Crude prices, rouble’s rumble & EU politics

Both crude oil benchmarks are more or less staying within their ranges seen in recent weeks. That would be US$80-85 per barrel for Brent and $76-80 per barrel for WTI. ‘Short’ is still the call. 

While Russia is coping with the current oil price decline, the country’s treasury is clearly not enjoying it. However, given the wider scenario in wake of Western sanctions, the Russian rouble’s decline actually provides momentary respite on the ‘crude’ front and its subsequent free float some much needed positivity.

The currency’s fall this year against the US dollar exasperated as sanctions began to bite. While that increases the bill for imports, Russian oil producers (and exporters) actually benefit from it. There is a very important domestic factor in the oil exporters’ favour – the effective tax rate paid by them as oil prices decline falls in line with the price itself, and vice versa. While a declining rouble hurts other parts of the economy reliant on imports, it partially helps offset weaker oil prices for producers.

According to calculations by Fitch Ratings, if the rouble stabilises near about its current level and the oil prices hold steady around $85 per barrel next year, an average Russian producer should report 2015 rouble operating profits broadly in line with 2013, when oil prices averaged $109. 

“In this scenario Russian oil companies' financial leverage may edge up, especially for those producers that relied most heavily on international finance, because their hard currency-denominated debts will rise in value. Given that Fitch-rated oil companies, such as LUKOIL, GazpromNeft and Tatneft, all have relatively low leverage for their current ratings, this should not trigger rating actions,” says Dmitry Marinchenko, an Associate Director at the ratings agency.

The primary worry for Russia at the moment would be a decline in prices below $85 (as is the case at the moment) which would certainly hurt profits, as would a sudden recovery for the rouble while oil prices continue to tumble. Fitch reckons most Russian oil companies have solid liquidity and would comfortably survive without new borrowing for at least the next couple of years.

“However, they may need to reconsider their financing model should access to international debt markets remain blocked for a long time, because of sanctions and overall uncertainty over the Ukrainian crisis. Nevertheless, their fundamentals remain strong, and we expect them to maintain flat oil production and generate stable cash flows for at least the next three to four years, even with lower oil prices,” Marinchenko adds.

There is one caveat though. All market commentary in this regard, including Fitch’s aforementioned calculation, is based on the assumption that the Kremlin won’t alter the existing tax framework in an attempt to increase oil revenue takings. Anecdotal evidence the Oilholic has doesn’t point to anything of the sort. In fact, most Russian analysts this blogger knows expect broader taxation parameters to remain the same.

If deliberations over the summer at the 21st World Petroleum Congress in Moscow were anything to go by, the country was actually attempting to make its tax regime even more competitive. A lot has happened since then, not just in terms of the oil price decline but also with relation to the intensification of sanctions. Perhaps with near coincidental symmetry, both the rouble and oil prices have plummeted by 30% since the first quarter of this year, though the free float attempt has helped the currency.

The Oilholic feels the Kremlin is inclined to leave more cash with oil companies in a bid to prop up production. With none of the major producers blinking (as one noted in a recent Forbes column), the Russians didn’t either pumping over 10 million barrels per day in September. That’s their highest production level since the collapse of the Soviet Union.

For the moment, the Central Bank of Russia has moved to widen the rouble's exchange-rate corridor and limit its daily interventions to a maximum of $350 million. This followed last week's 150 basis points increase in its benchmark interest rate to 9.5%. The central bank’s idea is to ease short-term pressure on dollar reserves and counteract the negative fiscal impact of lower oil prices. Given the situation is pretty fluid and there are other factors to be taken into account, let’s see how all of this plays over the first quarter of 2015.

Meanwhile, the Russians aren’t the only ones grappling with geopolitics and domestic political impediments. We’re in the season of silly politics in wider Europe as well. The European Union’s efforts to wean itself of Russian gas remain more about bravado than any actual achievement in this regard. As one blogged earlier, getting a real-terms cut in Russian imports to the EU over the next decade is not going to be easy.

Furthermore, energy policy in several jurisdictions is all over the place from nuclear energy bans to shale exploration moratoriums, or in the UK’s case a daft proposal for an energy price freeze by the leader of the opposition Labour party Ed Miliband to counter his unpopularity. All of this at a time when Europe will need to invest US$2.2 trillion in electricity infrastructure alone by 2035, according to Colette Lewiner, an industry veteran and energy sector advisor to the Chairman of Capgemini.

“Short of nationalisation where the state would bear the brunt of gas market volatility, a price freeze would not work. In order to mitigate effects of the freeze, companies could cut infrastructural investment which the UK can ill afford or they’ll raise revenue by other means including above average prices rises ahead of a freeze,” she told this blogger in a Forbes interview.

No wonder UK Prime Minister David Cameron is concerned as Miliband's proposal has the potential to derail much needed investment. In a speech to the 2014 CBI annual conference (see right) that was heavy on infrastructure investment and the country’s ongoing tussle with EU rules, Cameron did take time out to remind the audience about keeping the climate conducive for inward investment, especially foreign direct investment, in the UK’s energy sector.

“To keep encouraging inward investment, you need consistency and predictability. That is particularly important in energy,” he said to an audience that seemed to agree.

Investment towards infrastructure and promoting a better investment climate usually goes down well with the business lobby group. However, in the current confusing climate with barely six months to go before the Brits go to the polls, keeping the wider market calm when an opponent with barmy policies, could potentially unseat you is not easy.

The Oilholic feels the PM’s pain, but is resigned to acceptance of the country’s silly election season, and yet sillier policy ideas. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Photo 1: Red Square, Moscow, Russia. Photo 2: UK Prime Minister David Cameron addresses the 2014 CBI Annual Conference, November 2014 © Gaurav Sharma.

Crude reality: Time to short as bulls go lethargic?

Most of the Oilholic's contacts in City trading circles had been maintaining in recent months that a US$106 per barrel price would be the psychological floor to the year-end, barring bearish trends induced by a wider and unforeseen macroeconomic tsunami.

To be quite honest, the global economy is probably where it has been for a while – in a bit of a lull. So even though things are neither materially better nor all that worse, the level was still breached this Monday morning. Methinks there is going to be further selling and yet more shorting either side of the Atlantic.

Our old friends the hedge funds – held responsible by many for the assetization of black gold – certainly seem to think so. That's if you believe data published by ICE Futures Europe. It indicates speculative bets that the Brent price will rise (in futures and options combined), outnumbered short positions by 119,451 lots in the week ended October 29.

The London-based exchange says that's a reduction of 21% (or 30,710 contracts) from the previous week and the biggest drop since the week ended June 25. Concurrently, bearish positions on Brent outnumbered bullish wagers by 321,470; a 3.2% decrease in net-short positions from October 22. So there you have it!

On a related note, albeit for different reasons, the WTI also closed at its lowest since June 26. In fact the forward month futures contract for December shed as much as 55 cents to $94.06 at one point in intraday trading on Monday.

The Oilholic believes the prices aren’t plummeting; rather they are hitting a much more realistic level. Such a sentiment was echoed by two new supply-side contacts this blogger had the pleasure of running into at the UK business lobby group CBI's 2013 annual conference.

As 2014 is nearly upon us, Steven Wood, managing director (corporate finance) at Moody's, says oil prices should stay robust through next year. His and Moody's quantification of robustness for Brent, factoring in Chinese demand and tensions in the Middle East, stands at around $95 per barrel, and West Texas Intermediate "for slightly less, in the next one to two years."

"And with the worst behind the US natural gas industry, prices for benchmark Henry Hub will average about $3.75 per thousand cubic feet next year," he adds.

Additionally, the good folks at Moody's reckon the E&P sector's fortunes will continue to rise over the next year, with big capital spending budgets keeping fundamentals strong (also for the oilfield service and drilling sector).

One minor footnote though, even if it is still some way off – what if international sanctions on Iran get eased should relations between the Islamic Republic and the West improve? We could then see the Iran add over 750,000 barrels per day to the global oil output pool. Undoubtedly, this would be bearish for oil markets, especially so for Brent. The recent dialogue between both sides has made contemplating the possibility possible!

Away from price-related issues, if you needed any further proof of renewed vigour in North Sea E&P activity, then Norway's Statoil has announced it will go ahead with a decision to build a new platform at its Snorre field to extract another 300 million barrels of the crude stuff at an expense of £4.2 billion. This would, according to the Norwegian media, extend the project's lifetime to 2040.

Statoil will take a final decision on engineering aspects in the first quarter of 2015 with the platform scheduled to come onstream in the fourth quarter of 2021. The Norwegian firm owns 33.3% of the exploration project licence. Other shareholders include Petoro (30%), ExxonMobil (17.4%), Idemitsu Petroleum (9.6%), RWE (8.6%) and Core Energy (1.1%). That’s all for the moment folks! Keep reading, keep it ‘crude’!

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To email: gaurav.sharma@oilholicssynonymous.com

 

© Gaurav Sharma 2013. Photo: North Sea oil rig © Cairn Energy plc

UK PM flags up crude credentials

The Oilholic attended the British lobby group CBI’s annual conference earlier today listening to UK Prime Minister David Cameron flag-up his crude credentials (admittedly among other matters). The PM feels investment in the Oil & Gas sector and British expertise in it could be part of his wider economic rebalancing act.

“In last few weeks alone I have visited an £4.5 billion new investment from BP in the North Sea…And today I hosted Britain and Norway signing a 10-year deal to secure gas supplies and develop together over £1 billion of Norwegian gas fields,” he said.

That deal of course was part of British utility Centrica’s 10-year agreement worth £13 billion to buy natural gas from Norway's Statoil and jointly develop fields.

"Gas plays a central role in powering our economy, and will continue to do so for decades to come. Today's agreement will help to ensure the continued security and competitiveness of gas supplies to Britain, from a trusted and reliable neighbour," the PM concluded.

Admittedly, from a gasoline consumers’ standpoint successive British governments have long lost street cred when it comes to taxing fuel a long while ago; still the present lot fare better in relative terms if the UK ONS is to be relied upon. The British statistics body announced last week that the Government’s Share of petrol pump price dropped to 66p in the pound in 2009/10; from nearly 81p in 2001/02.

The data also show that the poorest 20% of UK households paid almost twice as much of their income in duties on fuel than the richest 20%. In 2009/10, the poorest 20% of households paid 3.5% of their disposable income on duty, compared with only 1.8% for the top 20%. Overall, the average UK household spent 2.3% of its disposable income on duties on fuel.

However, in cash terms, the richest 20% of households paid almost three-times the amount paid by the bottom 20%. In 2009/10 the richest 20% of households spent £1,062 on petrol taxes, compared with £365 for the poorest 20% of households. Overall, the average UK household spent £677 on duties on fuel in 2009/10.

Finally, the UK, US and Canada announced new sanctions against Iran following growing concern over its nuclear programme in wake of the IAEA report. In a statement the US government said that Iran's petrochemical, oil and gas industry (including supply of technical components for Upstream and downstream ops) and its financial sector would be targeted by the sanctions.

Canada will ban all exports for the petrochemical, oil and gas industries without exceptions while the British government would demand that all UK credit and financial institutions had to cease trading with Iran's banks from Monday afternoon. The Oilholic notes that this is first time the UK has cut off a petro-exporting country’s banking sector, in fact any country’s banking sector in this fashion. Its highly doubtful if the move will tame misplaced Iranian belligerence.

© Gaurav Sharma 2011. Photo: British Prime Minister David Cameron speaking at the CBI Conference, November 21^st, 2011 © Gaurav Sharma 2011.

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