Hawaii’s crude reality: Being a petrohead costs!

In a break from the ‘crude’ norm for visits to the USA, the Oilholic packed his bags from California and headed deep out to the Pacific and say ‘Aloha’ to newest and 50th United State of Hawaii. It’s good to be here in the Kona district of the Big Island and realise that Tokyo is a lot closer than London.

It is interesting to note that Hawaii is the only US state still retaining the Union Jack in its flag and insignia. The whole flag itself is a deliberate hybrid symbol of British and American historic ties to Hawaii and traces its origins to Captain John Vancouver – the British Naval officer after whom the US and Canadian cities of Vancouver and Alaska’s Mount Vancouver are named.

What’s not good being here is realising that a 1.3 million plus residents of these northernmost isles in Polynesia pay the most for their energy and electricity needs from amongst their fellow citizens in the US. It is easy to see why, as part dictated by location constraints Hawaii presently generates over 75% of its electricity by burning Petroleum.

Giving the geography and physical challenges, most of the crude oil is shipped either from Alaska and California or overseas. Furthermore, the Islands have no pipelines as building these is not possible owing to volcanic and seismic activity. Here’s a view of one active crater – the Halema’uma’u in Kilauea Caldera (see above right). You can actually smell the sulphur dioxide while there as the Oilholic was earlier today. In fact the entire archipelago was created courtesy of volcanic eruptions millions of years ago. The Big Island’s landmass of five plates is created out of Mauna Kea (dormant) and Mauna Loa (partly active) and the island is technically growing at moment as Kilaueu still spews lava which cools and forms land.

So both crude and distillates have to be moved by oil tankers between the islands or tanker lorries on an intra-island basis. The latter  creates regional pricing disparities. For instance in Hilo, the commercial heart of the Big Island and where the tanker docking stations are, gasoline is cheaper than Kona by almost 40-50 cents per gallon. The latter receives its distillates by road once tankers have docked at Hilo.

The state has two refineries both at Kapolei on the island of O‘ahu 20 miles west of capital Honolulu – one apiece owned by Tesoro and Chevron. The bigger of the two has a 93,700 barrels per day (bpd) and is owned by Tesoro; the recent buyer of BP’s Carson facility. However in January Tesoro put its Hawaiian asset up for sale.

Tesoro, which bought the refinery for US$275 million from BHP Petroleum Americas in 1998, said it no longer fitted with its strategic focus on the US Midcontinent and West Cost. The company expects the sale to be completed by the end of the year. Its Hawaiian retail operations, which include 32 gas stations, will also be part of the deal. Chevron operates Kapolei’s other refinery with a 54,000 bpd capacity. Between the two, there is enough capacity to meet Hawaii’s guzzling needs and the pressures imposed by US forces operations in the area.

In this serene paradise with volcanic activity and ample tidal movement, power generation from tidal and geothermal is not inconceivable and facilities do exist. In fact, for the remaining 25% of its energy mix, the state is one of eight US states with geothermal power generation and ranks third among them. Additionally, solar photovoltaic (PV) capacity increased by 150% in 2011, making Hawaii the 11th biggest US state for PV capacity. However, it is not nearly enough.

One simple solution that is being attempted is natural gas – something which local officials confirmed to the Oilholic. The EIA has also noted Hawaii’s moves in this direction. Oddly enough, while Hawaii hardly uses much natural gas, it is one of a handful of US states which actually produces synthetic natural gas. Switching from petroleum-based power generation to natural gas for much of Hawaii’s power generation could lower the state’s power bills considerably as the massive disconnect between US natural gas and crude oil prices looks set to continue.

Strong ‘gassy’ moves are afoot and anecdotal evidence here suggests feelers are being sent out to Canada, among others. In August, Hawaii Gas applied for a permit with the Federal Government to ship LNG to Hawaii from the West Coast. While the deliveries will commence later this year, arriving volumes of LNG would be small in the first phase of the project, according to Hawaii Gas. At least it is a start and the State House Bill 1464 now requires public utilities to provide 25% of net electricity sales from renewable sources by December 31, 2020 and 40% of net electricity sales from renewables by December 31, 2030.

That’s all for the moment folks as the Oilholic needs to explore the Big Island further via the old fashioned way which requires no crude or distillates – its the trusty old bicycle! Going back to history, it was Captain James Cook and not Vancouver who located these isles for the Western World in 1778. Regrettably, he got cooked following fracas with the locals in 1779 and peace was not made between Brits and locals until Vancouver returned years later.

Moving away from history, yours truly leaves you with a peaceful view of Punaluʻu or the Black Sand beach (see above left)! It is what nature magnificently created when fast flowing molten lava rapidly cooled and reached the Pacific Ocean. According to a US Park Ranger, the beach’s black sand is made of basalt with a high carbon content. It is a sight to behold and the Oilholic is truly beholden! On a visit there, you have a 99.99% chance of spotting the endangered Hawksbill and Green turtles lounging on the black sand. For once, yours truly is glad there are no bloody pipelines in the area blotting the landscape. More from Hawaii later - keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Halema’uma’u, Kilauea Caldera. Photo 2: Punaluʻu - the Black Sand beach, Hawaii, USA © Gaurav Sharma 2012.

Speculators, production & San Diego’s views

It is good to be in the ‘unified’ port of San Diego, California for a few days to get some crude views, especially those of the trading types who have a pad on the city’s Ocean Beach waterfront looking out to the Pacific. While the view from one of their living room windows is a testament to the current serenity of the Pacific Ocean (an example on the left), markets are anything but serene with politicians blaming paper traders for the current volatility.

Instead of shrugging and quipping ‘typical’, most admit candidly that the ratio of paper (or virtual) barrels versus physical barrels will continue to rise. Some can and quite literally do sit on the beach and trade with no intention of queuing at the end of pipeline in Cushing, Oklahoma to collect their crude cargo.

Anecdotal evidence suggests the ratio of paper versus physically traded barrels has risen from 8:1 at the turn of millennium to as high as 33:1 in 2012. Furthermore, one chap reminds the Oilholic not to forget the spread betting public. “They actually don’t even enter the equation but have a flutter on the general direction of crude benchmarks and in some cases – for instance you Brits – all winnings are tax free,” he added.

Nonetheless, on his latest visit to the USA, yours truly sees the supply and demand dynamic stateside undergoing a slow but sure change. In fact old merchant navy hands in San Diego, which is a unified port because the air and sea ports are next to each other, would tell you that American crude import and export dispatch patterns are changing. Simply put, with shale oil (principally in Eagle Ford) and rising conventional production in Texas and North Dakota in the frame and the economy not growing as fast as it should – the US is importing less and less of the crude stuff from overseas.

The IEA projects a fall of 2.6 million barrels per day (bpd) in imports by US refiners and reckons the global oil trading map and direction of oil consignments would be redrawn by 2017. Not only the US, but many nations with new projects coming onstream would find internal use for their product. India’s prospection drive and Saudi Arabia’s relatively new oilfield of Manifa are noteworthy examples.

So a dip in Middle Eastern crude exports by 2017 won’t all be down to an American production rise but a rise in domestic consumption of other producer nations as well. Overall, the IEA reckons 32.9 million bpd will trade between different regions around the globe; a dip of 1.6 million bpd over last year. With some believing that much of this maybe attributed to dipping volumes of light sweet crude demanded by the US; the thought probably adds weight to Eastward forays of oil traders like Vitol, Glencore and Gunvor. Such sentiments are also already having an impact on widening Brent’s premium to the WTI with the latter not necessarily reflecting global market patterns.

Elsewhere, while the Oilholic has been away, it seems BP has been at play. In a statement to the London Stock Exchange on Monday, BP said it had agreed 'heads of terms' to sell its 50% stake in Russian subsidiary TNK-BP to Rosneft for US$28 billion via a mixture of US$17.1 billion cash and shares representing 12.84% (of Rosneft). BP added that it intends to use US$4.8 billion of the cash payment to purchase a further 5.66% of Rosneft from the Russian government.

BP Chairman Carl-Henric Svanberg said, “TNK-BP has been a good investment and we are now laying a new foundation for our work in Russia. Rosneft is set to be a major player in the global oil industry. This material holding in Rosneft will, we believe, give BP solid returns.”

With BP’s oligarch partners at AAR already having signed a MoU with Rosneft, the market is in a state of fervour over the whole of TNK-BP being bought out by the Russian state energy company. Were this to happen, Rosneft would have a massive crude oil production capacity of 3.15 million bpd and pass a sizeable chunk of Russian production from private hands to state control. It would also pile on more debt on an already indebted company. Its net debt is nearing twice its EBITA and a swoop for the stake of both partners in TNK-BP would need some clever financing.

Continuing with the corporate front, the Canadian government has rejected Petronas' US$5.4 billion bid for Progress Energy Resources. The latter said on Sunday that it was "disappointed" with Ottawa’s decision. The company added that it would attempt to find a possible solution for the deal. Industry Minister Christian Paradis said in a statement on Friday that he had sent a letter to Petronas indicating he was "not satisfied that the proposed investment is likely to be of net benefit to Canada."

Meanwhile civil strife is in full swing in Kuwait according to the BBC World Service as police used tear gas and stun grenades to disperse large numbers of people demonstrating against the dissolution of parliament by Emir Sheikh Sabah al-Ahmad al-Sabah whose family have ruled the country for over 200 years.

In June, a Kuwaiti court declared elections for its 50-seat parliament in February, which saw significant gains for the Islamist-led opposition, invalid and reinstated a more pro-government assembly. There has been trouble at the mill ever since. Just a coincidental footnote to the Kuwaiti unrest – the IEA’s projected figure of 2.6 million bpd fall in crude imports of US refiners by 2017, cited above in this blog post, is nearly the current daily output of Kuwait (just to put things into context) ! That’s all from San Diego folks! It’s nearly time to say ‘Aloha’ to Hawaii. But before that the Oilholic leaves you with a view of USS Midway (above right), once an aircraft carrier involved in Vietnam and Gulf War I and currently firmly docked in San Diego harbour as a museum. In its heydays, the USS Midway housed over 4,000 naval personnel and over 130 aircraft.

According to a spokesperson, the USS Midway, which wasn’t nuclear-powered, had a total tank capacity of 2.5 million gallons of diesel to power it and held 1.5 million gallons of jet fuel for the aircraft. It consumed 250,000 gallons of diesel per day, while jet fuel consumption during operations came in at 150,000 gallons per day during flying missions. Now that’s gas guzzling to protect and serve before we had nuclear powered carriers. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Ocean Beach, San Diego. Photo 2: USS Midway, California, USA © Gaurav Sharma 2012.

Market chatter, luck of the Irish & East Timor

Rather than a daily assessment, the Oilholic often looks at how the forward month price of leading crude oil benchmarks fluctuates on a weekly basis. Such an exercise regularly provides interesting tangents for a discussion at the beginning of the week. Last Monday all three benchmarks – Brent, WTI and OPEC’s basket of crude – were in the red in week over week terms. This Monday, all three are in the green rising roughly between 2% and 3%. There is a clear reason for the upside momentum with Brent holding firm above US$114 per barrel and the WTI above US$90.

 

Better than expected Chinese economic data is largely behind the current market sentiment (see graphic above, click to enlarge). But as yours truly fast loses count of how many ‘critical’ EU summits we have recently had, another one is due towards the end of the week. So market caution will prevail either side of the pond. For Sucden Financial analyst Myrto Sokou, the two-day summit (this Thursday and Friday) and the regional Spanish elections (Galicia and Basque) will be the main focus for the week.

 

“We are not expecting any decision yet on Spain’s issues, with Reuters again suggesting that bundling multiple bailouts in one package is preferable, especially for Bundestag approval. Again the usual flow of Greek rumours, with some suggesting that the country needs two more years to implement reforms,” she added.

 

US EIA data released last Friday noted that American crude oil stocks built by 1.7 million barrels driven by a 193,000 barrels per day (bpd) increase in supply. This came from an import rise of 115,000 bpd and a domestic output rise of 78,000 bpd (to 6.598 million bpd). Concurrently, US refinery runs declined by 97,000 bpd, in line with the maintenance season and Cushing, Oklahoma stocks slightly gained by 0.3 million barrels (and are still comfortably above five year highs).

 

Société Générale analyst Mike Wittner felt the report indicated a typical pattern for a refinery maintenance season. “We see a very bullish backdrop for products and a bearish trend for crude…However, all products' fundamentals were very weak - both supply and demand. Recent positive US macroeconomic data might improve demand and add an upward pressure on prices,” he concluded.

 

Moving away from the price of the crude stuff, confirmation finally came that the Irish are about to hit black gold in meaningful quantities after many false dawns. This may largely be attributed to Providence Resources, a Dublin and London AiM dual-listed company, which first caught the Oilholic’s eye back in May.

 

The company’s chief executive Tony O’Reilly confirmed last week that its Barryroe site, 30 miles off the Cork coast, could potentially yield 280 million barrels of oil. He told the BBC that with Brent crude above US$100 per barrel at moment, the prospection offered a “lot of value” and would mark the beginning of the Irish oil industry.

 

While rules related to licensing, taxation and local job facilitation would still need to be worked on, what is transpiring at Providence is by all accounts a pivotal moment. "We hope there is a renaissance of interest by international companies who need to come to Ireland and help us to exploit our natural resources. We cannot do it alone," O’Reilly added.

 

ExxonMobil has already obliged by opting to explore a Providence site at Drumquin. Many others would surely follow given number of exploration licences the company currently holds according to its 2011 Annual report (see map of Providence Resources' licences above right, click to enlarge). Crossing over to the other side of the planet, East Timor or Timor Leste has created its domestic Institute of Petroleum and Geology (IPG) by means of its Decree-Law 33/2012 of July 18, 2012.

 

The new institute will be entrusted with archiving, producing, managing, storing and disseminating geological data, including that related to onshore and offshore oil, gas and mineral resources. Miranda Law Firm, which operates in the once strife ravaged jurisdiction, said the data collected and managed by IPG will provide the basis and impetus for domestic prospecting, exploration and production.

 

The problem is not so much of data collection hindering offshore prospection but one of defining East Timor’s maritime boundaries. It only became an independent state in May 2002. The new nation did not accept the Timor Gap Treaty of 1989, which divided the country’s resources between Australia and Indonesia. It was signed over a decade after Indonesia invaded East Timor in 1976 which had formerly been a Portuguese colonial outpost.

 

A new agreement – the Timor Sea Treaty of 2002 – then proposed a Joint Petroleum Development Area (JPDA) with a 90:10 oil & gas revenue share of new finds between East Timor and Australia. Then perhaps much to the chagrin of locals, Greater Sunrise Gas field – considered one of the most promising finds in the region – saw only a fifth of its nautical area within JPDA confines. As a consequence, only 18% of generated revenue currently falls in East Timor's lap according to sources in the Australian media. All the Oilholic can say is that if you need a crude talking point – talk East Timor.

 

Moving on from one post-conflict area to another supposedly post-conflict region – the Niger Delta – where Shell rejected the liability claims by four Nigerian farmers. At a civil court in The Hague, they have accused the Anglo-Dutch oil major of ruining their livelihood and causing damage to their land on account of oil spills. Shell for its part blamed sabotage and criminal theft by locals for the damage.

 

In a statement it said, "The real tragedy of the Niger Delta is the widespread and continual criminal activity, including sabotage, theft and illegal refining, that causes the vast majority of oil spills. It is this criminality which all organisations with an interest in Nigeria's future should focus their efforts on highlighting and addressing."

 

Opinion might well be divided, but this is the first instance of a half-Dutch multinational being taken to a civil court for an alleged offence caused outside the Netherlands. The only local connection is the Dutch arm of environmental group Friends of the Earth which is backing the four Nigerian farmers. While this landmark case is far from reaching its conclusion, if it has piqued your interest then Michael Peel’s brilliant book A Swamp Full of Dollars could give you all the background to the spills, the violence, the destruction and the crude world of Nigerian oil.

 

Finally, from the serious to the farcical – an episode was brought to the Oilholic’s attention by a colleague at industry scouting data and technical information provider Drillinginfo.  It seems Hollywood megastar Matt Damon’s latest foray – The Promised Land – widely touted as an anti-fracking response to US shale exploration is part bankrolled or rather will be brought to our screens “in association with” Image Media Abu Dhabi, a subsidiary of Abu Dhabi Media, according to the preview’s list of credits.

 

The media company is wholly owned by the government of UAE; an OPEC member country and one from which the US is hoping to cut its crude imports from based on the prospects of domestic shale exploration! It is best to leave it to you folks to draw your own conclusions, but that’s all for the moment! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Graphic 1: Forward month crude oil price © Sucden Financial, October 2012. Graphic 2: Providence Resources’ existing licences © Providence Resources Plc, December 2011

On another BP sale, another Chavez term & more

A not so surprising news flash arrived this week that BP has finally announced the sale of its Texas City refinery and allied assets to Marathon Petroleum for US$2.5 billion. A spokesperson revealed that the deal included US$600 million in cash, US$1.2 billion for distillate inventories and another US$700 million depending on future production and refining margins.

 

Following the Carson oil refinery sale in California, the latest deal ratchets BP’s asset divestment programme up to US$35 billion with a target of US$38 billion within reach. It is time for the Oilholic to sound like a broken record and state yet again that – Macondo or no Macondo – the oil major would have still divested some of its refining and marketing assets regardless.

 

However, for fans of the integrated model – of which there are quite a few including ratings agencies who generally rate integrated players above R&M only companies – the head of BP's global R&M business Iain Conn said, "Together with the sale of our Carson, California refinery, announced in August, the Texas City divestment will allow us to focus BP's US fuel investments on our three northern refineries."

 

Things have also picked-up pace on the TNK-BP front. On Tuesday, Reuters reported that BP’s Russian partners in the venture Alfa Access Renova (AAR) would rather sell their stake than end-up in a ‘devalued’ partnership with Kremlin-backed rival Rosneft. On Wednesday, the Russian press cited sources claiming a sale of BP’s stake to Rosneft has the full backing of none other than Russian President Vladimir Putin himself. Now that is crucial.

On a visit to Moscow and Novosibirsk back in 2004, the Oilholic made a quick realisation based on interaction with those in the know locally – that when it comes to natural resources assets the Kremlin likes to be in control. So if BP and the Russian government have reached some sort of an understanding behind the scene, AAR would be best advised not to scream too loudly.

 

Another hypothesis gaining traction, in wake of AAR’s intention to sell, is that instead of being the seller of its stake in TNK-BP, the British oil major could now turn buyer. BP could then re-attempt a fresh partnership with Rosneft; something which it attempted last year only for it to be scuppered by AAR.

 

There can be any amount of speculation or any number of theories but here again a nod from the Kremlin is crucial. Away from ‘British Petroleum’ (as Sarah Palin and President Obama lovingly refer to it in times of political need) to the British Government which reiterated its support for shale exploration earlier this week.

 

On Monday, Minister Edward Davey of UK's Department of Energy and Climate Change (DECC) expressed hopes of lifting a suspension on new shale gas exploration. It was imposed in 2011 following environmental concerns about fracking and a series of minor earthquakes in Lancashire triggered by trial fracking which spooked the nation. In near sync with Davey, Chancellor of the Exchequer George Osborne told the Conservative Party conference in Birmingham that he was considering a 'generous new tax regime' to encourage investment in shale gas.

 

In case you haven’t heard by now, Hugo Chavez is back as president of Venezuela for another six year stint. This means it will be another rendezvous in Vienna for the Oilholic at the OPEC meeting of ministers in December with Rafael Ramirez, the crude Chavista likely to be hawkish Venezuela’s man at the table. Opposition leader Henrique Capriles believed in change, but sadly for the Venezuelan economy grappling with mismanagement of its ‘crude’ resources and 20% inflation, he fell short.

 

On January 10, 2012 when Chavez will be inaugurated for another term as Venezuela's president, he will be acutely aware that oil accounts for 50% of his government’s revenue and increasingly one dimensional economy. Bloomberg puts Chinese lending to Venezuela between 2006 and 2011 at US$42.5 billion. In a staggering bout of frankness, Ramirez admitted in September that of the 640,000 barrels per day (bpd) that Venezuela exported to China, 200,000 bpd went towards servicing government debt to Beijing.

 

The country's oil production is hardly rising. Just as Chavez’s health took a toll from cancer, national oil company PDVSA has not been in good health either. Its cancer is mismanagement and underinvestment. Most would point to an explosion in August when 42 people perished at the Amuay refinery – Venezuela’s largest distillate processing facility as an example. However, PDVSA has rarely been in good health since 2003 when it fired 40% of its workforce in the aftermath of a general strike aimed at forcing Chavez from power.

 

Staying with Latin America, the US Supreme Court has said it will not block a February 2011 judgement from an Ecuadorean court that Chevron must pay US$19 billion in damages for allegedly polluting the Amazonian landscape of the Lago Agrio region. The court’s announcement is the latest salvo in a decade-long legal tussle between Texaco, acquired by Chevron in 2001, and the people of the Lago Agrio.

 

The Ecuadorians and Daryl Hannah (who is not Ecuadorian) wont rejoice as Chevron it is not quite done yet. Far from it, the oil major has always branded the Ecuadorian court’s judgement as fraudulent and not enforceable under New York law. It has also challenged it under an international trade agreement between the US and Ecuador.

 

The latter case will be heard next month – so expect some more ‘crude’ exchanges and perhaps some stunts from Ms. Hannah. That’s unless she is under arrest for protesting about Keystone XL! That’s all for the moment folks! Keep reading, keep it ‘crude’ or Elle Driver might come after you!

 

© Gaurav Sharma 2012. Photo: East Plant of the Texas City Refinery, Texas, USA © BP Plc

Non-OPEC supply, volatility & other matters

One of the big beasts of the non-OPEC supply jungle – Russia – held its latest high level meeting with OPEC earlier this week. Along with the customary niceties came the expected soundbites when Alexander Novak, Minister of Energy of the Russian Federation and Abdalla Salem El-Badri, OPEC Secretary General, met in Vienna on Tuesday.

 

Both men accompanied by “high-level” delegations exchanged views on the current oil market situation and “underscored the importance of stable and predictable markets for the long term health of the industry and investments, and above all, the wellbeing of the global economy.”

 

OPEC is also eyeing Russia’s Presidency of the G-20 in 2013 where the cartel has only one representative on the table in the shape of Saudi Arabia, which quite frankly represents itself rather than the block. However, non-OPEC suppliers are aplenty – Canada, Brazil, Mexico and USA to name the major ones alongside the Russians. The Brits and Aussies have a fair few hydrocarbons to share too.

 

Perhaps in light of that, OPEC and Russia have proposed to broaden their cooperation and discuss the possible establishment of a joint working group focused on information exchange and analysis of the petroleum industry. The two parties will next meet in the second quarter of 2013 by which time, unless there is a geopolitical flare-up or a massive turnaround in the global economy, most believe healthy non-OPEC supply growth would have actually been offset by OPEC cuts.

 

So the Oilholic thinks there’s quite possibly more to the meeting on September 25 than meets the eye…er…press communiqué. Besides, whom are we kidding regarding non-OPEC participants? Market conjecture is that non-OPEC supply growth itself is likely to be moderate at best given the wider macroeconomic climate.

 

Mike Wittner, global head of oil research at Société Générale, notes that non-OPEC supply growth is led by rapid gains in North America: tight oil from shale in the US and oil sands and bitumen in Canada. North American supply is forecast to grow by 1.04 million barrels per day (bpd) in 2012 and 0.75 million bpd in 2013. The reason for the overall higher level of non-OPEC growth next year, compared to 2012, is that this year’s contraction in Syria, Yemen, and South Sudan has  already taken place and will not be repeated.

 

“We are projecting output in Syria and Yemen flat through 2013, with disruptions continuing; we are forecasting only small increases in South Sudan beginning well into next year, as the recent pipeline agreement with Sudan appears quite tenuous at this point. With non-OPEC supply growth roughly the same as global demand growth next year, OPEC will have to cut crude production to balance the market,” he added.

 

With more than anecdotal evidence of the Saudis already trimming production, Société Générale reckons total non-OPEC supply plus OPEC NGLs production may increase by 0.93 million bpd in 2013, compared to 0.75 million bpd in 2012. Compared to their previous forecast, non-OPEC supply plus OPEC NGLs growth has been revised up by 50,000 bpd in 2012 and down by 60,000 bpd in 2013. That’s moderate alright!

 

The key point, according to Wittner, is that the Saudis did not replace the last increment of Iranian flow reductions, where output fell by 300 kb/d from May to July, due to EU and US sanctions. “The intentional lack of Saudi replacement volumes was – in effect – a Saudi cut; or, if one prefers, it was the Saudis allowing Iran to unintentionally and unwillingly help out the rest of OPEC by cutting production and exports,” he concluded.

 

Let’s see what emerges in Vienna at the December meeting of ministers, but OPEC crude production is unlikely to average above 31.5 million bpd in the third quarter of 2012 and is likely to be cut further as market fundamentals remain decidedly bearish. In fact, were it not for the geopolitical premium provided by Iran’s shenanigans and talk of a Chinese stimulus, the heavy losses on Wednesday would have been heavier still and Brent would not have finished the day remaining above the US$110 per barrel mark.

 

On a related note, at one point Brent's premium to WTI increased to US$20.06 per barrel based on November settlements; the first move above the US$20-mark since August 16. As a footnote on the subject of premiums, Bloomberg reports that Bakken crude weakened to the smallest premium over WTI oil in three weeks as Enbridge apportioned deliveries on pipelines in the region in Tuesday’s trading.

 

The Western Canadian Select, Canada’s most common benchmark, also usually sells at a discount to the WTI. But rather than the “double-discount” (factoring in WTI’s discount to Brent) being something to worry about, National Post columnist Jameson Berkow writes how it can be turned into an advantage!

 

But back to Europe where Myrto Sokou, analyst at Sucden Financial Research, feels that very volatile and nervous trading sessions are set to continue as Eurozone‘s concerns weigh on market sentiment. “The rebound on Thursday morning followed growing discussions of a further stimulus package from China that improved market sentiment and increased risk appetite,” she said.

 

However, Sokou sees the market remaining focussed on Spain as news of its first draft budget for 2013 is factored in. “It is quite a crucial time for the markets, especially following the recent refusal from Germany, Holland and Finland to allow ESM funds to cover legacy assets, so that leaves the Spanish Government to fund their Banks,” she added.

 

On the corporate front, Canadians find themselves grappling with the Nexen question as public sentiment is turning against CNOOC’s offer for the company just as its shareholders approved the deal. Many Members of Parliament have also voiced their concerns against a deal with the Chinese NOC. For its part, if a Dow Jones report is to be believed, CNOOC is raising US$6 billion via a one-year term loan to help fund the possible purchase of Nexen. The Harper administration is yet to give its regulatory approval.

 

Meanwhile, the Indian Government has confirmed that one of its NOCs – ONGC Videsh – has made a bid to acquire stakes in Canadian oil sands assets owned by ConocoPhillips with a total projected market valuation of US$5 billion. ConocoPhillips aims to sell about 50% of its stake in emerging oil sands assets, according to news reports in Canada. Looks like one non-OPEC destination just won’t stop grabbing the headlines!

 

Moving away from Canada, Thailand’s state oil company PTTEP has finalised arrangements for its US$3.1 billion share offer for Mozambique’s Cove Energy. Earlier this year, PTTEP won a protracted takeover battle for Cove over Shell. Concluding on a lighter note, the Oilholic has learned that the Scottish distillery of Tullibardine is to become the first whisky distillery in the world to have its by-products converted into advanced biofuel, capable of powering vehicles fuelled by petrol or diesel.

 

The independent malt whisky producer in Blackford, Perthshire has signed a memorandum of understanding with Celtic Renewables Ltd, an Edinburgh-based company which has developed the technology to produce biobutanol from the by-products of whisky production. Now that’s worth drinking to, but it’s all for the moment folks! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Oil Drilling site, North Dakota, USA © Phil Schermeister / National Geographic.

Talking geopolitics & refineries at Platts event

Following on from earlier conversations with contacts in the trading community about the direction of the Brent crude price versus geopolitics, the Oilholic extended his queries to the Platts Energy Risk Forum, held in London earlier this week. At the event, Dave Ernsberger, global editorial director of oil coverage at Platts, summed-up the market mood as we near the final quarter of 2012 (see graphic above, click to enlarge). “This year has been one of two realities, namely the dire economic climate and upward geopolitical risk. H1 2012 saw anxiety about a war in the Middle East and H2 sees renewed fears of a demand slowdown,” he told delegates.

“The oil price is poised to break away from the mean – but which way? So far it has been chained and shackled in the US$15-20 range either way falling below US$90 and rising above US$115 over the course of this year. The threat of an Iran versus Israel conflict which might draw the US in by default has not gone away. On the other hand a European recession could bring a new oil price crash. Additionally, there is a perception that supply-demand and spare capacity scenarios are not what they are made out to be,” Ernsberger added.

Over a break in proceedings, the Oilholic quizzed the Platts man about the actual influence of the geopolitical or instability premium on the price of the crude stuff and market conjecture about it being broadly neutral for 2013.

“I think the current geopolitical dynamic is fairly well understood at this point. The big touching points which are at play for instance, but not limited to, the US-Iran-Israel issue and the China-Japan and Asia Pacific energy politics have been with us for a while. I feel it is hard to see how those geopolitical arenas will evolve significantly in 2013 because we are at a stalemate point. In a sense, if you look forward they should be neutral,” Ernsberger said.

However, both of us were in agreement that one always needs to be careful about a geopolitical trigger as a single tiny flashpoint could offset the placidness. But from where Ernsberger and the Oilholic sit at present – geopolitical influences are in a kind of suspended animation for next year. The Platts Energy Risk Forum also noted that demand forecasts for 2012 have stabilised and that Chinese demand, on a standalone basis, had slowed considerably. As such, the price outlook for 2013 is overwhelmingly bearish.

One unintended result of the European crisis brings us to another area of interest - refining. Platts noted that the EU-wide recession is speeding up refinery closures. It suggested that 3 to 5 million barrels per day (bpd) of oil refining capacity is under immediate threat of closure or actually did close recently. Additionally, an estimated 7 million bpd needs to close to adjust for more efficient refining in Asia and Middle East. But the closures are lifting refining margins over the short-term in a business that remains volatile (see graphic above right, click to enlarge). Ernsberger also brought forth a very valid observation for the readers of this humble blog – the striking similarity between the survival (or vice versa) statistics within the refining and civil aviation sectors.

“Refining and aviation are two industries where it’s a race to the bottom! There is so much competition in both these industries that basically whatever environment you are operating in – even if you are operating in India or China – it’s a race to the bottom…Typically, what you’ll find is that every company would try and stay in the business as long as it can and will only leave when it runs out of money. It’s also why refining and aviation have more bankruptcies than any other sector I can think of,” he said.

At the same forum, it was also a pleasure running into Dr. Vincent Kaminski, a former Enron executive who repeatedly raised strong objections to the financial practices at the company prior to its scandal-ridden collapse in 2002. In the aftermath of the scandal, Dr. Kaminski was praised for being among the voices of reason at a company riddled with malpractices. (For background read Bethany McLean and Peter Elkind’s brilliant book – The Smartest Guys in the Room)

Dr. Kaminski, who is an academic on the faculty of Houston’s Rice University at present, told the forum that by the time of its collapse Enron had mutated from an energy company to one which traded practically everything and one which was not alone in devising trading strategies based on exploiting geographical constraints.

“Energy markets have evolved over the last 20 years into an integrated global system. Markets for different physical commodities form what can be called a tightly coupled system. While market participants learn and adjust their behaviour in order to survive and prosper in a changing world, the system itself evolves and remains far removed from a stable equilibrium at any point in time,” he added.

Dr. Kaminski also dwelt on the Shale Gas revolution in the US which was decades in the making but transformed the country's energy landscape upon fruition leading to the availability of natural gas in abundance and a dip in gas price-contracts (see graphic on the left, click to enlarge). “As US production sky-rocketed, conventional wisdom about the possibility of LNG shortages barely five years ago was turned on its head. By April 2012 we even noted a sub-US$2/mBtu front-month settlement on the NYMEX,” he added.

Later in the afternoon, Dr. Kaminski told the Oilholic that US LNG import terminals currently being prepped to export gas in wake of the shale bonanza could one day be sending tanker-loads to Europe in direct competition with Qatar and Russia.

“On the flipside for the US consumer, the moment a viable gas export market is established for US gas, the impact on the country’s domestic gas market would be a bullish one. That is the nature of market forces,” he added.

When asked about the prospects of shale prospection in Europe – most notably in Poland, Ukraine, Sweden and the UK – Dr. Kaminski said he was a ‘realist’ rather than a ‘sceptic’. “What happened in the US, did not take place overnight. Technology, legislative facilitation and public will – all played a part and gradually fell into place. I do not see it being replicated in Europe over the short term and certainly not with the speed that some are hoping it would,” he concluded.

Just as the Oilholic was winding down from a discussion on shale with Dr. Kaminski, it seems the UK Institution of Mechanical Engineers (IMechE) was talking up the economic benefits of a British Shale Gale! In a policy statement circulated to parliamentarians, the IMechE said shale gas was ‘no silver bullet’ for UK energy security but will provide long-term economic benefits in the shape of thousands of jobs.

Dr. Tim Fox, Head of Energy and Environment at IMechE and lead author of the shale gas policy statement, said, “Shale gas has the potential to give some of the regions hit hardest by the economic downturn a much-needed economic boost. The engineering jobs created will also help the Government’s efforts to rebalance the UK’s skewed economy.”

However, Dr. Fox added that shale gas "is unlikely to have a major impact on energy prices and the possibility that the UK might ever achieve self-sufficiency in gas is remote." 

IMechE projects that 4,200 jobs would be created per year over a ten-year drill programme. The engineering skills developed could then be sold abroad, just as the oil and gas experience built up in North Sea oilfields is now being sold across the world. Well, we shall see but that’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Graphic 1: Platts dated Brent – January 2011 to August 2012 © Platts September 2012. Graphic 2: International cracking margins snapshot © Platts / Turner Mason & Co. September 2012. Graphic 3: US Natural Gas futures contract © Dr. Vincent Kaminski, Rice University, Texas, USA /Bloomberg.

On Brent's direction, OPEC, China & more

Several conversations last week with contacts in the trading community, either side of the pond, seem to point to a market consensus that this summer’s rally in the price of Brent and other waterborne crudes was largely driven by geopolitical concerns. Tight North Sea supply scenarios in September owing to planned maintenance issues, the nagging question of Iran versus Israel and Syrian conflict continue to prop-up the so called ‘risk premium’; a sentiment always difficult to quantify but omnipresent in a volatile geopolitically sensitive climate.

 

However, prior to the announcement of the US Federal Reserve’s economic stimulus measures, contacts at BofAML, Lloyds, Sucden Financial, Société Générale and Barclays seemed to opine that the current Brent prices are nearing the top of their projected trading range. Then of course last Thursday, following the actual announcement of the Fed’s plan – to buy and keep buying US$40 billion in mortgage-backed securities every month until the US job market improves – Brent settled 0.7% higher or 78 cents more at US$116.66 per barrel.

 

Unsurprisingly, the move did briefly send the WTI forward month futures contract above the US$100 per barrel mark before settling around US$99 on the NYMEX; its highest close since May 4. But reverting back to Brent, as North Sea supply increases after September maintenance and refinery crude demand witnesses a seasonal drop, the benchmark is likely to slide back downwards. So for Q4 2012 and for 2013 as a whole, Société Générale forecasts prices at US$103. Compared to previous projections, the outlook has been revised up by US$6 for Q4 2012 and by US$3 for 2013 by the French investment back.

 

Since geopolitical concerns in the Middle East are not going to die down anytime soon, many traders regard the risk premium to be neutral through 2013. That seems fair, but what of OPEC production and what soundbites are we likely to get in Vienna in December? Following on from the Oilholic’s visit to the UAE, there is more than just anecdotal evidence that OPEC doves have begun to cut production (See chart above left, click to enlarge).

 

Société Générale analyst Mike Wittner believes OPEC production cuts will continue with the Saudis joining in as well. This would result in a more balanced market, especially for OECD inventories. “Furthermore, moderate demand growth, led – as usual – by emerging markets, should be roughly matched by non-OPEC supply growth, driven by the US and Canada,” Wittner added.

 

Of course, the soundbite of last week on a supply and demand discussion came from none other than the inimitable T. Boone Pickens; albeit in an American context. The veteran oilman and founder of investment firm BP Capital told CNBC that the US has the natural resources to stop importing OPEC crude oil one fine day.

 

Pickens noted that there were 30 US states producing oil and gas; the highest country has ever had. In a Presidential election year, he also took a swipe at politicians saying neither Democrats nor Republicans had shown “leadership” on the issue of energy independence.

 

At the Democratic convention the week before, President Obama boasted that the US had already cut imported oil by one million barrels per day (bpd). However, Pickens said this had little to do with any specific Obama policy and the Oilholic concurs. As Pickens explained, “The economy is poorer and that will get you less imports. You can cut imports further if the economy gets worse.”

 

He also said the US should build the Keystone XL oil pipeline, currently blocked by the Obama administration, to help bring more oil in to the country from Canada. Meanwhile, US Defense Secretary Leon Panetta is in Japan and China to calm tempers on both sides following a face-off in the East China Sea. On Friday, six Chinese surveillance ships briefly entered waters around the Senkaku Islands claimed by Japan, China and Taiwan.

 

After a stand-off with the Japanese Coastguard, the Chinese vessels left but not before the tension level escalated a step or two. The Chinese reacted after Japan sealed a deal to buy three of the islands with resource-rich waters in proximity of the Chunxiao offshore gas field. Broadcaster NHK said the stand-off lasted 90 minutes, something which was confirmed over the weekend by Beijing.

 

With more than just fish at stake and China’s aggressive stance in other maritime disputes over resource-rich waters of the East and South China Sea(s), Panetta has called for “cooler heads to prevail.”

 

Meanwhile some cooler heads in Chinese boardrooms signalled their intent as proactive players in the M&A market by spending close to US$63.1 billion in transactions last year according a new report published by international law firm Squire Sanders. It notes that among the various target sectors for the Chinese, energy & resources with 30% of deal volume and 70% of deal value and chemicals & industrials sectors with 21% of deal volume and 11% of deal value dominated the 2011 data (See pie-chart - courtesy Squire Sanders - above, click to enlarge). In deal value terms, the law firm found that North America dominates as a target market (with a share of 35%) for the Chinese, with oil & gas companies the biggest attraction. However, in volume terms, Western Europe was the top target market with almost a third (29%) of all deals in 2011, and with industrials & chemicals companies being the biggest focus for number of deals (29%) but second to energy & resources in value (at 18% compared to 61%).

 

Big-ticket acquisitions by Chinese buyers were also overwhelmingly concentrated in the energy & resources industries where larger transactions tend to predominate. Sinopec, the country’s largest refiner, brokered a string of the largest transactions. These include the acquisition of a 30% stake in Petrogal Brasil for US$4.8 billion in November last year, a US$2.8 billion deal for Canada's Daylight Energy and the 33.3% stake in five oil & gas projects of Devon Energy for US$2.5 billion.

 

Squire Sanders notes that Sinopec, among other Chinese outbound buyers, often acquires minority stake purchases or assets, in a strategy that allows it to reduce risks and gain familiarity with a given market. This also reduces the likelihood of any political backlash which has been witnessed on some past deals such as CNOOC’s hostile bid for US-based oil & gas producer Unocal in 2005, which was subsequently withdrawn.

 

Since then, CNOOC has found many willing vendors elsewhere. For instance, in July this year, the company announced the US$17.7 billion acquisition of Canadian firm Nexen. To win the deal, which is still pending Ottawa’s approval, CNOOC courted Nexen, offering shareholders a 15.8% premium on the price shares had traded the previous month.

 

Squire Sanders’ Hong Kong-based partner Mao Tong believes clues about direction of Chinese investment may well be found in the Government’s 12th five-year plan (2011-2015).

 

“It lays emphasis on new energy resources, so the need for the technology and know-how to exploit China’s deep shale gas reserves will maintain the country’s interest in US and Canadian companies which are acknowledged leaders in this area,” Tong said at the launch of the report.

 

Away from Chinese moves, Petrobras announced last week that it had commenced production at the Chinook field in the Gulf of Mexico having drilled and completed a well nearly five miles deep. The Cascade-Chinook development is the first in the Gulf of Mexico to prospect for offshore oil using a floating, production, storage and offloading vessel instead of traditional oil platforms.

 

Finally, after the forced nationalisation of YPF in April, the Argentine government and Chevron inked a memorandum of understanding on Friday to explore unconventional energy opportunities. Local media reports also suggest that YPF has reached out to Russia's Gazprom as well since its nationalisation in a quest for new investors after having squeezed Spain’s Repsol out of its stake in YPF.

 

In response, the previous owner of YPF said it would take legal action against the move. A Repsol spokesperson said, “We do not plan to let third parties benefit from illegally confiscated assets. Our legal teams are already studying the agreement."

 

Neither Chevron nor YPF have commented on possible legal action from Repsol. That’s all for the moment folks. Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Graph: OPEC Production 2010-2012 © Société Générale CIB 2012. Chart: Chinese M&A activity per sector by deal valuation and volumes © Squire Sanders. 

BP’s sale, South Africa’s move & the North Sea

BP continues to catch the Oilholic’s eye via its ongoing strategic asset sale programme aimed at mitigating the financial fallout from the 2010 Gulf of Mexico spill. Not only that, a continual push to get rid of refining and marketing (R&M) assets should also be seen as positive for its share price.

 

This afternoon, the oil giant inked a deal to sell five of its oil & gas fields in the Gulf of Mexico for US$5.6 billion to Plains Exploration and Production; an American independent firm. However, BP Group Chief Executive Bob Dudley reiterated that the oil giant remains committed to the region.

 

"While these assets no longer fit our business strategy, the Gulf of Mexico remains a key part of BP's global exploration and production portfolio and we intend to continue investing at least US$4 billion there annually over the next decade," he said in statement following the announcement.

 

Last month BP agreed to sell the Carson oil refinery in California to Tesoro for US$2.5 billion. As a footnote, the agreement holds the potential to make Tesoro the largest refiner on the West Coast and a substantial coastal R&M player alongside the oil majors. While regulatory scrutiny is expected, anecdotal evidence from California suggests the deal is likely to be approved. Back in June, BP announced its intention to sell its stake in TNK-BP, the company's lucrative but acrimony fraught Russian venture.

 

One can draw a straight logic behind the asset sales which BP would not contest. A recent civil case filed by the US Department of Justice against BP does not mince its words accusing the oil giant of “gross negligence” over the Gulf of Mexico spill which followed an explosion that led to the death of 11 workers. Around 4.9 million barrels of oil spewed into the Gulf according to some estimates.

 

The charges, if upheld by the court, could see BP fined by as much as US$21 billion. The trial starts in January and BP, which denies the claim, says it would provide evidence contesting the charges. The company aims to raise US$38 billion via asset sales by Q4 2012. However, the Oilholic is not alone is his belief that the sale programme, while triggered by the spill of 2010, has a much wider objective of portfolio trimming and a pretext to get rid of burdensome R&M assets.

 

Meanwhile in Russia, the Kremlin is rather miffed about the European Commission’s anti-trust probe into Gazprom. According to the country’s media, the Russian government said the probe “was being driven by political factors.” Separately, Gazprom confirmed it would no longer be developing the Shtokman Arctic gas field citing escalating costs. Since, US was the target export market for the gas extracted, Gazprom has probably concluded that shale exploration stateside has all but ended hopes making the project profitable.

 

Sticking with Shale, reports over the weekend suggest that South Africa has ended its moratorium on shale gas extraction. A series of public consultations and environmental studies which could last for up to two years are presently underway. It follows a similar decision in the UK back in April.

 

Sticking with the UK, the country’s Office for National Statistics (ONS) says output of domestic mining & quarrying industries fell 2.4% in July 2012 on an annualised basis; the 22nd consecutive monthly fall. More worryingly, the biggest contributor to the decrease came from oil & gas extraction which fell 4.3% in year over year terms.

 

The UK Chancellor of the Exchequer George Osborne has reacted to declining output. After addressing taxation of new UKCS prospection earlier this year, Osborne switched tack to brownfield sites right after the ONS released the latest production data last week.

 

Announcing new measures, the UK Treasury said an allowance for "brownfield" exploration will now shield portions of income from the supplementary charge on their profits. It added that the allowance would give companies the incentive to "get the most out of" older fields. Speaking on BBC News 24, Osborne added that the long-term tax revenues generated by the change would significantly outweigh the initial cost of the allowance.

 

According to the small print, income of up to £250 million in qualifying brownfield projects, or £500 million for projects paying Petroleum Revenue Tax (PRT), would be protected from a 32% supplementary charge rate applied by the UK Treasury to such sites.

 

Roman Webber, tax partner at Deloitte, believes the allowance should stimulate investment in older fields in the North Sea where it was previously deemed uneconomical. Such investment is vital in preserving and extending the life of existing North Sea infrastructure, holding off decommissioning and maximising the recovery of the UK’s oil & gas resources.

 

“Enabling legislation for the introduction of this allowance was already included in the UK Finance Act 2012, announced earlier this year. The allowance will work by reducing the profits subject to the 32% Supplementary Charge. The level of the allowances available will depend on the expected project costs and incremental reserves, but will be worth up to a maximum of £160 million net for projects subject to PRT and £80 million for those that are not subject to the tax,” Webber notes.

 

Finally on the crude pricing front, Brent's doing US$114-plus when last checked. It has largely been a slow start to oil futures trading week either side of the pond as traders reflect on what came out of Europe last week and is likely to come out of the US this week. Jack Pollard of Sucden Financial adds that Chinese data for August showed a deteriorating fundamental backdrop for crude with net imports at 18.2 million metric tonnes; a 13% fall on an annualised basis.

 

Broadly speaking, the Oilholic sees a consensus in the City that Brent’s trading range of US$90 to US$115 per barrel will continue well into 2013. However for the remaining futures contracts of the year, a range of US$100 to US$106 is more realistic as macroeconomics and geopolitical risks seesaw around with a relatively stronger US dollar providing the backdrop. It is prudent to point out that going short on the current contract is based Iran not flaring up. It hasn't so far, but is factored in to the current contract's price. That’s all for the moment folks! Keep reading, keep it ‘crude’!

 

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

A tailored guide to minerals and mining

Mining and quarrying together with oil & gas prospection complete the extractive industries landscape. Minerals have myriad uses in several key sectors of the world economy. Specifically in the oil & gas world, minerals used in the drilling process (e.g. - barytes, bentonites and frac sands) are key components of the hydrocarbon extraction processes.

 

Within this global setting, exploration, logistics and allied businesses are frequently impacted by constantly evolving commercial, legal, health and safety and cross-jurisdictional due diligence scenarios. Furthermore, professionals in the business as well as corporate project sponsors also need to keep abreast of technical and scientific matters ahead of a project feasibility study.

 

The book – Minerals and Mining: A Practical Global Guide – not only seeks to address an information gap in sector but also hopes to mitigate the information overload in this day and age. This succinct handy guide of just under 300 pages dwells on key legal and commercial concerns of the minerals and mining world. Various aspects of the subject at hand are examined by industry professionals via 19 detailed chapters.

 

Each chapter has been authored by jurisdictional experts ranging from Argentina to Russia  who work for some of the most recognisable brands in the legal and advisory business – including, but not limited to Allen & Overy, Norton Rose, SNR Denton and KPMG.

 

Topics include regulations, agreements, tariffs on minerals and mining; legal processes concerning  licences, concessions, production sharing and mining development agreements; financing; mining management and operating facets and last but not the least - the sale and purchase of mining assets. Additionally, mineral trading, environmental protection, social responsibility, accounting and taxation in various jurisdictions have also been examined.

 

The treatment of Latin American nations – Argentina, Brazil, Chile, Mexico and Peru – stands out for its veracity. However, it is the detailed chapters on emerging scenarios in Africa that sealed the deal for the Oilholic. As with works of this nature, consulting editor Per Vestergaard Pedersen of Lett Law Firm has done a commendable job of knitting this book of experts together. He has also authored an informative chapter on Greenland; a jurisdiction where mining activities have grown exponentially between 2002 and 2012.

 

On the whole, as expected the book is aimed at professionals with a mid-tier and upwards knowledge of the sector. The Oilholic believes it would make a handy and informative reference guide for legal practitioners and financiers. Executives at advisory firms, banks, engineering consultants and mining, shale, oilfield drilling project EPC contractors would appreciate it as well.

 

© Gaurav Sharma 2012. Photo: Front Cover – Minerals and Mining: A Practical Global Guide © Globe Law and Business

G7’s crude gripe, “Make oil prices dive”

As the Oilholic prepares to bid goodbye to Dubai, the G7 group of finance ministers have griped about rising oil prices and called on oil producing nations to up their production. They would rather have Dubai Mall’s Waterfall with Divers enclosure (pictured left) act as a metaphor for market direction! It is causing some consternation in this OPEC member jurisdiction and so it should.

 

First the facts – in a communiqué released on the US Treasury’s website yesterday, the G7 ministers say they are concerned about the impact of rising oil prices on the global economy and were prepared to act. Going one step further the ministers called on producing nations, most read OPEC, to act and now.

 

"We encourage oil producing countries to increase their output to meet demand. We stand ready to call upon the International Energy Agency (IEA) to take appropriate action to ensure that the market is fully and timely supplied," the statement notes. We have been here before back in March when American motorists were worried about prices at the pump and President Barack Obama was in a political quandary.

 

Now of course he is barely months away from a US Presidential election and here we are again. In fact the Canadians aside, all leaders elsewhere in the G7 are facing political pressure of some kind or the other related to the crude stuff too. Cue the statement and sabre rattling of releasing strategic petroleum reserves (SPRs)!

 

OPEC and non-OPEC producers' viewpoint, and with some reason, is that the market remains well supplied. Unfortunately plays around paper barrels and actual availability of physical barrels have both combined to create uncertainty in recent months.

 

On the face of it, at its last meeting OPEC – largely due to Saudi assertiveness – was seen producing above its set quota. Oil prices have spiked and dived, as the Oilholic noted earlier, but producers’ ability to change that is limited. Fear of the unknown is driving oil prices. As Saadallah Al Fathi, a former OPEC Secretariat staff member, notes in his recent Gulf News column, “prices seem to move against expectations, one way or another.”

 

Al Fathi further notes that the (West/Israel’s) confrontation with Iran is still on, but it is not expected to flare up. “Even the embargo on Iranian oil is slow to show in numbers, but may become more visible later,” he adds. While an oil shock following an Israeli attack on Iran could be made up by spare capacity, the room for another chance geopolitical complication or natural disaster would stretch the market. This is what spooks politicians, a US President in an election year and the market alike.

 

However, rather than talk of releasing SPRs for political ends now and as was the case in June 2011, the Oilholic has always advocated waiting for precisely such an emergency! While it has happened in the past, it is not as if producers have taken their foot off the production pedal to cash in on the prevailing bullish market trends at this particular juncture.

 

Away from G7’s gripe, regional oil futures benchmark – the Dubai Mercantile Exchange (DME) Oman Crude (OQD) – has caught this blogger’s eye. Oman’s production is roughly below 925,000 barrels per day (bpd) at present. For instance, in June it came in at 923,339 bpd. However, this relatively new benchmark is as much about Oman as Brent is about the UK. It is fast acquiring pan-regional acceptance and the November futures contract is seen mirroring Brent and OPEC basket crude prices. Its why the DME created the contract in the first place. Question is will it have global prowess as a 'third alternative' one day?

 

Elsewhere, the UAE has begun using the Abu Dhabi Crude Oil Pipeline (ADCOP). It will ultimately enable Abu Dhabi to export 70% of its crude stuff from Fujairah which is located on the Gulf of Oman bypassing the Strait of Hormuz and Iranian threats to close the passage in the process. However the 400km long pipeline, capable of transporting 1.5 million bpd, comes at a steep price of US$4 billion.

 

Sticking with the region, it seems Beirut is now the most expensive city to live in the Middle East according to Mercer’s 2012 Worldwide Cost of Living survey. It is followed by Abu Dhabi, Dubai (UAE), Amman (Jordan) and Riyadh (Saudi Arabia). On a global footing, Tokyo (Japan) tops the list followed by Luanda (Angola), Osaka (Japan), Moscow (Russia) and Geneva (Switzerland).

 

Meanwhile unlike the ambiguity over Dubai’s ratings status, Kuwait has maintained its AA rating from Fitch with a ‘stable’ outlook supported by rising oil prices and strong sovereign net foreign assets estimated by the agency in the region of US$323 billion in 2011.

 

Finally, on a day when the International Atomic Energy Agency (IAEA) says Iran has doubled production capacity at the Fordo nuclear site, Tehran has called for ridding the world of nuclear weapons at the Non Aligned Movement (NAM) summit claiming it has none and plans none. Yeah right! And  the Oilholic is dating Cindy Crawford! That’s all from Dubai folks; it’s time for the big flying bus home to London! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo: Waterfall at the Dubai Mall, UAE © Gaurav Sharma

The world according to ENOC, Jebel Ali & more

If you could think of one participant in the Dubai economy that exemplifies a bit of a detachment from its debt fuelled construction boom turned bust, then the Emirates National Oil Company (ENOC) is certainly it. The Oilholic has always been one for contrasting Dubai’s debt fuelled growth with neighbour Abu Dhabi’s resource driven organic growth. However, ENOC is a somewhat peculiar exception to the recent Dubai norm or some say form.

 

Since becoming a wholly owned Government of Dubai crown company in 1993, ENOC has continued to diversify its non-fuel operations while playing its role as a custodian of whatever little crude oil reserves the Emirate holds. The history of this NOC dates to 1974. Today it is among the most integrated (and youngest) operators in the business, though not necessarily profitable in a cut throat refining and marketing (R&M) world.

 

While it has no operations in neighbouring Abu Dhabi, ENOC has moved well beyond its Dubai hub establishing a foothold in 20 international markets and other neighbouring Emirates over the years. In case, you didn’t know or had never heard of ENOC, this Dubai crown company has a majority 51.9% stake in Dragon Oil Plc; a London-listed promising upstart. Dragon Oil’s principal producing asset is the Cheleken Contract in the eastern section of the Caspian Sea under Turkmenistan’s jurisdiction.

 

Despite trying times for refiners ENOC’s Jebel Ali Refinery, situated 40km southwest of Dubai City, is the crown company’s crown jewel. Planned in 1996 and completed by 1999, the Jebel Ali refinery’s processing capacity currently stands at 120,000 barrels per day (bpd). It processes condensate or light crude to myriad refined products which get exported as well as feed in to ENOC's own domestic supply chain.

 

ENOC says an upgrade of the refinery was carried in 2010 at a cost of US$850 million. The refinery dominates the landscape of the Jebel Ali free trade zone accompanied by a sprawling industrial estate and an international port. The Oilholic is reliably informed that the latter is among the largest and busiest ports in the region playing host to more ships of the US Navy than any other in the world away from American shores.

 

While being able to host aircraft carriers is impressive, what’s more noteworthy from a macroeconomic standpoint is the fact that the Jebel Ali Free Trade Zone as a destination exempts companies relocating there from corporate tax for fifteen years, personal income tax and excise duties. It’s a privilege to have visited Jebel Ali and also by ‘crude’ coincidence witness ENOC sign a joint venture agreement with Saudi Arabia’s Aldrees Petroleum & Transport Services Company (Aldrees) for setting up service stations in different locations across the latter.

 

The equal-staked venture will see service stations in Saudi Arabia feature ENOC’s regional marquee brand products. The first station is expected to open early next year, with the number of sites rising to 40 in due course. Given that ENOC needs to buy petroleum from international markets as Dubai does not produce enough of the crude stuff, the move has much to do with cost mitigation on the home front.

 

ENOC is forced to sell fuel at Dubai petrol pumps well below the price it pays for crude and refining costs. For instance, over 2011 fuel sales losses at ENOC were thought to be in the US$730-750 million range. So here’s a NOC with profitable non-fuel businesses but troubling fuel businesses looking for ‘crude’ redemption elsewhere. That’s all for the moment folks; a final word from Dubai later! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo 1: ENOC Bur Dubai Office, UAE. Photo 2: Jebel Ali Refinery and Industrial Estate, Dubai, UAE © Gaurav Sharma 2012.