EU’s Russian gas, who gets what & BP’s Bob

The vexing question for European Union policymakers these days is who has what level of exposure to Russian gas imports should the taps get turned off, a zero storage scenario at importing nations is assumed [hypothesis not a reality] and the Kremlin's disregard for any harm to its coffers is deemed a given [easier said than done].

Depending on whom you speak to, ranging from a European Commission mandarin to a government statistician, the figures would vary marginally but won't be any less worrying for some. The Oilholic goes by what Eurogas, a non-profit lobby group of natural gas wholesalers, retailers and distributors, has on its files.

According to its data, the 28 members of the European Union sourced 24% of their gas from Russia in 2012. Now before you say that's not too bad, yours truly would say that's not bad 'on average' for some! For instance, Estonia, Finland, Lativia and Lithuania got 100% of their gas from Russia, with Bulgaria, Hungary and Slovakia not far behind having imported 80% or more of their requirements at the Kremlin's grace and favour.

On the other hand, Belgium, Croatia, Denmark, Ireland, Netherlands, Portugal, Spain, Sweden and the UK have nothing to worry about as they import nothing or negligible amounts from Russia. Everyone in between the two ends, especially Germany with a 37% exposure, also has a major cause for concern.

And it is why Europe can't speak with one voice over the Ukrainian standoff. In any case, the EU sanctions are laughable and even a further squeeze won't have any short term impact on Russia. A contact at Moody's says the Central Bank of the Russian Federation has more than enough foreign currency reserves to virtually guarantee there is no medium term shortage of foreign currency in the country. Industry estimates, cited by the agency, seem to put the central bank's holdings at just above US$435 billion. EU members should know as they contributed handsomely to Russia's trade surplus!

Meanwhile, BP boss Bob Dudley is making a habit of diving into swirling geopolitical pools. Last November, Dudley joined Iraqi Oil Minister Abdul Kareem al-Luaibi for a controversial visit to the Kirkuk oilfield; the subject of a dispute between Baghdad and Iraqi Kurdistan. While Dudley's boys have a deal with the Iraqi Federal government for the oilfield, the Kurds frown upon it and administer chunks of the field themselves to which BP will no access to.

Now Dudley has waded into the Ukrainian standoff by claiming BP could act as a bridge between Russia and the West. Wow, what did one miss? The whole episode goes something like this. Last week, BP's shareholders quizzed Dudley about the company's exposure to Russia and its near 20% stake in Rosneft, the country's state-owned behemoth.

In response, Dudley quipped: "We will seek to pursue our business activities mindful that the mutual dependency between Russia as an energy supplier and Europe as an energy consumer has been an important source of security and engagement for both parties for many decades. We play an important role as a bridge."

"Neither side can just turn this off…none of us know what can happen in Ukraine," said the man who departed Russia in a huff in 2008 when things at TNK-BP turned sour, but now has a seat on Rosneft's board.

While Dudley's sudden quote on the crisis is surprising, the response of BP's shareholders in recent weeks has been pretty predictable. Russia accounts for over 25% of the company's global output in barrels of oil equivalent per day (boepd) terms. But, in terms of booked boepd reserves, the percentage rises just a shade above 33%.

However, instead of getting spooked folks, look at the big picture – according to the latest financials, in petrodollar terms, BP's Russian exposure is in the same investment circa as Angola and Azerbaijan ($15 billion plus), but well short of anything compared to its investment exposure in the US.

Sticking with the  crudely geopolitical theme, this blogger doesn't always agree with what the Henry Jackson Society (HJS) has to say, but its recent research strikes a poignant chord with what yours truly wrote last week on the Libyan situation.

The society's report titled - Arab Spring: An Assessment Three Years On (click to download here) - noted that despite high hopes for democracy, human rights and long awaited freedoms, the overall situation on the ground is worse off than before the Arab Spring uprisings.

For instance, Libyan oil production has dramatically fallen by 80% as neighbouring Tunisia's economy is now dependent on international aid. Egypt's economy, suffering from a substantial decrease in tourism, has hit its lowest point in decades, while at the same time Yemen's rate of poverty is at an all-time high.

Furthermore, extremist and fundamentalist activity is rising in all surveyed states, with a worrying growth in terror activities across the region. As for democracy, HJS says while Tunisia has been progressing towards reform, Libya's movement towards democracy has failed with militias now effectively controlling the state. Egypt remains politically highly-unstable and polarised, as Yemen's botched attempts at unifying the government has left many political splits and scars.

Moving on to headline crude oil prices, both benchmarks have closed the gap, with the spread in favour of Brent lurking around a $5 per barrel premium. That said, supply-side fundamentals for both benchmarks haven't materially altered; it's the geopolitical froth that's gotten frothier. No exaggeration, but we're possibly looking at a risk premium of at least $10 per barrel, as quite frankly no one knows where the latest Eastern Ukrainian flare-up is going and what might happen next.

Amidst this, the US EIA expects the WTI to average $95.60 per barrel this year, up from its previous forecast of $95.33. The agency also expects Brent to average $104.88, down 4 cents from an earlier forecast. Both averages and the Brent-WTI spread are within the Oilholic's forecast range for 2014. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: Sullom Voe Terminal, UK © BP

Examining a crude 2011 & talking Iran vs. 2012

As the Oilholic conjectured at the end of 2010, the year 2011 did indeed see Brent Crude at “around US$105 to US$110 a barrel”. However there was nothing ‘crudely’ predictable about 2011 itself – the oil markets faced stunted global economic growth, prospect of another few quarters of negative growth (which may still transpire) and a Greek crisis morphing into a full blown Eurozone crisis.

The Arab Spring also understandably had massive implications for the instability / risk premium in the price of crude over much of 2011. However, the impact of each country’s regional upheaval on the price was not uniform. The Oilholic summarised it as follows based on the perceived oil endowment (or the lack of it) for each country: Morocco (negligible), Algeria (marginal), Egypt (marginal), Tunisia (negligible), Bahrain (marginal), Iran and Libya (substantial).

Of the latter, when Libya imploded, Europe faced a serious threat of shortage of the country’s light sweet crude. But with Gaddafi gone and things limping back to normal, Libya has awarded crude oil supply contracts in 2012 to Glencore, Gunvor, Trafigura and Vitol. Of these Vitol helped in selling rebel-held crude during the civil war as the Oilholic noted in June.

Meanwhile Iran remains a troubling place and gives us the first debating point of 2012. It saw protests in 2011 but the regime held firm at the time of the Arab spring. However, in wake of its continued nuclear programme, recent sanctions have triggered a new wave of belligerence from the Iranian government including its intention to blockade the Straits of Hormuz. This raises the risk premium again and if, as expected a blanket ban by the EU on Iranian crude imports is announced, the trend for the crude price for Q1 2012 is decidedly bullish.

Société Générale's oil analyst Michael Wittner believes an EU embargo would possibly prompt an IEA strategic release. The price surge – directly related to the Saudi ability to mitigate the Iran effect – would dampen economic and oil demand growth. Market commentators believe an EU embargo is highly likely, especially after it reached an agreement in principle on an embargo on January 4th.

However, a more serious development would be if Iran carries out its threat to shut down the Straits of Hormuz, disrupting 15 million bpd of crude oil flows and we would expect Brent prices to spike into the US$150-200 range albeit for a limited time period according to Wittner.

“A credible threat from missiles, mines, or fast attack boats is all it would take for tanker insurers to stop coverage, which would halt tanker traffic. However, we believe that Iran would not be able to keep the Straits shut for longer than two weeks, due to a US-led military response. The disruption would definitely result in an IEA strategic release. The severe price spike would sharply hurt economic and oil demand growth, and from that standpoint, be self-correcting,” he adds.

Nonetheless, not many in the City see a “high” probability of such a step by Iran. Anyway, enough about Iran; lets resume our look back at 2011 and the release of strategic reserves would be a good joiner back to events of the past year.

Political pressure, which started building from April 2011, onwards saw the IEA ask its members to release an extra 60 million barrels of their oil stockpiles on to the world markets on June 23rd. The previous two occasions were the first gulf war (1991) and the aftermath of Hurricane Katrina (2005). That it happened given the political clamour for it is no surprise and whether or not one questions the wisdom behind the decision, it was a significant event.

For what it was worth, the market trend was already bearish at the time, Libya or no Libya. Concerns triggered by doubts about the US, EU and Chinese economies were aplenty as well as the end of QE2 liquidity injections coupled with high levels of non-commercial net length in the oil markets.

On the corporate front, refineries continued to struggle as expected with many major NOCs either divesting or planning to divest refining and marketing (R&M) assets. US major ConocoPhillips' announcement in July that it will be pursuing the separation of its exploration and production (E&P) and R&M businesses into two separate publicly traded corporations via a tax-free spin-off R&M co. to shareholders did not surprise the Oilholic – in fact it’s a sign of times.

Upstream remains inherently more attractive than the downstream business and the cliché of “high risk, high reward” resonates in the crude world. Continuing with the corporate theme, one has to hand it to ExxonMobil’s inimitable boss – Rex Tillerson – for successfully forging an Arctic tie-up with Rosneft so coveted by beleaguered rival BP.

On August 30th, 2011, beaming alongside Russian Prime Minister Vladimir Putin, Tillerson said the two firms will spend US$3.2 billion on deep sea exploration in the East Prinovozemelsky region of the Kara Sea. Russian portion of the Black Sea has also been thrown in the prospection pie for good measure as has the development of oil fields in Western Siberia.

The US oil giant described the said deal as among the most promising and least explored offshore areas globally “with high potential for liquids and gas.” If hearts at BP sank, so they should, as essentially the deal had components which it so coveted. However, a dispute with local partner TNK-BP first held up a BP-Rosneft tie-up and then finished it off.

One the pipelines front, the TransCanada Keystone XL project continues to be hit by delays and decision is not expected before the US presidential election; but the Oilholic feels the delay is not necessarily a bad thing. (Click here for thoughts)

The Oilholic saw M&A activity in the oil & gas sector over 2011 – especially corporate financed asset acquisitions – marginally exceeding pre-crisis deal valuation levels. Recent research for Infrastructure Journal – suggests the deal valuation figure for acquisition of oil & gas infrastructure assets, using September 30th as a cut-off date, is well above the total valuation for 2008, the year that the global credit squeeze meaningfully constricted capital flows.

Finally, on the subject of the good old oil benchmarks, since Q1 2009, Brent has been trading at premium to the WTI. This divergence has stood in recent weeks as both global benchmarks plummeted in wake of the recent economic malaise. WTI’s discount reached almost US$26 per barrel at one point in 2011.

Furthermore, waterborne crudes have also been following the general direction of Brent’s price. The Louisiana Light Sweet (LLS) increasingly takes its cue from Brent rather than the WTI, and has been for a while. Hence, Brent continues to reflect global conditions better.

Rounding things up, 2011 was a great year in terms of crude reading, travelling and speaking. Starting with the reading bit, 2011 saw the Oilholic read several books, but three particularly stood out; Daniel Yergin’s weighty volume - The Quest, Dan Dicker’s Oil’s Endless Bid and last but not the least Reuters’ in-house Oilholic Tom Bergin’s Spills & Spin.

Switching to crude travels away from London town, the Oilholic blogged from Calgary, Vancouver, Houston, San Francisco, Vienna, Dusseldorf, Bruges, Manama and Doha; the latter being the host city of the 20th World Petroleum Congress. The Congress itself and other signature events in the 2011 oil & gas calendar duly threw up several tangents for discussion.

Most notable among them were the two OPEC summits, the first in June which saw a complete disharmony among the cartel’s members followed by a calmer less acrimonious one in December where a unanimous decision to hold production at 30 million bpd was reached.

On the speaking circuit front, 2011 saw the Oilholic comment on CNBC, Indian and Chinese networks, OPEC webcasts and industry events, most notable among which was the Baker & McKenzie seminar at the World Petroleum Congress which was a memorable experience. That’s all for the moment folks. Here’s to 2012! Keep reading, keep it 'crude'!

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