Brent- WTI parity (again) before the year-end!

Before the year is out, we’ve got parity yet again between both benchmarks. Right at the start of the year, the West Texas Intermediate briefly traded at a premium to Brent having achieved parity at $48.05 per barrel on January 15. 

Come the end of the year and we are here again! Parity between both benchmarks was achieved once more at a lower level of $36.40 per barrel on December 22 (see above, click to enlarge), exactly $11.65 lower with WTI in the ascendancy. In fact, the US marker's premium appears to holding.

The OPEC stalemate, peak winter demand and lifting of US exports ban are and will remain price positives for the WTI, as one wrote in a Forbes column. So is this a reversal of the 'crude' pecking order of futures contracts we have gotten used to since 2010? The Oilholic feels its early days yet. However, the development sure makes for an interesting 12 months in more ways than one.

Happy Christmas dear readers, but that’s all for the moment folks! Keep reading, keep it ‘crude’!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2015. Photo: Bloomberg terminal screen grab showing moment of Brent-WTI parity on December 22, 2015  © Bloomberg.

Brent’s ‘nine-month high’, Aubrey, BP & more

Oh boy, what one round of positive data, especially from China, does to the oil market! The Brent forward month futures contract for March is within touching distance of a US$120 per barrel price and the bulls are out in force. Last Friday’s intraday price of US$119.17 was a nine-month high; a Brent price level last seen in May 2012. The cause – and you have heard this combination before – was healthy economic data from China, coupled with Syrian turmoil and an Iranian nuclear stalemate.

 

The Oilholic has said so before, and will say it again – the last two factors touted by market commentators have been broadly neutral in terms of their impact for the last six months. It is the relatively good macroeconomic news from China which is principally behind the rally that nearly saw the Brent price breach the US$120 level.

 

The bull-chatter is already in full force. In a note to clients, Goldman Sachs advised them last week to maintain a net long position in the S&P GSCI Brent Crude Total Return Index. The investment bank believes this rally is "less driven by supply shocks and instead by improving demand."

 

"Global oil demand has surprised to the upside in recent months, consistent with the pick-up in economic activity," the bank adds in an investment note. Really? This soon – on one set of data? One thing is for sure, with many Asian markets shut for the Chinese New Year, at least trading volumes will be lighter this week.

 

Nonetheless, the ‘nine-month high’ also crept into the headline inflation debate in the UK where the CPI rate has been flat at 2.7% since October, but commentators reckon the oil spike may nudge it higher. Additionally, the Brent-WTI spread is seen widening yet again towards the US$25 per barrel mark. On a related note, Enterprise Product Partners said that capacity on its Seaway pipeline to the US Gulf of Mexico coast from Cushing, Oklahoma will remain limited until much later this year.

 

Moving away from pricing, news arrived end-January that the inimitable Aubrey McClendon will soon vacate the office of the CEO of Chesapeake Energy. It followed intense scrutiny over the last nine months about revelations, which surfaced in May, regarding his borrowings to finance personal stakes in company wells.

 

As McClendon announced his departure on January 29, the company’s board reiterated that it had found no evidence to date of improper conduct by the CEO. McClendon will continue in his post until a successor is found which should be before April 1st – the day he is set to retire. The announcement marks a sad and unspectacular exit for the great pioneer who co-founded and led Chesapeake Energy from its 1989 inception in Oklahoma City and has been a colourful character in the oil and gas business ever since.

 

Whatever the circumstances of his exit may be, let us not forget that before the so called ‘shale gale’ was blowing, it was McClendon and his ilk who first put their faith in horizontal drilling and hydraulic fracturing. The rest, and US’ near self-sufficiency in gas supplies, is history.

Meanwhile, BP has been in the crude news for a number of reasons. First off, an additional US$34 billion in claims filed against BP by four US states earlier this month have provided yet another hurdle for the oil giant to overcome as it continues to address the aftermath of the 2010 Gulf of Mexico oil spill.

 

However, Fitch Ratings not believe that the new round of claims is a game changer. In fact the agency does not think that any final settlement is likely to be enough to interfere with BP's positive medium term credit trajectory. The latest claims come on top of the US$58 billion maximum liability calculated by Fitch. If realised, the cost of the spill could rise up to as much as US$92 billion.

 

The agency said the new claims should be put in the context of an asset sale programme that has raised US$38 billion. “This excludes an additional US$12 billion in cash to come from the sale of TNK-BP this year – upside in our analysis because we gave BP no benefit for the TNK-BP stake. BP had US$19 billion of cash on its balance sheet at 31 December 2012. That is after it has already paid US$38 billion in settlements or into escrow,” it added.

 

Away from the spill, the company announced that it had started production from new facilities at its Valhall field in the Norwegian sector of the North Sea on January 26 with an aim of producing up to 65,000 barrels of oil equivalent per day in the second half of 2013. Valhall's previous output averaged about 42,000 barrels per day (bpd), feeding crude into the Ekofisk oil stream.

 

Earlier this month, BP also said that both consortiums vying to link Azerbaijan's Shah Deniz gas field in the Caspian Sea, into Western European markets have an equal chance of success. BP operates the field which was developed in a consortium partnership with Statoil, Total, Azerbaijan’s Socar, LukAgip (an Eni, LUKoil joint venture) and others.

 

A decision, whether to pipe gas from the field into Austria via the proposed Nabucco (West) pipeline or into Italy through the rival Trans Adriatic Pipeline (TAP) project, is expected to be made by mid-2013. Speaking in Vienna, Al Cook, head of BP's Azeri operations, said, “I genuinely believe both pipelines at the moment have an equal chance. There's certainly no clear-cut answer at the moment.”

 

BP is aiming for the first gas from Shah Deniz II to be delivered to existing customer Turkey in 2018. Early 2019 is the more likely date for the first Azeri gas to reach Western Europe via this major development often touted as one which would reduce European dependence on Russia for its energy supplies.

 

The Shah Deniz consortium owns equity options in both the pipeline projects and Cook did not rule out that both Nabucco (West) and TAP could be built in the long term. Specifically, BP's own equity options, which are part of the Shah Deniz stakes, are pegged at 20% in TAP and 14% in Nabucco. Cook said BP was not “actively seeking” to increase its stake in either project – a wise choice indeed.

 

On February 4, BP said its Q4 2012 net profit, adjusted for non-operating items, currency and accounting effects, fell to US$3.98 billion from US$4.98 billion recorded over the corresponding quarter last year. Moving away from BP, Royal Dutch Shell posted a 6% dip in 2012 profits to US$27 billion on the back of weak oil and gas prices and lower exploration and production (E&P) margins.

 

The Anglo-Dutch oil major reported Q4 earnings of US$7.3 billion, a rise of 13%. However, on an adjusted current cost of supply basis and one-off asset sales, the profit came in at US$5.58 billion. In particular, Shell’s E&P business saw profits dip 14% to US$4.4 billion, notwithstanding an actual 3% increase in oil and gas production levels. However, the company did record stronger refining margins.

 

Ironically, while acknowledging stronger refining margins, Shell confirmed its decision to close most of its Harburg refinery units in Hamburg, Germany. The permanent shutdown of much of its 100,000 bpd refinery is expected next month in line with completing a deal made with Swedish refiner Nynas in 2011.

 

Finally, in a typical Italian muddle, several oil executives in the country are under investigation following a probe into alleged bribery offences related to the awarding of oil services contracts to Saipem in Algeria. Eni has a 43% stake in Saipem which is Europe’s biggest oil services provider. While the company itself denied wrongdoing, the probe was widened last Friday to include Eni CEO Paolo Scaroni.

 

The CEO’s home and office were searched as part of the probe. However, Eni is standing by their man and said it will cooperate fully with the prosecutor’s office in Milan. So far, Pietro Franco Tali (the CEO of Saipem) and Eni’s Chief Financial Officer Alessandro Bernini (who was Saipem’s CFO until 2008) have been the most high profile executives to step down in wake of the probe. Watch this crude space! That’s all for the moment folks! Keep reading, keep it ‘crude’!

 

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© Gaurav Sharma 2013. Photo 1: Asian oil rig © Cairn Energy. Photo 2: Gas extraction site © Chesapeake Energy.

Speculators, production & San Diego’s views

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Market chatter, luck of the Irish & East Timor

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Non-OPEC supply, volatility & other matters

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

The drivers, the forecasts & the ‘crude’ mood

At times wild swings in the crude market’s mood do not reflect oil supply and demand fundamentals. The fundamentals, barring a geopolitical mishap on a global scale, alter gradually unlike the volatile market sentiment. However, for most parts of Q2 and now Q3 this year, both have seemingly conspired in tandem to take the world’s crude benchmarks for a spike and dive ride.

 

Supply side analysts have had as much food for thought as those geopolitical observers overtly keen to factor in an instability risk premium in the oil price or macroeconomists expressing bearish sentiments courtesy dismal economic data from various crude consuming jurisdictions. For once, no one is wrong.

 

A Brent price nearing US$130 per barrel in mid-March (on the back of Iranian threats to close the Strait of Hormuz) plummeted to under US$90 by late June (following fears of an economic slowdown in China and India affecting consumption patterns). All the while, increasing volumes of Libyan oil was coming back on the crude market and the Saudis, in no mood to compromise at OPEC, were pumping more and more.

 

Then early in July, as the markets were digesting the highest Saudi production rate for nearly three decades, all the talk of Israel attacking Iran resurfaced while EU sanctions against the latter came into place. It also turned out that Chinese demand for the crude stuff was actually up by just under 3% for the first six months of 2012 on an annualised basis. Soon enough, Brent was again above the US$100 threshold (see graph on the right, click to enlarge).

 

Fast forward to the present date and the Syrian situation bears all the hallmarks of spilling over to the wider region. As the West led by the US and UK helps rebels opposed to President Bashar al-Assad, Russia is seen helping the incumbent; not least via a recent announcement concerning exchange of refined oil products from Russia for Syrian crude oil exports desperately needed by the latter.

 

A spread of hostilities to Lebanon, Jordan, Turkey and Iraq could complicate matters with the impact already having been seen in the bombing of Iraq-Turkey oil pipeline. Additionally, anecdotal evidence suggests the Saudis are now turning the taps down a bit in a bid to prop up the oil price and it appears to be working. The Oilholic will be probing this in detail on visit to the Middle East next week.

 

While abysmal economic data from the Old Continent may not provide fuel – no pun intended – to bullish trends, one key component of EU sanctions against Iran most certainly will. A spokesperson told the Oilholic that tankers insured by companies operating in EU jurisdictions will lose their coverage if they continue to carry Iranian oil from July.

 

Since 90% of the world's tanker fleet – including those behemoths called ‘supertankers’ passing through dangerous Gulf of Aden – is insured in Europe, the measure could take out between 0.8 and 1.1 million barrels per day (bpd) of Iranian oil from Q3 onwards according an Istanbul-based contact in the shipping business.

 

In fact OPEC’s output dipped by 70,000 bpd in month over month terms to 31.4 million bpd in July on the back of a 350,000 bpd drop in June over May. No prizes for guessing that of the 420,000 bpd production dip from May to July – 350,000 bpd loss is a direct result of the Iranian squeeze. Although Tehran claims it is a deliberate ploy.

With an average forecast of a rise in consumption by 1 million bpd over 2012 based on statements of various agencies and independent analysts, price spikes are inevitable despite a dire economic climate in Europe or the OECD in general.

 

Cast aside rubbish Iranian rhetoric and throw in momentary geopolitical supply setbacks like the odd Nigerian flare-up, a refinery fire in California or the growing number of attacks on pipeline infrastructure in Columbia. All of these examples have the potential to temporarily upset the apple cart if supply is tight.

 

“Furthermore, traders are wising up to fact that a price nudge upwards these days is contingent upon non-OECD consumption patterns and they hedge their bets accordingly. WTI aside, most global benchmarks look towards the motorist in Shanghai more than his counterpart in San Francisco these days,” says one industry insider of his peers.

 

When the Oilholic last checked at 1215 BST on August 23, the ICE Brent October contract due for expiry on September 13 was trading at US$115.95 while the NYMEX WTI was at US$97.81. It is highly likely that ICE Brent forward futures contracts for the remaining months of the year will end-up closing above US$110 per barrel, and almost certainly in three figures. Nonetheless, prepare for a rocky ride over Q4!

 

Moving away from pricing of the crude stuff, it seems the shutdown of Penglai 19-3 oilfield by the Chinese government in wake of an oil spill last year has hit CNOOC’s output and profits. According to a recent statement issued at Hong Kong Stock Exchange, CNOOC saw its H1 2012 output fall 4.6% on an annualised basis owing to Penglai 19-3 in which it holds 51% of the participating interest for the development and production phase. ConocoPhillips China Inc (COPC) is the junior partner in the venture.

 

This meant H1 2012 net income was down by 19% on an annualised basis from Yuan 39.34 billion to Yuan 31.87 billion (US$5 billion) according to Chief Executive Li Fanrong. CNOOC's US$15.1 billion takeover of Canada’s Nexen, a move which could have massive implications for the North Sea, is awaiting regulatory approval from Ottawa.

 

Away from the “third largest” of the big trio of rapidly expanding Chinese oil companies to a bit of good news, however temporary, for refiners either side of the pond. That’s if you are to believe investment bank UBS and consultancy Wood Mackenzie. UBS believes that for better parts of H1 2012, especially May and June, refining margins were at near “windfall levels” as the price of the crude stuff dipped in double-digit percentiles (25% at one point in the summer) while distillate prices held-up.

 

Wood Mackenzie also adds that given the refiners’ crude raw material was priced lower but petrol, diesel and other distillates remained pricey meant moderately complex refiners in northwest Europe made a profit of US$6.40 per barrel of processed light low sulphur Brent crude in June, compared with the average profit of 10 cents per barrel last year.

 

The June margin for medium, high sulphur Russian Urals crude was a profit of US$13.10 per barrel compared with the 2011 average of US$8.70, the consultancy adds. American refiners had a bit of respite as well over May and June. Having extensively researched refining investment and infrastructure for over two years, the Oilholic is in complete agreement with Société Générale analyst Mike Wittner that such margins are not going to last (see graph above, click to enlarge).

 

To begin with the French investment bank and most in the City expect global refinery runs to drop shortly and sharply to -1.3 million bpd in September versus August and -0.8 million bpd in October versus September. Société Générale also remains neutral on refining margins and expects them to weaken on the US Gulf Coast, Rotterdam and the Mediterranean but strengthen in Singapore. Yours truly will find out more in the Middle East next week. That’s all for the moment from London folks! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo 1: Russian oil pump jacks © Lukoil. Graph 1: Comparison of world crude oil benchmarks (Source: ICE, NYMEX, SG). Graph 2: World cracking margins (US$/barrel 5 days m.a) © SG Cross Asset Research, August 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.

Brent & the ‘crude’ fortnight to Friday the 13th!

Despite crude economic headwinds, the Brent forward month futures price spiked back well above US$100 per barrel on July 3. No one was convinced it’d stay there and so it proved to be barely a week later. Since then it has lurked around the US$100 mark. Our crude friends in the trading community always like to flag up supply shocks – some real some and some perceived along with some profit taking thrown in the mix.

The Norwegian oil industry strike which began on June 24 was a very real threat to supply. When oil industry workers down tools in a country which is the world’s fifth largest exporter of the crude stuff, then alarm bells ought to ring and so they did. Being a waterborne crude benchmark, Brent was always likely to be susceptible to one of its main production sources. The Louisiana Light’s fluctuation over the hurricane season stateside would be a fair analogy for the way Brent responded to the news of the strike.

Quite frankly, forget the benchmark; the strike saw Norwegian oil production dip by 13% and its gas output by 4% over the 16 days that it lasted. So when a Reuters report came in that Norway's government had used emergency powers to step in and force offshore oil and gas workers back to work, more than the bulls eased off.

The dispute, which is by no means over, concerns offshore workers' demand for the right to retire early, at 62, with a full pension. The row revolves around the elimination of a pension add-on introduced in 1998 for workers who retire (at 62), five years ahead of Norway's official retirement age and three years ahead of the general age for oil workers.

Accompanying a very real supply shock in the shape of the Norwegian strike were empty threats from Iran to close the Strait of Hormuz in wake of the EU sanctions squeeze. Traders put two and two together and perhaps came-up with 22 out of a sense of mischief.

First of all, the Iranians would be mighty silly if they decided to close the Strait of Hormuz with the US Fifth fleet lurking around. It just would not work and Iran would hurt itself more for the sake of what would at best be a temporary disruption. Secondly, City estimates, for instance the latest one being put out by Capital Economics, suggest that the US and EU sanctions could ultimately reduce oil exports from Iran by as much as 1.5 million barrels per day (bpd).

While it is serious stuff for Iran, the figure is less than 2% of global supply. As such hardly anyone in the City expects the implementation of sanctions on Iran to be a game-changer from a pricing standpoint.

“We maintain our view that the imminent tightening of Western sanctions on Iran is unlikely to have anywhere near as large an impact on global oil prices as many had feared. Demand is weakening and other suppliers are both able and willing to meet any shortfall. Admittedly, much could still depend on how the Iranian regime chooses to respond,” said Julian Jessop of Capital Economics.

Causative effect of such a market sentiment predictably sees Brent back in US$90s to lower US$100 range. In fact Capital Economics, Société Générale, Moody’s and many other forecasters have a US$70-100 per barrel forecast for Brent for the remainder of the year.

A spokesperson for Moody’s told the Oilholic that the agency has lowered its crude price assumptions to US$100/barrel for Brent and US$90/barrel for WTI in 2012, with an additional expected decline to US$95/barrel for Brent and US$85/barrel for WTI in 2013.

Moody's also expects that the spread between benchmark Brent and WTI crude will narrow to about US$5 in 2014. In a report, the agency adds that a drop in oil prices and jitters over economic conditions in Europe, the US and China suggest the global exploration and production sector (E&P) will see its earnings grow more slowly over the next 12 to 18 months.

As such, Moody's expects E&P industry EBITDA to grow in the mid-to-high single digits year on year through mid-2013. Expectations for EBITDA growth in the sector above 10% would suggest a positive outlook, while a retreat of 10% or more would point to a negative outlook. Moody's changed its outlook for the E&P industry to stable from positive on June 27, 2012.

The agency also expects little change in US natural gas prices before the end of 2013 with a normal winter offering the best near-term support for natural gas prices as increased utility and industrial demand will ramp up slowly.

On the corporate front, in an interesting fortnight Origin Energy announced that the Australia Pacific LNG project (APLNG) – in which its stake is at 37.5% after completion of Sinopec's additional equity subscription – has received board approval for Final Investment Decision (FID) for the development of a second LNG train.

The expanded two-train project is expected to cost US$20 billion for a coal seam gas (CSG) to liquefied natural gas (LNG) project in Queensland, Australia. Elsewhere, India’s Essar Energy subsidiary Essar E&P Ltd is to sell a 50% stake in Vietnam's offshore gas exploration block 114 to Italy’s ENI.

Under the terms of the transaction, which is still subject to approval from the Vietnamese government, ENI is also assuming operator status for the block. Yours truly guesses the Indian company finally decided it was time to indulge in a bit of risk diversification.

Continuing with corporate stuff, the Oilholic told you BP’s planned divestment in TNK-BP won’t come about that easily or smoothly. One of its oligarch partners - Mikhail Fridman - has alleged that there are no credible buyers for BP’s 50% stake in the dispute ridden Russian venture.

In an interview with the Wall Street Journal on June 29, Fridman said, "We doubt it has any basis in fact. They are trying to buy time, to reassure investors."

However, BP said it stood by its announcement. It also announced an agreement to sell its interests in the Alba and Britannia fields in the British sector of the North Sea to Mitsui for US$280 million. The sale includes BP’s non-operating 13.3% stake in Alba and 8.97% stake in Britannia. Completion of the deal is anticipated by the end of Q3 2012, subject to UK regulatory approvals.

Net production from the two fields averages around 7,000 barrels of oil equivalent per day. It is yet another example of BP’s smart management of its asset portfolio in wake of Macondo as the company refocuses on pastures and businesses new.

Elsewhere in the North Sea, Dana Petroleum expects to start drilling at two new oil fields off Shetland named - Harris and Barra – by Q2 2013. The first crude consignment from what’s described as the Western Isles project will come onstream in 2015. A spokesperson said field production could run for 15 years.

The region needs all the barrels it can pull as the UK’s budgetary watchdog – the Office for Budget Responsibility (OBR) – has projected that future oil and gas revenues from the North Sea may be much lower than previous forecasts.

OBR sees the Brent prices rise from US$95/barrel in 2016 to US$173/barrel in 2040. “This compares lower with a projection in our assessment last year of a rise from US$107/barrel in 2015, rising to US$206/barrel in 2040," a spokesperson said.

As a result the OBR now projects tax receipts will be about 0.05% of GDP by 2040-41; half the level it projected in last year. It identified lower projected oil and gas prices as the key driver for the reduced figures given this year. The Oilholic won’t be called upon to vote on Scottish independence; but if yours truly was a Scottish Nationalist then there’d be a lot to worry about.

Finally, it looks like UK regulator – the Takeover Panel – has had enough of the protracted battle for the takeover of Cove Energy between Royal Dutch Shell and Thailand's PTTEP. It has given both parties a deadline of July 16 to make their final offers.

The Takeover Panel announced on Friday 13, July 2012 that if no offer is accepted by the said date, the sale of Cove will be decided by an auction on July 17. It could be lucky for neither, if they pay over the odds. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: North Sea oil rig © Cairn Energy.

Charting the love-hate relationship with big oil

If the oil companies had answers to the energy crisis, and in some cases maybe they do, would you believe them? Given that most of us grow up loathing big oil for a multitude of reasons ranging from environmental to monetary ones while filling up the gas tank, all thoughts put forward by energy companies become suspect.

Or as the author of the book – Why we hate the oil companies? Straight talk from an energy insider – asks, would you accept the fox’s plan for the hen coop? Written by none other than John Hofmeister, the former president of Shell, it examines what’s behind the energy companies' swagger or perceived swagger.

Having made the transition from being a mere consumer of gasoline to the president of a major oil company, Hofmeister attempts to feel the pulse of public sentiment which ranges from indifference to pure hatred of those who produce the crude stuff. Spread over 270 pages split by 14 chapters, this book does its best to offer a reasonably convincing insider’s account of the industry.

Along the way it dwells on how politicians and special interest groups use energy misinformation and disinformation to meet their own odds and ends in a high stakes game. Hofmeister founded the US Citizens for Affordable Energy; an American grassroots campaign aimed changing the way the US looks at energy and energy security.

So this book benefits from his thoughts on solving energy issues, offering targeted solutions on affordable and clean energy, environmental protection and sustained economic competitiveness. The tone is a surprisingly frank one and research is solid. It is also no corporate waffle from an oilman lest sceptics dismiss it as such without reading it.

The Oilholic believes it even throws up some pragmatic solutions which appear sound at least on paper. So while there is little not to like about the book, there is one glaring caveat. It is just way too American in its scope. Yours truly is happy to recommend this book to our friends across the pond in North America; but readers elsewhere while appreciating the narrative, may come to the same conclusion.

© Gaurav Sharma 2012. Photo: Front Cover – Why we hate the oil companies? Straight talk from an energy insider © Palgrave Macmillan

An OPEC seminar & an Indian minister

Indian oil minister S. Jaipal Reddy is rather sought after these days. You would be, if you represented one of the biggest consumers of the crude stuff. So it is just about right that OPEC’s 5th international seminar here in Vienna had Reddy speak at a session titled: “Oil and the World Economy.”

In face of growing international pressure to reduce its dependence on Iranian oil and running out of capital market mechanisms to actually pay for the stuff in wake of US/EU sanctions, the Indian minister certainly had a few things to say and wanted to be heard.

India is the world's fourth-largest oil importer with all of its major suppliers being OPEC member nations, viz. - Saudi Arabia, Iraq and Iran. Given what is afoot from a global macroeconomic standpoint, Reddy has called upon oil producing and consuming countries to work together to build trust and share market data to establish demand certainty in international oil markets.

Unsurprisingly, he admitted that in an oil-importing country like India, higher oil prices lead to domestic inflation, increased input costs, an increase in the budget deficit which invariably drives up interest rates and slows down the economic growth.

“There could not be a more direct cause and effect relation than high oil prices retarding economic growth of oil-importing countries,” Reddy said adding that a sustained US$10 per barrel increase in crude prices reduces growth in developing countries by 1.5%.

“We are meeting in difficult times. The Eurozone crisis, the continuing recession in the global economy, rising geopolitical tensions, a sustained phase of high and volatile international oil prices, extraneous factors continuing to influence the price formation of oil – all these pose serious challenges to the health of the global economy and stability of the world’s financial system. The current global financial crisis, which has lasted longer than we thought in 2008, is the greatest threat faced by the global economy since the Great Depression eight decades ago,” he said further.

Reddy revealed that between the Financial Year 2010-11 and 2011-12, India’s annual average cost of imported crude oil increased by US$27 per barrel, making India’s oil import bill rise from US$100 billion to a whopping US$140 billion.

“Furthermore, since we could not pass on the full impact of high international oil prices, we had to shell out subsidies to consumers amounting to US$25 billion dollars...India’s GDP grew at 6.9% during the last financial year down from the 8% plus growth rate experienced in the past few years,” he continued.

India and perhaps many others see themselves distinguishing two schools of thoughts here in Vienna. One school holds that the global economy has built up enough resilience to absorb oil price hikes due to (a) stronger demand from emerging economies and, (b) more enlightened Central Bank policies; the other school is categorical that high oil prices are one of the primary reasons for the weak conditions in the economies of the US and Europe.

“We subscribe to the latter view and hold that very high and volatile oil prices will continue to weaken global efforts for an expeditious recovery from the ongoing global economic recession and financial crisis,” Reddy concluded.

The viewpoint of an importers’ club member is always welcome at an exporting cartel’s event. For good measure, the representatives of Nigeria, Ecuador and Iran provided the exporters’ perspective and IFC’s spokesperson did the balancing act as a sideshow. As for the word “Iran” and the sanctions it faces; the Oilholic has been told in no uncertain terms by quite a few key people that it’s...er...ahem...a taboo subject at this meeting. That's all for the moment folks. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Indian Gas Station © Indian Oil Corporation Ltd.

On Oilfield services co’s & a Texan Goodbye

Last two days have been about chatter on oilfield services and drilling companies at a pan global level based on Houstonian feedback, an interesting editorial and an investment note – all of which suggest that things are stable, growth will occur but that 2012-2013 may not be as good as 2011.

The reason is tied-in to the Oilholic’s last few blog posts that natural gas price is low and crude oil price is relatively high. So gains are to be made on one side of the business and the other side – while not necessarily countering all gains – would still stunt growth to a degree according to those in the know. Furthermore, growing competition within the services and drilling industry also means the biggest companies will still grow over the next 12 months, but not by the 10%-or-higher range that would warrant a continued positive outlook according to Moody’s.

“We foresee lower operating margins and slower EBITDA growth in 2012-2013 for the three companies that offer the best barometer of industry conditions – Schlumberger, Halliburton and Baker Hughes,” says Stuart Miller, Vice President & Senior Analyst at the ratings agency.

“We would move our outlook to positive if we projected that sector’s EBITDA would grow by more than 10% (annualised) over the next 12-18 months, while a drop of more than 10% would translate to a negative outlook,” he concludes.

The US rig count is also expected stabilise in 2012-2013. Oil-directed drilling will continue to outperform, but natural gas drilling will remain depressed into the foreseeable future, leading to a slower upward curve according to the agency.

(Click on graph - above right - to enlarge; for the latest Baker Hughes Rig Count click here). Nonetheless, drilling and associated services in unconventional plays continues as an area of strength for the industry.

The technical difficulty of developing unconventional resources will support a robust demand for sophisticated (also read expensive) horizontal well services. Companies such as Superior Energy Services, Key Energy Services and Basic Energy Services all stand to gain from their increasing exposure to unconventional plays, says Moody’s.

This ties-in nicely to an editorial in the latest (Apr 13, 2012) issue of the Houston Business Journal by Deon Daugherty in which she notes that private equity funding is being pumped in to oilfield services firms as 2012 unfolds alongside the usual investment in other traditional E&P components of the business.

Based on feedback from key local players, Daugherty writes that the technology and technical expertise needed to drill complex horizontal wells, hydraulic fracturing and expensive equipment is partly behind Houston private equity funds pouring investments in to oilfield services companies, alongside a high price of black gold driving investment into traditional E&P activity.

Speaking of editorials, there is another interesting and controversial one in The New Yorker (Apr 9, 2012) which makes a comment on ExxonMobil – the world’s largest “non-state-owned” corporation with annual revenues exceeding the GDP of Norway – and its ties with the US Republican Party.

While Democrats love to loathe the Irving, Texas headquartered IOC, columnist Steve Coll, splendidly notes that ExxonMobil CEO Rex Tillerson and President Obama "appear to share at least one understanding about energy policy and the 2012 (presidential) campaign: they are both aware that the partisan and media-amplified war over where to place the blame for rising (US) gasoline prices is largely a phony one."

The Oilholic couldn’t have put it better himself that being an E&P behemoth and that in itself being the area where its core interests are, "ExxonMobil can neither control prices at the pump nor make high profits there."

On a related R&M note, a Bloomberg report suggests that Delta Airlines is possibly in talks with ConocoPhillips about purchasing the Houston-based oil and gas major’s Trainer Refinery in Pennsylvania. Citing anonymous sources, the newswire says Delta would use the fuel from the Trainer refinery and other refineries in exchange for other products made there that it would not use.

While ConocoPhillips has said it would close the Trainer facility if it could not find a buyer by the end of May, its spokesman Rich Johnson told Bloomberg it is "still in the process of seeking a buyer for the refinery” and that the process was confidential. If it goes through, the move would be a remarkable one for a privately listed international airline.

Lastly on a crude pricing note, local media outlets suggest Enterprise Product Partners and Enbridge plan to reverse the flow of the Seaway oil pipeline two weeks ahead of schedule by mid-May pending US regulatory approval, thereby starting a much-needed reduction of excess crude from the US Midwest down and dispatch it to the Gulf Coast.

While the crude fetches a premium in the Gulf Coast, high inventory levels at the Cushing, Oklahoma – the delivery point for WTI oil futures contracts – have impacted WTI pricing relative to Brent. Reports suggest a mid-May (May 17) start date for the pipeline flow reversal will initially carry about 150,000 barrels per day of crude from the Midwest to the Gulf Coast. The news had an immediate impact as the arbitrage between transatlantic Brent and Gulf coast crudes on one hand and WTI on the other contracted sharply.

At 18:15 GMT, Light Louisiana Sweet (LLS) traded at US$19.40 a barrel premium over WTI, down US$1.65 from Friday's, Mars Sour (MRS) traded at US$12.25 a barrel over WTI down US$1.75, Poseidon (PSD) traded at US$11.55 over WTI down US$1.55.

Meanwhile, the ICE Brent futures contract for June traded at US$118.60 down US$2.61. Hitherto Brent crude and Gulf Coast crudes were moving up in tandem for the last 18 months, so this is certainly welcome news for those hoping for a return to more traditional levels stateside between WTI and Gulf Coast crudes.

Sadly, it is now time to bid another goodbye to Houston – a city which the Oilholic loves to visit more than any other. Yours truly leaves you with a view of the Minute Maid Park in downtown Houston. It is home to the local baseball team – the Houston Astros.

The stadium has a capacity of 40,963 spectators according to a spokesperson with an electronically retractable roof which was developed by Vahle, courtesy of which it can be fully air-conditioned when required – a wise decision given the city’s often hot and humid weather!

A local enthusiast tells the Oilholic that the field is unofficially and lightheartedly known as "The Field Formerly Known As Enron" by fans, locals, critics and scribes alike, acquiring the title in wake of the Enron scandal, as the failed energy company had bought naming rights to the stadium in 2000 before its spectacular and fraud-ridden collapse in November 2001.

Thankfully, on June 5, 2002, Houston-based Minute Maid, the fruit-juice subsidiary of Coca Cola Company, acquired the naming rights to the stadium for 28 years. Unlike Enron, it’s a healthier brand says the Oilholic. That’s all from Texas folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Pump Jacks Perryton, Texas, USA © Joel Sartore/National Geographic. Photo 2: Minute Maid Park - home of the Houston Astros, Texas, USA © Gaurav Sharma 2012. Graph: Land & Offshore rig count and forecast © Baker Hughes/Moody's.

First thoughts from Texas & Macondo bistro

It’s good to be back in Houston, Texas to meet old friends and make yet newer ones – not all of whom have a ‘crude’ side. On this visit, following on from last year and almost two years on from BP’s spill at the Macondo oil well in the Gulf of Mexico and the Deepwater Horizon explosion, the Oilholic finds a lot of positivity around.

Over a chat at Macondo, the Latin Bistro off Travis Street (near intersection with Franklin), not the spill site, most commentators – be they from legal, advisory or financial circles – seem to suggest that the US economy has gradually turned a corner though doubts persist.

While that is price positive for oil futures, some believe Chinese and Indian consumption may not be as trumped up as is being projected in the mass media. That’s not to say the consumption of both burgeoning economies won’t have an impact, only the impact would be felt less as both face economic headwinds. If combined with a dip in crude oil consumption in OECD jurisdictions, the scenario could be price negative but may well be countered by ongoing geopolitical factors.

Brent is holding ground at US$120-plus while WTI is resisting US$100-plus and a comparable forward month futures price differential between both benchmarks is now over US$20 per barrel. Even the most die-hard market commentator is acknowledging (finally) that Brent is more reflective of global price pressures than WTI. From global crude pressures to local price pressures on the refined stuff, which is averaging in downtown Houston at US$3.90 a gallon, well below the San Francisco average of US$4.40 a gallon; still Houstonians remain an unhappy bunch when it comes to prices at the pump.

A few good souls were both lucky and happy as a gas station in Texas made an error and marked the price at under US$2.00 a gallon leading to long queues before the owners could correct the error. One chap told a local radio station that he’d filled his car, his partner car, his mother’s car and his mother-in-law’s car before the error was corrected! Moving on from lucky sons and mother-in-laws to trends for independent upstarts, this state has always encouraged independents right from the heydays of wildcatters. In fact there is a lot of positivity around on that front too, especially if a new report from Moody’s is to be factored in.

The ratings agency believes the risk profile has improved for many small exploration and production (E&P) companies focused on oil and natural gas liquids production (NGL), and companies with technological ability to exploit unconventional resource plays are expected to benefit from rapid production and reserve growth.

Stuart Miller, Vice President & Senior Analyst at Moody’s notes, "Because of recent technological advances, smaller E&P companies that have large positions in newly productive, unconventional resource plays are expected to show rapid reserve and production growth over the next few years.”

“In addition, companies that have a high percentage of their production comprised of oil or natural gas liquids are expected to benefit from increased cash flow and greater liquidity. We believe that smaller, speculative-grade companies are disproportionately, and positively, affected by these developments," he adds.

Technological advances have made it possible to economically access vast new resources that were previously locked in place. New horizontal drilling techniques and the development of multi-stage hydraulic fracturing have unlocked these reserves.

Players who have been successful in applying these new drilling and completion techniques have lowered their finding and development costs, improved their risked return on investment, and enjoyed significant reserve and production growth. Future drilling results and production levels can now be predicted with greater certainty over large acreage positions, due to the improved performance of wells drilled using this new technology, says Moody's.

Over the next few years, Moody’s expects many small E&P companies with a high proportion of oil and natural gas liquids in their production streams are expected to report improving operating cash flow levels, higher capital budgets, declining leverage metrics, and better liquidity.

According to a spokesperson, with their existing ratings in brackets, these are: Alta Mesa Holdings (B2), Antero Resources LLC (B2), Baytex Energy (B1), Berry Petroleum (B1), Chaparral Energy (B3), Clayton Williams Energy (B3), Concho Resources (Ba3), Carrizo Oil & Gas (B2), Energy XXI Gulf Coast (B3), Harvest Operations (Ba2), Hilcorp Energy I (Ba3), Laredo Petroleum (B3) MEG Energy (B1), Oasis Petroleum (B3), PDC Energy (B2), RAAM Global Energy (Caa1), Rosetta Resources (B2), SandRidge Energy (B2), Sheridan Production Partners (B2), Stone Energy (B3), Swift Energy (B2), Unit Corporation (B1), W&T Offshore (B3).

That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Macondo Latin Bistro, Houston, Texas, USA © Gaurav Sharma.