Another two 'crude' days at CERAWeek '19

Day II or Tuesday (March 12) of CERAWeek zipped by, Wednesday is about to come to a close here in Houston and there have been several discussion points. Where to start when penning thoughts on the last 48 hours - a lot of plaudits were won by BP boss Bob Dudley's dinner speech overnight on the evolving oil landscape. 

"Oil and gas majors need to recognise the world's low carbon future. They need to be progressive for society and pragmatic for investors," he noted to considerable applause.

Earlier on Tuesday, OPEC Secretary General Mohammed Barkindo took to briefing journalists and analysts. Key points made included being 'apolitical' on the Venezuelan situation and launching a polite but firm attack on efforts by US lawmakers to hit OPEC with antitrust action - dubbed the No Oil Producing and Exporting Cartels (NOPEC) Act. Here's yours truly's full report for Forbes. 

The UAE government envoys were also in town promoting their catchy 'Oil and Gas 4.0' drive ranging from investing in digital assets to upskilling and hiring, from AI to robotics. William Clay Ford Jr was around too telling CERAWeek when Ford's F-150 truck's electric version is available it'll be a "completely different animal" and also admitted he had a soft sport for the Mustang. 

On Wednesday (March 13), Centrica Group CEO Iain Conn said societal pressures, e.g. UK government's energy price cap, are eating into utilities sector's operating margins, and that (yes) natural gas will serve as a bridging fuel for decades. 

Away from Brexit chaos back home, he also noted: "While the energy market will not be materially disrupted by Brexit; UK energy consumers would be left worse off if a declining GBP contributes to higher domestic energy bills linked to global markets."

US Energy Secretary Rick Perry also turned up for his second successive CERAWeek making a wide range of points from sanctions on Venezuela to President Donald Trump's opposition to NordStream 2. 

.@SecretaryPerry at #CERAWeek: What is afoot in #Venezuela is 'inhumane' & 'unconscionable' and the US will use every economic tool available against the Maduro regime in support of the Venezuelan people #OOTT #oilandgas #CERAWeek2019 pic.twitter.com/g2bKzUBv5t

— Gaurav Sharma (@The_Oilholic) March 13, 2019

Finally, here is the Oilholic's take on what ExxonMobil's Marine Fuels business makes of the approaching IMO 2020 rule. Well that's all for the moment, more from Houston soon. Keep reading, keep it 'crude'!

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© Gaurav Sharma 2019. Photo: BP CEO Bob Dudley addresses CERAWeek 2019 © Gaurav Sharma 2019.

On IPWeek 2019 & BP Boss' US shale take

A fascinating few days of debates and deliberations at the Energy Institute's International Petroleum Week 2019 came to a close in London earlier today.

For yet another year, the Oilholic was delighted to have spoken and moderated at the event as part of the Gulf Intelligence Middle East Energy Summit. Industry 4.0, investment climate, US shale and OPEC were all under the radar. Delegates were fairly evenly split on the direction of the oil price; but yours truly maintains that the phase of range-bound crude prices is here to stay. 

From where this blogger sits, it is appearing hard for Brent to escape the $65-75 per barrel range, and for the WTI to escape the $55-65 range this year. 

There were interesting soundbites aplenty, but BP Boss Bob Dudley's quip that US shale is a price responsive "brainless" market stood out among them all. Here's the Oilholic's full report and analysis on it for Forbes. That's all for the moment folks! Next stop - Houston, Texas for IHS CERAWeek 2019. Keep reading, keep it crude!

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© Gaurav Sharma 2019. Photo: Gaurav Sharma at IPWeek 2019; with Chris Midgley, Global Director of Analytics for S&P Global Platts © Gulf Intelligence. 

Crude musings at Platts LOF & IPWeek

A plethora of ongoing events meant the Oilholic ditched the comforts of suburbia last week and camped out at London’s Park Lane, with its row of hotels playing host to some crude events. 

For starters S&P Global Platts’ London Oil Forum 2018 made for an interesting Monday (19 Feb). Talk of the forum was, of course, the eastward direction of crude cargoes, as more and more oil tankers from the US head to Asian shores. There was tacit agreement among delegates at the Platts event that North American crude production will continue to grow, dominated by shale, leading to a relative surge in US exports.

Chris Midgley, Global Director of Analytics at Platts, noted: "Lot more US crude will move into Asia, primarily lighter crude for independent Asian refiners with less complex kit."

Platts' own observation, in tandem with those of rival data aggregators, also suggests that global production is growing a lot lighter. That's because the OPEC and non-OPEC production quota cut took heavy and medium crude exports to Asia into a net decline in 2017.

Additionally, Platts expects 2020 to be hugely disruptive from a crude cracking standpoint as nearly 3 million barrels per day (bpd) of fuel oil will have to "produced differently."

Right after the Platts LOF came the International Petroleum Week 2018, Tuesday through to Thursday, where yours truly also donned an event speaker’s hat. More on that later.  

On the very first day of IPWeek, UAE oil minister Suhail Al Mazrouei, said plans for an OPEC and non-OPEC producers’ ‘super-group’ were well and truly underway, and that the producers, while satisfied with the reduction in global inventories, had not quite reached their end-goal of achieving the kind of market balance they were aspiring for yet.

Elsewhere, BP Boss Bob Dudley told delegates the energy industry was in a race to lower carbon emissions, "not in a race to renewables"; which was one of the standout quotes of the event. 

Trump versus Iran, and India's crude oil demand were other burning topics. Platts also unveiled an agreement to track UAE oil inventories using blockchain. And the event ended with a lively debate organised by Gulf Intelligence, with the motion being ‘US Oil & Gas will steal market share from Gulf producers in Asia.’

The Oilholic joined Dr Carole Nakhle, CEO of Crystol Energy, in arguing against the motion, with Amrita Sen, Energy Aspects’ Chief Oil Analyst and David Sheppard, Energy Markets Editor of the Financial Times, supporting the motion.  

In a nutshell, Dr Nakhle and this blogger’s argument against the motion was a simple one – as the demand mix evolves, and much of the incremental demand comes from Asia, there is in fact room for everyone, and the impact of US exports should not be exaggerated or oversimplified. 

At the beginning, the audience was 61% in favour of the motion and 39% against. However, in a final vote upon the conclusion of the debate, the Nakhle-Sharma duo managed to sway audience opinion to 65% against the motion, with those in favour of it down to 35%! 

Overall, a fun end to a crude week. That’s all for the moment folks! Next stop, Houston, Texas for IHS CERAWeek! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2018. Photo1: Chris Midgley, S&P Global Platts’ ‎Director of Analytics, speaks at the data aggregator’s London Oil Forum. Photo 2: UAE Oil Minister Suhail Al Mazrouei  (left) talks to CNBC’s Steve Sedgwick at the International Petroleum Week, London, UK © Gaurav Sharma 2018. Photo 3: IPWeek Debate Participants at Middle East Energy Summit © Gulf Intelligence 2018.

Chatting to Bob Dudley & host broadcaster TRT

As the 22nd WPC approaches its end, more interesting soundbites have emerged, especially from International Energy Agency (IEA) Executive Director Dr Fatih Birol who has been on several panels and forums, energised no doubt in his hometown of Istanbul.

According to Birol, despite all the noise about electric cars, automobiles aren’t the primary drivers for oil demand. “That comes from trucks, aviation and petrochemicals. So even if one in every two cars is an electric vehicle, oil demand will still grow.”

On average, most analysts, including many at the IEA, expect that global demand growth to be in the region of 1.2 to 1.3 million barrels per day (bpd). That’s hardly the stuff of dreams for those placing long bets on the crude stuff. 

Getting away from Birol, the Oilholic also had the pleasure of spending a few minutes in the company of BP boss Bob Dudley, who said the oil giant was preparing for a $30 per barrel oil price breakeven. Here’s one’s exclusive interview for IBTimes UK. 

In another major development, the geopolitical significance of which cannot be understated, India has imported its first ever consignment of US crude oil. For a country largely reliant on Middle Eastern oil, the US is now an avenue.

The Oilholic is reliably informed the consignment has been drawn from conventional sources, but to quote Indian Oil Minister Dharmendra Pradhan - New Delhi would not be averse to importing “shale oil in the future.”

Finally, before one takes your leave and calls time on the 22nd WPC, it was a pleasure appearing on host broadcaster TRT World, and discussing the crude state of affairs on the channel’s Money Talks programme. Here’s a clip dear readers, but that’s all from Istanbul! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2017. Photo: The Oilholic (right) on TRT World’s Money Talks with Azhar Sukri © Gaurav Sharma 2017.

21 WPC Moscow: Who is here & said what so far

The Oilholic finds himself in Moscow for the 21st World Petroleum Congress, following on from the last one in Doha three years ago. However, what's different here is that while the Congress is a global event – often dubbed the Olympics of the oil & gas business – the 2014 host government Russia is involved in a face-off with the West over Ukraine.

There were whispers on Sunday that some governments and corporates alike would boycott the Congress. However, based on evidence here on the ground over the first day and half, the gossip seems to be unfounded.

At the mammoth Crocus Expo Centre, mingling with some 5,000 delegates are IOC and NOC bosses of every colour, stripe or nationality. Government representatives from around the world seem to be in solid attendance too. For instance, India's new Petroleum and Natural Gas Minister Dharmendra Pradhan seems to be a popular man with delegates doubtless wishing to gain insights into Prime Minister Narendra Modi's energy policy.

On the other hand, the US government has sent no high level representative and while the Canadians are here, the all important oil producing province of Alberta has decided, as one source says "not to participate." That aside, doing a like-for-like comparison with Doha, this blogger sees no reduced levels of participation.

Those who are here saw ExxonMobil chief executive Rex Tillerson, attending (and addressing) his fourth WPC. Tillerson called for a push on unconventional including Arctic drilling accompanied by "wise environmental stewardship."

"We must recognise the global need for energy is projected to grow, and grow significantly," he added. Close on Tillerson's heels, OPEC Secretary General Abdalla Salem El-Badri told the Congress: "In a global energy future, and with connected markets, no one party can act alone. We need shared solutions for market stability."

Acknowledging his hosts, El-Badri added that there were healthy partnerships between Russian oil companies and OPEC member NOCs choosing to flag-up the global footprint of Lukoil as an example."Russia a key partner in the global energy supply equation as the world's second-largest oil exporter," El-Badri said further.

This morning, BP's boss Bob Dudley said the US shale bonanza had to be taken into context before jumping to global conclusions.

"Not all shale is good from a commercial standpoint," he said sharing the stage with Daniel Yergin (Pulitzer Prize winning author and IHS Vice chairman) and Jose Alcides Santoro Martins (Director of energy & gas and board member of Petrobras).

Dudley also said oil & gas sector project investment these days was driven by much better capital discipline. The industry had learnt and there was ever greater ROCE (return on capital employed) scrutiny.

Earlier, Dudley's PR boys managed a bit of a coup by timing the release of the company's latest Statistical Review of World Energy, one of the industry's most recognised annual research reports, on the first day of the Congress. BP's 63rd annual statistical trend update since 1952 noted that last year China, USA and Russia were the three largest consumers of oil and gas.

US and China collectively accounted for 70% of global crude oil demand. More generally, non-OECD demand for 2013 came in below average, while OECD demand, propped up by the US was above average, according to BP Chief Economist Christof Ruhl, soon to be Abu Dhabi Investment Authority's inaugural global head of research.

Tight oil plays edged US production up by over 1 million barrels per day (bpd) to 10 million bpd; the country's highest production rate since 1996. Ruhl opined that this was largely behind relatively stable global oil prices as North American output matched each supply disruption in the Middle East and North Africa virtually "barrel for barrel."

Finally, general analyst consensus here about Iraq is that the trouble itself is not as worrying as the speed with which it has unfolded, raising serious questions about the territorial integrity of the country. Additionally, there could be some long term implications for the oil price.

Alex Griffiths, head of natural resources and commodities at Fitch Ratings, acknowledges that the seizure of Mosul and attacks on Tikrit by ISIS are not an immediate threat to Iraq's oil production, or the ratings of Western investment-grade oil companies.

The areas under attack are not in Iraq's key oil-producing regions in the south or the additional fields in the northeast as discussed earlier on this blog.

"However, if conflict spreads and the market begins to doubt whether Iraq can increase its output in line with forecasts there could be a sharp rise in world oil prices because Iraqi oil production expansion is a major contributor to the long-term growth in global oil output," Griffiths added. That's all from Moscow for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo 1: Logo of the 21st World Petroleum Congress, Moscow, Russia. Photo 2: (Left to Right) Jose Alcides Santoro Martins (Petrobras), Daniel Yergin (IHS) and Bob Dudley (BP) © Gaurav Sharma, June 2014.

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

A festive spike, ratings agencies & Omani moves

It's the festive season alright and one to be particularly merry if you'd gone long on the price of black gold these past few weeks. The Brent forward month futures contract is back above US$110 per barrel.

Another (sigh!) breakout of hostilities in South Sudan, a very French strike at Total's refineries, positive US data and stunted movement at Libyan ports, have given the bulls plenty of fodder. It may be the merry season, but it's not the silly season and by that argument, the City traders cannot be blamed for reacting the way they have over the last fortnight. Let's face it – apart from the sudden escalation of events in South Sudan, the other three of the aforementioned events were in the brewing pot for a while. Only some pre-Christmas profit taking has prevented Brent from rising further.

Forget the traders, think of French motorists as three of Total's five refineries in the country are currently strike ridden. We are talking 339,000 barrels per day (bpd) at Gonfreville, 155,000 bpd at La Mede and another 119,000 bpd at Feyzin being offline for the moment – just in case you think the Oilholic is exaggerating a very French affair!

From a French affair, to a French forex analyst's thoughts – Société Générale's Sebastien Galy opines the Dutch disease is spreading. "Commodity boom of the last decade has left commodity producers with an overly expensive non-commodity sector and few of the emerging markets with a sticky inflation problem. Multiple central banks from the Reserve Bank of Australia, to Norges bank or the Bank of Canada have been busy trying to mitigate this problem by guiding down their currencies," he wrote in a note to clients.

Galy adds that the bearish Aussie dollar view was gaining traction, though the bearish Canadian dollar viewpoint hasn't got quite that many takers (yet!). One to watch out for in the New Year! In the wind down to year-end, Moody's and Fitch Ratings have taken some interesting 'crude' ratings actions over the last six weeks. Yours truly can't catalogue all, but here's a sample.

Recently, Moody's affirmed the A3 long-term issuer rating of Abu Dhabi National Energy Company (TAQA), the (P)A3 rating for TAQA's MYR3.5 billion sukuk  programme, the (P)A3 for TAQA's $9 billion global medium-term note programme, the A3 rated debt instruments and the P-2 short-term issuer rating. Baseline Credit Assessment was downgraded to ba2 from ba1; with a stable outlook. It also upgraded the issuer rating of Rosneft International Holdings Limited (RIHL; formerly TNK-BP International) to Baa1 from Baa2.

Going the other way, it changed Anadarko's rating outlook to developing from positive. It followed the December 12 release of an interim memorandum of opinion by the US Bankruptcy Court, Southern District of New York regarding the Tronox litigation.

The agency also downgraded the foreign currency bond rating and global local currency rating of PDVSA to Caa1 from B2 and B1, respectively, and maintained a negative outlook on the ratings. Additionally, it downgraded CITGO Petroleum's corporate family tating to B1 from Ba2; its Probability of Default rating to B1-PD from Ba2-PD; and its senior secured ratings on term loans, notes and industrial revenue bonds to B1, LGD3-43% from Ba2, LGD3-41%.

Moving on to Fitch Ratings, given what's afoot in Libya, it revised the Italy-based Libya-exposed ENI's outlook to negative from stable and affirmed its long-term Issuer Default Rating and senior unsecured rating at 'A+'. 

It also said delays to the production ramp-up at the Kashagan oil field in Kazakhstan were likely to hinder the performance of ENI's upstream strategy in 2014. Additionally, Fitch Ratings affirmed Shell's long-term Issuer Default Rating (IDR) at 'AA' with a stable outlook.

Moving away from ratings actions, BP's latest foray vindicates sentiments expressed by the Oilholic from Oman earlier this year. Last week, it signed a $16 billion deal with the Omanis to develop a shale gas project.

Oman's government, in its bid to ramp-up production, is widely thought to offer more action and generous terms to IOCs than they'd get anywhere else in the Middle East. By inking a 30-year gas production sharing and sales deal to develop the Khazzan tight gas project in central Oman, the oil major has landed a big one.

BP first won the concession in 2007. The much touted Block 61 sees a 60:40 stake split between BP and Oman Oil Company (E&P). The project aims to extract around 1 billion cubic feet (bcf) per day of gas. The first gas from the project is expected in late 2017 and BP is also hoping to pump around 25,000 bpd of light oil from the site.

The oil major's boss Bob Dudley, fresh from his Iraqi adventure, was on hand to note: "This enables BP to bring to Oman the experience it has built up in tight gas production over many decades."

Oman's total oil production, as of H1 2013, was around 944,200 bpd. As the country's ministers were cooing about the deal, the judiciary, with no sense of timing, put nine state officials and private sector executives on trial for charges of alleged taking or offering of bribes, in a widening onslaught on corruption in the sultanate's oil industry and related sectors.

Poor timing or not, Oman ought to be commended for trying to clean up its act. That's all for the moment folks! Have a Happy Christmas! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2013. Photo: Oil Rig © Cairn Energy.

The Kurdish question & a ‘Dudley’ sin?

The autonomous region of Kurdistan within Iraq's borders is drawing 'crude' headlines yet again. It's that old row about who controls what and gives rights for E&P activity in the region – the Federal administration in Baghdad or the provincial administration in Erbil?

 

The historical context is provided by Gulf War I, when allied forces imposed a no-fly zone, and the Kurds subsequently pushed Saddam Hussein's forces back outside the provincial border. That was 1991, this is 2013 – a lot has changed for Iraq, but one thing hasn't – Iraqi Kurdistan is as autonomous today, as it was back then.

 

In fact, it is more prosperous and an oasis of calm compared to the rest of the Federal state. One simple measure is that the rest of Iraq ravaged by sectarian conflict and Gulf War II still only provides its citizens with about an average of 6 to 7 hours of electricity per day. The average resident of Erbil gets 22 hours and sees infrastructural spending all around, driven by targeted revenue from oil and gas licensing and exports.

Since 2006, the Kurdistan Regional Government (KRG) has been granting rights for exploration within its borders to firms from Norway to the US, with much gusto and on better terms, many say, than the Federal administration in Baghdad. The Iraqi government in turn says KRG has no right to do so.

 

Mutual consternation came to a head in January when BP and Baghdad reached an agreement to revitalise the northern Kirkuk oilfield. Since jurisdictional mandate over the oilfield and the city is hotly contested by both sides, KRG declared the deal to be illegal on grounds that it was not consulted.

 

Firing a return salvo, Iraqi Oil Minister Abdul Kareem al-Luaibi called the production and export of oil from Kurdistan to be an act of "smuggling" and threatened to cut the region's [17%] spending allocation from the federal budget as well as take legal action against Western firms digging up Kurdistan, beginning with London-listed Genel Energy (the first such firm to export from the region).

Neither Genel Energy nor the administration paid heed to that threat. Baghdad and BP did likewise with KRG's moans over Kirkuk. Then the US State Department issued an advisory to all American oil firms operating in Kurdistan that they could be liable for legal damages from Baghdad. Doubtless, the rather handsomely rewarded legal eagles at their end advised them not to worry too much.

An "as-you-were" lull lasted for roughly 10 months, when last week in an extraordinary development, Bob Dudley, CEO of BP, joined al-Luaibi and officials from the Iraqi state-run North Oil Company to pay a controversial visit to the Kirkuk oilfield in a show of support. Why Dudley took the decision to go himself instead of sending a deputy is puzzling and paradoxically a bit obvious as well.

 

In making an appearance himself, Dudley wanted to show how important the Kirkuk deal is. Yet a deputy of his would have drawn a similar two-fingered gesture from KRG, as his visit did. Playing it cool, a source at BP said its only intention is to revive production at Kirkuk, an oilfield which at the turn of millennium saw an output of 900,000 barrels per day (bpd), but can barely manage less than a third of it today.

 

BP has the technical know-how to improve the field's output, but how it will extricate itself from the quagmire of the area's politics is anybody's guess. An Abu Dhabi based source says both sides are entrenched at Kirkuk. BP will have access to the Federally-administered side of the Kirkuk field, namely the Baba and Avana geological formations. But one formation – Khurmala – is inside the Kurdish provincial borders and being is developed by the KAR group.

 

Furthermore, there is another twist in the linear fight between Baghdad and Erbil – Kirkuk's governor Najimeldin Kareem, a man of Kurdish origin, has backed the Federal deal with BP. Dudley left the oilfield without saying anything concrete on record, leaving it to the Iraqis to do most of the talking.

 

The Iraqi Oil Ministry chose to describe Kareem's backing "as securing the complete support from the local government of Kirkuk" in order to commence developing Kirkuk. Hmm…but whose Kirkuk is it anyway? The primary beneficiary of Kurdish oil exports is Turkey; the closest market where the aforementioned Genel Energy delivers most of its output to.

 

Where the tussle will lead to is unpredictable – but it hasn't deterred either BP from signing up a deal with Baghdad or the likes of ExxonMobil, Chevron and Total with Erbil. This brings us back to why Dudley went himself – well, when his peers such as Rex Tillerson, ExxonMobil's boss, have showed-up in Erbil, there was perhaps little choice left. If the regional politics goes out of control, the bosses of oil firms would have only themselves to blame for getting so close to the Iraqi wrangles most say they are least interested in.

 

At the centre of it all is the thirst for black gold. KRG is providing generous production sharing and contract conditions within its autonomous borders, while Baghdad has quite possibly given equally generous terms to BP for Kirkuk. The oil major has already announced a US$100 million investment in the oilfield.

 

Giving KRG the last word in the verbal melee – in September 2012, even before the recent salvos had been fired in earnest and the CEOs had come calling, Ashti Hawrami, Minister for Natural Resources of KRG, said something rather blunt on BBC’s Hard Talk programme which explains it all: "To put it politely, if I have million barrels of oil to produce in two years time, the market needs it, Iraq needs it and at the end of the day we are going to win that battle."

 

There are 50 plus firms already helping him achieve that objective. With geological surveys projecting that Kurdistan potentially has 45 billion barrels of the crude stuff, many of these firms are working with the KRG contrary to advice given by their own governments.

 

And as if to rub it in further into his Federal counterpart, Hawrami quipped, "Kurdistan's investment and spending plans are more structured…Why is Baghdad buying F-16s when Iraqis have little more than 4 hours of electricity per day on average [much worse than the inhabitants of Iraqi Kurdistan]." OUCH!

 

Moving away from Iraqi politics, Brent's $106 per barrel floor has not only been breached, but was smashed big time last week. As noted, hedge funds are indeed feeling the pinch, for instance high-flier Andy Hall's $4 billion baby – Astenbeck Capital Management.

 

According to Reuters, Astenbeck is down 5% as of Oct-end, largely due to the slump in Brent prices. Even though Hall's team have diversified into palladium, platinum and soft commodities, it'd be remarkable if the fund is able to avoid its first annual loss in six years. However, one shouldn't be too hard on Astenbeck as the average energy fund on Chicago's Hedge Fund Research Index, is down 4.45%. That's all for the moment folks! Keep reading, keep it 'crude'!

 

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© Gaurav Sharma 2013. Photo: Exploration site in Kurdistan © Genel Energy plc

Crude talking points of the last two weeks

In a fortnight during which the Bank of England hired a man whose signature appears on Canadian banknotes as its new governor, the oil & gas world reiterated its own cross-border nature, when an American firm sold a Kazakh asset to an Indian company. That firm being ConocoPhillips, the asset being its 8.4% stake in Kazakh oil field Kashagan and the Indian buyer being national oil company (NOC) ONGC Videsh – all signed, sealed and delivered in a deal worth around US$5.5 billion.

 

Even with an after-tax impairment of US$400 million, the deal represents a tidy packet for ConocoPhillips as it attempts to cut its debt. Having divested its stake in Russia’s Lukoil, the American oil major has already beaten its asset sale programme target of US$20 billion. So when the final announcement came, it was not much of a surprise as Kazakhstan government officials had revealed much earlier that a move was on the cards.

 

Still it is sobering to see ConocoPhillips divest from Kashagan – the world's biggest oilfield discovery by volume since 1968. It may hold an estimated 30 billion barrels of oil. Phase I of the development, set to begin next year, could yield around 8 billion barrels, a share of which ONGC is keenly eyeing.

India imports over 75% of the crude oil it craves and is in fact the world's fourth-biggest oil importer by volume. Given this dynamic, capital expenditure on asset with a slower turnaround may not be an immediate concern for an Indian NOC, but certainly is for investors in the likes of ConocoPhillips and its European peers.

On the back of a series of meetings between investors and its EMEA natural resources & commodities team in London, Fitch Ratings recently revealed that elongated upstream investment lead times and a (still) weak refining environment in Western Europe remain a cash flow concern for investors.

 

They seemed most concerned about the lead time between higher upstream capex and eventual cash flow generation and were worried about downward rating pressure if financial metrics become strained for an extended period. It is prudent to mention that Fitch Ratings views EMEA oil & gas companies' capex programmes as measured and rational despite a sector wide revised focus on upstream investment.

 

For example, the two big beasts – BP and Royal Dutch Shell – are rated 'A'/Positive and 'AA'/Stable respectively; both have increased capex by more than one-third for the first 9 months of 2012 compared to the same period last year. Elsewhere in their chats, unsurprisingly Fitch found that refining overcapacity and weak utilisation rates remain a concern for investors in the European refining sector. Geopolitical risk is also on investors' minds as they look to 2013.

 

While geopolitical events may drive oil prices up, which positively impact cash flow, interruptions to shipping volumes may more than offset gains from these price increases – negatively impacting both operating cash flow and companies' competitive market positions. Away from capex concerns, Fitch also said that shale gas production in Poland could improve the country's security of gas supplies but is unlikely to lead to large declines in gas prices before 2020.

In a report published on November 26, Arkadiusz Wicik, Fitch’s Warsaw-based director and one of the most pragmatic commentators the Oilholic has encountered, noted that shale gas production in Poland, which has one of the highest shale development potentials in Europe, would lower the country's dependence on gas imports. Most of Poland's imports currently come from Russia.

 

However, Wicik candidly noted that even substantial shale gas production by 2020, is unlikely to result in large declines in domestic gas prices.

 

"In the most likely scenario, shale gas production, which may start around 2015, will not lead to a gas oversupply in the first few years of production, especially as domestic gas demand may increase by 2020 as several gas-fired power plants are planned to be built. If there is a surplus of gas because shale gas production reaches a significant level by 2020, this surplus is likely to be exported," he added.

 

In actual fact, if the planned liberalisation of the Polish gas market takes place in the next few years, European spot gas prices may have a larger impact on gas prices in Poland than the potential shale gas output.

 

From a credit perspective, Fitch views shale gas exploration as high risk and capital intensive. Meanwhile, the UK government was forced on the defensive when a report in The Independent newspaper claimed that it was opening up 60% of the country’s cherished countryside for fracking.

 

Responding to the report, a government spokesperson said, "There is a big difference between the amount of shale gas that might exist and what can be technically and commercially extracted. It is too early to assess the potential for shale gas but the suggestion more than 60% of the UK countryside could be exploited is nonsense."

 

"We have commissioned the British Geological Survey to do an assessment of the UK's shale gas resources, which will report its findings next year," he added.

 

Barely had The Independent revealed this ‘hot’ news, around 300 people held an 'anti-fracking' protest in London. Wow, that many ‘eh!? In defence of the anti-frackers, it is rather cold these days in London to be hollering outside Parliament.

 

Moving on to the price of the crude stuff, Moody’s reckons a constrained US market will result in a US$15 per barrel difference in 2013 between the two benchmarks – Brent and WTI – with an expected premium in favour of the former. Its recently revised price assumptions state 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. While the price assumption for Brent beyond 2014 is unchanged, the agency has revised both the 2013 and 2014 assumptions.

 

For WTI, Moody’s has left its previous assumptions unchanged at US$85 in 2013, 2014 and thereafter. Such a sentiment ties-in to the Oilholic’s anecdotal evidence from the US and what many in City concur with. So Moody’s is not alone in saying that Brent’s premium to WTI is not going anywhere, anytime soon. Even if the Chinese economy tanks, it’ll still persist in some form as both benchmarks will plummet relative to market conditions but won’t narrow up their difference below double figures.

 

Finally, on the noteworthy corporate news front, aside from ConocoPhillips’ move, BP was in the headlines again for a number of reasons. Reuters’ resident Oilholic Tom Bergin reported in an exclusive that BP is planning a reorganisation of its exploration and production (E&P) operations. Citing sources close to the move, Bergin wrote that Lamar McKay, currently head of BP's US operations, will become head of a new E&P unit; a reinstatement of a role that was abolished in 2010 in the wake of the oil spill.

 

Current boss Bob Dudley split BP's old E&P division into three units on his elevation to CEO to replace Tony Hayward, whose gaffes in during the Gulf of Mexico oil spill led to his stepping down. BP declined to comment on Bergin’s story but few days later provided an unrelated newsworthy snippet.

 

The oil giant said it had held preliminary talks with the Russian government and stakeholders in the Nordstream pipeline about extending the line to deliver gas to the UK. BP said any potential extension to the pipeline was unlikely to be agreed before mid-2013.

 

The pipeline’s Phase I, which is onstream, runs under the Baltic Sea bringing Russian gas into Germany. A source described the move as “serious” and aimed at diversifying the UK’s pool of gas supplying nations which currently include Norway and Qatar as North Sea production continues to wane. As if that was not enough news from BP for one fortnight, the US government decided to "temporarily" ban the company from bagging any new US government contracts.

 

The country's Environmental Protection Agency (EPA) said on November 28 that the move was standard practice when a company reaches an agreement to plead guilty to criminal charges as BP did earlier in the month. New US E&P licences are made available regularly, so BP may miss out on some opportunities while the ban is in place but any impact is likely to be relatively ephemeral at worst. No panic needed!

 

On a closing note, in a move widely cheered by supply side industry observers, Shell lifted its force majeure on Nigeria's benchmark Bonny Light crude oil exports on November 21 easing supply problems for Africa’s leading oil producer. The force majeure, implying a failure to meet contractual obligations due to events outside of corporate control, on Bonny Light exports came into place on October 19 following a fire on a ship being used to steal oil. It forced the company to shut down its Bomu-Bonny pipeline and defer 150,000 barrels per day of production.

 

However, Shell said that force majeure on Nigerian Forcados crude exports remains in place. Forcados production was also stopped owing to damage caused by suspected thieves tapping into the Trans Forcados Pipeline and the Brass Creek trunkline. As they say in Nigeria - it’s all ok until the next attempted theft goes awry. That’s all for the moment folks! Keep reading, keep it 'crude'!

 

© Gaurav Sharma 2012. Photo: Oil Rig, USA © Shell

BP’s settlement expensive but sound

As BP received the biggest criminal fine in US history to the tune of US$4.5 billion related to the 2010 Gulf of Mexico oil spill, the Oilholic quizzed City analysts over what they made of it. Overriding sentiment of market commentators was that while a move to settle criminal charges in this way was expensive for BP, it was also a sound one for the oil giant.

 

Beginning with what we know, according to the US Department of Justice (DoJ), BP has agreed to plead guilty to eleven felony counts of misconduct or neglect of ships officers relating to the loss of 11 lives, one misdemeanour count under the Clean Water Act, one misdemeanour count under the Migratory Bird Treaty Act and one felony count of obstruction of Congress.

 

Two BP workers - Robert Kaluza and Donald Vidrine - have been indicted on manslaughter charges and an ex-manager David Rainey charged with misleading Congress according to the Associated Press. The resolution is subject to US federal court approval. The DoJ will oversee BP handover US$4 billion, including a US$1.26 billion fine as well as payments to wildlife and science organisations.

 

BP will also pay US$525 million to the US SEC spread over three years. The figure caps the previous highest criminal fine imposed on pharmaceutical firm Pfizer of US$1.2 billion. City analysts believe BP needed this settlement so that it can now focus on defending itself against pending civil cases.

 

“It was an expensive, but necessary closure that BP needed on one legal fronts of several,” said one analyst. The 2010 Deepwater Horizon disaster killed 11 workers and released millions of barrels of crude into the Gulf of Mexico which took 87 days to plug.

 

The company is expected to make a final payment of US$860 million into the US$20 billion Gulf of Mexico compensation fund by the end of the year. BP’s internal investigation about the incident had noted that, “multiple companies, work teams and circumstances were involved over time.”

 

These companies included Transocean, Halliburton, Anadarko, Moex and Weatherford. BP has settled all claims with Anadarko and Moex, its co-owners of the oil well and contractor Weatherford. It received US$5.1 billion in cash settlements from the three firms which was put into the Gulf compensation fund.

 

BP has also reached a US$7.8 billion settlement with the Plaintiffs' Steering Committee, a group of lawyers representing victims of the spill. However, the company is yet to reach a settlement with Transocean, the owner of the Deepwater Horizon rig and engineering firm Halliburton. A civil trial that will determine negligence is due to begin in New Orleans in February 2013.

 

Jeffrey Woodruff, Senior Director at Fitch Ratings, felt that the settlement was a positive move but key areas of uncertainty remained. “Although the settlement removes another aspect of legal uncertainty, it does not address Clean Water Act claims, whose size cannot yet be determined. It is therefore too early for us to consider taking a rating action,” he added.

 

Fitch said in July, when revising the company's Outlook to Positive, that BP should be able to cover its remaining legal costs without impairing its financial profile, and that a comprehensive settlement of remaining liabilities for US$15 billion or less would support an upgrade.

 

Recent asset sales have also strengthened BP's credit profile. Last month, BP posted a third quarter underlying replacement cost profit, adjusted for non-operating items and fair value accounting effects, of US$5.2 billion. The figure is down from US$5.27 billion recorded in the corresponding quarter last year but up on this year's second quarter profit of US$3.7 billion.

 

“The company has realised US$35 billion of its US$38 billion targeted asset disposal programme at end the end of the third quarter of 2012. Proceeds from the sale of its 50% stake in TNK-BP in Russia will further improve its liquidity, supporting our view that the company can meet legal costs without impairing its profile,” Woodruff concluded.

 

Meanwhile, Moody’s noted that the credit rating and outlook for Transocean (currently Baa3 negative), which is yet to settle with BP, was unaffected by the recent development.

 

Stuart Miller, Moody's Senior Credit Officer, said, "The big elephant in the room for Transocean is its potential exposure to Clean Water Act fines and penalties as owner of the Deepwater Horizon rig. The recent agreement between BP and DoJ did not address the claims under the Act."

 

However, he felt that Transocean will ultimately settle with the DoJ, and there was a good chance that the amount may be manageable given the company’s current provision level and cash balances.

 

“But if gross negligence is proven, a very high legal standard, the settlement amount could result in payments by Transocean in excess of its current provision amount,” Miller concluded.

Plenty more to unfold in this saga but that’s all for the moment folks. Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Gulf of Mexico spill containment area © BP Plc.

BP to call time on 9 years of Russian pain & gain?

After market murmurs came the announcement this morning that BP is looking to sell its stake in Russian joint venture TNK-BP; a source of nine years of corporate pain and gain. As the oil major refocuses its priorities elsewhere, finally the pain aspect has made BP call time on the venture as it moves on.

A sale is by no means imminent but a company statement says, it has “received unsolicited indications of interest regarding the potential acquisition of its shareholding in TNK-BP.”

BP has since informed its Russian partners Alfa Access Renova (AAR), a group of Russian billionaire oligarchs fronted by Mikhail Fridman that it intends to pursue the sale in keeping with “its commitment to maximising shareholder value.”

Neither the announcement itself nor that it came over Q2 2012 are a surprise. BP has unquestionably reaped dividends from the partnership which went on to become Russia’s third largest oil producer collating the assets of Fridman and his crew and BP Russia. However, it has also been the source of management debacles, fiascos and politically motivated tiffs as the partners struggled to get along.

Two significant events colour public perception about the venture. When Bob Dudley (current Chief executive of BP) was Chief executive of TNK-BP from 2003-2008, the Russian venture’s output rose 33% to 1.6 million barrels per day. However for all of this, acrimony ensued between BP and AAR which triggered some good old fashioned Russian political interference. In 2008, BP’s technical staff were barred from entering Russia, offices were raided and boardroom arguments with political connotations became the norm.

Then Dudley’s visa to stay in the country was not renewed prompting him to leave in a huff claiming "sustained harassment" from Russian authorities. Fast forward to 2011 and you get the second incident when Fridman and the oligarchs all but scuppered BP’s chances of joining hands with state-owned Rosneft. The Russian state behemoth subsequently lost patience and went along a different route with ExxonMobil leaving stumped faces at BP and perhaps a whole lot of soul searching.

In wake of Macondo, as Dudley and BP refocus on repairing the company’s image in the US and ventures take-off elsewhere from Canada to the Caribbean – it is indeed time to for the partners to apply for a divorce. In truth, BP never really came back from Russia with love and the oligarchs say they have "lost faith in BP as a partner". Fridman has stepped down as TNK-BP chairman and two others Victor Vekselberg and Leonard Blavatnik also seem to have had enough according to a contact in Moscow.

The Oilholic’s Russian friends reliably inform him that holy matrimony in the country can be annulled in a matter of hours. But whether this corporate divorce will be not be messy via a swift stake sale and no political interference remains to be seen. Sadly, it is also a telling indictment of the way foreign direct investment goes in Russia which is seeing a decline in production and badly needs fresh investment and ideas.

Both BP and Shell, courtesy its frustrations with Sakhalin project back in 2006, cannot attest to Russia being a corporate experience they’ll treasure. The market certainly thinks BP’s announcement is for the better with the company’s shares trading up 2.7% (having reached 4% at one point) when the Oilholic last checked.

From BP to the North Sea, where EnQuest – the largest independent oil producer in the UK sector – will farm out a 35% interest in its Alma and Galia oil field developments to the Kuwait Foreign Petroleum Exploration Company (KUFPEC) subject to regulatory approval. According to sources at law firm Clyde & Co., who are acting as advisers to KUFPEC, the Kuwaitis are to invest a total of approximately US$500 million in cash comprising of up to US$182 million in future contributions for past costs and a development carry for EnQuest, and of KUFPEC's direct share of the development costs.

Away from deals and on to pricing, Brent dropped under US$100 for the first time since October while WTI was also at its lowest since October on the back of less than flattering economic data from the US, India and China along with ongoing bearish sentiments courtesy the Eurozone crisis. In this crudely volatile world, today’s trading makes the thoughts expressed at 2012 Reuters Global Energy & Environment Summit barely two weeks ago seem a shade exaggerated.

At the event, IEA chief economist Fatih Birol said he was worried about high oil prices posing a serious risk putting at stake a potential economic recovery in Europe, US, Japan and China. Some were discussing that oil prices had found a floor in the US$90 to US$95 range. Yet, here we are two weeks later, sliding down with the bears! That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: TNK-BP Saratov Refinery, Russia © TNK-BP

Life After the Gulf Spill for Dudley & BP

I had the pleasure of listening to Robert Dudley this morning in what was his first major speech since taking over from Tony Hayward as the group chief executive of BP and there were quite a few noteworthy things to take away from it.

Speaking to delegates at the UK business lobby group CBI’s 2010 annual conference, Dudley said BP had learnt from the Gulf of Mexico tragedy of April 20 and added his own apology for the incident to that of his predecessor and colleagues.

He said that earning and maintaining trust is central to BP’s licence “to operate in society”, as for any business. Crucial to that was re-establishing confidence in BP and its ability to manage risk. “I am determined for BP to succeed in both,” he added emphatically.

Dudley opined that a silver lining of the event is the significant and sustained advance in industry preparedness that will now exist going forward from the learnings and the equipment and techniques invented by necessity under pressure to contain the oil and stop the well.

Not looking too overwhelmed by the task at hand, Dudley also defended BP’s position noting that it found that no single factor caused the tragedy, and that the well design itself, despite what “you have heard”, does not appear to have contributed to the accident. This has been further verified by recent retrieval of equipment.

Predictably there was much talk by Dudley about winning back trust and restoring the oil giant’s reputation. BP new American chief executive said “British Petroleum” was a part of the American community and would not cut and run from the US market. For good measure, he added that there was too much at stake, both for BP and the US.

“The US has major energy needs. BP is the largest producer of oil and gas in the country and a vital contributor to fulfilling them. We also employ 23,000 people directly, have 75,000 pensioners and have ½ million individual shareholders. Our investments indirectly support a further 200,000 jobs in the US. We have paid roughly US$25 billion in taxes, duties and levies in the last several years. These are significant contributions to the US economy,” Dudley explained.

Moving away from defending his own company, Dudley then launched a robust defence of offshore drilling. “The fact is that until this incident, over 5,000 wells had been drilled in over 1,000 feet of water with no serious accident. BP had drilled safely in deep waters of the Gulf of Mexico for 20 years. As business people are telling political leaders all the time, we cannot eliminate risks, but we must manage them,” he concluded.

He also had a pop at the media – noting that while BP’s initial response was less than perfect, for much of the media the Macondo incident seemed like the only story in town. Overall, a solid performance by the new boss of BP in front of what can be safely regarded as a largely sympathetic audience.

© Gaurav Sharma 2010. Photo 1: Aerial of the Helix Q4000 taken shortly before "Static Kill" procedure began at Macondo (MC 252) site in Gulf of Mexico, August 3, 2010. Photo 2: Robert Dudley, Group Chief Executive, BP © BP Plc