CERAWeek Day I: Aramco sets its stall in Houston

The Oilholic is back in town for CERAWeek 2024 and the first day has been pretty interesting. Key moments included - Aramco's CEO Amin Nasser wanting the world to ditch "fantasy" economics of phasing out oil and gas (full report for Forbes here) and Shell's CEO Wael Sawan telling delegates there is way more politicisation of oil and gas than is necessary. 

Sawan also took the opportunity to stress that Shell sees LNG as a massive opportunity. "We're heading for a multidimensional energy mix of the future. While we are stabilizing our oil business, we are actively growing our LNG business."

He added that the energy major was a "huge" believer in the LNG market's potential and sees demand rising "by 50% from current levels." 

Elsewhere, ExxonMobil CEO Darren Woods said he was not trying to scupper Chevron's acquisition of Hess. Rather his sole objective in its dispute with Chevron was to establish its own rights over Hess' lucrative assets in Guyana. 

Elsewhere, former United States Energy Secretary, and now Founder & CEO of Energy Futures Initiative Ernest Moniz summed up the most significant accomplishments of COP28. CERAWeek's video of the session here is a good one to listen to. 

Other notable speakers on Day I included Jean Paul Prates, CEO of Petrobras, Meg O'Neill, CEO of Woodside Energy, Jack Fusco, CEO of Cheniere Energy and Torbjörn Törnqvist, Chairman of Gunvor. 

As panel discussions gathered pace, CERAWeek's Agora technology and innovation program also got underway, duly visited by yours truly during the second half of the day. 

Emerging cleantech and breakthrough applications of artificial intelligence appeared to be all the rage here with loads of chatter in open forum events being held in "pods." And of course, where there are pods, there have to be hubs! 

One such hub was Agora's Climate Hub, where the Oilholic attended the "Weathering the change" session late in the day, and received some interesting perspectives on the links between climate change and extreme events, albeit with some familiar soundbites. 

And the first day of CERAWeek also saw the oil price spike to near-five month highs as Ukrainian attacks on Russian refineries spooked the markets. After hours, Brent went as high as $87 per barrel, and here's why the Oilholic believes the $85 support level has been broken (for now). Well, that's all for the moment folks, more musings to follow soon. Keep reading, keep it here, keep it 'crude'! 

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© Gaurav Sharma 2024. Photo I: Amin Nasser, Chief Executive Officer of Aramco & Wael Sawan, Chief Executive Officer of  Shell. Photo II: Climate Hub at CERAWeek's Agora program © Gaurav Sharma, March 2024. 

Big Oil quarterly earnings in the Covid-19 age

The first Big Oil quarterly earnings season in the age of the coronavirus or Covid-19 global pandemic has gone revealing profit slumps, capex and opex cuts, job losses and much upheaval. Selected reports on the financials by the Oilholic are listed below, with links:

• Profits Slump 67% At BP But Oil Major Maintains Dividend Despite Coronavirus Downturn, Apr 28
• ExxonMobil Follows BP In Maintaining Dividend But Shell Cuts As Oil Crash Bites, Apr 30
• Shell Cuts Dividend By 65% On ‘Prolonged’ Oil Market Uncertainty, Apr 30 
• Oil Giant Total Maintains Dividend Despite ‘Exceptional’ 35% Plunge In Profits, May 5
• Oil Major Equinor Suspends 2020 Guidance Following 51% Slump In Earnings, May 7
• Saudi Aramco Keeps Record $18.75 Billion Dividend Payment Intact Despite Profits Slump, May 12

Some key themes to emerge were: 

(1) Universal profit slumps, excepting Chevron which bucked wider quarterly trends, 

(2) Around $60 billion in cost cuts instituted by the biggest 20 IOCs, and 

(3) Shell's first dividend cut since the Second World War. 

A more detailed summary for Forbes on what we can learn from Q1 2020 figures for is here. But that's all for the moment folks. Keep reading, keep it 'crude'!

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© Gaurav Sharma 2020.

What to make of Chevron’s North Sea pullback?

What was widely rumoured is now official – oil major Chevron has commenced the divestment of a number of its oil and gas fields in North Sea.

For some in the UK, the San Ramon, California-based US company's retreat from the mature hydrocarbon exploration prospect is the end of an era. Chevron has had a presence in the region for decades and that about says it all, as the North Sea has been in decline since production peaked in 1998.

The company is by no means alone. Both BP and Royal Dutch Shell have sold assets in the North Sea in recent years, as has Chevron's US rival ConocoPhillips. But scale of the Chevron's assets up for sale is sizeable. In fact, the company has confirmed it would encompass "all of its UK Central North Sea assets."

That includes its Britannia platform and allied infrastructure, along with the Alba, Alder, Captain, Elgin/Franklin, Erskine, and Jade fields as well as the Britannia platform and its satellites. The assets collectively contributed 50,000 barrels per day (bpd) of oil and 155 million cubic feet of natural gas to its headline output. 

Company won't vanish from the North Sea just yet. It is currently considering the development of the Rosebank field west of the Shetland Islands. However, the oil major is now focussed on growing its shale production in the Permian basin in Texas as well as the giant Tengiz field in Kazakhstan.

All things considered, Chevron's moves points to a strategic move away from mature prospects by IOCs to those with a more viable higher production prospect. In the process, they are leaving these mature prospects behind to independent upstarts, or state operators who can maximise the asset's end of life potential. 

Take for instance, BP’s business in the North Sea, which is now centred around its major interests West of Shetland and in the Central North Sea. The company sold its Forties Pipeline system to billionaire Jim Ratcliffe's Ineos last year. 

The move put the 235-mile pipeline system, built in 1975, that links 85 North Sea oil and gas assets, belonging to 21 companies, to the UK mainland and Grangemouth refinery, which Ratcliffe bought from BP in 2005. 

In volume terms, the pipeline's average daily throughput was 445,000 bpd and around 3,500 tonnes of raw gas a day in 2016. The system has a capacity of 575,000 bpd.

The acquisition also made Ineos the only UK player with refinery and petrochemical assets directly integrated into the North Sea.

It is highly likely independents will queue up for Chevron's assets, and of course so will the state operators contingent upon pricing. Nexen, a subsidiary of China's CNOOC, and TAQA already have sizable operations in the North Sea and will be keeping an eye on proceedings. Expect more of the same! That's all for the moment folks! Keep reading, keep it crude! 

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© Gaurav Sharma 2018. Photo: Oil rig in the North Sea © Cairn Energy.

Volatile yet flat-ish Q1 points to $40-50/bbl price

The first quarter of 2016 has been pretty volatile for oil benchmarks. Yet if you iron out the relative daily ups and downs in percentage terms, both global benchmarks and the OPEC basket are marginally higher than early January (see chart left, click to enlarge). 

Brent, at $37.28 per barrel back then, ended Friday trading at $41.78, while WTI ended at $39.53, up from $37.04 in early January. That’s a fairly flat outcome following the end of a three-month period, but in line with the Oilholic’s conjecture of an initial slow creep above $40 per barrel by June, followed by yet another crawl up to  $50 per barrel (or thereabout) by Christmas (as the Oilholic opined on Forbes).

Moving on from pricing matters, a new report from GlobalData suggests crude refining capacity is set to increase worldwide from 96.2 million bpd in 2015 to 118.1 million bpd by 2020, registering a total growth of 18.5%.

In line with market expectations, the research and consulting firm agrees that global growth will be led by China and Southeast Asia. A total of $170 billion is expected to be spent in Asia alone to increase capacity by around 9 million bpd over the next four years, GlobalData added.

Matthew Jurecky, Head of Oil & Gas Research at the firm said: “The global refining landscape continues its shift eastwards; 40% of global refining capacity is projected to be in Asia by 2020, up from around 30% in 2010.

“China has led this growth, and is projected to have a 15% share of global crude refining capacity by 2020. This activity is putting pressure on other regional refiners, especially now that China has become a net exporter, and will become a larger one.”

In Europe, growth is expected to occur at a substantially slower rate. Although demand is decreasing and is less competitive, older refineries in Western Europe are being closed, these factors are being countered by investment in geographically advantaged and resource-rich Russia, which sees Europe’s capacity increasing marginally from 21.7 million bpd in 2015 to 22.5 million bpd by 2020.

Away the refining world to the integrated majors, with a few noteworthy ratings actions to report – Moody’s has downgraded Royal Dutch Shell to Aa2 with a negative outlook, Chevron to Aa2 with a stable outlook, Total to Aa3 with a stable outlook and reaffirmed BP at A2 with a positive outlook. 

Separately, Fitch Ratings has affirmed Halliburton at A-, with the oilfield services firm’s outlook revised to negative. That’s all for the moment folks, keep reading, keep it crude! 

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Notes on a scandal from an ex-Enron pragmatist

When the Enron scandal broke and that icon of corporate America filed for bankruptcy on December 1, 2001, the Oilholic was as stumped by the pace of events as those directly impacted by it. In the months and years that were to follow, bankruptcy proceedings for what was once 'America's Most Innovative Company' according to Fortune, turned out to be the most complex in US history.

It soon emerged that one of Enron's own – Dr Vincent Kaminski – a risk management expert especially headhunted in 1990s from Salomon Brothers and appointed Managing Director for Research, had repeatedly red flagged practices within the energy company's corridors of corporate power.

Alas, in a remarkably stupendous act, Kaminski and his team of 50 analysts, while specifically hired to red flag were often ignored when and where it mattered. Cited cautions ranged from advising against the use of creative accounting, "terminally stupid" structuring of Enron's special purpose vehicles (SPVs) to conceal debt by then CFO Andrew Fastow, and the ultimately disastrous policy of securing Enron's debt against stock in the corporation itself.

What transpired has been the subject of several books – some good (especially Elkind & McLean's), some bad and some opportunistic with little insight despite grandiose pretensions to the contrary. Having lapped all of these up, and covered the scandal in a journalistic capacity, the Oilholic had long wanted to meet the former risk manager of Enron.

At last, a chance encounter in 2012, followed by a visit to Houston last November, finally made it possible. These days Kaminski is an academic at Rice University and has written no less than three books; the latest one being on energy markets. Yet, not a single one on the Enron fiasco, one might inquire, for a man so close to it all?

At peace and reasonably mellow in the Houston suburb of The Woodlands, which he calls home, the former Enron executive says, even though it rankles, the whole episode was "in the past", and despite what was said in the popular press – neither was he the only one warning about impending trouble ahead nor could he have altered Enron's course on his own.

"A single person cannot stop a tanker and I wasn't the only insider who warned that there were problems on the horizon. Looking back, I always approached every problem at Enron in good faith, gave the best answers I could come up with on risk scenarios, based on the information I had and my interpretation of it, even if bosses did not like it.

"If honesty was deemed too candid or crude then so be it! Whatever I did at Enron, the red flags I raised, was what I was paid for. Nothing less could have been expected of me; I saw it as my fiduciary duty."

He agrees that Enron's collapse was a huge blow to Houston's economy and overall wellbeing at the time. "There was a chain reaction that affected other parts of the regional economy. In fact, energy trading and marketing itself went through a crisis which lasted a few years."

To this day, Kaminski says he has no way of knowing whether justice was done or not and isn't alone in thinking that. "By the time of the final winding-up process, Enron had about 3,000 entities created all over the world. It was an extremely complex company."

But does the current generation of Rice University students ask him about Enron? "Right now, I am teaching a different generation. Most of my students are typically 25 to 30 years old. When the Enron scandal unfolded [over a decade ago] they were teenagers. A lot has happened in the corporate world since then, which they have had to take in as they've matured. The financial tsunami that was the global financial crisis, and what emerged in its wake, dwarfed what happened at Enron. For them, Enron is but a footnote in corporate history."

"That scandal devastated public trust in one brand, however big it may have been at the time. But the global financial crisis eroded public trust in an entire sector – investment banking. Perhaps as a result, Enron's collapse has ceased to generate as much interest these days. That's a pity! Depending on one's point of view, the extent of the use [or misuse] of SPVs and the number that was discovered at collapsing financial institutions in 2007-09, was several times over what was eventually catalogued at Enron."

Hence, the ex-Enron executive turned academic doubts whether the world really learnt from the scandal. "Enron was a warning from history, from the energy business to other sectors. I describe my former employer as a canary in a coal mine demonstrating the dangers of excessive leverage, of having a non-transparent accounting system and all those sliced and diced SPVs."

"Pre-crisis, the financial sector was guilty of formally removing 'potentially' bad assets from the parent company to SPVs. However, in real financial terms that wasn't the case. When things took a turn for the worse, all the assets and liabilities put on to SPVs came back to be reabsorbed into the balance sheets."

Formally they were separate and 'special', Kaminski notes, but for all practical reasons there was no effective transfer of risk.

"Rewind the clock back and there was no effective transfer of risk in the case of Enron either when its horror story of SPVs and creative accounting came out in all its unsavoury detail. So if lessons were learnt, where is the evidence? Now, let's forget scruples for a moment and simply take it as a basic mistake. Even so, there is no evidence lessons were learned from the Enron fiasco."

He adds that those who don't have an open mind will never learn. "This is not exclusive to the energy business or financial services. It's perhaps true of everything in life. Arrogance and greed also play a part, especially in the minds of those who think they can somehow extricate themselves when the tide turns."

As early as 2004-05, the Rice University academic says he was debating with colleagues that a financial crisis could be on the horizon as the US property market bubbled up.

"Some people branded me as crazy, some called me pessimistic. They said the world is mature enough to manage the situation and progress in economic and financial sciences had created tools for effective management of market and credit risks. Some even agreed that we'll have a train wreck of a global economy, but to my amazement remarked that they knew how to "get out in time."

Kaminski says while it can be true of individuals who can perhaps get out in time, it cannot be true of large corporations and the entire financial system. "They would invariably take a hit, which in some cases – as the financial crisis showed – was a fatal hit. Furthermore, the financial system itself was scarred on a global scale."

Over the years, this blogger has often heard Kaminski compare chief risk officers (CROs) to food tasters in medieval royal courts.

"Indeed, being a risk manager is a job with limited upside. You cannot slow 'acting poison' and the cooks don’t like you as you always complain that the food tastes funny. So if they catch you in a dark place, they will rough you up!" he laughs.

"I have said time and again that risk managers should be truly independent. In a recent column for Energy Risk, I gave the example of the CRO at Lehman Brothers, who was asked to leave the room when senior executives were talking business. It is both weird and outrageous in equal measure that a CRO would be treated in this way. I would resign on the spot if this happened to me as a matter of principle."

He also thinks CROs should be reporting directly to the board rather than the CEO because they need true independence. "Furthermore, the board should not have excessive or blind confidence in any C-suite executive just because the media has given him or her rock-star status."

A switch from the corporate world to academia has certainly not diminished Kaminski’s sense of humour and knack for being candid.

"Maybe having your CEO on the cover of Business Week [Cue: Enron's then CEO Jeff Skilling] could be the first warning sign of trouble! The second signal could be a new shining tower [see above left - what was once Enron’s is now occupied by a firm Skilling called a 'dinosaur' or legacy oil company – Chevron] and the third could be your company's name on a stadium! Our local baseball team – Houston Astros – called a stadium that was 'Enron Field' their home, then 'Enron Failed'. Thankfully, it's now shaken it off and is simply Minute Maid Park [a drinks brand from Coca-Cola's portfolio]."

"But jokes apart, excessive reliance or confidence in any single individual should be a red flag. I feel it's prudent to mention that I am not suggesting companies should not reward success, that's different. What I am saying is that the future of a company should not rely on one single individual."

Switching to 'crude' matters, Kaminski says trading remains an expensive thing for energy companies and is likely to get even costlier in light of higher capital requirements for registering as a swap dealer and added compliance costs. "So the industry will go through a slowdown and witness consolidation as we are already seeing."

On a more macro footing, he agrees that the assetization of black gold will continue as investors seek diversity in uncertain times. As for the US shale bonanza versus the natural gas exports paradigm, should exports materialise in incremental volumes, the [domestic] price of natural gas will eventually have to go up stateside, he adds.

"Right now, the price [of US natural gas] is low because it is abundant. However, to a large extent that abundance is down to it being cross-subsidised by the oil industry [and natural gas liquids]. I believe in one economic law – nothing can go on forever.

"As far as the LNG business is concerned, it will still be a reasonably good business, but not with the level of profitability that most people expect, once you add the cost of liquefaction, transportation, etc."

The Oilholic and the ex-Enron pragmatist also agreed that there will be a lot of additional capacity coming onstream beyond American shores. "We could be looking at the price of natural gas in the US going up and global LNG prices going down. There will still be a decent profit margin but it's not going to be fantastic," he concludes.

And that's your lot for the moment! It was an absolute pleasure speaking to Dr Kaminski! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo 1: Dr Vincent Kaminski at El Paso Trading Room, Rice University, Houston. Photo 2: Chevron Houston, formerly the Enron Towers. Photo 3: Dr Kaminski & the Oilholic, in The Woodlands, Texas, USA © Gaurav Sharma, November 22, 2013.

On Abu Dhabi’s ‘spot’ chaps, ADNOC & INR

It's good to spot a traditional dhow on millionaire's yacht row at the marina here in Abu Dhabi. Though a millionaire or some tour company probably owns the thing! Switching tack from spot photography to spot crude oil trading – the community here in the UAE is in bullish mood, as is the national oil company – ADNOC.

With the spot Brent price in three figures, and above the US$110-level last time this blogger checked, few here (including the administration), have anything to worry about. The Oilholic has always maintained that a $80 per barrel plus price keeps most in OPEC, excluding Venezuela and Iran and including the Saudis and UAE happy. Short-term trend is bullish and Egyptian troubles, Libyan protests plus the US Federal Reserve's chatter will probably keep Brent there with the regional (DME Oman) benchmark following in its wake, a mere few dollars behind.

Furthermore, of the three traders the Oilholic has spoken to since arriving in the UAE, American shale oil is not much of a worry in this part of the world. "Has it dented the (futures) price?? An American bonanza remains…well an American bonanza. The output will be diverted eastwards to importing jurisdictions; they have in any case been major importers of ADNOC’s crude. What we are seeing at the moment are seasonal lows with refiners in India and China typically buying less as summer demand for distillate falls," says one.

In fact, on Wednesday, Oil Movements – a tanker traffic monitor and research firm – said just that. It estimates that OPEC members, with the exception of Angola and Ecuador, will curtail exports by 320k barrels per day or 1.3% of daily output, in the four weeks from August 10 to September 7.

Meanwhile, ADNOC is investing [and partnering] heavily as usual. Recently, it invited several IOCs to bid for the renewal of a shared licence to operate some of the Emirate's largest onshore oilfields. The concession (on Bu Hasa, Bab, Asab, Sahil and Shah oilfields), in which ADNOC holds a 60% stake, is operated by Abu Dhabi Company for Onshore Oil Operations (or ADCO) subsidiary.

Existing partners for the remaining stake include BP, Shell, ExxonMobil, Total and Partex O&G. All partners, except Partex have been invited to apply again, according to a source. Additionally, ADNOC has also issued an invitation to seek new partners. Anecdotal evidence here suggests Chevron is definitely among the interested parties.

The existing 75-year old concessions expire in January 2014, so ADNOC will have to move quickly to decide on the new line-up of IOCs. For once, its hand was forced as the UAE's Supreme Petroleum Council rejected an application for a one-year extension of the existing arrangement. Doubtless, Chinese, Korean and Indian NOCs are also lurking around. A chat with an Indian contact confirmed the same.

Whichever way you look at it – its probably one of the few new opportunities, not just in the UAE but the wider Middle East as well. Abu Dhabi is among the few places in the region where international companies would still be allowed to hold an equity interest; mostly a no-no elsewhere in the region. But in the UAE's defence, ever since the first concession was signed by this oil exporting jurisdiction in 1939 – it has always been open to foreign direct investment, albeit with caveats attached. ADNOC is also midway through a five-year $40 billion investment plan aimed at boosting oil and gas production and expanding/upgrading its petrochemical and refining facilities.

Meanwhile, the slump of Indian Rupee (INR) is headline news in the UAE, given its ties to the subcontinent and a huge Indian expat community here in Abu Dhabi. The slump could stoke inflation, according to the Reserve Bank of India, which is already struggling to curtail it. The central bank has tried everything from capital controls to trying to stabilise the INR for a good few months by hiking short-term interest rates. Not much seems to have gone its way (so far).

Furthermore, the INR's troubles have exposed indebtedness of the country's leading natural resources firms (and others) – most notably – Reliance, Vedanta and Essar. Last week, research conducted by Credit Suisse Securities noted that debt levels of top ten Indian business houses in the current fiscal year have gone up by 15% on an annualised basis.

With the currency in near freefall, the report specifically said Reliance ADA Group's gross debt was the highest, with Vedanta in second place among top 10 Indian groups. Draw your own conclusions. On a personal level, Mukesh Ambani (Chairman of Reliance Industries Ltd, the man who holds right to the world largest refinery complex and India's richest tycoon), has lost close to $5.6 billion of his wealth as the INR's plunge has continued, according to various published sources.

Few corporate jets less for him then but a much bigger headache for India Inc, one supposes. If the worried lot fancy a pipe or two, then the "Smokers Centre" (pictured right) on the City's Hamdan Street is a quirky old place to pick up a few. More generally, should one fancy a puff of any description shape, size or type then Abu Dhabi is the city for you. What's more, the stuff is half the price compared to EU markets! For the sake of balance, this humble blogger is officially a non-smoker and has not been asked to flag this up by the tobacco lobby!

Just one more footnote to the INR business, Moody's says the credit quality of state-owned oil marketing and upstream oil companies in India will likely weaken for the rest of the fiscal year (April 2013 to March 2014), if the Indian government continues to ask them, as it did in April-June, to share a higher burden of the country's fuel subsidies.

To put this into context - the INR has depreciated by about 10% and the crude oil prices have increased by about 6% since the beginning of June, as of August 20. Moody's projections for the subsidy total assumes that there will be no material changes in either the INR exchange rate or the crude oil price for the rest of the fiscal year (both are already out of the window). That's all from Abu Dhabi for the moment folks. Keep reading, keep it 'crude'!

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo 1: A dhow on the Abu Dhabi marina, UAE. Photo 2: Smokers Centre, Hamdan Street, Abu Dhabi, UAE © Gaurav Sharma, August, 2013.

Hawaii’s crude reality: Being a petrohead costs!

In a break from the ‘crude’ norm for visits to the USA, the Oilholic packed his bags from California and headed deep out to the Pacific and say ‘Aloha’ to newest and 50th United State of Hawaii. It’s good to be here in the Kona district of the Big Island and realise that Tokyo is a lot closer than London.

It is interesting to note that Hawaii is the only US state still retaining the Union Jack in its flag and insignia. The whole flag itself is a deliberate hybrid symbol of British and American historic ties to Hawaii and traces its origins to Captain John Vancouver – the British Naval officer after whom the US and Canadian cities of Vancouver and Alaska’s Mount Vancouver are named.

What’s not good being here is realising that a 1.3 million plus residents of these northernmost isles in Polynesia pay the most for their energy and electricity needs from amongst their fellow citizens in the US. It is easy to see why, as part dictated by location constraints Hawaii presently generates over 75% of its electricity by burning Petroleum.

Giving the geography and physical challenges, most of the crude oil is shipped either from Alaska and California or overseas. Furthermore, the Islands have no pipelines as building these is not possible owing to volcanic and seismic activity. Here’s a view of one active crater – the Halema’uma’u in Kilauea Caldera (see above right). You can actually smell the sulphur dioxide while there as the Oilholic was earlier today. In fact the entire archipelago was created courtesy of volcanic eruptions millions of years ago. The Big Island’s landmass of five plates is created out of Mauna Kea (dormant) and Mauna Loa (partly active) and the island is technically growing at moment as Kilaueu still spews lava which cools and forms land.

So both crude and distillates have to be moved by oil tankers between the islands or tanker lorries on an intra-island basis. The latter  creates regional pricing disparities. For instance in Hilo, the commercial heart of the Big Island and where the tanker docking stations are, gasoline is cheaper than Kona by almost 40-50 cents per gallon. The latter receives its distillates by road once tankers have docked at Hilo.

The state has two refineries both at Kapolei on the island of O‘ahu 20 miles west of capital Honolulu – one apiece owned by Tesoro and Chevron. The bigger of the two has a 93,700 barrels per day (bpd) and is owned by Tesoro; the recent buyer of BP’s Carson facility. However in January Tesoro put its Hawaiian asset up for sale.

Tesoro, which bought the refinery for US$275 million from BHP Petroleum Americas in 1998, said it no longer fitted with its strategic focus on the US Midcontinent and West Cost. The company expects the sale to be completed by the end of the year. Its Hawaiian retail operations, which include 32 gas stations, will also be part of the deal. Chevron operates Kapolei’s other refinery with a 54,000 bpd capacity. Between the two, there is enough capacity to meet Hawaii’s guzzling needs and the pressures imposed by US forces operations in the area.

In this serene paradise with volcanic activity and ample tidal movement, power generation from tidal and geothermal is not inconceivable and facilities do exist. In fact, for the remaining 25% of its energy mix, the state is one of eight US states with geothermal power generation and ranks third among them. Additionally, solar photovoltaic (PV) capacity increased by 150% in 2011, making Hawaii the 11th biggest US state for PV capacity. However, it is not nearly enough.

One simple solution that is being attempted is natural gas – something which local officials confirmed to the Oilholic. The EIA has also noted Hawaii’s moves in this direction. Oddly enough, while Hawaii hardly uses much natural gas, it is one of a handful of US states which actually produces synthetic natural gas. Switching from petroleum-based power generation to natural gas for much of Hawaii’s power generation could lower the state’s power bills considerably as the massive disconnect between US natural gas and crude oil prices looks set to continue.

Strong ‘gassy’ moves are afoot and anecdotal evidence here suggests feelers are being sent out to Canada, among others. In August, Hawaii Gas applied for a permit with the Federal Government to ship LNG to Hawaii from the West Coast. While the deliveries will commence later this year, arriving volumes of LNG would be small in the first phase of the project, according to Hawaii Gas. At least it is a start and the State House Bill 1464 now requires public utilities to provide 25% of net electricity sales from renewable sources by December 31, 2020 and 40% of net electricity sales from renewables by December 31, 2030.

That’s all for the moment folks as the Oilholic needs to explore the Big Island further via the old fashioned way which requires no crude or distillates – its the trusty old bicycle! Going back to history, it was Captain James Cook and not Vancouver who located these isles for the Western World in 1778. Regrettably, he got cooked following fracas with the locals in 1779 and peace was not made between Brits and locals until Vancouver returned years later.

Moving away from history, yours truly leaves you with a peaceful view of Punaluʻu or the Black Sand beach (see above left)! It is what nature magnificently created when fast flowing molten lava rapidly cooled and reached the Pacific Ocean. According to a US Park Ranger, the beach’s black sand is made of basalt with a high carbon content. It is a sight to behold and the Oilholic is truly beholden! On a visit there, you have a 99.99% chance of spotting the endangered Hawksbill and Green turtles lounging on the black sand. For once, yours truly is glad there are no bloody pipelines in the area blotting the landscape. More from Hawaii later - keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Halema’uma’u, Kilauea Caldera. Photo 2: Punaluʻu - the Black Sand beach, Hawaii, USA © Gaurav Sharma 2012.

On another BP sale, another Chavez term & more

A not so surprising news flash arrived this week that BP has finally announced the sale of its Texas City refinery and allied assets to Marathon Petroleum for US$2.5 billion. A spokesperson revealed that the deal included US$600 million in cash, US$1.2 billion for distillate inventories and another US$700 million depending on future production and refining margins.

 

Following the Carson oil refinery sale in California, the latest deal ratchets BP’s asset divestment programme up to US$35 billion with a target of US$38 billion within reach. It is time for the Oilholic to sound like a broken record and state yet again that – Macondo or no Macondo – the oil major would have still divested some of its refining and marketing assets regardless.

 

However, for fans of the integrated model – of which there are quite a few including ratings agencies who generally rate integrated players above R&M only companies – the head of BP's global R&M business Iain Conn said, "Together with the sale of our Carson, California refinery, announced in August, the Texas City divestment will allow us to focus BP's US fuel investments on our three northern refineries."

 

Things have also picked-up pace on the TNK-BP front. On Tuesday, Reuters reported that BP’s Russian partners in the venture Alfa Access Renova (AAR) would rather sell their stake than end-up in a ‘devalued’ partnership with Kremlin-backed rival Rosneft. On Wednesday, the Russian press cited sources claiming a sale of BP’s stake to Rosneft has the full backing of none other than Russian President Vladimir Putin himself. Now that is crucial.

On a visit to Moscow and Novosibirsk back in 2004, the Oilholic made a quick realisation based on interaction with those in the know locally – that when it comes to natural resources assets the Kremlin likes to be in control. So if BP and the Russian government have reached some sort of an understanding behind the scene, AAR would be best advised not to scream too loudly.

 

Another hypothesis gaining traction, in wake of AAR’s intention to sell, is that instead of being the seller of its stake in TNK-BP, the British oil major could now turn buyer. BP could then re-attempt a fresh partnership with Rosneft; something which it attempted last year only for it to be scuppered by AAR.

 

There can be any amount of speculation or any number of theories but here again a nod from the Kremlin is crucial. Away from ‘British Petroleum’ (as Sarah Palin and President Obama lovingly refer to it in times of political need) to the British Government which reiterated its support for shale exploration earlier this week.

 

On Monday, Minister Edward Davey of UK's Department of Energy and Climate Change (DECC) expressed hopes of lifting a suspension on new shale gas exploration. It was imposed in 2011 following environmental concerns about fracking and a series of minor earthquakes in Lancashire triggered by trial fracking which spooked the nation. In near sync with Davey, Chancellor of the Exchequer George Osborne told the Conservative Party conference in Birmingham that he was considering a 'generous new tax regime' to encourage investment in shale gas.

 

In case you haven’t heard by now, Hugo Chavez is back as president of Venezuela for another six year stint. This means it will be another rendezvous in Vienna for the Oilholic at the OPEC meeting of ministers in December with Rafael Ramirez, the crude Chavista likely to be hawkish Venezuela’s man at the table. Opposition leader Henrique Capriles believed in change, but sadly for the Venezuelan economy grappling with mismanagement of its ‘crude’ resources and 20% inflation, he fell short.

 

On January 10, 2012 when Chavez will be inaugurated for another term as Venezuela's president, he will be acutely aware that oil accounts for 50% of his government’s revenue and increasingly one dimensional economy. Bloomberg puts Chinese lending to Venezuela between 2006 and 2011 at US$42.5 billion. In a staggering bout of frankness, Ramirez admitted in September that of the 640,000 barrels per day (bpd) that Venezuela exported to China, 200,000 bpd went towards servicing government debt to Beijing.

 

The country's oil production is hardly rising. Just as Chavez’s health took a toll from cancer, national oil company PDVSA has not been in good health either. Its cancer is mismanagement and underinvestment. Most would point to an explosion in August when 42 people perished at the Amuay refinery – Venezuela’s largest distillate processing facility as an example. However, PDVSA has rarely been in good health since 2003 when it fired 40% of its workforce in the aftermath of a general strike aimed at forcing Chavez from power.

 

Staying with Latin America, the US Supreme Court has said it will not block a February 2011 judgement from an Ecuadorean court that Chevron must pay US$19 billion in damages for allegedly polluting the Amazonian landscape of the Lago Agrio region. The court’s announcement is the latest salvo in a decade-long legal tussle between Texaco, acquired by Chevron in 2001, and the people of the Lago Agrio.

 

The Ecuadorians and Daryl Hannah (who is not Ecuadorian) wont rejoice as Chevron it is not quite done yet. Far from it, the oil major has always branded the Ecuadorian court’s judgement as fraudulent and not enforceable under New York law. It has also challenged it under an international trade agreement between the US and Ecuador.

 

The latter case will be heard next month – so expect some more ‘crude’ exchanges and perhaps some stunts from Ms. Hannah. That’s unless she is under arrest for protesting about Keystone XL! That’s all for the moment folks! Keep reading, keep it ‘crude’ or Elle Driver might come after you!

 

© Gaurav Sharma 2012. Photo: East Plant of the Texas City Refinery, Texas, USA © BP Plc

On Brent's direction, OPEC, China & more

Several conversations last week with contacts in the trading community, either side of the pond, seem to point to a market consensus that this summer’s rally in the price of Brent and other waterborne crudes was largely driven by geopolitical concerns. Tight North Sea supply scenarios in September owing to planned maintenance issues, the nagging question of Iran versus Israel and Syrian conflict continue to prop-up the so called ‘risk premium’; a sentiment always difficult to quantify but omnipresent in a volatile geopolitically sensitive climate.

 

However, prior to the announcement of the US Federal Reserve’s economic stimulus measures, contacts at BofAML, Lloyds, Sucden Financial, Société Générale and Barclays seemed to opine that the current Brent prices are nearing the top of their projected trading range. Then of course last Thursday, following the actual announcement of the Fed’s plan – to buy and keep buying US$40 billion in mortgage-backed securities every month until the US job market improves – Brent settled 0.7% higher or 78 cents more at US$116.66 per barrel.

 

Unsurprisingly, the move did briefly send the WTI forward month futures contract above the US$100 per barrel mark before settling around US$99 on the NYMEX; its highest close since May 4. But reverting back to Brent, as North Sea supply increases after September maintenance and refinery crude demand witnesses a seasonal drop, the benchmark is likely to slide back downwards. So for Q4 2012 and for 2013 as a whole, Société Générale forecasts prices at US$103. Compared to previous projections, the outlook has been revised up by US$6 for Q4 2012 and by US$3 for 2013 by the French investment back.

 

Since geopolitical concerns in the Middle East are not going to die down anytime soon, many traders regard the risk premium to be neutral through 2013. That seems fair, but what of OPEC production and what soundbites are we likely to get in Vienna in December? Following on from the Oilholic’s visit to the UAE, there is more than just anecdotal evidence that OPEC doves have begun to cut production (See chart above left, click to enlarge).

 

Société Générale analyst Mike Wittner believes OPEC production cuts will continue with the Saudis joining in as well. This would result in a more balanced market, especially for OECD inventories. “Furthermore, moderate demand growth, led – as usual – by emerging markets, should be roughly matched by non-OPEC supply growth, driven by the US and Canada,” Wittner added.

 

Of course, the soundbite of last week on a supply and demand discussion came from none other than the inimitable T. Boone Pickens; albeit in an American context. The veteran oilman and founder of investment firm BP Capital told CNBC that the US has the natural resources to stop importing OPEC crude oil one fine day.

 

Pickens noted that there were 30 US states producing oil and gas; the highest country has ever had. In a Presidential election year, he also took a swipe at politicians saying neither Democrats nor Republicans had shown “leadership” on the issue of energy independence.

 

At the Democratic convention the week before, President Obama boasted that the US had already cut imported oil by one million barrels per day (bpd). However, Pickens said this had little to do with any specific Obama policy and the Oilholic concurs. As Pickens explained, “The economy is poorer and that will get you less imports. You can cut imports further if the economy gets worse.”

 

He also said the US should build the Keystone XL oil pipeline, currently blocked by the Obama administration, to help bring more oil in to the country from Canada. Meanwhile, US Defense Secretary Leon Panetta is in Japan and China to calm tempers on both sides following a face-off in the East China Sea. On Friday, six Chinese surveillance ships briefly entered waters around the Senkaku Islands claimed by Japan, China and Taiwan.

 

After a stand-off with the Japanese Coastguard, the Chinese vessels left but not before the tension level escalated a step or two. The Chinese reacted after Japan sealed a deal to buy three of the islands with resource-rich waters in proximity of the Chunxiao offshore gas field. Broadcaster NHK said the stand-off lasted 90 minutes, something which was confirmed over the weekend by Beijing.

 

With more than just fish at stake and China’s aggressive stance in other maritime disputes over resource-rich waters of the East and South China Sea(s), Panetta has called for “cooler heads to prevail.”

 

Meanwhile some cooler heads in Chinese boardrooms signalled their intent as proactive players in the M&A market by spending close to US$63.1 billion in transactions last year according a new report published by international law firm Squire Sanders. It notes that among the various target sectors for the Chinese, energy & resources with 30% of deal volume and 70% of deal value and chemicals & industrials sectors with 21% of deal volume and 11% of deal value dominated the 2011 data (See pie-chart - courtesy Squire Sanders - above, click to enlarge). In deal value terms, the law firm found that North America dominates as a target market (with a share of 35%) for the Chinese, with oil & gas companies the biggest attraction. However, in volume terms, Western Europe was the top target market with almost a third (29%) of all deals in 2011, and with industrials & chemicals companies being the biggest focus for number of deals (29%) but second to energy & resources in value (at 18% compared to 61%).

 

Big-ticket acquisitions by Chinese buyers were also overwhelmingly concentrated in the energy & resources industries where larger transactions tend to predominate. Sinopec, the country’s largest refiner, brokered a string of the largest transactions. These include the acquisition of a 30% stake in Petrogal Brasil for US$4.8 billion in November last year, a US$2.8 billion deal for Canada's Daylight Energy and the 33.3% stake in five oil & gas projects of Devon Energy for US$2.5 billion.

 

Squire Sanders notes that Sinopec, among other Chinese outbound buyers, often acquires minority stake purchases or assets, in a strategy that allows it to reduce risks and gain familiarity with a given market. This also reduces the likelihood of any political backlash which has been witnessed on some past deals such as CNOOC’s hostile bid for US-based oil & gas producer Unocal in 2005, which was subsequently withdrawn.

 

Since then, CNOOC has found many willing vendors elsewhere. For instance, in July this year, the company announced the US$17.7 billion acquisition of Canadian firm Nexen. To win the deal, which is still pending Ottawa’s approval, CNOOC courted Nexen, offering shareholders a 15.8% premium on the price shares had traded the previous month.

 

Squire Sanders’ Hong Kong-based partner Mao Tong believes clues about direction of Chinese investment may well be found in the Government’s 12th five-year plan (2011-2015).

 

“It lays emphasis on new energy resources, so the need for the technology and know-how to exploit China’s deep shale gas reserves will maintain the country’s interest in US and Canadian companies which are acknowledged leaders in this area,” Tong said at the launch of the report.

 

Away from Chinese moves, Petrobras announced last week that it had commenced production at the Chinook field in the Gulf of Mexico having drilled and completed a well nearly five miles deep. The Cascade-Chinook development is the first in the Gulf of Mexico to prospect for offshore oil using a floating, production, storage and offloading vessel instead of traditional oil platforms.

 

Finally, after the forced nationalisation of YPF in April, the Argentine government and Chevron inked a memorandum of understanding on Friday to explore unconventional energy opportunities. Local media reports also suggest that YPF has reached out to Russia's Gazprom as well since its nationalisation in a quest for new investors after having squeezed Spain’s Repsol out of its stake in YPF.

 

In response, the previous owner of YPF said it would take legal action against the move. A Repsol spokesperson said, “We do not plan to let third parties benefit from illegally confiscated assets. Our legal teams are already studying the agreement."

 

Neither Chevron nor YPF have commented on possible legal action from Repsol. That’s all for the moment folks. Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Graph: OPEC Production 2010-2012 © Société Générale CIB 2012. Chart: Chinese M&A activity per sector by deal valuation and volumes © Squire Sanders. 

A Californian emission law, refiners & Muir woods

When in town, spending a few hours watching shipping lanes in the San Francisco bay area is an old pastime of the Oilholic’s, especially when it comes to spotting oil tankers which bring in some of the crude stuff to the area's refiners.

This morning, while sitting on Pier 39, yours truly spotted three pass by along with a few loaded containers - all following a well practised drill moving along a designated route under the Golden Gate Bridge, past Alcatraz Island before turning away left. Away from eye-view and the rather tranquil shipping lanes, there is local trouble at the mill for the already beleaguered refiners who have to contend with overcapacity and stunted margins.

It comes in the shape of a gradual but steady implementation of California's (relatively) new environmental regulations by 2020. This piece of regulation is known as California's Global Warming Solutions Act a.k.a. the AB 32, the central objective of which is to reduce Californian greenhouse gas emissions to 1990 levels by 2020.

According to the California Air Resources Board, in 2013 it will begin enforcing a state-wide cap on greenhouse gas emissions. The cap-and-trade programme coupled with the Low Carbon Fuel Standard would give California some of the most stringent air quality and emissions laws in the USA, although a spokesperson refused to describe it as such.

Ratings agency Moody’s believes refining and marketing (R&M) companies Tesoro, Alon USA, Phillips 66 and Valero are particularly exposed to the gradual implementation of the new environmental rules.

"California's increasingly stringent environmental regulations will challenge refiners over the next decade, increasing operating costs and negatively impacting refined product demand. These new rules will reduce cash flow that could be used for debt repayment or strategic growth and could discourage refiners from investing in California," says Gretchen French, a senior analyst and Vice President at Moody’s.

Among the majors, Chevron which has a significant refinery capacity in California, is likely to feel the impact most among its peers. Nonetheless as ratings agencies generally tend to rate integrated oil & gas companies higher than R&M only companies, Chevron should have no immediate concerns. The company's long-term debt is rated by Moody’s Aa1 with a stable outlook according to a communiqué dated March 27th.

The agency believes Chevron's ratings reflect its significant scale and globally integrated operations, its diversified upstream reserves and production portfolio, and a strong financial profile, which is underpinned by strong cash flow coverage metrics, low financial leverage, robust capital returns, and a conservative approach to shareholder rewards.

Furthermore, Chevron's strong liquidity profile is characterised by free cash flow generation, ongoing asset sales proceeds, and a large cash position. Chevron's liquidity is further supported by US$6 billion of unused committed credit facilities due in December 2016. Moody's does not expect the new rules to affect the ratings for Tesoro, Alon, Phillips 66 or Valero either over the near to medium term, but the new standards could limit credit accretion.

"Well diversified companies with high financial flexibility and strong liquidity will shoulder the new burdens and weaker demand most easily. Refiners with efficient cost structures and high distillate yields will retain the greatest advantage," French says.

Additionally, a pool of commentators here in the Bay Area seem to suggest that most players – especially Tesoro and Valero – have had a fair bit of time to indulge in regulatory risk mitigation. This piece of legislation was to be expected as California has admirably been a state keen on conservation, forestry and the environment.

The “Father of the US National Parks” – John Muir – an author, naturist and an early advocate of preservation of wilderness in the USA did most of his life’s important work here in California’s Sierra Nevada mountain range. In 1908, Muir who also founded one the country’s most important conservation organisation – the Sierra Club – had a national park named after him. This amazing redwood forest - the Muir Woods National Monument near San Francisco - now provides joy to countless visitors among whom the Oilholic was one this afternoon.

More than six miles of trails are open for visitors to experience an easy walk on the valley floor through the primeval redwood forest. Though the forest is naturally quiet, the Oilholic is in agreement with the US National Park Service, that people are key to preserving the ancient tranquillity of an old-growth forest in our noisy, modern world. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Oil Tanker in the San Francisco Bay Area shipping lane. Photo 2: Valero Pump. Photo 3: Collage of Muir Woods National Monument, California, USA © Gaurav Sharma.

Speaking @ OPEC & WPC plus Dec's trading lows

It’s been a hectic few weeks attending the OPEC conference in Vienna and the 20th World Petroleum Congress in Doha, but the Oilholic is now happily back in London town for a calm Christmas. In fact, a more than passive interest in the festive period’s crude trading lows is all what you will get for the next fortnight unless there is a geopolitical mishap. However, before we discuss crude pricing, this humble blogger had the wonderful experience of doing a commentary hit for an OPEC broadcast and moderating a Baker & McKenzie seminar at the WPC.

Starting with OPEC, it was a pleasure ditching pricing and quotas for once in Vienna and discussing the infrastructure investment plans of its 12 member nations in OPEC webcast on December 14th. The cartel has announced US$300 billion of upstream infrastructure investment between 2011 and 2015.

The market is right in believing that Kuwait and Qatar would lead the new build and give project financiers considerable joy. However, intel gathered at the WPC suggests the Algerians could be the surprise package. (To watch the video click here and scroll down to the seventh video on the 160th OPEC conference menu)

This ties-in nicely to the Baker & McKenzie seminar at the WPC on December 7th where the main subject under the microscope was investment opportunities for NOCs.

Six legal professionals attached to Baker's myriad global practices, including familiar names from their UK office, offered the audience insight on just about everything from sources of funding to a reconciliation of different drivers for NOCs and IOCs in partnerships.

Once the panel discussion was over, the Baker partners were kind enough to allow the Oilholic to open the floor for some lively questioning from the audience. While the Oilholic did most of the probing and Baker professionals did most of the answering, the true credit for putting the seminar and its research together goes to Baker’s Emily Colatino and Lizzy Lozano who also clicked photos of the proceedings.

Now from crude sound-bites to crude market chatter post-OPEC, as the end of last week saw a major sell off. Despite the price of crude oil staging a minor recovery in Monday’s intraday trading; both benchmarks were down by over 4 per cent on a week over week, five-day cycle basis on Tuesday. Since the festive period is upon us, trading volumes for the forward month futures contracts will be at the usual seasonal low over the Christmas holidays. Furthermore, the OPEC meeting in Vienna failed to provide any meaningful upward impetus to the crude price level, which like all traded commodities is witnessing a bearish trend courtesy the Eurozone crisis.

Sucden Financial Research analyst Myrto Sokou notes that investors remained very cautious towards the end of last week and were prompted towards some profit taking to lock in recent gains as WTI crude was sliding down toward US$92 per barrel level.

“After market close on Friday, Moody’s downgraded Belgium by two notches to Aa3, as liabilities associated with the Dexia bailout and increased Eurozone risks were cited as key factors. In addition, market rumours on Friday of a France downgrade by S&P were not followed up, though the agency did have server problems during the day. Suspicion is now that they will wait until the New Year to conclude review on Eurozone’s second largest economy,” Sokou said in a note to clients.

Additionally, crude prices are likely to trade sideways with potential for some correction higher, supported by a rebound in the global equity markets. “However, should the US dollar strengthen further we expect some pressure in the oil market that looks fairly vulnerable at the moment,” Sokou concludes.

Away from pricing projections, the Reuters news agency reports that Libya has awarded crude oil supply contracts in 2012 to Glencore, Gunvor, Trafigura and Vitol. Of these Vitol helped in selling rebel-held crude during the civil war as the Oilholic noted in June.

On to corporate matters and Fitch Ratings has upgraded three Indonesian oil & gas utilities PT Pertamina (Persero) (Pertamina), PT Perusahaan Listrik Negara (Persero) (PLN) and PT Perusahaan Gas Negara Tbk (PGN) to 'BBB-' following the upgrade to Indonesia's Long-Term Foreign- and-Local-Currency Issuer Default Ratings (IDRs) to 'BBB-' from 'BB+'. The outlooks on all three entities are Stable, agency said in a note on December 15th.

Meanwhile, a Petrobras communiqué suggests that this December, the combined daily output of the Brazilian major and its partners exceeded 200,000 barrels of oil equivalent per day (boe/day) in the promising Santos Basin. The company said that on December 6, two days after operations began at well RJS-686, which is connected to platform FPSO Cidade de Angra dos Reis (the Lula Pilot Project), the total output operated by Petrobras at the Santos Basin reached 205,700 boe/day.

This includes 144,100 barrels of oil and condensate, in addition to 9.8 million cubic meters of natural gas (equivalent to an output of 61,600 boe), of which 8.5 million cubic meters were delivered to the Monteiro Lobato Gas Treatment Unit (UTGCA), in Caraguatatuba, and 1.3 million cubic meters to the Presidente Bernardes Refinery (RPBC) Natural Gas Unit, in Cubatão, both in the state of São Paulo.

Finally, ratings agency Moody's notes a potential sizable lawsuit against Chevron Corporation in Brazil could have a negative impact on the company, but it is too early to judge the full extent of any future liability arising from the lawsuit.

Recent news reports indicate that a federal prosecutor in the state of Rio de Janeiro is seeking BRL20 billion (US$10.78 billion) in damages from Chevron and Transocean Ltd. for the offshore oil leak last month. The Oilholic thinks Transocean’s position is more troublesome given it’s a party to the legal fallout from the Macondo incident.

That’s all for the moment folks – a crude year-ender to follow in early January! In the interim, have a Happy Christmas! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2011. Photo 1: Gaurav Sharma on OPEC's 160th meeting live webcast from Vienna, Austria on Dec 14, 2011 © OPEC Secretariat. Photo 2 & 3: The Oilholic at Baker & McKenzie seminar on investment opportunities for NOCs at the 20th World Petroleum Congress in Doha, Qatar on Dec 7, 2011 © Lizzy Lozano, Baker & McKenzie.

Valero, BP, Crude price & the week that was!

The seven days that have passed have been ‘crudely’ interesting to say the least. First off, early May saw one of the biggest market sell-offs in recent memory as commodities of all descriptions did a mini battle with price volatility. Brent crude for its part fell nearly 6% before recovering and stabilising above US$110 per barrel.

Macroeconomic factors aside many in the City believe the ongoing conflict in Libya no longer appears to be a key driver of oil prices as the loss of Libyan oil exports were fully discounted by the market some time ago. The profit takers agree! Société Générale CIB analysts noted in a report to clients that they estimate:

“the fair value for the Brent price would be about US$100 if no MENA risk premium were included. It is difficult to see the MENA risk premium rising much further near-term unless significant unrest emerges in countries with substantial oil exports such as Algeria and Saudi Arabia.”

That is not happening and Syria is of peripheral importance from near term instability premium perspective. Société Générale CIB analysts further note that the Brent crude oil price may correct lower over coming weeks as speculative traders may be tempted to take some profit on long positions as:

• recent significant events in the Middle East & North Africa (MENA) have been limited to countries with little oil exports


• tentative signs of demand destruction in the US, and


• growing concerns of a bumpy or hard landing in China.

Moving away from the crude price, heads of the big five oil firms Shell, Exxon, Conoco, BP America and Chevron and some Democrats on the Senate finance committee squared up to each other on May 6^th over the age-old issue of tax subsidies for oil companies. The latter want the tax subsidies removed, but big oil contests that they are benefitting from the subsidies like any other US business does and furthermore they are heavily taxed already.

That same day BP’s shares rallied in the UK following news that an arbitral panel has issued a consent order permitting BP and the AAR consortium to assign an Arctic opportunity to TNK-BP, subject to consent from Russian state-controlled firm Rosneft. The long drawn out saga may finally be reaching a favourable conclusion for BP.

Also last week ratings agency Moody’s changed US refiner Valero Energy's rating outlook to stable from negative and at the same time affirmed Valero's existing Baa2 senior unsecured note ratings. It said the stabilisation in the rating outlook reflects the expectation that Valero's cash flow will remain strong over the short term due to rising industrial activity pushing modest growth in demand for distillates and the expectation of supportive light/heavy spreads.

The stable outlook also reflects the assumption that Valero will maintain investment grade leverage metrics over the next 12-18 months as it continues to pursue organic growth and acquisition opportunities.

Additionally Moody's expects Valero's earnings to remain highly cyclical, and noted that the 2010 sale of the company's secularly weaker US East Coast refining assets, willingness and financial capacity to idle underperforming assets, as well as its recent cost reduction efforts should enhance the company's ability to withstand the inherent cyclicality of the sector. Moody's also expects that Valero will remain acquisitive. In March of this year, Valero announced the purchase of Chevron's Pembroke refinery in the UK for US $1.7 billion.

Rounding off - the Oilholic turned 33 years young today, last seven of which have been a ‘crude’ affair ;-) Thanks for all the birthday messages!

© Gaurav Sharma 2011. Photo: Alaska Pipeline with Brooks Range in background © Michael S. Quinton / National Geographic