Brent’s liquidity, Nexen, 'crude' Vancouver & more

Last Friday, the Brent forward month futures price plummeted to US$110.65 per barrel thereby losing all of the gains it made in 2013. The WTI price declined in near furious tandem to US$91.92; the  benchmark's lowest intraday price since January 4. An Italian political stalemate and US spending cuts enforced by Congressional gridlock have unleashed the bearish trends. Quite frankly, the troublesome headwinds aren’t going anywhere, anytime soon.

Prior to the onset of recent bearish trends, Bank of America said the upper limit for Brent crude will rise from US$140 per barrel this year to US$175 in 2017 because of constraints on supply. It added that WTI may slip to “US$50 within the next two years” amid booming North American supply. Meanwhile, ratings agency Moody’s expects strong global crude prices in the near term and beyond, with a continued US$15 per barrel premium in favour of Brent versus WTI over 2013.

Moody's still assumes that Brent crude will sell for an average US$100 per barrel in 2013, US$95 in 2014, and US$90 in the medium term, beyond 2014. For WTI, the agency leaves its previous assumptions unchanged at US$85 in 2013, 2014 and thereafter. Away from the fickle pricing melee, there was a noteworthy development last month in terms of Brent’s liquidity profile as a benchmark, which is set to be boosted.

On February 19, Platts proposed the introduction of a quality premium for Ekofisk and Oseberg crudes; two of the four grades constituting the Dated Brent marker. A spokesperson said the move would increase transparency and trading volumes in Dated Brent. The proposal came a mere fortnight after Shell’s adjustments to its trading contract for three North Sea blends including Brent.

The oil major said it would change its contract (SUKO 90) for buying and selling to introduce a premium for the delivery of higher quality Brent, Ekofisk and Oseberg grades. Previously, it only used the Forties grade which was typically the cheapest Brent blend and thus used to price the benchmark by default. BP has also agreed to Shell’s amended pricing proposals in principle.

The Oilholic thinks it is prudent to note that even though Platts is the primary provider of price information for North Sea crude(s), actual contracts such as Shell’s SUKO 90 are the industry’s own model. So in more ways than one, a broad alignment of the thinking of both parties (and BP) is a positive development. Platts is requesting industry feedback on the move by March 10 with changes being incorporated with effect from shipments in May.

However, there are some subtle differences. While Shell has proposed an inclusion of Brent, Platts is only suggesting premiums for Oseberg and Ekofisk grades. According to published information, the oil major, with BP’s approval, has proposed a 25% premium for Brent and Oseberg based on their difference to the Forties differential, and a 50% premium for Ekofisk.

But Platts, is seeking feedback on recommending a flat 50% premium for both Oseberg and Ekofisk. Nonetheless, at a time of a dip in North Sea production, a change of pricing status quo aimed at boosting liquidity ought to be welcomed. Furthermore, there is evidence of activity picking up in the UK sector of the North Sea, with Oil and Gas UK (OGUK), a body representing over 320 operators in the area, suggesting last month that investment was at a 30-year high.

OGUK said companies invested £11.4 billion in 2012 towards North Sea prospection and the figure is expected to rise to £13 billion this year. It credited UK Chancellor George Osborne’s new tax relief measures announced last year, which allowed gas fields in shallow waters to be exempt from a 32% tax on the first £500 million of income, as a key factor.

However, OGUK warned that reserves currently coming onstream have not been fully replaced with new discoveries. That is hardly surprising! In fact, UK production fell to the equivalent of 1.55 million barrels per day (bpd) in 2012, down by 14% from 2011 and 30% from 2010. While there may still be 24 billion barrels of oil to be found in the North Sea, the glory days are not coming back. Barrel burnt per barrel extracted or if you prefer Petropounds spent for prospection are only going to rise.

From the North Sea’s future, to the future of a North Sea operator – Canada’s Nexen – the acquisition of which by China’s state-owned CNOOC was finally approved on February 26. It took seven long months for the US$15.1 billion takeover to reach fruition pending regulatory approval in several jurisdictions, not least in Canada.

It was announced that shareholders of the Calgary, Alberta-based Nexen would get US$27.50 in cash for each share, but the conditions imposed by Canadian (and US) regulators for the deal to win approval were not disclosed. More importantly, the Harper administration said that CNOOC-Nexen was the last deal of its kind that the Canadian government would approve.

So it is doubtful that a state-controlled oil company would be taking another majority stake in the oil sands any time soon. The Nexen acquisition makes CNOOC a key operator in the North Sea, along with holdings in the Gulf of Mexico and West Africa, Middle East and of course Canada's Long Lake oil sands project (and others) in Alberta.

Meanwhile, Moody’s said the Aa3 ratings and stable outlooks of CNOOC Ltd and CNOOC Group will remain unchanged after the acquisition of Nexen. The agency would also continue to review for upgrade the Baa3 senior unsecured rating and Ba1 subordinated debt rating of Nexen.

Moving away from Nexen but sticking with the region, the country’s Canadian Business magazine asks, “Is Vancouver the new Calgary?”  (Er…we’re not talking about changing weather patterns here). The answer, in 'crude' terms, is a firm “Yes.” The Oilholic has been pondering over this for a good few years. This humble blogger’s research between 2010 and present day, both in Calgary and Vancouver, has always indicated a growing oil & gas sector presence in BC.

However, what is really astonishing is the pace of it all. Between the time that the Oilholic mulled about the issue last year and February 2013, Canadian Business journalist Blair McBride writes that five new oil & gas firms are already in Vancouver. Reliable anecdotal evidence from across the US border in general, and the great state of Texas in particular, suggests more are on their way! Chevron is a dead certain, ExxonMobil is likely to follow.

One thing is for certain, they’re going to need a lot more direct flights soon between Vancouver International and Houston’s George Bush Intercontinental airport other than the solitary Continental Airlines route. Hello, anyone from Air Canada reading this post?

Continuing with corporate news, Shell has announced the suspension of its offshore drilling programme in the Arctic for the rest of 2013 in order to give it time to “ensure the readiness of equipment and people.” It was widely expected that prospection in the Chukchi and Beaufort Seas off Alaska would be paused while the US Department of Justice is looking into safety failures.

Shell first obtained licences in 2005 to explore the Arctic Ocean off the Alaskan coastline. Since then, £3 billion has been spent with two exploratory wells completed during the short summer drilling season last year. However, it does not mask the fact that the initiative has been beset with problems including a recent fire on a rig.

Meanwhile, Repsol has announced the sale of its LNG assets for a total of US$6.7 billion to Shell. The deal includes Repsol’s minority stakes in Atlantic LNG (Trinidad & Tobago), Peru LNG and Bahia de Bizkaia Electricidad (BBE), as well as the LNG sale contracts and time charters with their associated loans and debt. It’s a positive for Repsol’s credit rating and Shell’s gas reserves.

As BP’s trial over the Gulf of Mexico oil spill began last month, Moody’s said the considerable financial uncertainty will continue to weigh on the company’s credit profile until the size of the ultimate potential financial liabilities arising from the April 2010 spill is known.

Away from the trial, the agency expects BP's cash flows to strengthen from 2014 onwards as the company begins to reap benefits of the large roster of upstream projects that it is working on, many of which are based in high-margin regions. “This would help strengthen the group's credit metrics relative to their weaker positioning expected in 2013,” Moody’s notes.

One final bit of corporate news, Vitol – the world's largest oil trading company –  has posted a 2% rise in its 2012 revenue to US$303 billion even though volumes traded fell and profit margins remained under pressure for much of the year. While not placing too much importance on the number, it must be noted that a US$300 billion-plus revenue is more than what Chevron managed and a first for the trading company.

However, it is more than safe to assume Chevron’s profits would be considerably higher than Vitol’s. Regrettably, other than relying on borderline gossip, the Oilholic cannot conduct a comparison via published sources. That’s because unlike listed oil majors like Chevron, private trading houses like Vitol don’t release their profit figures.

That’s all for the moment folks. But on a closing note, this blogger would like to flag-up research by the UK’s Nottingham Trent University which suggests that Libya could generate approximately five times the amount of energy from solar power than it currently produces in crude oil!

The university’s School of Architecture, Design and the Built Environment found that if the North African country – which is estimated to be 88% desert terrain – used 0.1% of its landmass to harness solar power, it could produce almost 7 million crude oil barrels worth of energy every day. Currently, Libya produces around 1.41 million bpd. Food for thought indeed! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2013. Photo 1: Oil tanker, English Bay, BC, Canada. Photo 2: Downtown Vancouver, BC, Canada © Gaurav Sharma

Crude mood swings, contagion & plenty of chatter

There is a lot going on at the moment for commentators to easily and conveniently adopt a bearish short term stance on the price of crude. Take the dismal US jobs data, Greek crisis, Irish ratings downgrade and fears of contagion to begin with. Combine this with a relatively stronger dollar, end of QE2 liquidity injections, the finances of Chinese local authorities and then some 50-odd Chinese corporates being questioned and finally the US political standoff with all eyes on the Aug 2 deal deadline or the unthinkable.

Additionally, everyone is second guessing what crude price the Saudis would be comfortable with and MENA supply fears are easing. Quite frankly, all of these factors may collectively do more for the cause of those wishing for bearish trends than the IEA’s announcement last month – no not the one about the Golden Age of gas, but the one about it being imperative to raid strategic petroleum reserves in order to ‘curb’ rising prices! The Oilholic remains bullish and is even more convinced that IEA’s move was unwarranted and so are his friends at JP Morgan.

In an investment note, they opined that the effectiveness of IEA’s coordinated release is a matter of some debate and crude prices have rebounded quickly. “But while the US especially has demonstrated a willingness to use oil reserves as a stimulus tool in what has become a rather limited toolbox, a second release will require higher prices and a far more arduous task to achieve unity,” they concluded.

Now, going beyond the short to medium term conjecture, the era of cheap oil, or shall we say cheap energy is fading and fast. An interesting report titled – A new world order: When demand overtakes supply – recently published by Société Générale analysts Véronique Riches-Flores and Loïc de Galzain confirms a chain of thought which is in the mind of many but few seldom talk of. Both analysts in question feel that the last long cycle, which extended from the middle of the 1980s to the middle of the 2000s, was shaped by an environment that strongly favoured the development of supply; the next era will in all likelihood be dictated by demand issues.

Furthermore, they note and the Oilholic quotes: “According to our estimates, energy demand will at least double if not triple over the next two decades. This is significantly more than the IEA is currently projecting, with the difference being mainly attributable to our projections for emerging world energy consumption per capita, which we estimate will considerably rise as these countries develop. Applied to the oil market, these projections mean that today’s proven oil reserves, which are currently expected to meet 45 years of global demand based on the present rate of production, would be exhausted within 15-22 years.”

IEA itself estimates that demand will grow by an average of 1.47 million barrels a day (bpd) in 2012, up from the current 2011 average of 1.2 million bpd. Moving away from crystal ball gazing, Bloomberg’s latest figures confirm that record outflows from commodity ETPs (ETF, ETC and ETN) observed in May slowed abruptly. According to SG Cross Asset Research apart from net inflows into precious metals – the biggest sub-segment measured by assets under management – other categories such as Energy and base metals saw limited net outflows (see table on the left, click to enlarge).

Meanwhile, the London Stock Exchange (LSE) was busy welcoming another new issuer of ETFs – Ossiam – on to its UK markets on Monday. It is already the largest ETF venue in Europe by number of issuers; 20 to be exact. According to a spokesperson there are 481 ETFs listed on the LSE. In H1 2010 there were 369,600 ETF trades worth a combined £19 billion on the Exchange's order book, a 40.3% and 33.5% increase respectively on the same period last year.

Switching to corporates and continuing with the LSE, today Ophir Energy plc was admitted to the Main Market. The company listed on the Premium segment of the Main Market and raised US$375 million at admission and has a market capitalisation of US$1.28 billion.

Ophir is an independent firm with assets in a number of African countries particularly Tanzania and Equatorial Guinea. Since its foundation in 2004, the company has acquired an extensive portfolio of exploration interests consisting of 17 projects in nine jurisdictions in Africa.

The company is one of the top five holders of deepwater exploration acreage in Africa in terms of net area and could be one to watch. So far it has made five discoveries of natural gas off Tanzania and Equatorial Guinea and has recently started drilling in the offshore Kora Prospect in the Senegal Guinea Bissau Common Zone. For the LSE itself, Ophir brings the number of companies with major operations in sub-Saharan Africa listed on its books to 79.

Across the pond, Vanguard Natural Resources (VNR) announced on Monday that it will buy the rest of Encore Energy Partners LP it does not already own for US$545 million, gaining full access to the latter’s oil-heavy reserves. While its shares fell 8% on the news, the Oilholic believes it is a positive statement of intent by VNR in line with moves made by other E&P companies to secure reserves with an eye on bullish demand forecasts over the medium term.

Meanwhile, a horror story with wider implications is unfolding in the US, as ExxonMobil’s Silvertip pipeline leaked oil into the Montana stretch of the Yellowstone River on July 1. The company estimates that almost 42,000 gallons may have leaked and invariably questions were again asked by environmentalists about the wisdom of giving the Keystone XL project the go-ahead. This is not what the US needed when President Obama was making all the right noises – crudely speaking that is.

In March, he expressed a desire to include Canadian and Mexican oil in the US energy mix, in May he said new leases would be sold each year in Alaska's National Petroleum Reserve, and oil and gas fields in the Atlantic Ocean would be evaluated as a high priority. To cap it all, last month, the President reaffirmed that despite the BP oil spill in the Gulf of Mexico in 2010, drilling there remained a core part of the country's future energy supply and new incentives would be offered for on and offshore development. Leases already held but affected by the President's drilling moratorium, imposed in wake of the BP spill, would be eligible for extensions, he added. The ExxonMobil leak may not impact the wider picture but will certainly darken the mood on Capitol Hill.

Russians and Norwegians have no hang-ups about crude prospection in inhospitable climates – i.e. the Arctic. Details are now emerging about an agreement signed by the two countries in June which came into effect on July 7. Under the terms, both countries’ state oil firms – i.e. Russia’s Gazprom and Norway’s Statoil – will divide up their shares of the Barents Sea. USGS estimates from 2008 suggest the Arctic was likely to hold 30% of the world's undiscovered gas and 13% of its oil.

Finally, Sugar Land, Texas-based Industrial Info Resources (IIR) came-up with some interesting findings on the Canadian oil sands. In a report last week, the research firm noted that Canada's Top 10 metals and minerals industry projects are large scale oil sands and metal mining endeavours, with the No. 1 being in Alberta's oil sands.

IIR observed that what was once considered a “large project” was now being dwarfed by “megaprojects”. Not long ago a project valued at CAD$1 billion was considered a mega project; now the norm is more in the region of CAD$5 billion (and above) for a project to earn that accolade. Not to mention the fact that the Canadian dollar has been stronger in relative terms in recent years and not necessarily suffering from a mild case of the Dutch disease like its Australian counterpart. IIR’s findings take the Oilholic nicely back to his visit to Calgary in March, a report he authored for Infrastructure Journal and a conversation he had with veteran legal expert Scott Rusty Miller based in Canada's oil capital. We concurred that while the oil sands developments face myriad challenges they are certainly on the way up. The Canadians are developers with scruples and permit healthy levels of outside scrutiny more than many (or perhaps any) other jurisdictions.

IIR recorded US$176 billion worth of oil sands projects and all of the projected investment capital, except for one project in Utah, is in Alberta. It is becoming more likely than ever that Prime Minister Stephen Harper’s dream of Canada becoming an energy super power will be realised sooner rather than later.

© Gaurav Sharma 2011. Photo 1: Pump Jacks Perryton, Texas © Joel Sartore, National Geographic. Photo 2: Shell Athabasca Oil Sands site work © Royal Dutch Shell. Table: Global Commodity ETPs: Inflows analysis by category © Société Générale July 2011.

Crude Year 2011 Begins With a Bang

I must say the New Year has commenced with a flurry of crude news. Traders and oil men had barely resumed work for the first trading day of 2011 that the IEA declared rising oil prices to be a risk to economic recovery. In a publication on Jan 5th, the agency said oil import costs for OECD countries had risen 30% in the past year to US$790 billion which is equal to a loss of income of 0.5% of OECD gross domestic product (GDP).

Speaking to the BBC’s world service, IEA’s Fatih Birol said, "There is definitely a risk of major negative implications for the global economy." I agree and accept this, but truth be told we are some way away from a US$150-plus per barrel high. This morning though, the Brent forward month futures contract was flirting with the US$100 mark. The cold weather we have had either side of the pond does generally tend to support crude prices.

Analysts at SocGen believe the Alaska pipeline shutdown, following a leak, provided only limited support to WTI. Last weekend, a minor leak was discovered at Pump Station 1 on the Trans-Alaska Pipeline System (TAPS) causing a shutdown on the pipeline and prompting Alaska North Slope (ANS) production to be cut from 630,000 bpd to just 37,000 bpd. The pipeline, which carries almost 12% of US crude output, should be restarted "soon", according to its operator Alyeska which is 47% owned by BP, while ConocoPhillips and ExxonMobile have 28% and 20% stakes respectively.

Continuing with forecasts, a new report from ratings agency Moody’s notes that oil prices should stay "moderately high" in 2011, boosting energy companies that produce crude and natural gas liquids, but weak natural gas prices will continue to dog the energy sector this year. More importantly, rather than the volatility of recent years, Moody's expects a continuation of many of the business conditions seen in 2010, despite the Macondo incident.

Steven Wood, managing director of Moody's Oil and Gas/Chemicals group believes that certain business conditions will tighten during the year, and pressures could emerge beyond the near term. Moody's price assumptions – which are not forecasts, but guidelines that the agency uses in its evaluations of credit conditions – call for moderately high crude prices of US$80 per barrel for 2011, along with natural gas prices of US$4.50 per million Btus.

Elsewhere, a US government commission opined in a report that 'bad management' led to BP disaster. Across the pond in London, a parliamentary committee of British MPs raised "serious doubts" about the UK's ability to combat offshore oil spills from deep sea rigs. However, they stopped short of a calling for a moratorium on deep sea drilling noting that it would undermine British energy security.

© Gaurav Sharma 2011. Photo: Veneco Oil Platform, California © Rich Reid / National Geographic