view was gaining traction, though the bearish Canadian dollar viewpoint hasn't got quite that many takers (yet!). One to watch out for in the New Year! In the wind down to year-end, Moody's and Fitch Ratings have taken some interesting 'crude' ratings actions over the last six weeks. Yours truly can't catalogue all, but here's a sample.

Recently, Moody's affirmed the A3 long-term issuer rating of Abu Dhabi National Energy Company (TAQA), the (P)A3 rating for TAQA's MYR3.5 billion sukuk  programme, the (P)A3 for TAQA's $9 billion global medium-term note programme, the A3 rated debt instruments and the P-2 short-term issuer rating. Baseline Credit Assessment was downgraded to ba2 from ba1; with a stable outlook. It also upgraded the issuer rating of Rosneft International Holdings Limited (RIHL; formerly TNK-BP International) to Baa1 from Baa2.

Going the other way, it changed Anadarko's rating outlook to developing from positive. It followed the December 12 release of an interim memorandum of opinion by the US Bankruptcy Court, Southern District of New York regarding the Tronox litigation.

The agency also downgraded the foreign currency bond rating and global local currency rating of PDVSA to Caa1 from B2 and B1, respectively, and maintained a negative outlook on the ratings. Additionally, it downgraded CITGO Petroleum's corporate family tating to B1 from Ba2; its Probability of Default rating to B1-PD from Ba2-PD; and its senior secured ratings on term loans, notes and industrial revenue bonds to B1, LGD3-43% from Ba2, LGD3-41%.

Moving on to Fitch Ratings, given what's afoot in Libya, it revised the Italy-based Libya-exposed ENI's outlook to negative from stable and affirmed its long-term Issuer Default Rating and senior unsecured rating at 'A+'. 

It also said delays to the production ramp-up at the Kashagan oil field in Kazakhstan were likely to hinder the performance of ENI's upstream strategy in 2014. Additionally, Fitch Ratings affirmed Shell's long-term Issuer Default Rating (IDR) at 'AA' with a stable outlook.

Moving away from ratings actions, BP's latest foray vindicates sentiments expressed by the Oilholic from Oman earlier this year. Last week, it signed a $16 billion deal with the Omanis to develop a shale gas project.

Oman's government, in its bid to ramp-up production, is widely thought to offer more action and generous terms to IOCs than they'd get anywhere else in the Middle East. By inking a 30-year gas production sharing and sales deal to develop the Khazzan tight gas project in central Oman, the oil major has landed a big one.

BP first won the concession in 2007. The much touted Block 61 sees a 60:40 stake split between BP and Oman Oil Company (E&P). The project aims to extract around 1 billion cubic feet (bcf) per day of gas. The first gas from the project is expected in late 2017 and BP is also hoping to pump around 25,000 bpd of light oil from the site.

The oil major's boss Bob Dudley, fresh from his Iraqi adventure, was on hand to note: "This enables BP to bring to Oman the experience it has built up in tight gas production over many decades."

Oman's total oil production, as of H1 2013, was around 944,200 bpd. As the country's ministers were cooing about the deal, the judiciary, with no sense of timing, put nine state officials and private sector executives on trial for charges of alleged taking or offering of bribes, in a widening onslaught on corruption in the sultanate's oil industry and related sectors.

Poor timing or not, Oman ought to be commended for trying to clean up its act. That's all for the moment folks! Have a Happy Christmas! Keep reading, keep it 'crude'!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo: Oil Rig © Cairn Energy.

Of inequalities, debt, oil & international finance

Rewind the clock back to the morning after the collapse of Lehman Brothers; the Oilholic remembers it vividly. The world's fourth-largest investment bank at the time ran out of options, ideas, saviours and most importantly - working capital - on that fateful morning in September 2008. However, when filing for bankruptcy, it committed one final blunder. The administrators and liquidators - spread as far and as wide as the investment bank's own global operations - failed to coordinate with each other.

Uninstructed, the London administrator froze the bank's assets and panic ensued as investors started pulling out money from all investment banks; even those few with no question marks surrounding them. It was the moment the US sub-prime crisis became a global financial malaise that nearly took the entire system down. 

Since the episode, several books have been written about the when, where, why and how; even what lead to the crisis and the inequity of it all has been dealt with. However, via his book Baroque Tomorrow, Jack Michalowski has conducted a rather novel examination – not just of the crisis alone, but also of our economic health either side of it, the proliferation of international finance and consumer driven innovations.

His claim about our present reality is a bold and controversial one – that virtually every element of the story of the past four decades points to a structural decline, one that's rooted, as in all other historical declines, in massively growing populations faced with declining innovation and lack of new energy converters or new cheap energy sources.

Drawing interesting parallels with what happened in Renaissance and Baroque Europe, Michalowski opines that the so-called Third Wave visions of mass affluence and broad technological progress hailed by Alvin Toffler and other futurists were just a fantasy.

In his book of just under 360 pages, split into four parts, Michalowski writes that in a world where political programmes last only until the next election; progress is flat or worse still non-existent. That all innovations are driven by returns on the money invested, and the major life-changing ones that propelled us onwards and upwards from the Industrial Revolution are already with us. What has followed in their wake are fads delivered to a consumer-led debt-laden world with rising levels of energy consumption. 

According to Michalowski, history proves that we were only rescued from decline and propelled along a new path by the invention of new energy sources and new energy converters – things like agriculture, sailships, windmills, iron ploughs, combustion engines, trains, cars and airplanes, or nuclear reactors – and never by invention of new information processing technologies. IT advances, he argues, usually come late in the historical cycle.

On reading this book, many would remark that the author is over-simplifying the complex issues of innovation, progress and prosperity (or the lack of). Others would say he is bang on. That's the beauty of this work – it makes you think. For this blogger – it was a case of 50:50. There are parts of the book the Oilholic profoundly disagrees with, yet there are passages after passages, especially the ones on proliferation of international finance centres, debt, hydrocarbon usage and pricing, that one cannot but nod in agreement with. 

Perhaps we are wiser in wake of the financial crisis and have turned a corner. That may well be so. But here's a tester – drive away from the glitzy Las Vegas Strip to other parts of the city where you’ll still see streets with plenty of foreclosed homes. Or perhaps, you care to visit the suburbs of Spanish cities littered with incomplete apartment blocks where developers have run out of money and demand is near-dead. Or simply check the inflation stats where you are? And so on.

In which case, is Michalowski wrong in assuming that there is a "de-education and de-skilling of the rapidly pauperizing middle class and dramatic polarization of the society between rich and poor. Very high levels of inequality are proven by history to be absolutely destructive. As malaise sets in, they become a major contributor to decline."

Some of the author's thoughts are hard to take; some of the dark quips – especially one describing Dubai as a Disneyland for grown-ups – make one smirk. None of his arguments are plain vanilla, but they make you turn page after page either in agreement or disagreement. You'll keep going because the book itself is very engaging; even more so in a climate of persistent inflation and stagnant real incomes. 

Michalowski says that unless current trends change dramatically, the next forty years will bring more of the same. If so, we are looking at an entire century of decline in incomes and living standards or a "true Baroque era." Now, whether one buys that or not, the way the author has used history to make a statement on the macroeconomics of our time is simply splendid and a must read.

The Oilholic is happy to recommend it to peers in the world of energy analysis, economists and social sciences students. Even the enthusiasts of digital media might find it well worth their while to pick this book off the bookshelves or download it on their latest gizmo.

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo: Front Cover – Baroque Tomorrow © Xlibris / Jack Michalowski

OPEC holds quota at 30 mbpd, El-Badri stays on

We’ve been here before dear readers, we’ve been here before. Main headline at the conclusion of the 164th OPEC conference here in Vienna is a familiar one. OPEC’s production quota stays at 30 million barrels per day and Secretary General Abdalla Salem El-Badri – long overdue to step down – stays on in his post, as member nations torn between Iranian and Saudi tussles fail to agree on a candidate for the post. So at the end of it all a battle-weary El-Badri, took the stage as usual. Not entirely bereft of a sense of humour, the secretary general had a few quips, the odd joke, brushed off scribes pokes to say that the cartel had considered the global economic outlook which remains “uncertain with the fragility of the Euro-zone remaining a cause for concern.”

 

“We was also noted that, although world oil demand is forecast to increase during the year 2014, this will be more than offset by the projected increase in non-OPEC supply. Nevertheless, in the interest of maintaining market equilibrium, the OPEC decided to maintain the current production level of 30 million bpd.”

 

In taking this decision, OPEC said it had reconfirmed its members’ readiness to swiftly respond to developments which could have an adverse impact on the maintenance of an orderly and balanced oil market.

 

El-Badri's tenure as Secretary General carries on for a period of one year, with effect from January 1, 2014. As the Oilholic noted in an earlier post, OPEC had a chance to send a message but missed a trick here. Despite the threat of incremental non-OPEC barrels, it failed to present a united front leaving El-Badri to carry the can in front of the world’s press and fly the OPEC flag.

 

The man himself though had a thing or two to say or avoid saying. Coming on the latter bit first, El-Badri declined comment on what increasing Iranian production would mean for the overall production quota. He also described incremental non-OPEC supply as "good for global consumers", acknowledged OPEC’s concerns about shale and said he was monitoring the supply side situation.

 

Yet later, he cut short an analyst’s question saying people should not “exaggerate” the impact of incremental or additional project barrels. “You keep going down this track and very soon you will see both prospective and thriving E&P jurisdictions lose their appetite for investing in new fields and enhancing existing facilities.” The Oilholic thinks the Secretary General has a point, albeit the point itself is a bit exaggerated.

 

One key theme to emerge was that OPEC members’ focus for exports was firmly to the East now. Several delegates and El-Badri himself acknowledged that supplies heading to the US – especially from Nigeria, Angola and Venezuela – were being diverted to far Eastern markets. The US it seems “wasn’t a priority” for OPEC in the first place; it’s even less so now. That's your lot from OPEC HQ! Keep reading, keep it ‘crude’!

 

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo: OPEC Secretary General Abdalla Salem El-Badri at the conclusion of 164th OPEC meeting of ministers in Vienna, Austria © Gaurav Sharma December 4, 2013.

The acknowledgement: OPEC flags-up US output

There should be no shock or horror – it was coming. Ahead of taking a decision on its production quota, president of the 164th OPEC conference Mustafa Jassim Mohammad Al-Shamali, who is also the deputy prime minister and minister of oil of Kuwait, openly acknowledged the uptick in US oil production here in Vienna.

 

“In the six months that have passed since the Conference met here in Vienna in May, we have seen an increasingly stable oil market, which is a reflection of the gradual recovery in the world economy. This positive development stems mainly from a healthy performance in the US, in addition to the Eurozone countries returning to growth,” Al-Shamali told reporters in his opening remarks.

 

It follows on from an acknowledgement by OPEC at its last summit in May about the impact of shale, which up and until then it hadn’t. But the latest statement was more candid and went further. “Non-OPEC oil supply is also expected to rise in 2014 by 1.2 million barrels per day (bpd). This will be mainly due to the anticipated growth in North America and Brazil,” Al-Shamali added.

 

You can add Canada and Russia to that mix as well even though the minister didn’t.

 

Turning to the wider market dynamics, Al-Shamali said that although the market had started to gradually emerge from the tough economic situation of the past few years, the pace of world economic growth remains slow. “Clearly, there are still many challenges to overcome.”

 

Finally, a few footnotes before the Oilholic takes your leave for the moment. Here is the BBC’s take why OPEC is losing control of oil prices due to US fracking – not entirely accurate but largely on the money. Meanwhile, Nigerian oil minister Diezani Alison-Madueke has just told Platts that her country supports OPEC’s current 30 million bpd crude output ceiling, at least for the next few months until the group's next meeting.

 

Alison-Madueke also said she was keen to see how OPEC saw the impact of the US shale oil and gas boom on itself. "We would like to see that we continue with volumes we have held for the last year or so at least between now and the next meeting. I think that would be a good thing. We would like to see a review of the situation referencing the shale oil and gas to see where we are at this stage as OPEC among other things."

 

Earlier, the Saudi oil minister Al-Naimi poured cold water over the idea of a production cut lest some people suggest that. He sounded decidedly cool on the subject at this morning's media scrum. So that’s three of the ministers saying the quota is likely to stay where it was. The Oilholic would say that removes all doubt. That's all from OPEC HQ for the moment folks, more from Vienna later as we gear up for an announcement! Keep reading, keep it ‘crude’! 

 

To follow The Oilholic on Twitter click here.

 

To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo: OPEC media briefing room, Vienna, Austria © Gaurav Sharma 2013.