Talking Crude: Of Profits, Tax rebates & Asset Sales

Last week was an eventful one in crude terms. Well it’d have to be if Shell and Exxon Mobil declare bumper profits. Both saw their quarterly profits almost double. Beginning with Shell, the Anglo-Dutch firm reported profits of US$4.5 billion on a current cost (of supply) basis, up from US$2.3 billion noted over the corresponding quarter last year.

Excluding one-off items, Shell's profit was $4.2 billion, compared with $3.1 billion last year. Unlike BP, Shell said it would pay a second quarter dividend of $0.42 per share. The oil giant's restructuring plans also appear to be bearing fruit achieving cost savings of $3.5 billion, beating the stated corporate savings target by about 15% and some six months ahead of schedule.

Furthermore, it is thought that as a result of the restructuring, 7,000 employees would leave Shell nearly 18 months ahead of schedule. It also said it expected to sell $7-$8 billion of assets over 2010-11. Concurrently, oil giant Exxon Mobil reported quarterly profits of $7.6 billion, well above the $4.1 billion it posted over the corresponding quarter last year. Revenue for the quarter rose 23% in year over year terms on annualised basis from $72.5 billion to $92.5 billion.

Meanwhile, rival BP reported a record $17 billion second quarter loss which the market half expected. The figure included funds to the tune of $32 billion set aside to cover the costs of the oil spill in the Gulf of Mexico.

Sticking with BP, it has emerged that the beleaguered oil giant included a tax credit claim of almost $10 billion in its Q2 results as it seeks to take the edge off the impact of the Gulf of Mexico oil spill on its corporate finances. Its income statement for the second quarter carries a pre-tax charge of $32.2 billion related to the oil spill and a tax credit of $9.79 billion.

Under domestic tax laws in the US, BP is entitled to deduct a proportion of its losses against US tax. The issue is likely to turn political – especially in an election year, when much more has been made out of far less. However, legally the US government can do precious little to prevent BP from claiming the tax credit.

Crude asset sales seem to be the order of the day. Following on from BP’s sale of assets and Shell’s announcement that it will sell too, news emerged that the Russian government also wants to join the party.

It plans to sell $29 billion worth of assets (not all which are energy sector assets) on the open markets. In the absence of official confirmation, local media speculation suggests minor stakes in Rosneft and Transneft may be put up for sale.

However, speaking to reporters in Moscow on July 29th, the country’s Finance Minister Alexei Kudrin said, "We will sell significant stakes in state companies on the market. We plan to keep controlling stakes. Assets will be valued publicly, in line with market prices and tenders will be open. We are fully ruling out a situation when somebody sells something to someone at an artificially low price."

According to communiqués, the Russian government wanted to rake in $10 billion next year from asset sales. It has also approved a decision to increase mineral extraction taxes on gas producers by 61% from 2011.

Finally from a macro strandpoint, market consensus and comments from BP, Shell and Exxon officials seem to indicate that the top bosses of all three see mixed signals in the global economy. While their earnings figures, excluding BP for obvious reasons, have improved markedly from the quarterly lows of 2009, the overall industry outlook remains uncertain.

© Gaurav Sharma 2010. Photo courtesy © Shell

Trying to Decipher Oil Majors’ Debt Ratings

Last month, BP’s image and shares were not the only things taking a plastering. Its bonds, due for repayment in 2013 were nearly downgraded to junk status trading at a price of less than 90 cents in the dollar. Given BP’s asset base, even if the ultimate cost of the Gulf of Mexico clean-up and legal costs amount to US$50 billion, there is not a cat in hell’s chance of the company defaulting on its debt obligation unless the oil price plummets dramatically. So quite frankly, the development was a load of rubbish which piled up owing to media pressure.

Now, it gets even more interesting. Following, BP’s asset sales to the tune of US$7 billion, Moody's cautiously placed the asset purchaser Apache Corporation’s ratings, including its A3 senior unsecured ratings, under review for downgrade on July 21st. However, Its P-2 commercial paper rating is not under review.

The ratings agency observes that while substantial existing cash and equity will fund the BP transaction, the: “leverage is amplified by the fairly low proportion of production and producing reserves relative to the price paid for the BP assets (by Apache), the corresponding substantial proportion of undrilled yet-to-be-funded proven undeveloped reserves and probable and possible acreage, the pending $3.9 billion acquisition of Mariner Energy and the June closing of its $1.050 billion acquisition of Devon Energy properties.”

Overall nearly US$5 billion of Apache’s rated debt is affected. Moody’s says that if Apache were to be downgraded, it would be no more than one notch. The principal methodology used in rating was the Independent Exploration and Production (E&P) Industry rating methodology published in December 2009.

I have reason to question the knee-jerk reaction of the markets to BP’s debt and but can find no reason to question Moody’s downgrade – except that caution has prevailed following the financial tsunami of 2008. Furthermore, a “who’s to say what might happen” sentiment is doing the rounds in the city of London. We’ve said time and again – from Enron to Lehman – that they were too big to fail. BP won’t fail, but the sentiment does not help and permeates across the oil and gas sector, with agencies being stricter than ever. Ratings agency, at the present moment in time are damned if they do and damned if they don’t. They’d rather “do” then “don’t” seems to be the consensus.

In a speech at the British Bankers Association (BBA) International conference that I attended on July 13th, Deven Sharma, President of Standard & Poor's, said that the industry realised the issue of transparency and accountability. He added that sound, consistent oversight of ratings firms will help build confidence in ratings, which has clearly been affected by the crisis.

However, Sharma also noted that, "Most of our ratings during the last three years have performed broadly in line with previous periods of economic stress - including our ratings of corporates and sovereigns globally and our ratings of European structured securities. However, the performance of our ratings on US mortgage-related securities clearly has been disappointing, which we very much regret."

Sharma said serious steps are being taken to address the scenario through major changes to ratings process and analytics. "S&P's aim is to make our ratings more forward looking, more stable and more comparable across asset classes," he added. We hope so too Sir!

© Gaurav Sharma 2010. Photo courtesy © Cairn Energy Plc

Mainly About Fund Managers & BP

Do some mutual fund managers know something about BP that we don’t or rather the wider market does not?

The answer is a flat ‘no’. Following the Gulf of Mexico oil spill which began on April 20th, BP’s market value has declined 40%. All what these guys did was not react to the headlines. That is simply because they saw an opportunity based on the conjecture that BP is too big to file for a US Chapter 11 bankruptcy (even if it wanted to).

One contact of mine in the industry says, “When others panic we don’t. On the contrary we see value in a cheap stock because let’s face it - BP is not going to go bankrupt despite all the garbage in the popular press. Four weeks ago its stock was as cheap as it can get.”

There is a thought process behind all this. To begin with, the crude oil price has averaged US$78 a barrel for the first six months of the year and many in the market believe it will end the year above the US$80 mark. Furthermore, the oil giant’s financials indicate that it has been raking in over US$30 billion in operating income each year in recent financial years.

Additionally, BP is methodically making asset sales. It is in negotiations with US developer Apache Corp. with regard to a massive asset sale to the tune of US$12 billion according to UK media reports. Some reports are also naming Standard Chartered as the bank responsible for setting up the oil giant’s crisis fund of US$5.25 billion launched in May.

In a related development, Magellan Midstream Partners announced that it has agreed to acquire certain petroleum storage and pipelines for US$339 million, including about US$50 million in inventory from BP Pipelines (North America) Inc. Moody’s notes that the move will not impact Magellan’s Baa2 senior unsecured debt ratings and stable rating outlook at this time. Its rating has stayed at Baa2 since March 5, 2009.

Meanwhile BBC news has just reported that BP has temporarily stopped oil from leaking into the Gulf, pending further tests. A spokesman confirmed that further work is being carried out. Elsewhere political pressure continues to mount on the oil giant as US media reports suggests it could potentially be hit with a 7-year drilling ban.

Away from the oil spill, uncertainty off the Falkland Islands continues as shares in Falkland Oil & Gas fell sharply after the company said it would give up on one of its oil wells – Toroa – off the coast of the South Falklands.

Despite its optimism in May when it started drilling, the company now says there are no hydrocarbons there and it will plug the well. However, it said that it still hoped there was oil in the area. In June, Rockhopper Exploration said it was looking to raise US$75 million after striking above-expectation reserves of oil in the region. A number of the small scale UK oil & gas upstarts are searching for oil in the Falklands, despite strong opposition from Argentina.

Argentina and UK went to war over the Falkland Islands in 1982 after the former invaded. UK forces wrested back control of the islands, held by it since 1833, after a week long war that killed 649 Argentine and 255 British service personnel. The Islands have always be a bone of contention between the two countries. The prospect of oil in the region has renewed diplomatic spats with the Argentines complaining to the UN and launching fresh claims of sovereignty.

© Gaurav Sharma 2010. Logo courtesy © BP Plc

Moody’s Says Global Integrated Oil Industry Stable

A report published on Wednesday by Moody’s notes that the global integrated oil and gas industry outlook remains stable and the sector is likely to continue seeing a moderate recovery over the next 12-18 months. However, it adds that the recovery could be more subdued for international oil companies (IOCs).

Oil prices have generally averaged over US$75+ per barrel, and Moody’s has joined ranks with the wider market in noting that the oil sector is well past the bottom of the cycle.

Thomas Coleman, a Senior Vice President at Moody's, says, "The integrated oil companies on the whole enjoy a strong and competitive financial position today; with oil prices trading in a moderate level of about US$75 a barrel as the world's leading economies continue to emerge from the serious downturn of 2008-2009."

Overall, the report notes that the demand for crude oil will remain strong outside the OECD, as – well no prizes for guessing – China and other booming economies, most notably India, steadily increase consumption.

The report also notes that IOCs' earnings and cash flow are improving and could rise by almost 20% over the next 12-18 months - thanks to the H1 2010 revival in crude prices - but these companies remain exposed to fairly weak conditions in the refining sector, which is set to take on even more capacity in 2010 and in coming years.

In addition, high inventories worldwide and recent commodity price volatility amid deepening concerns over Eurozone debt issues further illustrate the risks to the sector, according to Moody's. On the Gulf of Mexico oil spill, the ratings agency noted that the "costs of drilling in the Gulf will escalate dramatically when the US government's ongoing moratorium ends, though deepwater drilling is unlikely to come to permanent halt."

© Gaurav Sharma 2010. Photo courtesy © Shell

Crude Dips but Total Warns of Year-end Price Spike

Crude prices dipped yet again last week, especially towards the end of the week, as bearish trends witnessed in the wider financial markets clobbered commodities. Additionally, the US Department of Energy reported a 1.9 million barrel peak-to-trough decline of crude oil inventories (gasoline and distillate inventories both rose).

The drawdown was above expectations and NYMEX WTI August contract fell 30 cents to US$75.64 a barrel in New York following publication of the report. In fact, crude prices, instead of being the exception, were following the norm as commodities in general suffered their first negative quarter since 2008, if the past three months are anything to go by.

Problem these days is that higher institutional investor participation in commodities markets has without a shadow of doubt, at least in my mind, increased the connection between forex carry trade and stock market fluctuations with commodity assets. Still, most oil market commentators I have spoken to forecast crude prices as well as commodities prices to reverse last week’s losses as the supply and demand scenario has not been fundamentally altered. In fact, it remains strong.

However, Christophe de Margerie, CEO of oil major Total believes crude prices could spike on account of an entirely different reason – the Gulf of Mexico oil spill. Speaking to the Wall Street Journal, he said that while it remained necessary to drill in deep waters to meet global demand for fuel, tougher safety rules could result in higher crude price.

"Total’s policy is clearly towards zero risk. All this means potential additional costs," de Margerie said, adding that oil prices could reach US$90 a barrel by end-2010.

© Gaurav Sharma 2010. Photo courtesy © Cairn Energy Plc

Alcohol & Oil Don’t Mix Well on the Trading Desk!

Unfortunately, some idiots learn the hard way that alcohol and trading do not mix all that well. The crude story doing the rounds in the City these past 24 hours is a mildly humorous one. That is unless you happen to be Steven Noel Perkins, a former futures trader at PVM Oil Futures Ltd. in London.

It seems that in the early hours of the morning on June 30, 2009 following a weekend (plus a Monday) of excessive drinking, the great Mr. Perkins went to his desk at PVM and placed a trade for ICE Brent crude futures contract (for August 2009 delivery) in excess of 7,000 lots representing nearly 7 million barrels of the crude stuff.

High on alcohol, the oil futures broker, whose job was to trade orders on an execution only basis at a firm which did no proprietary trading, accumulated a long outright position so substantial that the price of Brent spiked significantly over the course of the early session.

Perkins initially lied to his employer in order to try and cover up his unauthorised trading. But alas, no boss is that dumb. What’s more, the UK watchdog – the Financial Services Authority (FSA) – came down hard on him. It noted that Perkins' trading manipulated the market by giving a false and misleading impression as to the supply, demand and price of Brent crude and caused the price to increase to an abnormal and artificial level.

So in addition to losing his job, Perkins also got clobbered with a fine of £72,000 for market abuse. The FSA also banned him from working in the financial services industry.

Alexander Justham, director of markets at the FSA, said, "We view market manipulation extremely seriously. Perkins' trading caused disruption to the market and has been met with both a fine and prohibition. This reinforces the fact that a severe sanction will apply in cases of market manipulation, even where no profit is made. Perkins' drunkenness does not excuse his market abuse. He has been banned because he is not a fit and proper person to be involved in regulated activities and his behaviour posed a risk to the proper functioning of the market."

Oh dear! However, there is a silver lining. Immediately after the incident, Perkins joined a rehabilitation programme for alcoholics and has since stopped drinking. The FSA considers that it is possible that Perkins may be rehabilitated over time and could be fit and proper again in the future.

The ban has therefore been limited to a minimum term of 5 years, and his fine reduced from £150,000 to £72,000 resulting from a combination of not causing Perkins serious financial hardship as well as taking account of his desire to settle his case early under FSA's executive settlement procedures.

He’ll drink to that! Or maybe not!

© Gaurav Sharma 2010. Graphic © Gaurav Sharma 2010

OPEC 'Comfortable' with Oil Prices

OPEC appears to be comfortable with the current price of oil, presently trading at US$ 75+ per barrel, according to the cartel’s Secretary General Abdalla Salem El-Badri.

Speaking to journalists, prior to a meeting with European Union representatives, he said, “Current prices are comfortable. I don't see any change in the production; I don't see any meeting coming before the set-up meeting in October (viz. 14)."

El-Badri added there was plenty of oil in the supply chain and that and discipline was needed among OPEC member countries when it came to compliance with production quotas. He felt compliance was recently around 53%, and said he doesn't see the level falling below that.

His comments, while noteworthy, hardly come as a surprise. The OPEC secretary general also said that oil giant BP was “too big” to be pushed to a Chapter 11 bankruptcy in the US following the Gulf of Mexico oil spill which is yet to be plugged. However, he added that the oil spill may impact crude prices in the long-term if regulation becomes too strict and projects get cancelled or delayed.

On the sidelines of El-Badri’s arrival in Brussels, news emerged that energy giant Total has stopped petrol deliveries to Iran, bowing to pressure over Iran's nuclear programme. A spokeswoman for Total confirmed the move on Monday evening after the US Congress had earlier proposed unilateral sanctions that could punish companies doing business with Iran.

Additionally, Reuters reported that Repsol had withdrawn from a contract it won with Royal Dutch Shell to develop the South Pars gas field in southern Iran. Despite, being a leading member of OPEC and a major oil exporting country Iran suffers from a severe lack of refinery capacity and depends on petrol imports for over 30% of its domestic consumption according to industry estimates.

© Gaurav Sharma 2010. File Photo © Gaurav Sharma 2008 - OPEC Secretary General Abdalla Salem El-Badri (right) with Former OPEC President Chakib Khelil (left)

Stop Press: India Getting Rid of Fuel Subsidies!

I must admit that I never once thought this was achievable. Given India’s crazy domestic politics it may yet not happen. However, if local media reports are to be believed, the Indian government has taken the first constructive steps in its history as an independent nation to get rid of petrol subsidies.

The country’s oil secretary Sthanunathan Sundareshan told reporters on Friday, that not only petrol, but diesel and kerosene prices would be freed from the shackles of government price controls. What differentiates the present drive from past murmurings is that for a change the government is willing to provide figures on this occasion.

Apparently by lifting price controls, petrol prices would rise by INR3.5 (£0.05), diesel by INR2.00 and kerosene by INR3.00. Furthermore, government ministers have agreed that the market would henceforth drive the price(s).

Protests, marches, agitations, you name it - have already been planned. Everyone from the Communists to Hindu nationalists are in a strop (real or artificial), according to NDTV, an Indian news broadcaster. The commitment of the government cannot be faulted, but Indian politicians always follow short-term populist agenda where such a move would not sit well, especially as it is a coalition government that is presently running the world’s largest democracy.

Still, the move is long overdue and the need to cut the country’s budget deficit is pressing. India's fiscal deficit is forecast to hit 5.5% of GDP by 2010-11. Whether ridding the nation of fuel subsidies will play a part in cutting it remains to be seen.

© Gaurav Sharma 2010. Photo Courtesy © IndianOil Corporation Ltd.

Yachting, Golfing & Blogging after BP's Oil-spill

As the BP-spill, its containment, aftermath, costs and impact on the industry are scrutinised from all possible angles, side issues which dominate the headlines are about as farcical as they can be. It emerged on June 20 that BP’s egregious CEO Tony Hayward took a break from overlooking the Gulf of Mexico oil spill and committing a series of PR disasters, to spend a day with his teenage son on Father’s day, yachting off the “pristine” (as many American media outlets stress) coast of the UK.

US politicians never loathe showing false anger and lost no time in criticising him, with the charge being led by White House Chief of Staff Rahm Emanuel. However, it then emerged that President Obama, carted off for a few rounds of golf taking the Vice-President along for the ride, that’s after attending a baseball game for good measure. This enabled his opponents to level the same criticism at him and made his Chief of staff look like a jack-ass (as if he needed any help in that department).

Blogger Scott Coen asked why different rules should apply for both men facing criticism for the handling of the ongoing spill? As did UK's Telegraph newspaper. Republican Party Chairman Michael Steele couldn’t agree more putting in his two bits worth. Some were busy revealing how much in political campaign donations had President Obama taken from BP. Turns out he's on top of the pile. Wonder if they will even exchange Christmas cards this year.

Yours truly also felt the need to go beyond his own blog – say a thing or two on BBC reporter Robert Peston and Mark Mardell Blogs. (Click image icons below for text)

As everyone big or small exchanges hot air, tragically the oil spill is far from being plugged amid worries that Tropical storm Alex might hit the spill area this week thereby hampering containment operations.

© Gaurav Sharma 2010. Photo Courtesy © BBC

Russian Production Capped Saudi Output in 2009

Russian production of crude oil overtook that of Saudi Arabia in 2009, thereby making the former the world’s leading oil producer, according to BP’s Statistical Review of World Energy.

Russian crude production rose 1.5% year over year, increasing the country's global oil output share to 12.9%. This compared favourably, for the Russians at least, with Saudi Arabia’s decline in market share to 12% of global output, following an annualised production fall of 10.6%. The difference may be marginal, but it gives the Russians some much needed bragging rights.

Proven oil global reserves rose by 700 million barrels to 1.33 trillion barrels in 2009, the report adds. It also notes that after the global financial crisis, oil consumption dipped 1.7% or 1.2 million barrels per day last year; highest decline since 1982.

It does seem a shade ironic that BP should be bringing this data while the Gulf of Mexico oil spill saga carries on. However, to be fair, they have been publishing this particular data-set for years and are among the most reliable sources of oil industry data.

Following publication of the BP report, the International Energy Agency (IEA) revised its 2010 global oil demand forecast upwards by 60,000 barrels a day to 86.4 million barrels, on the basis of above expectation preliminary economic data from the OECD countries.

The new demand forecast suggests annual demand growth is seen up by 1.7 million barrels or 2% year over year from 2009.

© Gaurav Sharma 2010. Photo Courtesy © Adrian R. Gableson

A Bashed-up BP and a Desperate President

Just how much political capital is worth is one tough question? President Obama is playing a strange and desperate game in his repetitive bashing of BP over the Deepwater Horizon oil spill. A clear strategy seems to be emerging – whenever the President feels the heat, he calculates that a rant (sprinkled with real or staged anger) against BP will help. It makes for good political theatre and to a certain extent it plays out well to an American audience. Having trawled the blogosphere as well as key US news reports, I found very little, if any, mention of Transocean or Halliburton or the fact that it was a rig built, operated and managed by Americans.

Obama can’t bash BP and see all of the pain being felt across the Pond. As many commentators on either side of the Atlantic, including the BBC’s Business Editor Robert Peston, have noted nearly 40% of its shares are held in the US. The financial pain will and perhaps already is being felt in Britain – whether we’re talking pension funds or investment trust ISAs. But the Brit’s wallets, Gulf Coastline Residents and wildlife would not be the only ones to suffer.

Long-term investors are not panicking (yet!) according to my investigations. If anything, from what I hear in the City, many opine now would be a “good time to buy BP shares” on the cheap. One mute point is that crude oil is trading in the circa of US$71 – 77 per barrel in recent weeks. It stood at $74-plus levels the last time I checked. It is not as if crude futures are trading at sub $10 levels, and the US is the only market BP operates in?

I would stress that no one denies the Deepwater Horizon Gulf oil spill is an appalling tragedy in more ways than one. However, drilling in the Gulf is crucial for the energy security of the United States. Obama acknowledged just as much in a speech in March prior to this incident. This morning the International Energy Agency (IEA) opined that a long-term impact on future off-shore supply was unlikely in wake of the incident.

“The longer-lasting impact of Deepwater Horizon on U.S. oil supplies may depend on whether operational negligence on the part of companies or regulators, or rather shortcomings in current operating procedures and regulatory structures, were the key cause. The former might suggest a less profound impact on future oil supply than the latter,” the agency said.

Additionally, the IEA made another interesting comment. It said the US government was now belatedly following the steps taken by the UK after the Piper Alpha disaster (1988) - but noted that scores of new offshore fields were developed in the subsequent demand.

In the interim, what’s influencing markets’ sentiment about BP momentarily is that both the US President and the company’s executives sound desperate given the battering they’ve taken in recent weeks. Neither is helping either which is a real shame.

© Gaurav Sharma 2010. Logo Courtesy © BP Plc

Is Brent Winning Battle of the Indices?

Is London’s Brent Crude winning the battle of the indices? David Peniket, President and Chief Operating Officer of Intercontinental Exchange (ICE) Futures Europe, certainly seems to think so.

Speaking at the Reuters Global World Energy Summit on May 27th, Peniket said, “Brent is the global oil benchmark. Brent is used as the price benchmark for around two-thirds of the world's traded oil. It reflects the fundamentals of the oil market on a global basis and we're seeing Brent used as part of the pricing for oil throughout the world.”

Looking ahead, he added that based on “ongoing” growth in Asia, ICE currently expects Asian market participants to use Brent to hedge their risk rather than other benchmarks.

WTI Volumes traded on the NYMEX are far higher than those of Brent on ICE but Peniket said that from 2008 to 2009 Brent grew by 8% in volume terms while WTI grew 2%. Over Q1 2010, Brent grew by 34% while NYMEX WTI grew by 8%.

He declined comment on when he thought ICE Brent volumes may exceed WTI on NYMEX but said that, “Brent is a seaborne crude; it's at a point of the world where crude oil can move around and it can act as a point of arbitrage between different crude grades. Clearly WTI is an important US benchmark but I don't think it reflects the fundamentals of the global oil market in the way that Brent reflects them.”

Elsewhere in the summit, Reuters reported that top bosses of several leading commodities exchange, including Peniket, expressed their common view that speculation has not caused extreme volatility in oil prices and the efforts by state regulators in various markets are unwise to say the least. That will hardly convince politicians seeking capital and a largely sceptical wider public opinion, most notably in the US.

© Gaurav Sharma 2010. Photo Courtesy © Royal Dutch Shell

The Crude Month of May!

The month of May was an extraordinary one for those following crude price fluctuations. Cumulatively speaking, both the major oil futures markets saw the oil price tumble by nearly a fifth since April 30. Over the last fortnight, the price of oil closed below US$70 a barrel for the first time in 2010 driven down by the Greek debt crisis as well as US inventory build-up.

However, between May 26 and 28, the market witnessed a spectacular rebound when the NYMEX contract for July spiked nearly $7 a barrel. Hence, the weekly rise on the back of a healthy 48 hours came in at 5.6% or $3.93 a barrel. Impressive as it may appear, several market commentators I spoke to on the day seemed reluctant to rule out fresh lows over the course of next week (and well into June).

There’s plenty to spook the markets – Greece debt crisis, the Euro’s woes as a result of it, Spain’s recent debt ratings downgrade and US consumer spending. Brent’s premium to NYMEX, which was markedly visible mid-May, also disappeared by Friday.

Predictably, near-term futures contracts are trading at a discount to more-distant contracts. Prices for the most actively traded NYMEX futures contract fell 14.1% or $12.18 in May, the worst month on record since December 2008. Concurrently, over the same period, the front-month Brent crude contract fell 15.4% or $13.42 a barrel, the highest monthly decline since November 2008.

Overall, May was a tough old month for energy futures in general, with perhaps the notable exception of Natural Gas. Expect more of the same in June.

© Gaurav Sharma 2010. Chart Courtesy © Digital Look/BBC

To Drill or Not to Drill Mr. President?

One cannot but help feeling for President Barack Obama. As a candidate and Democrat nominee for the highest American office, Obama was often sceptical about offshore drilling. While his opponents were screaming “Drill Baby Drill,” the then young senator from Illinois was not convinced for his own reasons – some sound, others well – not all that sound.

As President, facing the ground realities and very real concerns about US energy security, Obama made the correct call on March 31 to permit offshore drilling off the US coastline. His opponents claimed the President was not going far enough. Some on his own side claimed he was pandering to the Republicans.

Sadly, before the dust could settle, on April 20th, an environmentally tragic oil spill in the Gulf of Mexico that followed an explosion on an offshore rig, complicated the scenario further. More so executives, from both - oil giant BP which commissioned the rig and Transocean, one of the world’s largest offshore drilling companies, and the rig's operator - did not acquit themselves well in front of American legislators by trying to shift the blame for the incident.

As both companies were trying their hardest to ensure that they do not endear themselves to the American public, the President summed up the emotions, “The American people could not have been impressed with that display, and I certainly wasn’t...There’s enough responsibility to go around, and all parties should be willing to accept it. That includes, by the way, the federal government.”

Trouble is, even though he says oil exploration and drilling must still be part of US energy strategy, the issue has become more political than ever. Following the spill, Obama announced a moratorium on new offshore drilling projects unless rigs have new safeguards to prevent another disaster.

Governor of California Arnold Schwarzenegger said the accident had caused him to drop his support for new offshore drilling in his state. "You turn on the television and see this enormous disaster. You say to yourself, 'Why would we want to take on that kind of risk?” he added.

Across the political divide politicians are asking the very same questions, albeit not for the same reasons. Let us take things into perspective. No one, not least the author of this blog, or people within or outside the oil world including BP (who may have to foot most if not all of the bill to clean up the mess), are suggesting for a moment that what has happened is not terrible and tragic in equal measure.

However, the spill will make it harder for America to follow an energy policy that could actually deliver long-term satisfaction. Some in political circles would try their best to pander to the voting public’s fears for their own gains. Here is a telling fact - before the latest oil spill began on April 20th; the last “big” oil platform leak in the US was 40 years ago. Exxon Valdez incident, though related, cannot be brought into the equation.

So, while any such incident is regrettable to say the least, the figure not only speaks for itself but also indicates that safety standards have improved markedly. However, the figure is something the politicians risk even raising, let alone rely upon to justify offshore drilling and the list does include the President. The oil spill, will be contained and hopefully soon, but US energy policy is currently in a mess and all at sea. Actually it could be both and that in itself is no laughing matter.

© Gaurav Sharma 2010. Photo Courtesy © The White House website

Shell Q1 2010 Profits up 49%

Following on from BP’s bumper profit announcement on Tuesday, Royal Dutch Shell declared a quarterly profits rise of nearly 50% today. In a corporate announcement, the oil giant said profits for the first quarter of the year came in at $4.9 billion; a 49% appreciation on profit noted over the corresponding quarter of 2009.

A marked improvement in the price of crude, despite current wobbles, meant Q1 2010 profit was also well above the $1.2 billion profit figure noted over Q4 2009. In a statement, Shell chief executive Peter Voser said improved first quarter profits were "driven largely by our own actions," which included new explorations and organic production growth.

Looking ahead, Voser said, "So far in 2010, oil prices have remained firm, and demand for petrochemicals has increased, but refining margins, oil products demand and spot gas prices all remain under pressure. Although there are signs of an improving economic outlook, we are not relying on it."

It goes without saying that the average crude oil price of $75 per barrel seen this year has helped Shell as well as its peers, for it is a far cry from an average price of $41 per barrel seen in wake of the global financial crisis. Furthermore, Voser himself said last month that the era of cheap oil was over. Question is how expensive will it be in the short-term?

© Gaurav Sharma 2010. Photo Courtesy © Royal Dutch Shell

Credit Suisse Revises Oil Price Estimates

Credit Suisse revised its oil price estimates this month. On April 15, in a note to investors, the Swiss bank raised its 2010 oil price estimate from US$70 per barrel to $82.90. Concurrently, the 2011 estimate was raised from $70 to $80. CS analysts noted that $80 per barrel provides “a better balance of an oil price which encourages marginal investment in new production, without crimping demand during the economic recovery phase, than (our) previous forecast of $70 per barrel.”

In a related development, four days later, Bank of America Merrill Lynch noted that the spike in oil prices from $80 per barrel to $87 per barrel came along with a rapid deterioration in the term structure of the WTI market. BoA-ML analysts feel that a surge in demand for storage, as spot oil prices rally, is an unusual event. They suggest that further oil price appreciation is unlikely in the short run.

“Rising on-shore stocks around Cushing, more floating storage in the Middle East, additional non-OPEC crude oil and a partial shutdown of European air space (last week) will likely limit further oil price advances near term. We thus maintain our second quarter 2010 average Brent and WTI crude oil price forecast of $83 per barrel. Looking ahead, we remain structurally bullish and still believe in our average $92 per barrel WTI crude oil forecast for the second half of 2010,” they noted further.

Meanwhile quarterly profits at UK oil giant BP more than doubled in year over year terms, according to results published earlier today. Replacement cost profit for January to March 2010 was $5.6 billion, compared with $2.4 billion for the first quarter of 2009. The figure is also up from the $3.45 billion in profit noted over the fourth quarter of 2009.

© Gaurav Sharma 2010. Photo Courtesy © BP Plc

Cairn’s Indian Find Continues to Excite

Cairn Energy’s oilfields in the Indian state of Rajasthan continue to excite. In a trading statement last week, the company raised its estimate of reserves from 175,000 barrels of oil per day to a potential 240,000 barrels of oil. Cairn’s stock rose nearly 11.5% intraday as the markets greeted the news with much gusto as did the Indian media given the oily needs of the country’s burgeoning economy.

Cairn also hopes the opening of a new 590 km pipeline over the second quarter of 2010, which will connect the Mangala oilfield to Salaya port (in Gujarat state), would further fire-up production. Currently, oil from Mangala is transported by road haulage tankers.

In other trading data, Cairn posted an operating profit of $53 million in 2009, up from $11 million in 2008. Its Chief Executive Sir Bill Gammell also sounded optimistic about the company's prospects in Greenland. Cairn is to prospect for oil at four drilling sites in Baffin Bay and estimates these areas could contain over 4.0 billion barrels of oil.

Sir Bill says, "It’ll take stamina, skill and indeed luck to find hydrocarbons in the area." That was probably his philosophy when he bought his company’s Indian assets from Royal Dutch Shell; and it sure has yielded dividends.

In contrasting fortunes, it seems drilling for the crude stuff off the Falkland Islands coast may not be economically feasible after all the argy-bargy between UK and Argentina. The prospect of oil in the region renewed diplomatic spats with the Argentine Government complaining to the UN and launching fresh claims of sovereignty on the Falkland Islands, over which in went to war with the British and lost.

UK promptly rejected the recent claims on basis of the right of self-government of the people of the Islands "underpinned by the principle of self-determination as set out in the UN charter". The people are happy to be British subjects and have been for over a century. All the caterwauling now sounds foolish and premature.

In a corporate announcement in London on Monday, Desire Petroleum – one of the British companies prospecting for oil in the area – said initial results from its Liz 14/19-1 well, in the North Falkland basin prospection zone, showed quantities of oil may be small and of poor quality.

Shares in Desire, recently named among Deloitte’s upstream upstarts, ended Monday trading in London down nearly 50%. Rockhopper Exploration, another company drilling in the region with a 7.5% interest in the Liz well, saw its shares tumble 25.5%. Other regional players also took a hit across the board. Desire Petroleum will need to drill further and deeper than anticipated if it has the will to find better quantities of oil and gas. "It will not be possible to determine the significance of the hydrocarbons encountered and whether the well will need to be drilled deeper, suspended for testing or plugged and abandoned," the company said.

© Gaurav Sharma 2010. Photo Courtesy © Cairn Energy Plc

OPEC Holds Production as Crude Nears $82.50

In line with market expectations, oil cartel OPEC held its current daily production output quota at 24.845 million barrels following the conclusion of its meeting in Vienna.

In a statement the cartel noted that production increases among oil exporting countries that were not part of OPEC would offset rising global demand for oil. Clarifying its stand, OPEC said that although world oil demand is projected to increase marginally during the year, this rise will be more than offset by the expected increase in non-OPEC supply, meaning that 2010 is likely to witness a decline in the demand for OPEC crude oil for the third consecutive year.

The cartel added that the persistently high OECD stock levels (estimated to currently stand at 59-61 days of forward cover i.e. well above their five-year average) indicate that there has been a contra-seasonal stock build in the first quarter 2010 and the overhang in terms of forward cover is expected to continue throughout the year.

Furthermore, market commentators also believe that OPEC member nations already flout their set quota cap. Overall compliance of quotas is thought to be in the circa of 52% to 58% depending on whom you speak to in the City.

OPEC president, Germanico Pinto, said that while an improvement was seen in the oil market outlook in recent months, there was some way to go before the cartel could feel at ease with the situation. In case the markets get unstable, the cartel stands ready, “to swiftly respond to any developments which might place oil market stability in jeopardy.”

Despite the predictability of the announcement, markets responded with a customary spike largely fuelled by a weaker U.S. Dollar. NYMEX light sweet crude was up 77 cents at $82.47 a barrel, nearing the $82.50 barrier. Concurrently, in London Brent crude was up by 72 cents to $81.25 a barrel on ICE Europe. Next meeting of the cartel is set for Oct 14, 2010 in Vienna.

© Gaurav Sharma 2010. Photo Courtesy © Royal Dutch Shell

BP Swoops for (More) Global Assets

Oil major BP has swooped for assets in Brazil, Azerbaijan and U.S. deepwater Gulf of Mexico from Devon Energy for a price tag of $7 billion as well as giving the latter a 50% stake in its Kirby oil sands holdings in Alberta, Canada, for $500 million.

The 50/50 Canadian joint venture, slated to be operated by Devon, will pursue development of the interest. Devon Energy has also committed to fund an additional $150 million in capital costs on BP’s behalf.

Going into further details, BP said the acquired assets include ten exploration blocks in Brazil, seven of which are in the Campos basin, prospects in the U.S. Gulf of Mexico and an interest in the BP-operated Azeri-Chirag-Gunashli (ACG) development in the Caspian Sea, Azerbaijan.

Apart from diversifying in general, the move was as much about strengthening the British oil major’s foothold in the Gulf of Mexico where it has been a key player for decades. BP will now gain a high quality portfolio in the Gulf with interests in some 240 leases, with a particular focus on the emerging Paleogene play in the ultra-deepwater.

The addition of Devon Energy’s 30% interest in the major Paleogene discovery Kaskida will give BP a 100% interest in the project. The assets also include interests in four producing oil fields: Zia, Magnolia, Merganser, and Nansen. Market commentators have already given the deal a thumbs-up.

Furthermore, Andy Inglis, BP's chief executive of Exploration and Production, told the media that BP’s entry into Brazil will add a major position in another attractive deepwater basin. "Together with the additional new access in the Gulf of Mexico, it further underlines our global position as the leading deepwater international oil company," he added.

BP also hopes to count on Devon Energy's first-hand experience in Canada. "Devon is an experienced operator in the Canadian oil sands with a proven track record of in situ development and production. We expect this transaction will accelerate the development of the Kirby assets and, through the associated crude off-take agreement, provide a secure source of Canadian heavy oil for our advantaged Whiting refinery," Inglis noted.

© Gaurav Sharma 2010. Logo Courtesy © BP Plc

Adios Cheap Oil, Says Shell's CEO

As the crude oil price lurks around its 52-week high of $83.25 a barrel, one cannot but help thinking about what CEO of Royal Dutch Shell Peter Voser said earlier this month. Speaking at the Wall Street Journal’s ECO:nomics conference in California on March 4, Voser told delegates, "I think what is dead is cheap oil. There is sufficient oil around but producers will have to spend more to get it. And I think you'll see that in the end price for consumers."

Debunking the “Peak Oil” hypothesis, Voser said that by 2050 around 40% of cars worldwide will be electric leaving some two-thirds still running on oil. “We will need conventional oil for the foreseeable future,” he added.

Oil futures gained over 2% last week, on the back of positive U.S. jobs data and healthy market feedback on Chinese and Indian economic growth. According to an investors note sent out to clients, analysts at Commerzbank AG believe the price of oil could exceed the current trading circa of $70 to $82 a barrel.

Earlier today, the crude contract for April delivery rose to an intraday high of $82.47 a barrel on the NYMEX before being tempered by a rising U.S. dollar, with the ongoing Greek debt tragedy continuing to weigh on the Euro. At 17:15 GMT, NYMEX crude contract for April delivery was up 10 cents or 0.12% at $81.51 a barrel. Concurrently, London Brent crude contract was trading at $80.35 up 11 cents or 0.14%.

Classic problem for forecasters is that direction of the economy and currency fluctuation aside, ETFs have more or less converted investing in commodities into a pseudo asset class. Hence, retail investors could de facto bet on commodities consumption patterns of emerging economies by investing (or divesting) in commodities, especially oil, via ETFs.

Oil has always been the vanguard of the commodities bubble. Excluding, London and Singapore markets, in 2003, ratio of paper barrels traded to physical barrels traded on NYMEX stood at 6:1. By 2008, the figure had risen to 19:1 and continues to rise, according to industry sources. Now imagine adding London and Singapore markets to the ratios?

It is a no-brainer that anyone who holds a paper barrel hopes to profit from it and few have any intention whatsoever of ever taking an actual delivery of oil. I feel it is prudent to mention that I am not joining the “Hate Speculators Club”. While supply and demand scenarios should (and in most cases do) dictate market movements, there’s more than one reason why cheap oil’s dead.

© Gaurav Sharma 2010. Photo Courtesy © Royal Dutch Shell

Talking of Moses & Geology in the Same Sentence?

Could a study of religion and geology come together and yield one of the most precious natural resources? Yes, say the founders of two rather unique firms prospecting for the crude stuff in Israel. They are Zion Oil – a Dallas, Texas-based, NASDAQ (Global market) listed company and Givot Olam Oil Ltd which is listed on the Tel Aviv Stock Exchange (TASE).

The founders of both firms believe visions in science and religious epiphanies can come together. In case of Givot Olam, (meaning “everlasting hills” in Hebrew), its founder Tovia Luskin has been prospecting for oil in Israel since 1994 with a degree of success. Corporate records suggest he found inspiration in Chapter 33 of the Book of Deuteronomy, in which Moses, after having guided the tribes of Israel to the Promised Land, leaves each tribe with a blessing.

Of these, Ephraim and Manasseh, two tribes thought to have descended from Joseph, were blessed by Moses with the “precious fruits of the deep lying beneath the ancient mountains and of the everlasting hills.” Givot Olam was founded on the premise that the words pointed to an oil trap in Palmyra rift region in Israel.

The area is thought to be in the biblical territories of Ephraim and Manasseh, or rather sandwiched in the patch between Tel Aviv and Haifa. In a land far, far away, known by some as the USA, a born again Catholic from Texas - John Brown had a similar vision to Luskin's, pointing to nearly the same crude prospection zone.

Both men and the companies they subsequently founded spent years raising capital and literally digging up geological evidence to back their respective religious epiphanies. Seismic studies confirm some of their conjecture and crude stuff has indeed been found; albeit not (yet) in meaningful quantities. It is not that Israel has no oil and gas wells – they do exist but are very few and far between.

Further prospection has been hampered by geopolitics as major oil corporations with exposure elsewhere in the Middle East, have not touched Israel perhaps for fear of antagonising their Arab partners. Zion Oil and Givot Olam have no such concerns. If both companies strike oil in meaningful quantities, the discoveries could make Israel partly self-reliant.

According to the country’s Ministry of National Infrastructures, Israel currently imports 90% of its oil from Russia and FSU nations. The country consumes about 80 million barrels of oil annually or 270,100 barrels per day according to latest industry estimates. Only time will tell if Moses’ blessing came in the form of black gold. Regardless of the ultimate results, the endeavours of team(s) Brown and Luskin cannot be faulted.

© Gaurav Sharma 2010. Photo Courtesy © Zion Oil, Dallas, USA

Deloitte’s Take on UK Upstream Independents

A report into activities of UK upstream independent companies published by consulting firm Deloitte this morning makes-up for quite interesting reading. Its ranking of 25 leading independents has the usual suspects – Tullow Oil and Cairn Energy atop, as first and second. However, movements elsewhere in the table narrate a story of their own.

Desire Petroleum Plc, Borders & Southern Petroleum Plc and Rockhopper Exploration Plc rose in market value rankings for London-listed independent production companies as they hold exploration rights near the Falkland Islands. According to the report, Desire, which started exploratory drilling in Falkland Island Waters for the first time since 1998, rose by 10 places to 14th place, Borders & Southern rose 17 places to break into the top 25 at 15th and Rockhopper Exploration Plc rose 23 places to 26 – just outside the top 25.

Desire’s Liz prospection field has estimated resources of between 40 million and 800 million barrels, according to published reports. Meanwhile, Falkland Oil and Gas Plc, another operator, has estimated resources of between 380 million and 2.9 billion barrels at its Tora prospection, according to its Q4 documents.

Argentina and UK went to war over the Falkland Islands in 1982 after the former invaded. UK forces wrested back control of the islands, held by it since 1833, after a week long war that killed 649 Argentine and 255 British service personnel. The Islands have always be a bone of contention between the two countries. The prospect of oil in the region has renewed diplomatic spats with the Argentines complaining to the UN and launching fresh claims of sovereignty.

UK has rejected the claims on the basis of the right of self-government of the people of the Islands "underpinned by the principle of self-determination as set out in the UN charter". Market commentators feel the fresh round of diplomatic salvos are as much about oil as they are about politics. A widely held belief that fresh conflict was highly unlikely could precipitate in independent operators in the region being taken over by oil majors.

Ian Sperling-Tyler, co-head of oil and gas corporate finance at Deloitte, raised some very important points while doing his press rounds. In separate interviews with Bloomberg and CNBC Europe, he opined that the wider market would have to wait and see what effect political risk will have on activity levels in the Falklands. However, he thinks it is highly plausible that operators in the Falklands were not big enough to monetise those assets on their own.

Hence, they could very well be acquired by a bigger company. And well the independents are growing bigger by the month too. The top two in the league table - Tullow Oil, which is developing reserves in Uganda, and Cairn Energy, which focuses on India, accounted for 60% of the market capitalisation of the top 25 companies for 2009, the report shows (click on image).

As for the diplomatic row between the two nations; it’s nothing more than a bit of argy-bargy with an oily dimension and is highly likely to stay there. Meanwhile, the BBC reports that Spanish oil giant Repsol might be about to join the exploration party from the Argentinean side.

© Gaurav Sharma 2010. Table Scan © Deloitte LLP UK

Crude Price Seen Factoring In Survey Data

Crude oil futures rose over 3% on average in week over week terms and for a change that is not chiefly down to a stand-alone argument that black gold is higher because the commodity is cheaper in U.S. Dollar terms.

To be fair, the 5-day cycle I examine began with the usual market conjecture over the position of the dollar. However, survey evidence indicates that manufacturing activity is picking-up. This morning, the Philadelphia Federal Reserve said its index of manufacturing activity rose to 17.6 in February from 15.2 in January; a sixth consecutive monthly rise. Across the pond, UK’s Society of Motor Manufacturers and Traders (SMMT) reported its biggest monthly increase in auto production in year over year terms since May 1976. It said 101,190 cars were produced in January, up from 85,316 in December.

Trawling back the economic calendar, manufacturing purchasing managers’ indices (PMI) on either side of the pond are positive, especially the Eurozone PMI released on February 1st. It came in at 52.4 for January, versus 51.6 at the end of 2009; the highest level in two years. Admittedly, difference between the zone’s healthiest and weakest economies is widening, but overall picture is improving. Furthermore, Indian and Chinese economic activity remains buoyant. Yet, market commentators correctly opine that global economy is not quite out of the woods yet. From a British standpoint, Kate Barker, a member of the Bank of England’s rate setting monetary policy committee, summed up the City of London’s fears best in an interview with the Belfast Newsletter.

“Do I think that it’s possible we (in the UK) will have another quarter of negative production at some point? I do think it’s possible and I think the recovery will be quite hesitant but I wouldn’t necessarily describe that as a double dip,” Baker said.

That argument could be used for a number of OECD economies which have emerged from the recession over the last two quarters. Not to mention that Spain is yet to come out of a recession. David Moore, Chief Commodities Strategist at Commonwealth Bank of Australia, sees a gradual rebound in economic activity as the recovery takes hold which would then reflect in crude oil consumption patterns supporting crude prices to the upside.

Energy markets have always had to contend with volatility and that will not change. As Greece’s debt weighs on the Euro, the Dollar is seen strengthening which would in turn have a bearing upon crude prices. Moore opines that had the Dollar not strengthened against the Euro, crude oil price seen this week would have been even higher than current levels.

U.S. Energy Information Administration (EIA) and American Petroleum Institute (API) data did not really temper this morning’s climb. A few hours ago, the EIA said U.S. crude inventories rose by 3.1 million barrels over the week ending February 12, while the API said late on Wednesday that crude supplies declined by 63,000 barrels last week. However, it also reported that gasoline stocks rose by 1.4 million barrels over the corresponding period.

Following the EIA data, NYMEX crude contract for March settlement stood at $78.15 up 84 cents or 1.09% at 17:00 GMT, trading in the circa of 76.32 to 78.71. Across the pond, London Brent Crude’s April settlement contract stood at $76.03 up 66 cents or 0.87% trading in the circa of $75.27 to $77.65. The Dollar’s strength remains a factor, but there are others to consider too.

© Gaurav Sharma 2010. Photo Courtesy © BP Plc

Et tu Branson? Then let's debate “Peak Oil”

One must confess that until recently all talk of “Peak Oil” theories was confined to academics, geologists, the odd government white paper or publicity literature of environmental groups worried about a perceived global addiction to oil. But these days “Peak Oil” talk is all the rage. In December, IEA belatedly joined the debate. North Sea drillers voiced their supply concerns, difficulties and increasing expenses faced while prospecting for and extracting oil in the area. The Rig building lobby has given its take too.

Now their ranks have been joined by the inimitable Sir Richard Branson. Furthermore, the Virgin Group boss has brought some friends along too. The group, rather seriously titled as UK Industry Taskforce on Peak Oil and Energy Security (ITPOES), includes Arup (Engineering), Foster and Partners (Architects), Scottish and Southern Energy, Solar Century and Stagecoach (a British transport firm) along with Virgin Group.

Launching ITPOES’ second report on the subject at the Royal Society in London on February 10, Sir Richard said, “If somebody had been able to warn the world five years before the credit crunch, the credit crunch could have been avoided. The same thing could be said for the oil crunch. We suggest there should be a workforce for government and industry to work together on addressing this problem.”

He wants the world in general and UK in particular to move from coal and oil to gas and nuclear. “We need to move our cars from oil-consuming cars to electric cars and clean-fuel cars. The government should say, 'For 2020 there should be no more oil cars running in this country and for 2015 no new cars can be sold using oil,' just to force people to move over to clean energy,” he added.

Away from the Branson babble, the group believes a “Peak Oil” scenario may potentially occur as early as 2015, with oil production levels at 95 million barrels per day. According to published statistics, including both OPEC and non-OPEC output, 85 million barrels per day were produced in 2008.

The British government issued a swift response. A spokesperson for the Department of Energy and Climate Change (DECC) denied that it is ignoring the issue but said it was unsure as to when Peak Oil may occur and was taking action to mitigate those risks.

In more ways than one, I can feel Branson’s pain. The assembled party, including all the scribes, did not hear how much worry volatile oil prices were probably causing Virgin Atlantic and Virgin Trains. Since they are not publicly listed companies it is rather hard to get an accurate picture. However, we get the idea from their industry peers.

Putting a cynical hat on, it could be dismissed as yet another publicity stunt by the Virgin boss. However, one statement of his, was quite on the spot and got nods of approvals from market commentators. Branson suggested that the credit crisis stemmed a trend of rising oil prices and delayed the inevitable spike. Before the crisis took hold, crude oil price rose spectacularly to $147 per barrel in July 2008. At one point, with the fledgling U.S. Dollar, there was talk of prices rising as high as $200 per barrel. Then the credit crisis took hold and along with a recession driven drop in demand the crude price plummeted.

Subsequently, it is also worth noting that 2009 ended with just the sort of worries about the crude oil price spikes that we saw in 2008. I suspect 2010 will end in a similar fashion. So Branson and his ITPOES have a point. Those who have debated “Peak Oil” without receiving any concrete publicity or tangible answers will now hope that the subject becomes mainstream. It is a long journey and the Virgin boss would be a rather interesting companion.

© Gaurav Sharma 2010. Photo Courtesy © Virgin Atlantic

Oil Giants' Crude Quarter has a Common Theme

The last quarter was very ‘crude’ for the oil industry’s books. Fourth quarter results of three oil majors – namely Royal Dutch Shell, BP and Exxon Mobil make-up for some interesting reading with one common theme. Beginning with Exxon Mobil, the American oil behemoth reported on February 1st, 2010 that its fourth quarter profit dipped 23%. The decline meant it made a net profit of $6.05 billion over Q4 2009, compared to a $7.82 billion profit noted over the corresponding period last year. For the whole of 2009, Exxon's profit stood at $19.3 billion, less than half of what it made in 2008, and the lowest in seven years.

Then on February 2nd, BP said its Q4 2009 profits were up 33% to $3.45 billion. However, its annual profit was down 45% with the replacement cost profit at $13.96 billion compared to $25.59 billion in 2008. Two days later, on February 4th, Royal Dutch Shell’s profits for Q4 2009 came in at $1.2 billion, down by a whopping 75% from the $4.8 billion the Anglo-Dutch oil giant made over the corresponding quarter last year.

For the whole of 2009, Shell made a dwarfed $9.8 billion in profits, compared to $31.4 billion it made in profits over 2008. All three oil majors found common ground in suggesting that a global slump in demand courtesy of the economic climate and a dip in oil prices were to be blamed for their relatively poor set(s) of quarterly results. All three, in addition to many of their industry peers, added that the outlook for 2010 was uncertain.

In the midst of all this, OPEC secretary general Abdalla Salem El-Badri told the BBC that its members’ compliance with set production targets fell to 55-56% in January compared to 80% noted over the corresponding month last year. He described the development as "worrying".

El-Badri further said, "The risk is you see a lot of oil in the market and no one is buying it. Then the price will come down." At its last meeting in Angola on December 22nd (2009), OPEC held output at 24.84 million barrels per day.

OPEC and oil companies seem to bring up the word “uncertain” with some degree of conviction these days, more so because forecasting consumption patterns is proving to be mighty hard. Chinese and Indian consumption patterns and sluggish recovery in the West complicates drawing an overall global picture even further.

As for the prevailing price of black gold, NYMEX crude contract for March settlement was up 79 cents, or 1.10% trading at $72.67 a barrel and in the circa of $71.32 to $73.04 per barrel at 15:04 GMT. The corresponding Brent crude contract was up 87 cents, or 1.27 %, to $69.98 a barrel, trading in the circa of $69.61 to $71.30 in London. Overall, it’s still a far cry from a $147 per barrel price of July 2008. Many wonder for how long, but for very different reasons.

© Gaurav Sharma 2010. Photo Courtesy © Cairn Energy Plc

Rig Building Industry Remains in a State of Flux

Post-recession, if one may use the expression, the global rig building industry remains in a state of flux. Often oil market commentators give due attention to global rig counts as a way of gauging the prosperity of oil business. The simple conjecture is that when oil price is high, it makes it worthwhile for oil companies to order jack-ups and semi-submersibles in greater numbers for usage at difficult offshore extraction spots.

The latest overall Baker-Hughes rig count, suggests that in year over year terms, 1282 rigs were in operation in the U.S., 233 fewer than the corresponding week last year. Over a comparable period, Canada saw 495 rigs in operation, up by 69. Internationally, excluding U.S. and Canada, 1024 rigs were in operation, down 54 using December 2009 as a cut-off point.

The stated figures are by no means excellent. However, they are not catastrophic either according to those in the rig building business. The first real rig building boom was seen in the early 1980s. Subsequently, American shipyards as well as their European counterparts lost ground of sorts when demand flattened.

Manufacturing sector analysts partly attribute this to the average age of a jack-up being 20 years, which in truth, most oil firms extend by a further two years. Hence, when the next boom arrived in 2001, Asian players seized the initiative. Of particular significance is the global emergence of two Singapore-based companies – SembCorp and Keppel Offshore & Marine. In between 2002 and 2007, both firms became the world’s leading suppliers of rigs.

As oil prices soared over 2007-08, touching $147 a barrel at one point, both saw their collective order books swell to $8 billion. Apart from being listed companies whose share prices were soaring, direct investment from the Singaporean Government, which has a stake in both, undoubtedly boosted confidence.

Inevitably, the rig count took a beating when the oil price plummeted. Prior to that, Hurricanes Katrina and Rita (2005) took five rigs offline completely and damaged several others. However, that proved to be a different sort of a growth trigger. To begin with, both hurricanes added to order books of rig builders. Furthermore, as the U.S. economy began to take a beating in 2007, drilling companies signed long-term deals to send rigs overseas. It meant the Gulf of Mexico, widely held as the birthplace of offshore drilling, ceased to dictate contract terms benchmarks for drilling equipment.

Emergence of several offshore zones off the coasts of Africa, Middle East, Indian subcontinent and China along with a partial rebound in crude prices has stabilised rig building activity, admittedly at a level below that of fiscal year 2005-06. Rig builders worldwide had 91 major offshore rig manufacturing contracts in 2005-06, up from less than 10 in 2002-03, according to ODS-Petrodata, a research and analysis firm.

Since then, the recession and fluctuation in oil prices has made building trends forecasting extremely tricky. ODS-Petrodata’s latest research reveals that 577 of 751 mobile offshore drilling units were under contract worldwide with global offshore rig fleet utilisation at 76.8%; the highest level since July 2009. Speaking in November 2009, at the IADC Annual General Meeting in Miami, Florida, Tom Kellock, head of consulting and research, ODS-Petrodata, highlighted some of the difficulties faced by forecasters and rig builders alike.

He noted that over 100 jack-ups were idle at the time, i.e. assembled but not online. Another 60 or more were nearing completion and Kellock felt that most but not all will enter the market. Furthermore, ODS-Petrodata had seen a trend of rising gas prices and falling jack-up utilisation from 2002 into 2008.

“No longer do we have the close correlation between gasoline prices and jack-up activity. And the only obvious explanation and the one I would support is that, this is such a mature market, the prospects are just not there anymore. Analysts and even some contractors say, well, when gas prices get back to $5, $6 or $7, (at U.S pumps/per gallon) it’s all going to be OK. I really have difficulty with that,” Kellock told IADC delegates.

“I think industry needs to move on from shallow-water Gulf of Mexico, quite honestly.…This is not where people are going if they have a choice these days to look for oil and gas,” he concluded. Pretty much the same arguments are being put forward to explain the difficulties faced by North Sea as an offshore extraction zone.

Looking ahead, ODS-Petrodata forecasts a supply of 506 jack-ups worldwide by the end of 2015, assuming no additional new-builds or attrition. Its middle of the road forecast, based on gradually increasing oil and gas prices, puts jack-up demand at 334 rigs by end-2015, while the conservative forecast is set at 282 units.

Depending on the type of rigs being ordered, costs could range from US$200 million to $900 million. Hire-purchase and subletting rates of oil rigs, which were seen stabilising in 2008, are likely to remain stable over the next three years before a possible shortage develops. The silver lining is that offshore opportunities in China and India are thought to be growing rapidly. The industry also hopes that Petrobras’ prospecting and subsequent extraction off the coast of Brazil would provide a much needed boost.

While many players fret over pragmatically tight market forecasts, SembCorp and Keppel Offshore & Marine have shown the way by diversifying heavily since 2005. SembCorp builds as well as repairs shipping liners. Keppel has real estate and infrastructure divisions. Both Singaporean firms have expanded overseas and currently operate not just rig-building yards but also ship-repair yards around the world.

© Gaurav Sharma 2010. Photo Courtesy © Cairn Energy Plc