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.

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.

Three Months, Three Cities, Three ‘crude’ reports

The three cities being – Delhi, Doha and Vienna, the three reports being Oilholic’s work on Latin American Offshore, Shale Oil & Gas and Refineries projects outlook, research for which was spread over December, January and February from the 20th World Petroleum Congress to the 160th OPEC Meeting to the streets of ‘crude’ Delhi.

The last of the three reports was published by Infrastructure Journal on Feb 29th and while the analysis in the reports remains the preserve of the Journal’s subscribers, the Oilholic is more than happy to share a few snippets starting with the Latin American offshore landscape, which shows no signs of a post ‘Macondo’ hangover [1].

In fact, the month of May, will be a momentous one for the region’s offshore oil & gas projects market in general and Brazil in particular, as the country would dispatch its first shipment of oil from ultradeepwater pre-sal (‘below the salt layer’) sources. The said export consignment of 1 million barrels destined for Chile is a relatively minor one in global crude oil volume terms. However, its significance for offshore prospection off Latin American waters is immense.

When thinking about Latin American offshore projects think Brazil; think Brazil and think Petrobras’ Lula test well in the Santos basin, named after the former president, which is producing 100,000 barrels per day (bpd). Almost over a third of the Chilean consignment originated from the Lula well according to the Oilholic’s sources.

What should excite project financiers, corporate financiers and technical advisers alike is the fact the company expects to pump nearly 5 million bpd by 2020 and its ambitious drive needs investment.

However, ignoring other jurisdictions in the region and focussing only on Brazil, its promise and problems would be a fallacy. Others such as Argentina, Columbia and prospection in Falkland Islands waters are worth examining, the latter especially from the standpoint of corporate financed asset acquisitions.

Data always helps in contextualising the market movements. Using the present Infrastructure Journal data series on project finance, which commenced in 2005, figures certainly suggest the sun is shining on the Brazilian offshore industry. Of the 15 Latin American offshore projects on record which reached financial close between October 2006 and Sept 2011, 13 were Brazilian along with one apiece from Panama and Peru (Click on pie-chart above to enlarge). With a cumulative deal valuation of just under US$9.3 billion, among these Brazil’s Guara FPSO valued at US$1.2 billion led the way reaching financial close in June 2011.

The year 2010, was a particularly good one for Brazil with five projects reaching financial close. Over the last three years, sponsors of offshore projects in the country have been consistent in approaching the debt markets and bringing three to five projects per annum to financial close, with 2011 following that trend.

Moving on to the Oilholic’s second report, for all intents and purposes, Shale oil & gas prospection has been the energy story of the last half decade and Q1 2012 would be an apt time to scrutinise the ‘Fracks’ and figures[2].

To say that shale gas has altered the American energy landscape would be the understatement of the decade, or to be more specific at least half a decade. Courtesy of the process of hydraulic ‘fracking’, shale gas prospection – most of which was initially achieved in the US by independent upstart project developers – has been an epic game changer.

US shale gas production stood at 4.9 trillion cubic feet (tcf) by end-2011, which is 25% of total US production up from 4% in 2005. Concurrently, net production itself is rising exponentially owing to the shale drive according to the EIA.

Project finance aside, it is in the corporate finance data where the shale story is truly reflected – i.e. one of a steady rise both in terms of deal valuation as well as the number of projects. From four corporate infrastructure finance deals valued at US$1.89 billion in 2009, both data metrics posted an uptick to seven deals valued at US$8.35 billion in 2010 and 10 deals valued at US$7.58 billion in 2011 (Click on bar-chart above to enlarge).

However, a short term global replication of a US fracking heaven is unlikely and not just because there isn’t a one size fits all model to employ. While American success with shale projects has not escaped the notice of Europeans; financiers and sponsors in certain quarters of the ‘old continent’ are pragmatic enough to acknowledge that Europe is no USA. The recent shale projects bonanza stateside is no geological fluke; rather it bottles down to a combination of geology, American tenacity and inventiveness.

Europe’s best bet is Poland, but European shale oil & gas projects market is unlikely to record an uptick between 2012 to 2017 on a scale noticed in North America in general and the USA in particular between 2007 and 2012. The financing for shale projects – be it corporate finance or project finance – would be a slow, but steady trickle rather than a stream beyond North America.

Finally, to the Refineries report, given the wider macroeconomic climate, refinery infrastructure investment continues to face severe challenges in developed jurisdictions and Western markets[3]. Concurrently, the balance of power in this subsector of the oil & gas infrastructure market is rapidly tipping in favour of the East.

Even if refinery investment of state-owned Chinese oil & gas behemoths, which rarely approach the debt markets, is ignored – there is a palpable drive in emerging economies elsewhere in favour of refinery investment as they do not have to contend with overcapacity issues hounding the EU and North America.

For some it is a needs-based investment; for others it makes geopolitical sense as their Western peers holdback on investing in this subsector. The need for refined products is often seen superseding concerns about low refining margins, especially in the Indian subcontinent and Asia Pacific.

Industry data, empirical, anecdotal evidence and direct feedback from industry participants do not fundamentally alter the Oilholic’s view of tough times ahead for refinery infrastructure. As cracking crude oil remains a strategic business, investing in refinery infrastructure reflects this sentiment, investor appetite and financiers' attitudes.

According to current IJ data, investment in refinery infrastructure via private or semi-private financing continues to remain muted; a trend which began in 2008. In fact, 2011 has been the most wretched year since the publication began recording refinery project finance data.

Updated figures suggest the year 2010, which saw the artificial fillip of Saudi Arabia’s mega Jubail refinery project (valued at US$14.04 billion) reach financial close, has been the best year so far for refinery project finance valuation despite closing a mere two projects. However, industry pragmatists would look at 2008 which saw ten projects valued at US$9.39 billion as a much better year (Click on bar-chart above to enlarge).

From there on it has been a tale of post global financial crisis woes with the market struggling to show any semblance of a recovery and most of the growth coming from non-OECD jurisdictions. In 2009, three projects valued at US$4.79 billion reached financial close, followed by two projects including Jubail valued at US$15.04 billion in 2010, and another two projects valued at US$1.49 billion in 2011. By contrast, the pre-crisis years of 2005, 2006 and 2007 averaged US$6.71 billion in terms of transaction valuations.

A general market trend in favour of non-OECD project finance investment in refineries is obviously mirrored in the table of the top deals between 2005 and 2011 (above). Of the five, four are in non-OECD countries – led by Jubail Refinery (Saudi Arabia) valued at US$14.04 billion which closed in 2010, followed by Guru Gobind Singh Bhatinda Refinery, India (valued at US$4.69 billion, financial close – 2007), Jamnagar 2 Refinery, India (US$4.50 billion, financial close – 2006) and Paradip refinery, India (US$2.99 billion, financial close – 2009).

Only one deal from an OECD nation, which is a very recent member of the club, made it to the top five, namely Poland’s Grupa Lotos Gdansk Refinery Expansion valued at US$2.85 billion which reached financial close in 2008. Simply put, the future of infrastructure investment in this sub-component of the oil & gas business lies increasingly in the East wherein India could be a key market. That’s all for the moment folks! Keep reading, keep it ‘crude’!

NOTES:

[1] Latin American Offshore O&G Outlook 2012: Brazil’s decade, By Gaurav Sharma, Infrastructure Journal, January 17, 2012. Available here.

[2] Shale Oil & Gas Outlook 2012: The ‘Fracks’ and figures, By Gaurav Sharma, Infrastructure Journal, January 25, 2012. Available here.

[3] Refinery Projects Outlook 2012: ‘Cracking’ times for Eastern markets, By Gaurav Sharma, Infrastructure Journal, February 29, 2012. Available here.

© Gaurav Sharma 2012. Graphics: Pie Chart 1 – Latin American Offshore Project Finance transactions (October 2006 to Sept 2011), Bar Chart 1 – Number of Shale Corporate Finance transactions (2009-2011), Bar Chart 2 – Refinery Project Finance Valuation (2005-2011) © Infrastructure Journal.

Of PetroChina, Gazprom and Hackers!

But first...Brent remains well into US$100+ per barrel territory while WTI remains in sub-US$90 region. Let’s face it the Nymex WTI-ICE Brent spreads remain extremely weak and it is becoming a recurring theme. The front-month spread even capped -US$16 per barrel mark (US$16.29 to be exact) on Feb 11; the date of expiry of the Brent forward month futures contract.

Moving away from pricing, it emerged last week that Russia’s Gazprom reported a fall in profits from RUR173.5 billion to RUR160.5 billion; an annualised dip of 9% for the quarter from July to Sept 2010 period. The cost of purchasing oil and gas jumped 29% according to the state owned firm while operational costs rose 12%. Dip in profit even prompted Russian PM Putin to “ask” them to raise their game.

Elsewhere, the “All Hail Shale” brigade had to contend with PetroChina – the Chinese state-controlled energy firm – acquiring a 50% stake in a Canadian Shale Gas project run by Encana. The stake cost is pegged at a cool US$5.4 billion. PetroChina already has majority stakes in two oil projects in Canada with Encana. There doesn’t appear to be much of a ruckus about the Chinese shopping in Canada. I guess Canadians are less uptight about Chinese investment in perceived strategic energy assets than the Americans.

Finally, computer security firm McAfee claimed in a report published on February 10th that hackers have attacked networks of a number of oil and gas firms for a good few years now. The full report is available for downloading here and it makes for interesting reading. However, I am not entirely surprised by the revelations.

In a nutshell, McAfee claims that in a series of co-ordinated attempts at least a dozen multinational oil, gas and energy companies were targeted – named by it as Night Dragon attacks – which began in November 2009. Five firms have now confirmed the attacks, it adds.

© Gaurav Sharma 2011. Photo: Oil tanker © Michael S. Quinton/National Geographic Society