Oil rich Abu Dhabi’s 'benign' shadow over Dubai

The Oilholic thinks there is certain poignancy about a street sign in the Dubai Marina area. The sign (pictured left) points to different directions for Abu Dhabi and Dubai city centre – while the macroeconomic direction for both Emirates is anything but following on from the 2008-09 domestic real estate crisis. As if with perfect metaphorical symmetry, the sign’s current backdrop is coloured by construction conglomerate EMAAR’s flags, the odd logo of another construction conglomerate Nakheel and ongoing building work; some of which is a little ‘behind schedule’ for good reason.

 

In March this year, the UAE’s oil production came in at 2.7 million barrels per day (bpd) with attempts on track to increase it to 3 million bpd. Of this, Dubai’s production on a standalone basis has never accounted for more than 70,000 bpd at any given point excluding barrels of oil equivalent in offshore gas findings. It is Abu Dhabi that holds 95% of proven oil reserves in the UAE.

 

With Dubai’s oil reserves set to be exhausted within a few decades bar the emergence of a significant find, a decision was taken in the late 1990s, by the powers that be, to diversify towards finance, tourism and manufacturing. The decision made sense but the approach was not sensible. By 2008, construction, real estate, trade and finance and not oil & gas had become the biggest contributors to Dubai’s economy.

 

Dubai was to be the go to capital market of the Middle East, so ran the spiel. Along came the construction of some of the tallest skyscrapers in the world such as – the Burj Dubai (renamed Burj Khalifa later for a reason), Palm Islands, Emirates Towers and the Burj Al Arab hotel. However, the global financial crisis that was to follow laid bare the fact that some of tall buildings downtown were built (or about to be built) on a mountain of debt covered by a cone of opacity. A global credit squeeze hit debt laden Dubai where it hurt – its brash, inflated property market.

 

The Oilholic distinctly remembers a wire flash from December 2008 when Mohammed al-Abbar, CEO of Emaar, told the world’s scribes that his company held US$350 billion in real estate assets and US$70 billion in credits. Concurrently, industry peer Nakheel declared US$16 billion in debts.

 

As speculators ditched the Dubai real estate market, property values tumbled, construction stalled and unemployment spiked. Inevitably, both Nakheel and Emaar were left with a pile of defunct assets, angry investors, homeowners defaulting and many dodging service charges. One contact recollects an instance where a fresh development lost 63% of its marked pre-crisis value. While Emaar was holding firm, Nakheel owned by Dubai World was imploding.

 

Absence of organic growth and the end of a debt fuelled boom had Dubai staring into the abyss. With the credit rating of the entire UAE being threatened, a miffed white knight came along on December 14, 2009 in the shape of Abu Dhabi. The oil rich emirate had decided to bailout its beleaguered neighbour on the day to the tune of US$10 billion.

 

Not only that, Abu Dhabi then went on to provide Dubai with US$25 billion in the shape of buying Dubai bonds. Local independent commentators say the actual figure may never be known but a 2010 calculated guess puts Dubai’s debt to Abu Dhabi in the range of US$80 to US$95 billion. When asking for an official confirmation, yours truly was told to “enjoy the sunshine!”

 

However, a most polite spokesperson on the Abu Dhabi side says it took remedial action needed at the time in good faith and to this day the UAE central bank is firmly committed to domestic banking institutions exposed to the real estate crisis of 2009, bringing about institutional reforms and learning from it.

 

Yet, transparency never comes easy for Dubai even after facing a financial storm it never envisaged. In March this year, Richard Fox, head of Middle East and Africa sovereigns’ ratings at Fitch, summed it up best while speaking in London. “Ratings agencies have no plans to give Dubai a credit rating because its government has not asked to be rated, and the lack of transparency would make a credit assessment difficult,” he said.

 

Three years later both Nakheel and Emaar are thought to be in a much happier place according to local media outlets. This is particularly true of Emaar which builds its domestic projects on land that is provided free in the main and uses migrant labour on little more than US$8 to US$10 a day based on anecdotal evidence and the Oilholic’s own findings! Despite recent attempts by the government to rectify the manner in which Dubai’s property market is hitherto disconnected from conventional market ground rules, not much has changed.

 

One thing is certain, Dubai will never be disconnected from its ‘benevolent’ oil rich neighbour Abu Dhabi. Some complain that Abu Dhabi’s crude help must have come with strings attached; something which was strenuously denied by both sides in 2009.

The Oilholic thinks strings weren’t attached; Abu Dhabi quite simply now holds most of the strings! So it was fitting that on January 4, 2010, when Emaar inaugurated the world tallest building (pictured right) – its name was promptly changed from Burj Dubai to Burj Khalifa in honour of Sheikh Khalifa bin Zayed bin Sultan Al Nahyan, the Emir of Abu Dhabi.

 

For oil producing nations, the challenge has always been to establish a viable non-oil sector which counters the impact of a resource driven windfall on other facets of the economy. Dubai had every chance, not to mention a more pressing need than its neighbour to do this and messed it up spectacularly. Au contraire, Abu Dhabi has managed the challenge rather well as it seems.

 

For an Emirate which holds 9% of global proven oil reserves and 95% of that of the UAE, Sheikh Khalifa’s Abu Dhabi sees around 44% of its revenues come in from non-oil sources. Abu Dhabi Investment Authority, the Emirate’s sovereign wealth fund rumoured to have nearly U$900 billion in managed assets, leads the way.

 

Ratings agencies may grumble about Dubai’s opacity but all three major ones do rate Abu Dhabi. Fitch and Standard & Poor's rate Abu Dhabi 'AA' while Moody's rates it 'Aa2'. Sheikh Khalifa is actively looking to increase the share of non-oil revenue in Abu Dhabi to 60% within this decade if not sooner.

So maybe the several streets signs in Dubai pointing to the route to Abu Dhabi and the imposing Burj Khalifa (a structure that’s hard to miss from practically most parts of Dubai) have a metaphorical message. And probably there is envy and gratitude in equal measure. Cosmopolitan Dubai is now increasing reliant on black gold dust from Abu Dhabi. That’s all for the moment folks; more from Dubai later! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo 1: A street sign on the Dubai Marina, UAE. Photo 2: Burj Khalifa, Dubai, UAE © Gaurav Sharma 2012.

Talking global 'crude' capex in the Emirates

It is good to be back in the Emirate of Dubai to catch-up with old friends and make yet newer ones! In the scorching heat of 41 C, sitting inside an English Pub (sigh…someone tell these guys yours truly just got off the plane from England) at a hotel right next to ENOC’s Bur Dubai office, new research of a ‘crude’ nature has thrown-up plenty of talking points here.

 

It seems that a report published this morning by business intelligence provider GlobalData projects capital expenditure in the global oil & gas business to come in at US$1.039 trillion by the end of December 2012; a rise of 13.4% on an annualised basis. However, no prizes for guessing that E&P activity would be the primary driver.

 

GlobalData predicts Middle Eastern and African capital spend would be in the region of US$229.6 billion. The figure has been met with nods of approval here in Dubai though one contact of the Oilholic’s (at an advisory firm) reckons the figure is on the conservative side and could be exceeded by a billion or two.

 

North America is likely to witness the highest capex with a US$254.3 billion spend; a 24.5% share of the 2012 figure. GlobalData reckons that renewed market confidence is a direct consequence of the increasing number of oil & gas discoveries (which stood at 242 over 2011 alone), high (or rather spiky) oil prices and emerging and cost effective drilling technologies making deep offshore reserves technically and financially viable.

 

So the ‘All hail shale brigade’ and ‘shale gale’ stateside along with Canadian oil sands would be the big contributors to the total North American spend. The Asia Pacific region could pretty much spend in the same region with a capex of US$253.1 billion.

 

However another facet of the GlobalData report fails to surprise punters at the table wherein it notes that National Oil Companies (NOCs) will lead the way in terms of capex. Though there were some “Hear, Hear(s)” from somewhere. (We try not to name names here of loyal NOC employees, especially if they’ve just walked in from a building next door!)

 

Only thing is, while the Middle Eastern and Chinese NOCs are in the predictable data mix, GlobalData notes that for the 2012–2016 period it is Petrobras which ranks first for capex globally amongst NOCs. As a footnote, ExxonMobil will be atop the IOC list. That’s all for the moment folks! More from Dubai later. Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo: View of city skyline from Jumeriah beach, Dubai, UAE © Gaurav Sharma 2012.

The drivers, the forecasts & the ‘crude’ mood

At times wild swings in the crude market’s mood do not reflect oil supply and demand fundamentals. The fundamentals, barring a geopolitical mishap on a global scale, alter gradually unlike the volatile market sentiment. However, for most parts of Q2 and now Q3 this year, both have seemingly conspired in tandem to take the world’s crude benchmarks for a spike and dive ride.

 

Supply side analysts have had as much food for thought as those geopolitical observers overtly keen to factor in an instability risk premium in the oil price or macroeconomists expressing bearish sentiments courtesy dismal economic data from various crude consuming jurisdictions. For once, no one is wrong.

 

A Brent price nearing US$130 per barrel in mid-March (on the back of Iranian threats to close the Strait of Hormuz) plummeted to under US$90 by late June (following fears of an economic slowdown in China and India affecting consumption patterns). All the while, increasing volumes of Libyan oil was coming back on the crude market and the Saudis, in no mood to compromise at OPEC, were pumping more and more.

 

Then early in July, as the markets were digesting the highest Saudi production rate for nearly three decades, all the talk of Israel attacking Iran resurfaced while EU sanctions against the latter came into place. It also turned out that Chinese demand for the crude stuff was actually up by just under 3% for the first six months of 2012 on an annualised basis. Soon enough, Brent was again above the US$100 threshold (see graph on the right, click to enlarge).

 

Fast forward to the present date and the Syrian situation bears all the hallmarks of spilling over to the wider region. As the West led by the US and UK helps rebels opposed to President Bashar al-Assad, Russia is seen helping the incumbent; not least via a recent announcement concerning exchange of refined oil products from Russia for Syrian crude oil exports desperately needed by the latter.

 

A spread of hostilities to Lebanon, Jordan, Turkey and Iraq could complicate matters with the impact already having been seen in the bombing of Iraq-Turkey oil pipeline. Additionally, anecdotal evidence suggests the Saudis are now turning the taps down a bit in a bid to prop up the oil price and it appears to be working. The Oilholic will be probing this in detail on visit to the Middle East next week.

 

While abysmal economic data from the Old Continent may not provide fuel – no pun intended – to bullish trends, one key component of EU sanctions against Iran most certainly will. A spokesperson told the Oilholic that tankers insured by companies operating in EU jurisdictions will lose their coverage if they continue to carry Iranian oil from July.

 

Since 90% of the world's tanker fleet – including those behemoths called ‘supertankers’ passing through dangerous Gulf of Aden – is insured in Europe, the measure could take out between 0.8 and 1.1 million barrels per day (bpd) of Iranian oil from Q3 onwards according an Istanbul-based contact in the shipping business.

 

In fact OPEC’s output dipped by 70,000 bpd in month over month terms to 31.4 million bpd in July on the back of a 350,000 bpd drop in June over May. No prizes for guessing that of the 420,000 bpd production dip from May to July – 350,000 bpd loss is a direct result of the Iranian squeeze. Although Tehran claims it is a deliberate ploy.

With an average forecast of a rise in consumption by 1 million bpd over 2012 based on statements of various agencies and independent analysts, price spikes are inevitable despite a dire economic climate in Europe or the OECD in general.

 

Cast aside rubbish Iranian rhetoric and throw in momentary geopolitical supply setbacks like the odd Nigerian flare-up, a refinery fire in California or the growing number of attacks on pipeline infrastructure in Columbia. All of these examples have the potential to temporarily upset the apple cart if supply is tight.

 

“Furthermore, traders are wising up to fact that a price nudge upwards these days is contingent upon non-OECD consumption patterns and they hedge their bets accordingly. WTI aside, most global benchmarks look towards the motorist in Shanghai more than his counterpart in San Francisco these days,” says one industry insider of his peers.

 

When the Oilholic last checked at 1215 BST on August 23, the ICE Brent October contract due for expiry on September 13 was trading at US$115.95 while the NYMEX WTI was at US$97.81. It is highly likely that ICE Brent forward futures contracts for the remaining months of the year will end-up closing above US$110 per barrel, and almost certainly in three figures. Nonetheless, prepare for a rocky ride over Q4!

 

Moving away from pricing of the crude stuff, it seems the shutdown of Penglai 19-3 oilfield by the Chinese government in wake of an oil spill last year has hit CNOOC’s output and profits. According to a recent statement issued at Hong Kong Stock Exchange, CNOOC saw its H1 2012 output fall 4.6% on an annualised basis owing to Penglai 19-3 in which it holds 51% of the participating interest for the development and production phase. ConocoPhillips China Inc (COPC) is the junior partner in the venture.

 

This meant H1 2012 net income was down by 19% on an annualised basis from Yuan 39.34 billion to Yuan 31.87 billion (US$5 billion) according to Chief Executive Li Fanrong. CNOOC's US$15.1 billion takeover of Canada’s Nexen, a move which could have massive implications for the North Sea, is awaiting regulatory approval from Ottawa.

 

Away from the “third largest” of the big trio of rapidly expanding Chinese oil companies to a bit of good news, however temporary, for refiners either side of the pond. That’s if you are to believe investment bank UBS and consultancy Wood Mackenzie. UBS believes that for better parts of H1 2012, especially May and June, refining margins were at near “windfall levels” as the price of the crude stuff dipped in double-digit percentiles (25% at one point in the summer) while distillate prices held-up.

 

Wood Mackenzie also adds that given the refiners’ crude raw material was priced lower but petrol, diesel and other distillates remained pricey meant moderately complex refiners in northwest Europe made a profit of US$6.40 per barrel of processed light low sulphur Brent crude in June, compared with the average profit of 10 cents per barrel last year.

 

The June margin for medium, high sulphur Russian Urals crude was a profit of US$13.10 per barrel compared with the 2011 average of US$8.70, the consultancy adds. American refiners had a bit of respite as well over May and June. Having extensively researched refining investment and infrastructure for over two years, the Oilholic is in complete agreement with Société Générale analyst Mike Wittner that such margins are not going to last (see graph above, click to enlarge).

 

To begin with the French investment bank and most in the City expect global refinery runs to drop shortly and sharply to -1.3 million bpd in September versus August and -0.8 million bpd in October versus September. Société Générale also remains neutral on refining margins and expects them to weaken on the US Gulf Coast, Rotterdam and the Mediterranean but strengthen in Singapore. Yours truly will find out more in the Middle East next week. That’s all for the moment from London folks! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo 1: Russian oil pump jacks © Lukoil. Graph 1: Comparison of world crude oil benchmarks (Source: ICE, NYMEX, SG). Graph 2: World cracking margins (US$/barrel 5 days m.a) © SG Cross Asset Research, August 2012.

The South Sudan question & other crude matters

Where South Sudan fits in the oil world has troubled ‘crudely’ inclined geopolitical analysts for some time now. The country celebrated the first anniversary of its creation on July 9th. But there is little to cheer about yet for South Sudan which inherited over 75% of parent Sudan’s proven oil reserves but is overtly reliant on the latter’s infrastructure to bring it to market. Sources with expertise as well as anyone with a modicum of interest in current events would agree that South Sudan’s outlook is bleak at best and abysmal at worst following decades of conflict. That’s notwithstanding a prolonged border dispute with the North, 170,000-plus refugees and tension over oil revenues which have only just shown signs of easing.

While it is early days, on August 4th a Reuters’ flash stating that the North and South sides had pulled back from the brink of war and finally agreed on oil transit payments was widely welcomed from trading floors to the Office of US Secretary of State Hillary Clinton. And what has emerged so far is a relief for everyone from Elf to Total, from OMV to CNPC; the Chinese being the biggest players in Sudan. Of the seven exploration blocks, CNPC is majorly involved with four in case you didn’t know.

Yet deep down everyone, not least the Oilholic, is pragmatic enough to acknowledge that the time to uncork the champagne is not here yet. This humble blogger was not in the Ethiopian capital of Addis Ababa where the agreement was reached, but courtesy dispatches from kindred souls in diplomatic circles it is known that South Sudan agreed to pay North Sudan just over US$9.05 per barrel for usage of its transport, supply and logistics infrastructure to move the crude stuff to Port Sudan.

However, nearly a fortnight on from the announcement, we still await an announcement about when the South will resume oil exports which were stopped in January. That said North Sudan will receive US$3 billion as compensation for revenue lost in that period.

The agreement is not the end of South Sudan’s problems. Without even having meaningfully exploited its precious resources, the world's newest nation is already a case study for the resource curse hypothesis. With oil production having only begun in 2005 and anti-graft measures either side of the border being ‘less than worse’, it can be safely concluded that South Sudan is more likely to resemble a 1970s Nigeria than a 2012 Botswana.

If the Americans press South Sudan to act on graft they are labelled as arrogant, the South Africans as patronising, the Brits as colonials and so on in populist circles even if the government is partially listening. The Chinese way to calm the situation either side of the disputed border and improving things is by offering to buy the crude stuff at above existing market rates (as they did in February).

Clue – nothing is going to change meaningfully anytime soon. Alas, with a production peak for existing facilities forecast for 2020, a turnaround is needed and fast! At least a plan to move away from overreliance on the North by building a pipeline to Kenya is a positive if it materialises. Happy Belated Birthday South Sudan!

Away from Sudanese problems, but sticking with the African continent – Nigeria has signed an ‘initial’ agreement with USA’s Vulcan Petroleum Resources Ltd.; a Vulcan Capital Management SPV, to build six new oil refineries worth US$4.5 billion. If ‘initial’ becomes ‘final’ and the deal materialises, it would add to the four refineries Nigeria already has increasing refining capacity by 180,000 barrels per day.

For a country which is Africa’s largest oil exporter but a net importer of refined distillates, the Oilholic has always opined that seeing is believing. So we’ll believe when we see and greet the announcement with cautious optimism.

Moving to some corporate news which also has an African flavour, its emerged that Edinburgh-based independent upstart Melrose Resources has announced a merger with Ireland’s Petroceltic. Both companies will now merge operations in North Africa along with Black Sea and the Mediterranean.

The new company will have Petroceltic’s branding and will be headquartered in Ireland. The merger values Melrose at £165 million with Petroceltic shareholders having a 54% stake in the merged company and Melrose shareholders having the rest. Sounds like a sound move!

Finally, a new computer virus is doing the rounds targeting energy infrastructure being dubbed by the security firms as the “Shamoom” attack. A notice from Symantec (available here) describes the virus as “a destructive malware that corrupts files on a compromised computer and overwrites the MBR (Master Boot Record) in an effort to render a computer unusable.”

On Wednesday, Saudi Aramco said it was subject to a virus attack but did not acknowledge whether it was a Shamoom attack. A spokesperson said Aramco had now isolated its computer networks as a precautionary measure while stressing that the attack had no impact on its production. Virulent times in the crude world. That’s all for the moment folks! Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Oil worker © Shell

Scrutinising UK’s latest North Sea tax break

The British government announced fresh tax relief measures last week aimed at boosting output in the North Sea. The Oilholic’s first thought, after having scrutinised the small print, is that it’s a positive signal of intent from UK chancellor George Osborne following on from his 2012 union budget. In all fairness he is also looking to put the taxation measures of 2011 budget, which irked the industry, behind him.

From July 25th, new UKCS gas fields with 10-20 billion cubic metres (bcm) in reserves located at depths of less than 30 metres will be exempted from a 32% tax levy on the first £500 million (or US$776 million) of income. Shallow water offshore projects will still pay the 30% Ring Fence Corporation Tax on all income from the field.

UK Treasury figures suggest the measure is expected to cost £20 million per annum in reduced tax receipts, but the government reckons it would generate additional jobs and crucially bolster energy security.

Chancellor Osborne said, "Gas is the single biggest source of energy in the UK. Today the government is signalling its long-term commitment to the role it can play in delivering a stable, secure and lower-carbon energy mix."

A new UK gas strategy is expected this autumn and all indications are that the British will acknowledge the critical role of the gas market in meeting emissions targets alongside a mix of subsidy supported renewable projects. Another passive acknowledgement then that gas, not renewable energy platforms, would be the immediate beneficiary of a post-Fukushima turn-off?

In fact the Oilholic and quite a few others are convinced that gas-fired plants would play a more than complementary role in a future British energy mix. The latest tax relief, aimed at shallow water gas prospection is proof of this.

Derek Henderson, senior partner in the Aberdeen office of Deloitte, also believes the move builds on UK March’s Budget when a number of other reliefs were announced. “This announcement should further support investment, unlock potential gas reserves and increase long term production leading to additional employment and an increase in overall tax revenue,” he said.

“This encouraging action by the Chancellor also provides more evidence of the constructive dialogue that is taking place between industry and the Government. The politicians are demonstrating their commitment to gas, it is now up to the industry to respond with increased activity levels,” Henderson concludes.

Centrica pledged to invest £1.4 billion towards developing its Cygnus gas field with partner GDF Suez barely hours after the announcement of the tax relief. Six days later Prime Minister David Cameron came ‘up North’ to pledge his support to the sector.

“If everything goes well in the oil sector and the renewables sector, is really important, high-quality manufacturing. I think that's something to celebrate and something to stand up for," he said speaking at Burntisland Fabrications in Fife.

The company has just won a contract from Premier Oil to create structures for their platform destined for the Solan oilfield development, west of Shetland. Burntisland Fabrications said the contract will create an additional 350 jobs.

UK’s Department of Energy and Climate Change (DECC) greenlighted Premier Oil’s plans for the Solan oilfield in April. The field could produce up to 40 million barrels of oil, with a projected production commencement rate of 24,000 barrels per day from Q4 2014. Given the amount of activity in the area, looks like a lot work might be coming from developments west of Shetland and it’s great to see the Prime Minister flag it up.

Meanwhile oil giant BP posted a sharp fall in Q2 2012 profits after it had to cut the value of a number of its key assets. The company made a replacement cost profit, outstripping the effect of crude oil price fluctuation, of US$238 million over Q2; versus a profit of US$5.4 billion in the corresponding quarter last year. The cut in valuation was in a number of its refineries and shale play assets.

With the TNK-BP saga continuing, BP’s underlying replacement cost profit for Q2 2012, leaving out asset value reductions, dipped to US$3.7 billion versus US$5.7 billion noted in Q2 2011.

On the crude pricing data front, both benchmarks have not moved much week on week and price sentiment is still bearish ahead of FOMC and ECB meetings. Given that on the macroeconomic front, the global indicators are fairly mixed, Sucden Financial Research analyst Myrto Sokou believes crude oil prices will continue to consolidate within the recent range.

“We saw this today; trading volume remains fairly low as investors would like to remain cautious ahead of the ECB and Fed decisions,” she concluded.

Andrey Dirgin, Head of Research at Forex Club said, “On Tuesday’s trading session, September’s energy futures performed indifferently. Oil contracts didn’t manage to fix on their levels and moved slightly down. The nearest Brent Crude futures contract fell 0.21% to US$104.7.”

Away from pricing and on a closing note, the Oilholic notes another move in the African crude rush. This one’s in Sierra Leone. A fortnight ago, the Sierra Leone government provisionally awarded two offshore exploration blocks – SL 8A-10 and SL 8B-10 – to Barbados registered ODYE Ltd.

The said exploration blocks SL 8A-10 and SL 8B-10 contain 2584 sq.km and 3020 sq.km of prospection area respectively. According to the Petroleum Directorate of Sierra Leone, the exploration blocks consist of early to late Cretaceous oil prone marine source rocks, primarily shale, sand and shale basin floor fans, channelised sand sequences and potentially high porosity sands.

ODYE says it is looking forward to “working with the other participants in these provisionally awarded blocks, Chevron Sahara and Noble Energy” to develop the assets. So the West African gold rush continues. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Andrew Rig, North Sea © BP Plc.

Why CNOOC’s move matters beyond Canada?

China’s CNOOC has made yet another Canadian acquisition; only its latest one announced earlier this week has global implications in the shape of Nexen. On July 23rd Nexen’s board approved CNOOC’s offer to pay US$27.50 per share valuing their company at US$15.1 billion; a near 60% appreciation on valuation at the close of trading on July 20th.

So why does this acquisition matter? After all, it isn’t the first time the Chinese state-owned firm has acquired a Canadian asset. Only last November, CNOOC bought Canadian oil sands firm Opti Canada for C$2.1 billion. In 2005, it acquired a 16.7% share of MEG Energy, another Canadian oil firm.

A CNOOC communiqué suggests it is operating as any oil company would, i.e. by strategically expanding its reserve base. It says the acquisition, which is yet to be cleared by the Canadian government, would boost its oil reserves by 30%.

In a rather 'crude' world, if this Chinese takeover is approved by the Canadians, CNOOC would take control of the UK's largest producing oil field - Buzzard. This would be on top of the Golden Eagle prospection zone about 43 miles offshore from Aberdeen. Unlike oil sands upstarts, Nexen is a major established global operator and has a significant presence in the North Sea. 

Now if you count Sinopec 49% stake in Talisman's business in the British sector of the North Sea together with hypothetical CNOOC access via a takeover of Nexen; it would in theory give the Chinese control of just under 10% of British oil and gas production in the North Sea!

Understandably, there have been murmurings in the Oilholic’s part of the world. However, there are no loud noises as they would run contrary to the British government’s pro-investment stance and in any case they can’t do much about it. By law, the Canadians can block any foreign investments in the country’s firms exceeding C$330 million if the government believes they are not in Canada's best interests. In 2010, the Canadian government prevented BHP Billiton's US$39 billion hostile takeover of fertiliser firm Potash Corp. The LSE-TSX shenanigans of last year are also well documented.

Chinese firms have not felt as welcome in the US, but in Canada their investment is not considered a taboo subject. So how the Harper government responds in this case, which has far reaching implications beyond Canada, remains to be seen.

Meanwhile, contrary to AAR and tycoon Mikhail Fridman’s assertion that there were no takers for BP’s stake in Russia’s TNK-BP, Russian state giant Rosneft has said it is considering buying the stake. A Roseneft statement earlier this week suggested it was interested in a ‘potential acquisition’.

TNK-BP is jointly owned by AAR and BP. Already troubled relations between the two became further fraught after BP sought to form a separate partnership with Rosneft last year.

As AAR has preferred bidder status, this gives it around 90 days during which BP can talk to – but not sign an agreement with – other parties interested in its stake. BP put up its half of the TNK-BP business up for sale in June. AAR has itself declared an interest in buying BP's share.

Finally, the Oilholic is getting in to the Olympics spirit as well! The Chinese, Russians, Americans, Canadians and athletes of some 200-odd countries are now in London town. The Tower Bridge has got its own fancy Olympics rings (see above) and the Olympic Torch passed from the street in front of this blogger’s humble abode on Thursday (see below)!

For those wondering how the torch was being kept powered-up in some really wretched British weather – there is a liquid fuel canister located about halfway up the torch connected via tiny pipe to the top. Through it, the fuel travels up before it is released out at the top of the torch where the pressure in it decreases and this converts the liquid into gas ignited by a spark. Despite exhaustive enquiries, no one would reveal the flow rate which is special to each Olympic torch.

This has been the case since 1972 and London 2012 is no exception to this rule. Quite a few London 2012 Olympic Torches are up for sale on eBay should any of you wish to get your own now that Olympics opening ceremony is done and the cauldron has been lit in the stadium. That’s all for the moment folks! Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo 1: North Sea oil rig © Shell. Photo 2: Tower Bridge London with Olympic rings. Photo 3: London 2012 Olympic Torch passes through London Borough of Barnet, UK.  © Gaurav Sharma 2012.

Crude profit taking & Browne’s Shale hypothesis

Concerns over a conflict in the Middle East involving Iran did ease off last week but apparently not far enough to prevent a further slide in the price of the crude stuff. A relative strengthening of the US dollar was also seen supporting prices to the upside despite Eurozone woes. So Brent resisted a slide below US$107 on Friday while the WTI resisted a slide below US$91 a barrel.

In fact, the WTI August contract reached a high of US$92.94 while Brent touched US$108.18 at one point; the highest for both benchmarks since May 22. This meant that the end of last week saw some good old fashioned profit taking with conditions being perfect for it.

However, on this crude Monday afternoon, we see both benchmarks dipping again. When the Oilholic last checked, Brent was resisting a slide below US$102 per barrel while the WTI was resisting a US$88 level. With the Middle East risk premium easing marginally, City traders have turned their attention to Spain.

Last week the country’s government predicted that the Spanish recession may well extend into next year. Additionally, the regional administration of Valencia asked for federal help from Madrid to balance its books. So what have we learnt over the last seven or eight trading sessions and what has changed? Well not much except that oil price forecasting often resembles an inexact task based on fickle market conjecture.

The bullish sentiments of last week were an aberration prompted by the perceived risk of a conflict in the Middle East which the Iranians would be incredibly barmy to trigger. Add the temporary lowering of oil production courtesy a Norwegian strike and you provide the legs to a perfect short term prancing bull!

Existing economic fundamentals and current supply demand scenarios did not merit last week’s pricing levels either side of the pond. The Oilholic agrees with the EIA’s opinion that the Brent price would indeed range between US$97.50 and US$99.50 a barrel up until the end of 2013. Analysts at investment banks and ratings agencies are also responding.

For instance, Société Générale has downgraded Brent price estimates by 10% over 2012-14, from US$117 a barrel to US$105. The French bank views oil market fundamentals as neutral for the rest of the year. Nonetheless, should the Brent price weaken below US$90, like others in the City, Société Générale says a Saudi response is to be expected.

For what it is worth, at least Brent’s premium to the WTI has been constantly taking a knock. By some traders' accounts, it is presently below US$15 a barrel for the September settlement contract having been at US$26.75 at one point over Q4 2011. As a direct consequence of the linkage between waterborne light sweet crudes, the Louisiana Light Sweet’s premium to the WTI is down as well to around US$16 a barrel according to Bloomberg.

Moving away from pricing, Lord Browne – the former boss of BP and a director of fracking firm Cuadrilla – believes shale prospection would rid the US of oil imports. Speaking in Oxford at the Resource 2012 forum on water, food and energy scarcity, Browne said the US will not need to import any crude within two decades.

He quipped that the amount of shale gas in the US was effectively “infinite". On a sombre note, Browne said, “Shale gas has a very bad reputation, as a result of the weak players cutting corners. Regulation tightening would be welcome."

His Lordship is known to be a member of the “All hail shale” brigade. Back in March he told The Independent newspaper that if fracking took off meaning fully in the UK, it could generate 50,000 British jobs. The country could very well need its own shale drive especially as a government watchdog recently warned of declining oil and gas revenues.

A consultation period is currently underway in London. All UK fracking activity ground to a halt last year, when a couple of minor quakes majorly spooked dwellers of Lancashire where Cuadrilla was test fracking. Given the incident and environmental constrictions, the Oilholic suspects that Lord Browne knows it is too early to get excited about shale from a British perspective. However, Americans see no cause for curbing their enthusiasm. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil tankers in English Bay, British Columbia, Canada © Gaurav Sharma 2012.

Brent & the ‘crude’ fortnight to Friday the 13th!

Despite crude economic headwinds, the Brent forward month futures price spiked back well above US$100 per barrel on July 3. No one was convinced it’d stay there and so it proved to be barely a week later. Since then it has lurked around the US$100 mark. Our crude friends in the trading community always like to flag up supply shocks – some real some and some perceived along with some profit taking thrown in the mix.

The Norwegian oil industry strike which began on June 24 was a very real threat to supply. When oil industry workers down tools in a country which is the world’s fifth largest exporter of the crude stuff, then alarm bells ought to ring and so they did. Being a waterborne crude benchmark, Brent was always likely to be susceptible to one of its main production sources. The Louisiana Light’s fluctuation over the hurricane season stateside would be a fair analogy for the way Brent responded to the news of the strike.

Quite frankly, forget the benchmark; the strike saw Norwegian oil production dip by 13% and its gas output by 4% over the 16 days that it lasted. So when a Reuters report came in that Norway's government had used emergency powers to step in and force offshore oil and gas workers back to work, more than the bulls eased off.

The dispute, which is by no means over, concerns offshore workers' demand for the right to retire early, at 62, with a full pension. The row revolves around the elimination of a pension add-on introduced in 1998 for workers who retire (at 62), five years ahead of Norway's official retirement age and three years ahead of the general age for oil workers.

Accompanying a very real supply shock in the shape of the Norwegian strike were empty threats from Iran to close the Strait of Hormuz in wake of the EU sanctions squeeze. Traders put two and two together and perhaps came-up with 22 out of a sense of mischief.

First of all, the Iranians would be mighty silly if they decided to close the Strait of Hormuz with the US Fifth fleet lurking around. It just would not work and Iran would hurt itself more for the sake of what would at best be a temporary disruption. Secondly, City estimates, for instance the latest one being put out by Capital Economics, suggest that the US and EU sanctions could ultimately reduce oil exports from Iran by as much as 1.5 million barrels per day (bpd).

While it is serious stuff for Iran, the figure is less than 2% of global supply. As such hardly anyone in the City expects the implementation of sanctions on Iran to be a game-changer from a pricing standpoint.

“We maintain our view that the imminent tightening of Western sanctions on Iran is unlikely to have anywhere near as large an impact on global oil prices as many had feared. Demand is weakening and other suppliers are both able and willing to meet any shortfall. Admittedly, much could still depend on how the Iranian regime chooses to respond,” said Julian Jessop of Capital Economics.

Causative effect of such a market sentiment predictably sees Brent back in US$90s to lower US$100 range. In fact Capital Economics, Société Générale, Moody’s and many other forecasters have a US$70-100 per barrel forecast for Brent for the remainder of the year.

A spokesperson for Moody’s told the Oilholic that the agency has lowered its crude price assumptions to US$100/barrel for Brent and US$90/barrel for WTI in 2012, with an additional expected decline to US$95/barrel for Brent and US$85/barrel for WTI in 2013.

Moody's also expects that the spread between benchmark Brent and WTI crude will narrow to about US$5 in 2014. In a report, the agency adds that a drop in oil prices and jitters over economic conditions in Europe, the US and China suggest the global exploration and production sector (E&P) will see its earnings grow more slowly over the next 12 to 18 months.

As such, Moody's expects E&P industry EBITDA to grow in the mid-to-high single digits year on year through mid-2013. Expectations for EBITDA growth in the sector above 10% would suggest a positive outlook, while a retreat of 10% or more would point to a negative outlook. Moody's changed its outlook for the E&P industry to stable from positive on June 27, 2012.

The agency also expects little change in US natural gas prices before the end of 2013 with a normal winter offering the best near-term support for natural gas prices as increased utility and industrial demand will ramp up slowly.

On the corporate front, in an interesting fortnight Origin Energy announced that the Australia Pacific LNG project (APLNG) – in which its stake is at 37.5% after completion of Sinopec's additional equity subscription – has received board approval for Final Investment Decision (FID) for the development of a second LNG train.

The expanded two-train project is expected to cost US$20 billion for a coal seam gas (CSG) to liquefied natural gas (LNG) project in Queensland, Australia. Elsewhere, India’s Essar Energy subsidiary Essar E&P Ltd is to sell a 50% stake in Vietnam's offshore gas exploration block 114 to Italy’s ENI.

Under the terms of the transaction, which is still subject to approval from the Vietnamese government, ENI is also assuming operator status for the block. Yours truly guesses the Indian company finally decided it was time to indulge in a bit of risk diversification.

Continuing with corporate stuff, the Oilholic told you BP’s planned divestment in TNK-BP won’t come about that easily or smoothly. One of its oligarch partners - Mikhail Fridman - has alleged that there are no credible buyers for BP’s 50% stake in the dispute ridden Russian venture.

In an interview with the Wall Street Journal on June 29, Fridman said, "We doubt it has any basis in fact. They are trying to buy time, to reassure investors."

However, BP said it stood by its announcement. It also announced an agreement to sell its interests in the Alba and Britannia fields in the British sector of the North Sea to Mitsui for US$280 million. The sale includes BP’s non-operating 13.3% stake in Alba and 8.97% stake in Britannia. Completion of the deal is anticipated by the end of Q3 2012, subject to UK regulatory approvals.

Net production from the two fields averages around 7,000 barrels of oil equivalent per day. It is yet another example of BP’s smart management of its asset portfolio in wake of Macondo as the company refocuses on pastures and businesses new.

Elsewhere in the North Sea, Dana Petroleum expects to start drilling at two new oil fields off Shetland named - Harris and Barra – by Q2 2013. The first crude consignment from what’s described as the Western Isles project will come onstream in 2015. A spokesperson said field production could run for 15 years.

The region needs all the barrels it can pull as the UK’s budgetary watchdog – the Office for Budget Responsibility (OBR) – has projected that future oil and gas revenues from the North Sea may be much lower than previous forecasts.

OBR sees the Brent prices rise from US$95/barrel in 2016 to US$173/barrel in 2040. “This compares lower with a projection in our assessment last year of a rise from US$107/barrel in 2015, rising to US$206/barrel in 2040," a spokesperson said.

As a result the OBR now projects tax receipts will be about 0.05% of GDP by 2040-41; half the level it projected in last year. It identified lower projected oil and gas prices as the key driver for the reduced figures given this year. The Oilholic won’t be called upon to vote on Scottish independence; but if yours truly was a Scottish Nationalist then there’d be a lot to worry about.

Finally, it looks like UK regulator – the Takeover Panel – has had enough of the protracted battle for the takeover of Cove Energy between Royal Dutch Shell and Thailand's PTTEP. It has given both parties a deadline of July 16 to make their final offers.

The Takeover Panel announced on Friday 13, July 2012 that if no offer is accepted by the said date, the sale of Cove will be decided by an auction on July 17. It could be lucky for neither, if they pay over the odds. That’s all for the moment folks. Keep reading, keep it ‘crude’!

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

Charting the love-hate relationship with big oil

If the oil companies had answers to the energy crisis, and in some cases maybe they do, would you believe them? Given that most of us grow up loathing big oil for a multitude of reasons ranging from environmental to monetary ones while filling up the gas tank, all thoughts put forward by energy companies become suspect.

Or as the author of the book – Why we hate the oil companies? Straight talk from an energy insider – asks, would you accept the fox’s plan for the hen coop? Written by none other than John Hofmeister, the former president of Shell, it examines what’s behind the energy companies' swagger or perceived swagger.

Having made the transition from being a mere consumer of gasoline to the president of a major oil company, Hofmeister attempts to feel the pulse of public sentiment which ranges from indifference to pure hatred of those who produce the crude stuff. Spread over 270 pages split by 14 chapters, this book does its best to offer a reasonably convincing insider’s account of the industry.

Along the way it dwells on how politicians and special interest groups use energy misinformation and disinformation to meet their own odds and ends in a high stakes game. Hofmeister founded the US Citizens for Affordable Energy; an American grassroots campaign aimed changing the way the US looks at energy and energy security.

So this book benefits from his thoughts on solving energy issues, offering targeted solutions on affordable and clean energy, environmental protection and sustained economic competitiveness. The tone is a surprisingly frank one and research is solid. It is also no corporate waffle from an oilman lest sceptics dismiss it as such without reading it.

The Oilholic believes it even throws up some pragmatic solutions which appear sound at least on paper. So while there is little not to like about the book, there is one glaring caveat. It is just way too American in its scope. Yours truly is happy to recommend this book to our friends across the pond in North America; but readers elsewhere while appreciating the narrative, may come to the same conclusion.

© Gaurav Sharma 2012. Photo: Front Cover – Why we hate the oil companies? Straight talk from an energy insider © Palgrave Macmillan

Price correction, Saudis hurt Canada & Russia!

Finally, we have a price correction which saw both global oil benchmarks reflect the wider macroeconomic climate accompanied by a dip in stock markets and a downgrade of 15 of the world’s largest banks by Moody’s. NYMEX WTI forward month futures contract fell below US$80 per barrel on Thursday for the first time since October 2011 while Brent is just about resisting the US$90-level trading at US$90.77 when last checked.

The benchmarks have shown bearish trends for almost three months but they were still not reflecting the wider macroeconomic climate; until yesterday that is. The ‘only way is up’ logic based on a linear supply-demand permutation oversimplifies the argument as the current situation demonstrates. Factors such as the absence of QE3 by the US Federal Reserve, a stronger US Dollar, and weaker Chinese, Indian and European data finally influenced market sentiment – not to provide the perfect storm but to provide the perfect reality! A decline in German business confidence levels reinforces bearish trends which will last for a while yet.

Despite negative sentiments and the possibility of Brent trading below US$100 per barrel for prolonged periods between now and Q1 2013, OPEC did not cut its quota last week. Saudi Arabia, which is so dominant within the cartel, actually wanted to send the price lower as it can contend with Brent falling to US$85 per barrel.

From a geopolitical standpoint, Saudis not only kicked a sanction hit Iran (maybe gleefully) but delivered bad news for Russia (perhaps intentionally) and Canada (almost certainly unwittingly). Saudi rivalry with Iran has more than a ‘crude’ dimension, but one with Russia almost certainly revolves around market dominance. The Oilholic’s hypothesis is that this intensified when Russian production first overtook Saudi production in 2009.

As the world’s leading producer for over two years, Moscow was causing Riyadh some discomfort. So the Saudis raised their game with the Libyan conflict and Iranian sanctions giving them ample excuses to do so. Constantly flouting OPEC production quotas, this February Saudi Arabia regained its top spot from Russia. Now with prices in reverse, it is the Russians who are sweating having rather bizarrely balanced their budget by factoring in an oil price in the circa of US$110 to US$120 per barrel.

Several independents, ratings agencies (for example S&P) and even former finance minister Alexei Kudrin repeatedly warned Russia about overreliance on oil. The sector accounts for nearly 70% of Russian exports and Vladimir Putin has done little to alter that dynamic both as prime minister and president in successive tenures.

Realising the Russian position was not going to change over the short term and with a near 10% (or above) dip in production at some of their major fields; the Saudis ramped up their production. A masterstroke or precisely a deft calculated hand played by Minister Ali Al-Naimi planked on the belief that amid bearish trends the Russians simply do not have the prowess, or in fact the incentive, to pump and dump more crude on the market has worked.

A Russian production rise to 10 million bpd is possible in theory, but very difficult to achieve in practice in this macroeconomic climate. So the markets (and the Saudis) expect Russia to fall back on their US$500 billion in reserves to balance the books over the short to medium term rather than ramp-up production. Furthermore, unless the Russians invest, the Saudis’ hand will only be strengthened and their status as ‘crude’ stimulus providers enhanced.

Canada’s oil sands business while not a direct Saudi target is indeed an accidental victim. The impact of a fall in the price of crude will also be very different as Canada’s economy is far more diversified than Russia’s. Instead of a decline in production, the ongoing oil sands and shale prospection points to a potential rise.

Canadian prospection remains positive for Canadian consumers and exporters alike; provincial and federal governments want it, justice wants it, PM wants it and the public certainly want it. However, developing the Athabasca oil sands and Canadian shale plays (as well as US’ Bakken play) is capital and labour intensive.

For the oil sands – holding the world’s second largest proven oil resource after Saudi Arabia’s Dhahran region – to be profitable, crude price should not plummet below US$60 per barrel. Three visits by the Oilholic to Calgary and interaction with colleagues at CAPP, advisory, legal and energy firms in Alberta between 2008 and 2011 threw up a few points worth reiterating amidst this current crude price correction phase. First of all, anecdotal evidence suggests that while it would rather not, Alberta’s provincial administration can even handle a price dip to US$35 to 40 per barrel.

Secondly, between Q2 2007 and Q1 2008 when the price of crude reached dizzy heights, oilfield services companies and engineering firms hired talent at top dollar only to fire six months later when the price actually did plummet to US$37 per barrel in wake of the financial crisis. Following a wave of redundancies, by 2010 Calgary and Fort McMurray were yet again witnessing a hiring frenzy. The cyclical nature of the industry means this is how things would be. Canadians remain committed to the oil & gas sector and in this blogger’s humble opinion can handle cyclical ups and downs better than the Russians.

Finally, Canada neither has a National Oil Company nor is it a member of any industry cartel; but for the sake of pure economics it too needs a price of about US$80 a barrel. On an even keel, when the price plummets or the Saudis indulge in tactical production manoeuvres, as is the case at present, you’d rather be a Canadian than a Russian.

The Oilholic has long suspected that the Saudis look upon the Canadians as fellow insurers working to prevent ‘oil demand destruction’ and vying for a slice of the American market; for them the Iranians and Russians are just market miscreants. That the market itself is mischievous and Canadians might join the 'miscreants' list if proposed North American pipelines come onstream is another matter! That’s all for the moment folks! Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo 1: Russian pump jacks © Lukoil. Photo 2: Red Square, Moscow, Russia © Gaurav Sharma 2004. Photo 3: Downtown Calgary, Alberta, Canada © Gaurav Sharma 2011.

“Stability, stability, stability,” says El-Badri

So the press briefing room has emptied and the OPEC ministers have left the building for first time after failing to cut the cartel’s official output in face of crude price corrections exceeding 10% over a fiscal quarter. Thanks largely to Saudi Arabia, OPEC output stayed right where it was at 30 million bpd. Given the Eurozone crisis and a US, Indian and Chinese slowdown – OPEC members will invariably see Brent trading below US$100 per barrel for extended periods of time over the medium term.

It is doubtful if the Saudis would be too perturbed before the price of Brent slips below US$85 per barrel. As the Oilholic noted last year, studies suggest that is the price they may have budgeted for. Putting things into perspective analysts polled by the Oilholic here in Vienna suggest Iran would need a Brent price of US$110-plus to come anywhere balancing its budget.

However, with all bar the Saudis sweating already, outgoing OPEC Secretary General Abdalla Salem El-Badri, whose successor is yet to be decided, probably provided the signature quote of 161st meeting of ministers. Given the long term nature of the oil & gas business and a need for clarity and predictability, the Secretary General demanded ‘stability, stability, stability’.

“Stability for investments and expansion to flourish; Stability for economies around the world to grow; And stability for producers that allows them a fair return from the exploitation of their exhaustible natural resources,” he said in a speech at the OPEC seminar ahead of the meeting.

Problem is the Saudis have taken the message a little bit too literally; oil minister Ali Al-Naimi likened his country’s high production level and its insistence that OPEC’s official quota stays right where it is to a kind of an economic ‘stimulus’ which the world needs right now.

Of course on the macro picture, everyone at OPEC would have nodded in approval when El-Badri noted that fossil fuels – which currently account for 87% of the world's energy supply – will still contribute 82% by 2035.

“Oil will retain the largest share (of the energy supply) for most of the period to 2035, although its overall share falls from 34% to 28%. It will remain central to growth in many areas of the global economy, especially the transportation sector. Coal's share remains similar to today, at around 29%, whereas gas increases from 23% to 25%,” he added.

In terms of non-fossil fuels, renewable energy would grow fast according to OPEC. But as it starts from a low base, its share will still be only 3% by 2035. Hydropower will increase only a little – to 3% by 2035. Nuclear power will also witness some expansion, although prospects have been affected by events in Fukushima. However, it is seen as having only a 6% share in 2035.

For oil, conventional as well as non-conventional resources are ‘sufficient’ for the foreseeable future according to El-Badri. The cartel expects significant increases in conventional oil supply from Brazil, the Caspian, and of course from amongst its own members, as well as steady increases in non-conventional oil and natural gas liquids (e.g. Canada and US).

On the investment front, for the five-year period from 2012 to 2016, OPEC's member countries currently have 116 upstream projects in their portfolio, some of which would be project or equity financed but majority won’t. Quite frankly do some of the Middle Eastern members really need to approach the debt markets after all? Moi thinks not; at best only limited recourse financing maybe sought. If all projects are realised, it could translate into an investment figure of close to US$280 billion at current prices.

“Taking into account all OPEC liquids, the net increase is estimated to be close to 7 million bpd above 2012 levels, although investment decisions and plans will obviously be influenced by various factors, such as the global economic situation, policies and the price of oil,” El-Badri concluded.

That’s all from Austria folks where the Oilholic is surrounded by news from the G20, rising cost of borrow for Spain and Italy, European Commission President Jose Manuel Barroso ranting, Fitch downgrading India’s outlook, an impending US Federal Reserve decision and the Greek elections! Phew!

Since it’s time to say Auf Wiedersehen and check-in for the last Austrian Airlines flight out of this Eurozone oasis of ‘relative’ calm to a soggy London, yours truly leaves you with a sunny view of the Church of St. Charles Borromeo (Karlskirche) near Vienna’s Karlsplatz area (see above right, click to enlarge). It was commissioned by Charles VI – penultimate sovereign of the Habsburg monarchy – in 1713. Johann Bernhard Fischer von Erlach, one of Austro-Hungarian Empire’s most renowned architects, came up with the original design with construction beginning in 1716.

However, following Fischer’s death in 1727, it was left to his son Joseph Emanuel to finish the project adding his own concepts and special touches along the way. This place exudes calmness, one which the markets, the crude world and certainly Mr. Barroso could do well with. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Empty OPEC briefing room podium following the end of the 161st meeting of ministers, Vienna, Austria. Photo 2: Church of St. Charles Borromeo (Karlskirche), Vienna, Austria © Gaurav Sharma 2012.

OPEC 'holds' production at 30 mbpd as expected

OPEC decided to maintain production at 30 million barrels per day (bpd) in line with market expectations following the conclusion of its 161st meeting here in Vienna. Frustrated at unilateral increases in production by Saudi Arabia, the cartel merely noted in a statement that member countries “should adhere to the production ceiling.”

How on earth OPEC will monitor whether (or not) members flout their quota is open to question as individual quotas were shunned last year. All it can do is hope the Saudis, who are currently dovish on the price of crude, decide to cut back.

The Oilholic is reliably informed that five other OPEC members, excluding the usual suspect Iran, urged the Saudis to respect the ceiling and cut back production. At least three oil ministers left OPEC HQ whinging that members ought to respect the production ceiling and that an oil price below US$100 per barrel was unacceptable. Unsurprisingly they hailed from Iran, Algeria and Venezuela. Apparently even the UAE is unhappy but no one from their delegation openly criticised the Saudis at the end of the meeting.

On supply-demand permutations, OPEC noted that although world oil demand is projected to increase slightly during the year, this rise is expected to be mostly offset by the projected increase in non-OPEC supply.

In addition, comfortable OECD stock levels – which presently are below the historical average in terms of absolute volumes but well above the historical norm in terms of days of forward cover – indicate that there has been a “contra-seasonal stock” build in the first quarter 2012 and this overhang is predicted to continue throughout 2012 according to the cartel. Stocks outside the OECD region have also increased. Taking these developments into account, the second half of the year could see a further easing in fundamentals, despite seasonally-higher demand, it said.

OPEC also said it reviewed recent oil market developments, as well as the outlook for the second half of 2012, noting that the heightened price volatility witnessed earlier this year was a reflection of geopolitical tensions and increased levels of speculation in the commodities markets, rather than “solely a consequence of supply/demand fundamentals.”

Furthermore, the cartel observed heightened Eurozone sovereign debts concerns and the consequent weakening economic outlook, with its concomitant lower demand expectation, continue to mount. “These ongoing challenges to world economic recovery, coupled with the presence of ample supply of crude in the market, have led to the marked and steady fall in oil prices over the preceding two months,” it concluded.

Meanwhile no decision has been taken as yet on who would replace OPEC Secretary General Abdalla Salem al-Badri of Libya with four member countries having proposed candidates – old rivals Saudi Arabia and Iran along with perceived compromise candidates in Iraq and Ecuador. Finally, OPEC will convene for its 162nd meeting in Vienna on December 12, 2012. However, some delegates left suggesting that if economic fundamentals deteriorate further an extraordinary meeting maybe called before December.

On a lighter note, so predictable was the outcome of the 161st meeting, that the Oilholic’s blog post from December 14, 2011 (on the 160th meeting) notched up a quite a few clicks from ‘Googlers’ searching “OPEC outcome” and “30 million bpd” before one could biff out this post. As was the case on December 14, 2011, so it was on June 14, 2012 – the ‘official’ production quota remains capped at 30 million bpd.

This is the first instance since yours truly has been blogging or reporting from OPEC, when the price of the crude stuff has dipped more than 10% over a fiscal quarter and the cartel has not responded with a cut in its output. Given whats going on in the Eurozone, a cooling in India and China and a poor US recovery, Brent is unlikely to find a medium term US$100 price floor. If anyone thought there was a counterweight to the Saudis within OPEC, this outcome is your answer! That’s all for the moment folks. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: OPEC Logo, Vienna, Austria © Gaurav Sharma 2012.

The tussle for OPEC Secretary General’s post

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

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

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

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

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

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

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

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

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

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