Keystone XL revisited, some results & fossil fuels

Despite it having been a mad few days of 'crude' results, the Oilholic feels there is only one place to start this post – the US State Department's recent take on the Keystone XL project.

The Department's review of the project or should you like formalities – its Final Supplemental Environmental Impact Statement – noted that it had "no objections" on any major environmental grounds to the cross-border 1,179 mile-long Alberta to Texas pipeline extension project.

Its take, of course, pertains to 875 miles of proposed pipeline construction across US jurisdictional control which has been the subject of immense controversy with everyone from the American workers' unions [flagging-up job creation] to environmentalists [warning about risk of spillage] weighing in.

So is the end of the saga close with a thumbs-up from the State Department? Sadly, not quite, not yet! A 30-day public comment period has begun and is scheduled to end on March 7. During this time, "members of the public and other interested parties" are encouraged to submit comments on "the national interest determination."

Then the ultimate decision has to be made by the ditherer-in-chief, President Barack Obama, who is yet to make his mind up, pending reviews from "other government agencies" and the public at large.

As expected, the State Department's statement is full of waffle. Hoping not to annoy either those for or against the project, it took no firm stances in the Oilholic's opinion. However, there is one very clear, in fact explicit, conclusion by the department, from this blogger's reading of it – Alberta's oil sands will be developed Keystone XL or not!

In a related development impact assessment, it also noted – perhaps in no small part down to recent incidents and accidents – that using the rail network to transport crude was an even worse option than the pipeline itself, if a carbon footprint was the deciding factor. The so-called "other agencies", most notably the Environmental Protection Agency, now have around 90 days to comment before the State Department finally issues its "final" recommendation to the President.

Then there would be no excuses or reasons for stalling left and we should know either ways by the summer. One thing is for sure, the Americans have formally acknowledged that cancelling the pipeline extension won't stop E&P activity in the oil sands. So if that's what the environmentalists are after, there's some food for thought. One wishes, the State Department read this blog more often. Yours truly could have saved them a lot of time and money in reaching such a blatantly obvious conclusion.

For TransCanada's sake, which first applied for a permit from the US government as far back as 2008, the Oilholic hopes the US$7 billion project does go ahead. Stepping away from pipeline politics, to some 'crude' financial results over the past week, one cannot but feel for BG Group's Chief Executive Chris Finlayson.

In a geopolitically sensitive industry, Finlayson's team could not be apportioned blame when he announced that group earnings would dip by 33% on an annualised basis to around $2.2 billion, owing to unrest in Egypt. In the backdrop of domestic strife, the Egyptian government has not honoured agreements covering BG Group's share of gas from fields in the country, with high levels of gas being diverted to the domestic market.

Unable to fulfil its export obligations, the company had to serve force majeure notices to affected buyers and lenders, in effect releasing all sides from contractual obligations for circumstances beyond their control. Hence, a company deemed to be high-flier in the oil & gas world was - albeit temporarily - made to look like a low-flapper boosted by occasional gusts of gas...er sorry wind!

As Egypt accounts for over 20% of its annual production at present – BG Group's profit warning made its shares take a plastering following the trading update on January 27, dipping 18% at one point. The price is currently in the £10 to £11 range and most analysts are nonplussed. For instance, Liberum Capital cut BG Group to hold from buy, with the target cut from £14.75 to £12.80. Investec analyst Neill Morton cut the group's EPS forecast for 2014 and 2015 by 22% and 16% respectively.

"However, we do not believe that a takeover is likely (or even possible?) for a $60 billion company which is likely to command a substantial takeover premium. The key challenges over the next 18 months are the developments in Brazil and Australia which still run the risk of further issues, in our view (for e.g. the Brazil development is being done by Petrobras)," Morton added.

While BG Group was warning on profits, supermajor Shell wasn't exactly covering itself in glory. Following on from a pretty substantial profits warning, Shell's profits [outstripping the effect of oil price fluctuations came] in at $2.9 billion for the last quarter of 2013, down from $5.6 billion noted over the same period in 2012. The market was already well prepared for a dip in performance from Shell, but much to this blogger's surprise, new chief executive Ben van Beurden said the company's strategy presentation [slated for March 13] would contain no fresh targets on production, capex and asset disposal.

Odd indeed, and if one might humbly add – Shell's asset disposal, especially if similar drives at BP, Chevron and ConocoPhillips are to be used as measuring rods, seems a bit random! The Anglo-Dutch company said it was targeting disposals of $15 billion in the current financial year, and had stopped exploration in Alaska.

Its stake in the Australian Wheatstone project is expected to go, and a 23% stake in the Brazilian Parque das Conchas (BC-10) offshore project already has gone, subject to regulatory approvals. Ratings agency Fitch said such moves were positive, but added: "It remains to be seen whether Shell will take the opportunity that this flexibility affords it to retrench, or be tempted into shareholder friendly actions that could threaten its 'AA' credit rating."

Finally, ExxonMobil – biggest of the publicly traded IOCs by market value – also saw its profits below market expectations after a failure to offset declining production with fresh reserves. For the fourth quarter, it posted a net income of $8.35 billion, or $1.91 per share, compared with $9.95 billion, or $2.20 per share, over the same quarter in 2012. Those picky analysts were hoping for $1.92 to $1.94 per share – some will never be pleased!

Forget the analysts, here's an interesting article on what Warren Buffet sees in ExxonMobil to help draw conclusions on the "quintessential defensive stock." In response to his company's latest financials, chief executive Rex Tillerson promised to move ahead with new exploration projects.

Away from results, oil majors and minors ought to take notice as it seems oil might be overtaken by coal as the dominant primary energy source worldwide by 2017, according to the IEA. Adding further weight to this hypothesis, Worldwatch Institute's recent Vital Signs Online study noted that natural gas increased its share of energy consumption from 23.8% to 23.9% during 2012, coal rose from 29.7% to 29.9%, while oil fell from 33.4% to 33.1%.

Coal, natural gas, and oil, collectively accounted for 87% of global primary energy consumption in 2012. Finally, OPEC's 'long-standing' Secretary General Abdalla Salem El-Badri has said its member nations will be able to handle the extra oil "expected to come from Iran, Iraq and Libya" to head off any oversupply.

We believe you sir, but it'll be kinda hard to keep a trio gagging for an export impetus to toe the line, say us supply-side analysts. Hopefully, oversupply or even the perception of oversupply should bring the price of the crude stuff down a fraction and may be price positive for consumers. Hence, a month into 2014, yours truly stands by his price forecast. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo 1: The White House, Washington DC, USA © Gaurav Sharma, April 2008. Photo 2: Shell tanker truck at Muscat International Airport, Oman © Gaurav Sharma, August 2013.

The Keystone XL saga: Views of Toronto analysts

The Oilholic arrived in Toronto, ON for the briefest of visits to find the energy community here in bullish mood about the Keystone XL pipeline project getting a nod of approval from the Obama administration this summer.

Out of a snap, unscientific, random poll of seven energy analysts in downtown Toronto, none of the commentators thought the project’s second application for approval would be turned down this summer by the US Government. Only one analyst thought the second application would face severe delays yet again. On the subject of what next if the unthinkable happens and the US yet again denies approval, most thought Canada can find plenty of takers for Alberta’s most precious resource.

Simply put, if the US does not want oil derived from a bituminous source, there are many takers – as is evident from the interest in the oil sands from burgeoning Asian importers. Make no mistake, the oil sands would be developed, most said. Additionally, there were some predictable quips as well from our friends in Toronto along the lines of “Obama doesn’t have a re-election to fight, so he’ll approve”, “who would the US deal with Canadians or Venezuelans?” or “it could be a shot in the arm for US refinery upgrade projects”.

All of these quips ring true in parts. Furthermore, a recent poll, conducted across the border by the non-partisan Pew Research Center, suggests two-thirds of Americans (66%) favour building the pipeline, which would transport oil from Alberta via the Midwest to Texan refineries. For purposes of its research, Pew polled 1501 adult US citizens between March 13 and 17. The survey result is a pretty convincing one, polled by a very respectable source.

Away from Pew’s findings was a totally unrelated editorial calling for the project’s approval in none other than the Chicago Tribune. The Oilholic is not from Illinois but is quietly confident that President Obama, who was once a senator from the state, does read his local broadsheet. On March 29, printed on page 22, he would have found the lead editorial declaring: “Enough dawdling. Obama should approve the Keystone pipeline.”

Further down the editorial, the paper wrote: “The President is expected to make a decision by this summer. He rejected a Keystone plan a year ago, in the midst of his re-election campaign. This was applauded by some environmental groups and angered the Canadian government. But the most significant impact was this: It kept Americans from getting good-paying jobs.”

Powerful stuff one would say! Canada, you have the support of the President’s (once) local newspaper! Furthermore, most Chicago-based analysts the Oilholic spoke to last week seemed to be clamouring for an approval. Phil Flynn, senior analyst at Price Future Group, said it had been a sad political story symptomatic of dysfunctional US politics and government.

“Here we have a bizarre situation that a pipeline is geopolitically right, but politically...a mess! Democrats had a pop at President George W. Bush tying him with “big oil”; Obama is getting the other end of the stick with people labelling him “big green.” Had he approved the Keystone XL project before it had become a “major issue” in this social media age – well it would not have become an issue at all; just one of the many North American pipelines plain and simple!”

“I see it as a classic case of a bungled energy policy. The Obama administration grossly underestimated the both the importance of Canadian oil sands and American shale and worse still that we could be energy independent. This side of the border, the shale gas revolution happened not because of Washington, but rather despite of Washington,” he said.

Most in the trading community this blogger met in Toronto and Chicago feel an important reason why Keystone XL is going to be approved this time around is because the US labour unions want it badly. Now, hardly any Democrat would flag this up as a reason for approving the project in the summer. Saddest part of it all – for both Canada and the US – is that the Keystone XL project is such a small part of the ongoing energy story of both countries.

Flynn reckons it is all about finding a way to approve it and save face in the summer! “Canadian crude from the oil sands is coming to the market anyway. So the Democrats on Capitol Hill will say America may as well go for it anyway! Mark my word, that’ll be the argument used to peddle the approval,” he concluded.

Moving away from Keystone XL, but sticking with pipelines, ratings agency Moody’s has given thumbs-up to Enbridge’s capital expenditure programme. In a note to clients this morning, Moody's affirmed Enbridge's Baa1 senior unsecured, Baa1 long term issuer, (P)Baa2 subordinate shelf and Baa3 preferred stock ratings.

“The company has taken timely advantage of opportunities that have developed in the North American liquids market over the last few years as a result of regulatory delays in getting new pipelines approved and a persistent liquids pricing differential attributed to tight takeaway capacity, bottlenecks and an inability for shippers to access tidewater and global markets,” the agency said.

According to Moody’s, Enbridge's announced projects are lower risk because they are generally on existing rights of way as either expansions or reversals. “Once this large programme is completed, Enbridge's business risk should be lower due to even greater liquids network diversity,” it added.

Just one more footnote before a farewell to Toronto, the local networks and newspapers are awash with news that Canada's Information Commission is poised investigate claims the Federal government is "muzzling" its scientists.

According to The Globe and Mail, the Commission is investigating seven government departments. These include Environment, Fisheries and Oceans, Natural Resources, National Defence, the Treasury Board Secretariat, National Research Council of Canada and the Canadian Food Inspection Agency.

A spokesperson said the investigation is in response to a complaint filed by the University of Victoria, BC and the campaign group Democracy Watch. Assistant Information Commissioner Emily McCarthy’s office would be leading the probe. Intriguing story indeed and one to watch out for!

It is almost time to head back home, but before heading up in the air towards London Heathrow, the Oilholic leaves you with a view of a natural wonder which helps Ontario Power and Power Authority of New York harness copious amounts of hydroelectricity – the Niagara Falls.

With even Americans saying the view is better from the Canadian side, the Oilholic simply had to pop over and admire it. So it turned out to be quite a view. Photographed here is the Horseshoe Falls – on the side yours truly has snapped from is Canada and on the other is the USA. Sandwiched between is the Niagara River which drains Lake Erie in to Lake Ontario.

The first known effort to harness these waters for power generation was made by one Daniel Joncaire who built a small canal above the falls to power his sawmill in 1759, according to a local park official. Today, if the US (Robert Moses Niagara Power Plant and the Lewiston Pump Generating Plant) and Canadian (Sir Adam Beck I and II) power generation facilities are pooled, the total power production would be 4.4 gigawatts! That’s all from Toronto folks! Keep reading, keep it ‘crude’!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo 1: Toronto’s Skyline and Lake Ontario, Canada. Photo 2: The Niagara Falls, Ontario, Canada © Gaurav Sharma.

‘Oh Frack’ for OPEC, ‘Yeah Frack’ for IEA?

In a space of a fortnight this month, both the IEA and OPEC raised “fracks” and figures. Not only that, a newly elected President Barack Obama declared his intentions to rid the USA of “foreign oil” and the media was awash with stories about American energy security permutations in wake of the shale bonanza. Alas, the whole lot forgot to raise one important point; more on that later.

 

Starting with OPEC, its year-end calendar publication – The World Oil Outlook – saw the oil exporters’ bloc acknowledge for the first time on November 8 that fracking and shale oil & gas prospection on a global scale would significantly alter the energy landscape as we know it. OPEC also cut its medium and long term global oil demand estimates and assumed an average crude oil price of US$100 per barrel over the medium term.

 

“Given recent significant increases in North American shale oil and shale gas production, it is now clear that these resources might play an increasingly important role in non-OPEC medium and long term supply prospects,” its report said.

 

The report added that shale oil will contribute 2 million barrels per day (bpd) towards global oil supply by 2020 and 3 million bpd by 2035. If this materialises, then the projected rate of incremental supply is over the daily output of some OPEC members and compares to the ‘official’ daily output (i.e. minus the illegal siphoning / theft) of Nigeria.

 

OPEC’s first acknowledgement of the impact of shale came attached with a caveat that over the medium term, shale oil would continue to come from North America only with other regions making “modest” contributions over the longer term at best. For the record, the Oilholic agrees with the sentiment and has held this belief for a while now based on detailed investigations in a journalistic capacity (about financing shale projects).

 

OPEC admitted that the global economy, especially the US economy, is expected to be less reliant on its members, who at present pump over a third of the world's oil and have around 80% of planet’s conventional crude reserves. Pay particular attention to the ‘conventional’ bit, yours truly will come back to it.

 

According to the exporters’ bloc, global demand would reach 92.9 million bpd by 2016, down over 1 million from its 2011 report. By 2035, it expects consumption to rise to 107.3 million bpd, over 2 million less than previous estimates. To put things into perspective, global demand in 2011 was 87.8 million bpd.

 

Partly, but not only, down to shale oil, non-OPEC output is expected to rise to 56.6 million bpd by 2016, up 4.2 million bpd from 2011, the report added. So OPEC expects demand for its crude to average 29.70 million bpd in 2016; much less than its current output (ex-Iraq).

 

"This downward revision, together with updated estimates of OPEC production capacity over the medium term, implies that OPEC crude oil spare capacity is expected to rise beyond 5 million bpd as early as 2013-14," OPEC said.

 

"Long term oil demand prospects have not only been affected by the medium term downward revisions, but by higher oil prices too…oil demand growth has a notable downside risk, especially in the first half of 2013. Much of this risk is attributed to not only the OECD, but also China and India," it added.

 

So on top of a medium term crude oil price assumption of US$100 per barrel (by its internal measure and OPEC basket of crudes, which usually follows Brent not WTI), the bloc forecasts the price to rise with inflation to US$120 by 2025 and US$155 by 2035.

 

Barely a week later, IEA Chief Economist Fatih Birol – who at this point in 2009 was discussing 'peak oil' – created ripples when he told a news conference in London that in his opinion the USA would overtake Russia as the biggest gas producer by a significant margin by 2015. Not only that, he told scribes here that by 2017, the USA would become the world's largest oil producer ahead of the Saudis and Russians. 

 

Realising the stirrings in the room, Birol added that he realised how “optimistic” the IEA forecasts were sounding given that the shale oil boom was a new phenomenon in relative terms.

 

"Light, tight oil resources are poorly known....If no new resources are discovered after 2020 and plus, if the prices are not as high as today, then we may see Saudi Arabia coming back and being the first producer again," he cautioned.

 

Earlier in the day, the IEA forecasted that US oil production would rise to 10 million bpd by 2015 and 11.1 million bpd in 2020 before slipping to 9.2 million bpd by 2035. It forecasted Saudi Arabia’s oil output to be 10.9 million bpd by 2015, 10.6 million bpd in 2020 but would rise to 12.3 million bpd by 2035.

 

That would see the world relying increasingly on OPEC after 2020 as, in addition to increases from Saudi Arabia, Iraq will account for 45% the growth in global oil production to 2035 and become the second-largest exporter, overtaking Russia.

 

The report also assumes a huge expansion in the Chinese economy, which the IEA said would overtake the USA in purchasing power parity soon after 2015 (and by 2020 using market exchange rates). It added that the share of coal in primary energy demand will fall only slightly by 2035. Fossil fuels in general will remain dominant in the global energy mix, supported by subsidies that, in 2011, rose by 30% to US$523 billion, due mainly to increases in the Middle East and North Africa.

 

Fresh from his re-election, President Obama promised to “rid America of foreign oil” in his victory speech prior to both the IEA and OPEC reports. An acknowledgement of the US shale bonanza by OPEC and a subsequent endorsement by IEA sent ‘crude’ cheers in US circles.

 

The US media, as expected, went into overdrive. One story – by ABC news – stood out in particular claiming to have stumbled on a shale oil find with more potential than all of OPEC. Not to mention, the environmentalists also took to the airwaves letting the great American public know about the dangers of fracking and how they shouldn’t lose sight of the environmental impact.

 

Rhetoric is fine, stats are fine and so are verbal jousts. However, one important question has bypassed several key commentators (bar some environmentalists). That being, just how many barrels are being used, to extract one fresh barrel? You bring that into the equation and unconventional prospection – including US and Canadian shale, Canadian oil sands and Brazil’s ultradeepwater exploration – all seem like expensive prepositions.

 

What’s more OPEC’s grip on conventional oil production, which is inherently cheaper than unconventional and is expected to remain so for sometime, suddenly sounds worthy of concern again.

 

Nonetheless “profound” changes are underway as both OPEC and IEA have acknowledged and those changes are very positive for US energy mix. Maybe, as The Economist noted in an editorial for its latest issue: “The biggest bonanza from all this new (US) energy would be if users paid the real cost of consuming oil and gas.”

 

What? Tax gasoline users more in the US of A? Keep dreaming sir! That’s all for the moment folks! Keep reading, keep it crude!

 

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

Why CNOOC’s move matters beyond Canada?

China’s CNOOC has made yet another Canadian acquisition; only its latest one announced earlier this week has global implications in the shape of Nexen. On July 23rd Nexen’s board approved CNOOC’s offer to pay US$27.50 per share valuing their company at US$15.1 billion; a near 60% appreciation on valuation at the close of trading on July 20th.

So why does this acquisition matter? After all, it isn’t the first time the Chinese state-owned firm has acquired a Canadian asset. Only last November, CNOOC bought Canadian oil sands firm Opti Canada for C$2.1 billion. In 2005, it acquired a 16.7% share of MEG Energy, another Canadian oil firm.

A CNOOC communiqué suggests it is operating as any oil company would, i.e. by strategically expanding its reserve base. It says the acquisition, which is yet to be cleared by the Canadian government, would boost its oil reserves by 30%.

In a rather 'crude' world, if this Chinese takeover is approved by the Canadians, CNOOC would take control of the UK's largest producing oil field - Buzzard. This would be on top of the Golden Eagle prospection zone about 43 miles offshore from Aberdeen. Unlike oil sands upstarts, Nexen is a major established global operator and has a significant presence in the North Sea. 

Now if you count Sinopec 49% stake in Talisman's business in the British sector of the North Sea together with hypothetical CNOOC access via a takeover of Nexen; it would in theory give the Chinese control of just under 10% of British oil and gas production in the North Sea!

Understandably, there have been murmurings in the Oilholic’s part of the world. However, there are no loud noises as they would run contrary to the British government’s pro-investment stance and in any case they can’t do much about it. By law, the Canadians can block any foreign investments in the country’s firms exceeding C$330 million if the government believes they are not in Canada's best interests. In 2010, the Canadian government prevented BHP Billiton's US$39 billion hostile takeover of fertiliser firm Potash Corp. The LSE-TSX shenanigans of last year are also well documented.

Chinese firms have not felt as welcome in the US, but in Canada their investment is not considered a taboo subject. So how the Harper government responds in this case, which has far reaching implications beyond Canada, remains to be seen.

Meanwhile, contrary to AAR and tycoon Mikhail Fridman’s assertion that there were no takers for BP’s stake in Russia’s TNK-BP, Russian state giant Rosneft has said it is considering buying the stake. A Roseneft statement earlier this week suggested it was interested in a ‘potential acquisition’.

TNK-BP is jointly owned by AAR and BP. Already troubled relations between the two became further fraught after BP sought to form a separate partnership with Rosneft last year.

As AAR has preferred bidder status, this gives it around 90 days during which BP can talk to – but not sign an agreement with – other parties interested in its stake. BP put up its half of the TNK-BP business up for sale in June. AAR has itself declared an interest in buying BP's share.

Finally, the Oilholic is getting in to the Olympics spirit as well! The Chinese, Russians, Americans, Canadians and athletes of some 200-odd countries are now in London town. The Tower Bridge has got its own fancy Olympics rings (see above) and the Olympic Torch passed from the street in front of this blogger’s humble abode on Thursday (see below)!

For those wondering how the torch was being kept powered-up in some really wretched British weather – there is a liquid fuel canister located about halfway up the torch connected via tiny pipe to the top. Through it, the fuel travels up before it is released out at the top of the torch where the pressure in it decreases and this converts the liquid into gas ignited by a spark. Despite exhaustive enquiries, no one would reveal the flow rate which is special to each Olympic torch.

This has been the case since 1972 and London 2012 is no exception to this rule. Quite a few London 2012 Olympic Torches are up for sale on eBay should any of you wish to get your own now that Olympics opening ceremony is done and the cauldron has been lit in the stadium. That’s all for the moment folks! Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo 1: North Sea oil rig © Shell. Photo 2: Tower Bridge London with Olympic rings. Photo 3: London 2012 Olympic Torch passes through London Borough of Barnet, UK.  © Gaurav Sharma 2012.

“Stability, stability, stability,” says El-Badri

So the press briefing room has emptied and the OPEC ministers have left the building for first time after failing to cut the cartel’s official output in face of crude price corrections exceeding 10% over a fiscal quarter. Thanks largely to Saudi Arabia, OPEC output stayed right where it was at 30 million bpd. Given the Eurozone crisis and a US, Indian and Chinese slowdown – OPEC members will invariably see Brent trading below US$100 per barrel for extended periods of time over the medium term.

It is doubtful if the Saudis would be too perturbed before the price of Brent slips below US$85 per barrel. As the Oilholic noted last year, studies suggest that is the price they may have budgeted for. Putting things into perspective analysts polled by the Oilholic here in Vienna suggest Iran would need a Brent price of US$110-plus to come anywhere balancing its budget.

However, with all bar the Saudis sweating already, outgoing OPEC Secretary General Abdalla Salem El-Badri, whose successor is yet to be decided, probably provided the signature quote of 161st meeting of ministers. Given the long term nature of the oil & gas business and a need for clarity and predictability, the Secretary General demanded ‘stability, stability, stability’.

“Stability for investments and expansion to flourish; Stability for economies around the world to grow; And stability for producers that allows them a fair return from the exploitation of their exhaustible natural resources,” he said in a speech at the OPEC seminar ahead of the meeting.

Problem is the Saudis have taken the message a little bit too literally; oil minister Ali Al-Naimi likened his country’s high production level and its insistence that OPEC’s official quota stays right where it is to a kind of an economic ‘stimulus’ which the world needs right now.

Of course on the macro picture, everyone at OPEC would have nodded in approval when El-Badri noted that fossil fuels – which currently account for 87% of the world's energy supply – will still contribute 82% by 2035.

“Oil will retain the largest share (of the energy supply) for most of the period to 2035, although its overall share falls from 34% to 28%. It will remain central to growth in many areas of the global economy, especially the transportation sector. Coal's share remains similar to today, at around 29%, whereas gas increases from 23% to 25%,” he added.

In terms of non-fossil fuels, renewable energy would grow fast according to OPEC. But as it starts from a low base, its share will still be only 3% by 2035. Hydropower will increase only a little – to 3% by 2035. Nuclear power will also witness some expansion, although prospects have been affected by events in Fukushima. However, it is seen as having only a 6% share in 2035.

For oil, conventional as well as non-conventional resources are ‘sufficient’ for the foreseeable future according to El-Badri. The cartel expects significant increases in conventional oil supply from Brazil, the Caspian, and of course from amongst its own members, as well as steady increases in non-conventional oil and natural gas liquids (e.g. Canada and US).

On the investment front, for the five-year period from 2012 to 2016, OPEC's member countries currently have 116 upstream projects in their portfolio, some of which would be project or equity financed but majority won’t. Quite frankly do some of the Middle Eastern members really need to approach the debt markets after all? Moi thinks not; at best only limited recourse financing maybe sought. If all projects are realised, it could translate into an investment figure of close to US$280 billion at current prices.

“Taking into account all OPEC liquids, the net increase is estimated to be close to 7 million bpd above 2012 levels, although investment decisions and plans will obviously be influenced by various factors, such as the global economic situation, policies and the price of oil,” El-Badri concluded.

That’s all from Austria folks where the Oilholic is surrounded by news from the G20, rising cost of borrow for Spain and Italy, European Commission President Jose Manuel Barroso ranting, Fitch downgrading India’s outlook, an impending US Federal Reserve decision and the Greek elections! Phew!

Since it’s time to say Auf Wiedersehen and check-in for the last Austrian Airlines flight out of this Eurozone oasis of ‘relative’ calm to a soggy London, yours truly leaves you with a sunny view of the Church of St. Charles Borromeo (Karlskirche) near Vienna’s Karlsplatz area (see above right, click to enlarge). It was commissioned by Charles VI – penultimate sovereign of the Habsburg monarchy – in 1713. Johann Bernhard Fischer von Erlach, one of Austro-Hungarian Empire’s most renowned architects, came up with the original design with construction beginning in 1716.

However, following Fischer’s death in 1727, it was left to his son Joseph Emanuel to finish the project adding his own concepts and special touches along the way. This place exudes calmness, one which the markets, the crude world and certainly Mr. Barroso could do well with. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Empty OPEC briefing room podium following the end of the 161st meeting of ministers, Vienna, Austria. Photo 2: Church of St. Charles Borromeo (Karlskirche), Vienna, Austria © Gaurav Sharma 2012.

What prospective Albertan pipelines mean for BC

If a new permit application by TransCanada for the Keystone XL pipeline from Hardisty, Alberta to Port Arthur, Texas does not get approved after the US 2012 presidential elections, attention will shift towards expanding the pipeline network westwards within Canada. If the project does get approved, well attention would still shift towards expanding the pipeline network westwards within Canada.

The Oilholic’s conjecture is that policy debate within Canada is already factoring in a westward expansion of pipelines eyeing exports via the Pacific Coast to China, Japan, India and beyond, whether the Keystone XL pipeline extension gets built or not. When US President Barack Obama did not grant approval to the original Keystone XL pipeline application earlier this year, Canadian Prime Minister Stephen Harper expressed his ‘disappointment’, had a candid conversation with Obama at an Asia Pacific leaders summit and then got on a plane to China.

He has also been to India on a high level mission in recent memory. At the 20th World Petroleum Congress in Doha last year, Indian officials listened intently to what was coming out of the Canadian camp. Canadian Association of Petroleum Producers (CAPP) has already noted increasing interest from Korean and other Asian players as well when it comes to buying in to both crude oil reserves and natural gas in Western Canada. Club it all together and a westward expansion is inevitable.

Central to a westward expansion is British Columbia (BC), the Canadian province neighbouring Alberta, which could become as important in terms of pipeline infrastructure as Alberta is in terms of the crude stuff itself. From the standpoint of a ‘crude’ analogy, the situation is a bit like South Sudan (which has all the resources) and Sudan (which has the infrastructure to bring the resource to market) with a good Canadian fortune of zero conflict or geopolitical flare-ups. Thankfully for Canada and the importers club, Albertans and British Columbians also get along a tad better than their Sudanese counterparts and what is Alberta’s gain could also be BC's gain.

Last year, over a meeting with the Oilholic in Calgary, Dave Collyer, President of CAPP, noted, “As our crude production grows we would like access to the wider crude oil markets. Historically those markets have almost entirely been in the US and we are optimistic that these would continue to grow. Unquestionably there is increasing interest in the Oil sands from overseas and market diversification to Asia is neither lost on Canadians nor is it a taboo subject for us.”

At present, there are five major pipelines that are directly connected to the Albertan supply hubs at Edmonton and Hardisty – Enbridge Mainline, Enbridge Alberta Clipper, Kinder Morgan Trans Mountain, Kinder Morgan Express, and of course the original TransCanada Keystone pipeline.

Of these, the Trans Mountain system transports crude to delivery points in BC, including the Westridge dock for offshore exports, and to a pipeline that provides deliveries to refineries in the US state of Washington. It is the only pipeline route to markets off the West coast and is currently operating as a common carrier pipeline where shippers nominate for space on the pipeline without a contract. Since May 2010, the pipeline has been in steady apportionment.

Excess demand for this space is expected to continue until there is additional capacity available to transport crude oil to the west coast for export according to CAPP. The available pipeline capacity depends on the amount of heavy crude oil transported. (For example, in 2010, about 27% of the volumes shipped were heavy crude oil).

So four more have been proposed via BC (see map above) – namely Enbridge Northern Gateway (from Bruderheim, Alberta to Kitimat, BC, Capacity: 525,000 barrels per day), Kinder Morgan TMX2 (from Edmonton, Alberta to Kamloops, BC, Capacity: 80,000 bpd), Kinder Morgan TMX3 (from Kamloops, BC to Sumas, BC, Capacity: 240,000 to 300,000 bpd) and Kinder Morgan TMX Northern Leg (Rearguard/Edmonton, Alberta to Kitimat, BC, Capacity: 400,000 bpd).

Given that it’s green BC in question, there already are legal impediments as well as a major bid to address the concerns of the Native Indian First Nations communities according to the Oilholic’s local feedback here. Environmental due diligence should be and is being taken seriously on the West Coast. Then there is the spectre of a socialist NDP provincial government or a hung parliament at the next elections in BC which could hamper activity and investment.

Taking in to account all this, realistically speaking not much may start happening before 2015, but there is a growing belief within the province that happen it most likely will and the benefit to the provincial economy would manifold. To begin with jobs, direct construction related to the proposed pipelines and revenues spring to mind. Additionally, there is likely to be a decade long rise in service sector jobs in the province.

Then given that BC has a proven crown agency in Partnerships BC which since its inception has been building generally bankable infrastructure projects; an ancillary social infrastructure boom to cater to what would become a burgeoning Kitimat and Kamloops is also within the realm of possibility.

Over the last ten days the Oilholic has gathered the thoughts of legal professionals, financial advisers, provincial civil servants and last but certainly not the least the average British Columbian you’d run into in a bar or a Starbucks. The overriding emotion was one of positivity though everyone acknowledges the impediments.

Furthermore, many think the pipelines would assist in diversifying BC's economy which is largely reliant on tourism and timber to include yet another key sector without necessarily compromising its green credentials and a record of accommodating the First Nations Native Indian population. That’s all from Canada folks! Yours truly is off to Houston, Texas. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Map: Proposed (in dotted lines) and existing pipelines to the West Coast of Canada © CAPP 2011.

Tankers in English Bay & Canada's Confidence

The Oilholic headed to downtown Vancouver from the suburbs this afternoon, up on Burrard Street, turning right on Davie Street, down Jervis Street straight through to Sunset Beach in order to get a look in at the English Bay which is quite a sight. Standing bang in the middle of the beach, to your left would be Granville Island, the Burrard Bridge overlooking it and Granville Bridge reaching out to it.

To your right would be two more beaches and Stanley Park on the Vancouver Downtown Peninsula and looking out to the horizon you’ll see pristine waters of the Bay littered with tankers (see image above on the left, click to enlarge). The view is a vindication of Western Canada’s growing crude credentials and its clout in the world of oil & gas exports. Yours truly and other onlookers would often spot the odd oil or LNG tanker on the horizon making its way to or from Vancouver Harbour and docking bays on the inlet towards Port Moody. However, this afternoon the Oilholic counted 12 tankers - the most yours truly has ever counted on five previous visits to the Bay!

There is a new found confidence in the Canadian energy business and a palpable shift in the balance of economic prowess from a manufacturing-led East Coast/Eastern dominated macroeconomic dynamic of the 1950s to a natural resources-led West Coast/Western dominated economy since 2005 or thereabouts. Furthermore, an ever mobile financial services sector with its hubs in Montreal and Toronto now looks increasingly Westwards. Law firms and advisory firms are increasing their presence in Western Canada by expanding practices and a network of partners in Calgary and Vancouver.

Calgary now has more corporate headquarters than Montreal. Of the top 20 most profitable Canadian companies by exchange filings in 2010, eight were natural resources companies with a Western Canadian slant (viz. Suncor, Barrick, Imperial Oil, PCS, Teck, CNR, Goldcorp and EnCana).

A recently spurned merger between natural resources and banking sector(s) dominated stock exchanges of London (LSE) and Toronto (TSX) would have been ideal. But much to the dismay of the Oilholic, the Canadians involved wanted to go it alone and whether you agree or not. In more ways than one LSE and TSX are rivals, especially when it comes to attracting mining companies.

Switching tack to big shots in Ottawa – well to begin with Prime Minister Stephen Harper is an Alberta man. Bank of Canada governor Mark Carney, Chief Justice Beverley McLachlin and the inimitable Rt. Hon. Joe Oliver – the country’s Natural Resources Minister and the most vocal among his G7 peers with an identical ministerial portfolio – are all ‘Western’ Canadians.

Having visited Canada on an annual basis since 2001, the Oilholic has seen the transformation of Canadian politics and the country’s economy first hand and it has been extraordinary in a positive sense. Harper’s “ocean of oil soaked sand” in Northern Alberta has more of the crude stuff than any other crude exporting country bar Saudi Arabia. Let’s not forget the Saudis’ reserves position has been verified by Aramco, Canada’s has been subjected to scrutiny by half world’s independent verifiers of different political leanings and persuasions.

The total value Canada’s natural resources according to various estimates at 2009 prices comes in at US$1.1 trillion to US$1.6 trillion, with the bituminous bit and shale alone accounting for at least 45% per cent of that depending on which financial analyst or economist you speak to.

“Canada’s biggest advantage as an oil exporter in the eyes of the world is that it’s no Saudi Arabia. Furthermore, in a business full of unsavoury characters, dealing with Canadians makes for a welcome change,” quips one patriotic analyst on condition of anonymity.

In the oil business there are no moral absolutes and no linear path to the Promised ‘Crude’ Land. Canada will have its fair share of challenges related to extracting, refining and marketing the oil. The will to do so is certainly there and so are the buyers. The Oilholic’s timber trade analogy has won him quite a few beers from Canadians and pragmatic macro analysts who loved it. There is an unassailable truth here – American dithering and often unjust punitive action against Canadian timber exports in the 1990s lead a Liberal party-governed Canada to look Eastwards to Japan and China.

Fast forward to 2011-2012 and history is repeating itself with President Obama’s dithering over Keystone XL (although TransCanada’s reputation in relation to leaks has not helped either). Akin to the 1990s, there are other buyers in town for the Canadian crude stuff, with India joining the tussle for Canadian attention along with Japan, South Korea and China.

When a Liberal-led Canadian federal government looked elsewhere in the 1990s to market and sell its dominant natural resource at the time, if the US government thinks a present-day Conservative government with a parliamentary majority and a forceful character like Stephen Harper at the helm won’t do likewise (and sooner) when it comes to oil, then they are kidding themselves more than anyone else.

The presence of Korean, Indian and Chinese NOCs can be felt alongside top 20 IOCs in Calgary. Not a single oil major worth its weight in crude oil has chosen to ignore the oil sands, just as onlookers at Sunset Beach can’t ignore tankers on the English Bay horizon. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil & LNG tankers on the English Bay horizon, British Columbia, Canada © Gaurav Sharma 2012.

Canadian & Russian supply risk scenarios

Happy Easter folks! Following on from California, the Oilholic is once again back in Beautiful British Columbia, as vehicle licence plates from the province would point out, should you need reminding in these serene picturesque surroundings. When talking non-OPEC supply of the crude stuff – Russia and Canada always figure prominently in recent discussions, the latter more so than ever.

In fact, when it comes to holding exposure to oil price sensitivity, as recommended by some analysts for the next two quarters, via mixed bag of investments – Russian equities and “natural resources linked” (and not yet showing signs of Dutch disease) Forex including the Russian Rouble and the Canadian dollar are flagged-up more often than ever. In fact the Canadian Dollar, often called south of the border by Americans as the “Loonie” (based on a common bird on the CAD$1 coin), is proving pricier and more worthy than the world’s reserve currency itself in the post-Global financial crisis years.

Between Russia and Canada, given that the latter has a more diverse range of exports, the Russians have a bigger problem when it comes to oil price swings. In fact, ratings agency S&P reckons that a sustained fall in the price of oil could damage the Russian economy and public finances and consequently lead to a cut of the long-term sovereign rating.

"We estimate that a US$10 decline in oil prices will directly and indirectly lead to a 1.4% of GDP decline in government revenues. In a severe stress scenario, where a barrel of Urals oil drops to, and stays at, an average US$60, we would expect the general government to post a deficit above 8% of GDP. In that scenario, the long-term ratings on the Russian Federation could drop by up to three notches," says S&P credit analyst Kai Stukenbrock.

The rise in oil prices over the past decade has supported an expansionary fiscal policy, while still allowing the country to build up fiscal reserves. Still, fiscal expansion, not least significant countercyclical spending during the recent crisis, has led to a significant increase in expenditures relative to GDP.

As a result, despite record revenues from oil in 2011, S&P estimates the general Russian government surplus at merely 0.8% of GDP. To balance the budget in 2012, the agency thinks the government will require an average oil price of US$120 per barrel.

While former Russian finance minister Alexei Kudrin has also expressed fears of Russian over reliance on the price of oil, most analysts have a base price range of US$90 to 100 for 2012. So a fear it may well be; it remains what it is – a fear! Another ratings agency – Moody’s noted last month that as a result of financial flexibility built up over the past two years, rated Russian integrated oil & gas companies will be able to accommodate volatility in oil prices and other emerging challenges in 2012 within their current rating categories.

"In 2011, rated Russian players continued to demonstrate strong operating and financial results, underpinned by elevated oil prices," says Victoria Maisuradze, an Associate Managing Director in Moody's Corporate Finance Group. "Indeed, operating profits are likely to remain stable in 2012 as an increased tax and tariff burden will offset the benefits of high crude oil prices. All issuers have stable outlooks and our outlook for the sector is stable."

Nevertheless, developing reserves in new regions remains a major challenge for Russia as traditional production areas deplete; a problem which the Canadians don’t have to contend with. In 2006, Prime Minister Stephen Harper, whose hand is now politically more stronger than ever, told an audience in London that Canada was ranked third in the world for gas production, seventh in oil production, the market leader in hydroelectricity and uranium. He described it six years ago as “just the beginning.”

Harper’s journey to make Canada an ‘energy superpower’ is well and truly underway. The Oilholic charted the view from Calgary on his visit to Alberta last year and has followed the shenanigans related to the US ‘dis’-approval of Keystone XL pipeline project over the course of 2011-12. Over the coming days, yours truly would revisit the subject with a take on prospective exports to Asia via British Columbia.

Continuing with non-OPEC supplies, the Oilholic’s old contact in Warsaw – Arkadiusz Wicik, Director of Energy, Utilities and Regulation at Fitch Ratings – believes Shale gas in Poland could still be a game changer for the country's energy sector despite the disappointing shale gas reserve estimate published in March by the Polish Geological Institute (PGI).

PGI assessed most likely recoverable shale gas reserves to be between 0.35 and 0.77 trillion cubic meters (tcm), which is about one-tenth the 5.3 tcm estimated by the US Energy Information Administration in April 2011. PGI estimates maximum recoverable shale gas reserves at 1.92 tcm.

Wicik believes it is still too early to make any meaningful assumptions about the future of shale gas in Poland, believed to have one of the highest development potentials in Europe. “Less than 20 exploration wells have been drilled by domestic and foreign companies, in many cases with disappointing results. From a credit perspective, we view shale gas exploration as high risk and capital intensive. Partnerships among domestic companies to share exploration risks and costs, or more participation by foreigners would be positive,” he says.

Exploration by Poland's energy companies at an early stage gives them a chance to become major players should the commercial availability of gas be proven over the next several years. This was not the case in the US, where the shale gas industry was developed by a number of smaller, independent players as the Oilholic noted in a special report for Infrastructure Journal. Large US oil and gas companies have only recently started to be active in the sector, mostly through acquisitions.

Wicik notes, “We do not expect that the success in the US, which led to about a 50% decrease in US gas prices between 2008 and 2011, will be easily replicated in Poland. Commercial production in the first five to 10 years is unlikely to substantially lower gas prices given high breakeven costs. Also, Poland and the US differ both in terms of shale formations and the gas market structure.”

A number of foreign companies already have exploration concessions for shale gas in Poland, including ExxonMobil, Chevron, ConocoPhillips (through a service agreement with Lane Energy), Marathon Oil and Eni. Local players that have been granted exploration concessions include PGNiG, PKN Orlen, Grupa Lotos and Petrolinvest.

Another three large domestic companies - PGE, Tauron, and KGHM - also plan to enter shale gas exploration. In January 2012, they signed three separate letters of intent with PGNiG regarding cooperation in shale gas projects. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil Refinery, Quebec, Canada © Michael Melford / National Geographic.

Canada, India pitch to world & each other!

One country aims to be a leading producer (Canada) and one is projected to be a leading consumer or at least among them (India), so the Oilholic has clubbed them together for purposes of blogging about what officials from each country said and did here today at the 20th WPC.

Starting with Canada, its ministerial session complete with a RCMP officer on either side of the stage saw Serge DuPont, Deputy Minister, Natural Resources Canada and Cal Dallas, Alberta’s Minister of Intergovernmental, International and Aboriginal Affairs outline their country’s goals for its energy business with the session being moderated by Neil McCrank, Counsel at Borden Ladner Gervais LLP.

The Canadians maintained that in context of developing and investing in the oil sands – of which there is considerable interest here – the country’s energy strategy would be transparent, accountable and responsible both internally and internationally. They also outlined plans to support their industry, akin to many rival oil & gas exporting jurisdictions, via grants – chiefly the provincial government’s energy innovation fund.

This would, according to Deputy Minister DuPont, accompany developing renewable energy sources and a C$2 billion investment in carbon capture and storage. Canada indeed is open for business with foreign direct investment (FDI) welcomed albeit under strict investment guidelines. Proof is in the pudding – not even one top 10 international oil major worth its balance sheet has chosen to ignore projects in the Alberta oil sands.

The Oilholic is reasonably convinced after hearing the ministerial session, that when it comes to environmental concerns versus developing oil & gas projects who would you rather reason with – an open democracy like Canada or Chavez about Venezuela’s heavy oil? In light of recent events, one simply had to raise the Keystone XL question as the Oilholic did with Canadian Association of Petroleum Producers (CAPP) President Dave Collyer on a visit to Calgary earlier this year. After all, one wonders, what is the Canadian patience threshold when it comes to US exports given that new buyers are in town chiefly China, Korea and India.

“Well Canadians are a patient lot. The US remains a major export market for us. The delays associated with the Keystone XL project are frustrating but our medium term belief is that the construction of the pipeline would be approved,” said session moderator and member of the Canadian delegation Neil McCrank of BLG.

He also believes the new buyers in town can be happily accommodated with the oil sands seeing investments from China, South Korea and India (among others). “We acknowledge that there are difficulties in pulling a pipeline from Alberta via British Columbia to the Pacific coast as well – but we are working to resolve these issues as patiently, pragmatically and ethically as only Canadians can!” McCrank concludes.

There is certain truth in that. Despite being an oil producer, Canada does not have a national oil company (NOCs) to trumpet and shows no inclination to shun FDI in Alberta. One of the aforementioned investors, whether ethical or not, is India which has a ‘mere’ 14 NOCs all aching to explore and secure fresh oil reserves to help meet its burgeoning demand for oil.

Of the 14, some four are in the Fortune 500 and operate in 20 international jurisdictions; the loudest of these is ONGC Videsh Limited (or OVL) which among other countries is also looking at Canada as confirmed by both sides. India’s Minister for Petroleum & Natural Gas S. Jaipal Reddy sounded decidedly upbeat at the WPC, telling the world his country’s NOCs would make for robust project partners.

Over a period of the last 12 months, the Oilholic notes that Indian NOCs have invested in admirably strategic terms but overseas forays have also seen them in Syria and Sudan which is politically unpalatable for some but perhaps ‘fair game’ for India in its quest for security of supply. Canada – should Indian NOCs increase their exposure in Alberta – would be interesting from a geopolitical standpoint given China’s overt stance on being a Canadian partner too.

However, the only open quotes in terms of overseas forays from Indian officials came regarding investment in Russia and FSU republics. A high powered Russo-Indian delegation met on the sidelines of the 20th WPC to discuss possible investment by Indian NOCs in the Sakhalin project. Separately, officials from ONGC and GAIL told the Oilholic they were keen in buying a stake in Kazakhstan’s Kashagan oilfield, which is thought to contain between 9 to 16 billion barrels of oil, and join the consortium under the North Caspian Sea Production Sharing Agreement which sees stakes by seven companies – Eni (16.81%), Shell (16.81%), Total (16.81%), ExxonMobil (16.81%), KazMunayGas (16.81%), ConocoPhillips (8.4%) and Inpex (7.56%).

However the rumoured seller – ConocoPhillips – quashed all rumours and instead said it was actually checking out material prospects in Kazakhstan itself. It also detailed its plans for Canada and shale plays. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2011. Photo 1: Canadian Ministerial session at the 20th Petroleum Congress (Seated L to R: Neil McCrank, BLG, Cal Dallas, Alberta Goverment, Serge DuPont, Canada's Deputy Minister, Natural Resources. Photo 2: Indian Ministerial session (Seated third from right: India’s Minister for Petroleum & Natural Gas S. Jaipal Reddy) © Gaurav Sharma 2011.

Why Keystone XL’s delay is not such a bad thing!

Over the last fortnight the Oilholic has been examining the fallout from the US government’s announcement delaying a decision on the proposed Keystone XL pipeline and its decision to explore alternative routes for it from Alberta, Canada to Texas, USA (See map. Click image to enlarge).

To begin with, it gave Canadian Prime Minister Stephen Harper an opportunity trumpet his country's new-found assertiveness in the energy sphere. A mere three days after the US State department announced the delay, Harper told President Obama, whom he met at the Asia Pacific Economic Co-operation forum in Hawaii, that his government was working to forcefully advance a trade strategy that looks towards the Asia Pacific.

Harper had strong language for the President and told reporters that since the project will now be delayed for over a year, Canada must (also) look elsewhere. "This highlights why Canada must increase its efforts to ensure it can supply its energy outside the United States and into Asia in particular. And that in the meantime, Canada will step up its efforts in that regard and I communicated that clearly to the president,” he said.

Of course, this version differs significantly from what the White House said but it gives you a flavour of the frustration being felt in Canada. The Canadian Association of Petroleum Producers (CAPP) says the US government’s decision was disappointing given the three years of extensive analysis already completed and after the US government’s own environmental impact assessment determined the proposed Keystone XL pipeline routing would not have an undue environmental impact.

CAPP President Dave Collyer, whom the Oilholic met back in March, said, “Keystone XL is not about America using more oil, it’s about the source of America’s oil – Canada or elsewhere. It’s also about common economic and geopolitical interests between Canada and the US. While the Keystone delay is unfortunate, we respect the United States regulatory process and remain optimistic the pipeline will be approved on its strong environmental, economic and energy security merits.”

CAPP also seeks to look at the positives and maintains that Canadian oil sands production will not be impacted in the near term and other alternatives are being pursued to ensure market access over the medium term. Simply put, delaying Keystone XL will motivate exploration of other markets for Canadian crude oil products as the Canadian PM has quite clearly stated.

Moving beyond the geopolitical scenario, ratings agency Moody's feels the Keystone XL delay is credit positive for TransCanada Pipelines (TCPL) – the project saga’s chief protagonist – although it does not change TCPL's A3 Senior Unsecured rating or stable outlook given the relative size of the Keystone XL project to TCPL's existing businesses.

In a note to clients on Nov 11, the agency noted that the announcement was likely to cause a material delay in the potential construction of that pipeline, which will actually benefit TCPL's liquidity, leverage and free cash flow, providing the company with a greater financial cushion with which to undertake the project if and when it is fully approved.

Moody's also does not expect the Company to undertake share buybacks with the funds not invested in Keystone XL due to the approval delay. TCPL's liquidity will improve as the construction delay will defer over $5 billion of additional capex (compared to TCPL's total assets of approximately $46 billion).

Furthermore, 75% of additional costs associated with the delay or rerouting is expected to be largely borne by the shippers rather than TCPL. Moody's expects the shippers to agree to a project delay, but that is not certain.

“While the delay may reduce TCPL's growth prospects in the medium term, that is not a major influence in the Company's credit rating. Should the project ultimately be cancelled, Moody's expects that the pipe, which is the largest component of the $1.9 billion that TCPL has already invested in the project and which is already reflected in the company's financial statements, would be repurposed to other projects that would presumably generate additional cash to TCPL over the medium term,” it concludes.

Since then, the US state of Nebraska and TCPL have agreed to find a new route for the stalled pipeline that would ensure it does not pass through environmentally sensitive lands in the state. The deal with Nebraska would see the state fund new studies to find a route that would avoid the Sandhills region and the Ogallala aquifer.

However, the deal will not alter the timeline for a US Federal review, according to the State Department. That means, as the Oilholic noted earlier, the Obama Administration will not have to deal with the issue until after the 2012 election. While that’s smart politics, its dumb energy economics. Right now it appears that the Canadians have less to lose than the Americans.

Moving away from Keystone XL, the crude markets began the week with a bang as the ICE Brent forward month futures contract climbed over US$3 to US$109 per barrel but the rise across the pond was more muted with WTI ending the day at US$98.20 unable to hold on to earlier gains. Jack Pollard, analyst at Sucden Financial Research, feels that Middle-Eastern tensions provided significant support to the upside momentum.

“Yesterday we had the first day of Egyptian elections, with the final vote not due until early to middle January and the interim prospect of further violence could maintain volatility. Furthermore, the pressure on Syria increased even further with some suggesting a no-fly zone could be in the offing,” he said.

However, the Oilholic and Pollard are in agreement that the main market driver emanated from Iran. “Ever since the IAEA report on November 8th we have seen the possibility of supply disruptions contribute to crude oil price’s resilience relative to the rest of the commodity complex. On Monday, we heard reports that Iran’s government had officially voted in favour of revising down their diplomatic relations with the UK, ejecting the ambassador. Should the situation escalate further, the potential for upside could increase significantly, disproportionately so for Brent,” Pollard concludes.

© Gaurav Sharma 2011. Map: All proposals of Canadian & US Crude Oil Pipelines © CAPP (Click map to enlarge)

‘Quest’ for energy security vis-à-vis geopolitics

The current disruption of the geostrategic balance that had underpinned the Middle East for decades is bound to cause ripples in energy markets. But don't these recent developments only add to scares of the past. In his latest work 'The Quest', a follow-up to his earlier work 'The Prize', author Daniel Yergin notes that in a world where fossil fuels still account for more than 80% of the world's energy, crises underscore a fundamental reality - how important energy is to the world.

This weighty volume is Pulitzer Prize winner Yergin's attempt to explain that importance intertwined in a story about the quest for energy security, oil business, search for alternatives to fossil fuels and the world we live in. Three fundamental questions shape this free-flowing and brilliant narrative spread over 800 pages split by six parts containing some 35 detailed chapters. To begin with, will enough energy be available to meet the needs of a growing world and crucially at what cost and with what technologies?

Secondly, how can the security of the energy system on which the world depends be protected and finally, what will be the impact of environmental concerns? The author gives his answers to these profound questions citing international events and technological developments of the decades past and present.

Part I discusses the new and more complex world order after the Gulf War, Part II focuses on energy security issues while Part III discusses the advent of electricity and "gadgetwatts". Part IV discusses climate change, Part V clean technologies and lastly in Part VI, Yergin offers the reader his take on the road ahead.

Shale, oil sands, 'rise' of gas, wind, solar, biofuels, offshore and peak oil versus the perceptively "ever expanding range of the drillbit" have all been discussed in detail by the author. In all honestly, it is neither a pro-fossil fuel rant nor does it belittle the renewables business. Rather it highlights the complexities of both sides of the carbon divide with the macroeconomic and geopolitical climate serving a constant backdrop.

Current the book surely is, accompanied by a healthy dosage of historical contextualisation and Yergin's own take on whether nation states - chiefly the US and China - are destined for a clash over energy security. The Oilholic read page after page fascinated by an extraordinary range of 'non-fiction' characters, places, technologies, theories and the dramatic stories they resulted in.

What really struck the Oilholic was that the narrative is free from industry gobbledegook (or its duly explained where applicable) and as such should appeal to a wider mainstream readership base than just energy professionals and those with a mid to high level of market knowledge. Its crisp mix of storytelling and analysis suits petroleum economists and leisure readers alike.

While the Oilholic attaches a caveat that a book of 800 pages is not for the faint hearted, he is happy to recommend it to business professionals, students of economics and the energy business, and as noted above - those simply interested in current events and the history of the oil trade. It is of course, a must for fellow Oilholics.

© Gaurav Sharma 2011. Photo: Cover of ‘The Quest: Energy, Security, and the Remaking of the Modern World’ © Allen Lane/Penguin Publishers 2011.