UK election result's impact on British Energy Inc

By all accounts, result of the UK General Election on May 7 was simply stunning. Pollsters got it horribly wrong, Prime Minister David Cameron’s Conservative Party returned with a majority against all expectations, Scottish National Party bagged 56 out of 59 parliamentary seats in the ‘oil hub’ of Scotland - all the ingredients to excite politically minded scribes and the general public alike. The Oilholic began his experience at Ellwood Atfield’s splendid election night bash in Westminster (photo above left) ushering in news of the first exit poll predicting the Conservatives were going to be the largest party with 316 members of parliament.

As events unfolded into early hours of the morning and late afternoon the next day, Cameron’s Conservatives returned with 331 MPs and a slim majority putting to bed all talk of a hung parliament. This blogger was up when Labour heavyweights Ed Balls, Douglas Alexander, Jim Murphy and Liberal Democrats ministers Vince Cable, Ed Davey, Lynne Featherstone and Danny Alexander all lost their seats.

Resignation of the hapless Labour leader Ed Miliband who managed to deliver his party’s worst election result since 1983 followed, along with that of Nick Clegg, now former deputy prime minister and Liberal Democrat leader. Cameron soon walked back into Downing Street after meeting the Queen and telling her he’d now form a majority Conservative government.

Having enjoyed the drama of election night well into sunrise the next day, it’s worth pondering what the result means for the UK’s energy industry in general and the oil and gas business in particular. Afterall, the Oilholic did fret about the direction of the market in his pre-election column for Forbes.

For starters, Ed Miliband’s barmy energy price freeze isn’t going to happen. A daft idea, daftly presented to maximum populist effect just didn’t work and is now in the dustbin of political history. This blogger expects ratings agencies to ease up both on UK-listed energy utilities Centrica, the owner of British Gas, and SSE, another service provider as well as the sector in general. 

Unsurprisingly, both stocks jumped as the entire London market welcomed the result on May 8 morning with the FTSE 100 momentarily returning back above 7,000 points. Nonetheless, Cameron’s government faces a very serious challenge of planning investment towards creaking energy infrastructure – from nuclear to renewables – ensuring the lights are kept on. By some estimates, the required capital expenditure could be as high as £330 billion by 2030.

Switching to the mainstream oil and gas business, both the Conservative victory in the UK and an SNP landslide in Scotland are broadly positive for various reasons. As this blogger has noted before, Chancellor George Osborne’s taxation policies turned positive for the industry towards the end of the last parliament, as the oil price decline began to bite North Sea players. 

Collective measures put into effect back in March imply that the UK’s total tax levy would fall from 60% to 50%, giving a much needed breather to those prospecting in the North Sea. Any further stimulus measures for the better are unlikely to be disrupted by the SNP, even if they do have a broader agenda of roughing up other government programmes both North and South of the Scottish border.

This is broadly good for the industry, as it goes through a challenging period and grapples with the restructuring in Aberdeen triggered by companies as large as BP and as small as independent operations services providers. 

Finally, turning attention to the new energy minister Amber Rudd, a Conservative MP for Hastings, who has been appointed as the successor to Ed Davey; the choice is a great one. Obviously, her credentials are solid or she wouldn’t be here. Gauging the response of the wider industry, most have welcomed the appointment.

Rudd is seen as conscientious and hard working minister. Even Greenpeace sent out a release welcoming her to the job, hoping that she’d bring the same energy to implementing the Climate Change Act, as she did to fight the corner of fisheries in her last government remit.

With a challenging portfolio, Rudd has her work cut out and we wish her well, especially as she sets about the arduous task of attracting investment to the sector. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Ellwood Atfield election night party, May 7, 2015 © Gaurav Sharma

Greens deserve inclusion in UK leaders’ debates

A political kerfuffle has broken out in British political circles about inclusion (or exclusion) of the UK’s Green Party in televised leaders’ debate ahead of the 2015 General Election on May 7.

It all kicked-off on Monday when the country’s broadcasting regulator Ofcom opined that the Green Party did not have the clout to be considered a big enough player on the national stage.

Prime Minister and leader of the Conservative Party David Cameron then said he wouldn’t take part in a televised debate that excludes the Green Party, since UKIP a minor right-wing party that’s eating into his political base had been invited to participate but not the Greens. 

As exposure for the Greens is likely to hurt the opposition Labour party and the Liberal Democrats, Cameron’s desire to have the Greens included might well be driven by his own interests. Labour, Liberal Democrats and UKIP all cried foul at Cameron’s announcement, while he in turn accused opponents of running scared. 

Whatever his reasons might be, the Oilholic feels Cameron is right to demand inclusion of the Greens. Those asking why the Greens should be included must actually ask “Why not?” instead. The Oilholic profoundly disagrees with a lot of what the Greens say and the policies they propose. However, that does mean this blogger should frown upon giving them a voice on a national stage at one of the most important general elections in a generation.

The British Green movement should now be considered sufficiently mature and in sync with some of its counterparts in the wider European Union. In fact, at the recent European elections both the Greens and UKIP got more votes than the Liberal Democrats.

The Greens had their first MP in 2010 as Caroline Lucas entered parliament on her own merit and credentials having fought against mainstream parties with deeper pockets. While UKIP might well have two MPs in parliament at the moment; both are defectors from the Conservative Party who re-entered parliament having been elected on their established political reputations while piggybacking on a populist bandwagon provided by a protest party.

Yet UKIP gets a voice, but the Greens don’t despite being level pegging with the Liberal Democrats in many opinion polls? Some say giving the Greens a nationally televised platform would invite legal challenges from Scottish and Welsh nationalists, and other minor parties. If so, then so be it – let them prove the credentials as a national party.

That the Greens are a national force is beyond dispute. They might well be a fringe party, but unlike Scottish and Welsh nationalists, the Greens are fighting UK-wide not just in pockets of the still United Kingdom. Perhaps we should look to Germany and how its multiparty system has incorporated the Green movement. There are other such examples within the EU.

We should give the Greens a wider platform and leave their electoral performance to the court of public opinion. By that argument, allowing them to participate in a national leaders’ debate would be a good starting point. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Big Ben and the UK parliament, London © Gaurav Sharma

Crude prices, rouble’s rumble & EU politics

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sights & sounds from the G8 in Enniskillen

As the G8 circus prepares to leave town, with the Lough Erne Declaration firmly signed, it is time to reflect on the town and the folks who played host to the leaders of the eight leading industrialised nations. Wherever this blogger went, asked for directions, picked-up something in a shop, had a meal or a beer, you name it – he was greeted by helpful people with welcoming smiles.

The leaders’ motorcades were met with much gusto, especially by local school children “Welcoming the G8” even when there wasn’t a leader inside the cars zipping by! Bless them! On Monday, the townsfolk got a pleasant surprise to see President Barack Obama and Prime Minister David Cameron waving to them from a vehicle in the same motorcade.

Later, the two leaders also visited Enniskillen Integrated Primary School, attended by both Catholic and Protestant children, on the outskirts of Enniskillen. It was established, as a place of reconciliation and peace, in wake of the 1987 IRA Poppy Day bombing which resulted in 12 local fatalities. The bomb may have killed and maimed but didn’t break the community here, says one resident. The town itself got a complete makeover with every building spruced-up, primed and painted, according to locals and as is apparent.

However, like any other High Street in the British Isles, Enniskillen is no exception from the economic downturn, with retailers either going under or vacating premises. Yet, instead of boarding these shops up, their glass panes had a façade of wallpaper showing people and products inside, perhaps to convey a positive illusion for cars zipping past.

The protestors were here in numbers too, and in spirit as far away as Belfast and London. Everyone from anti-poverty campaigners to food scarcity examiners, from rights and environmental groups to fair trade advocates were here in numbers. Amnesty International’s protest ‘display’ on the arms-supplying shenanigans by G8 nations was the most eye-catching one for the Oilholic.

There is one mute point though. It seems the militant element largely stayed away and most of the protesters, barring few nutcases, engaged and sent their message out peacefully. That the Lough Erne Resort is surrounded by water supplemented by miles of metal fences, multiple security checkpoints and around 8,000 security personnel, certainly ensured the G8 2013 Summit saw far fewer protestors relative to the norm in recent years.

Swimming, sailing, paddling and canoeing in the waters around Lough Erne Resort were banned for the duration of the summit, but not fishing! That’s all from Enniskillen folks which is getting back to normalcy. Before his departure back to London via Belfast, the Oilholic leaves you with some views from the G8 summit through the lens of his non-professional but supremely effective automatic camera. Click on images(s) to enlarge. Keep reading, keep it ‘crude’!
 

A 'wallpapered' shop in Enniskillen

Enniskillen Castle



Waters 'off limits' says PSNI

Police comb River Erne

 

Amnesty Intl makes its point on Syria

Police personnel from around UK make their way back home from Belfast City airport

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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© Gaurav Sharma 2013. Photos: As captioned, images from the G8 2013 summit in Northern Ireland © Gaurav Sharma, June 16-19, 2013.

Crude bits of the ‘Lough Erne Declaration'

As predicted, Russia and the West's differing positions for and against supporting the Assad regime in Syria threatened to overshadow everything else at the G8 Summit here in Lough Erne Resort, Enniskillen, Northern Ireland but mercifully didn’t.

The leaders of the group of eight leading industrialised nations, meant to promote trade and dialogue at this forum, did make some progress and provided lots of hot air…er sorry…soundbites. The outcome of talks was grandiosely dubbed the 'The Lough Erne Declaration'. But before that, the European Union and the US finally agreed to 'start talks' on a new trade pact while not losing sight (or to the detriment) of ongoing negotiations with Canada.

The trade talks had been under threat from a potential French veto, but EU ministers agreed to their demand "or exclusion of the film and television industry from the talks". On to crude notes, the leaders thankfully did not indulge in silly talk of doing something to 'bring down the price of oil' (and leave it to market forces) just because the Brent contract is at US$100-plus levels.

 

There were also no wide-ranging discussions about price levels of crude benchmarks, apart from individual non-Russian grumbling that they should be lower. More importantly, the G8 thinks the state of their respective economies would hopefully act as a correcting mechanism on prices in any case. The leaders agreed that global economic prospects "remain weak".

 

Ironically, just as US Federal Reserve Chairman Ben Bernanke was issuing soundings stateside about easing-up on quantitative easing, they noted that downside risks have reduced thanks in part to "significant policy actions taken in the US, euro area and Japan, and to the resilience of major developing and emerging market economies".

 

The leaders said most financial markets had seen marked gains as a result. "However, this optimism is yet to be translated fully into broader improvements in economic activity and employment in most advanced economies. In fact, prospects for growth in some regions have weakened since the Camp David summit." You bet they have!

 

The Lough Erne declaration had one very significant facet with implications for the oil and gas industry along with mining. The G8 leaders said developing countries should have corporate identification data and the capacity to collect the taxes owed to them and other countries had "a duty to help them".

 

The move specifically targets extractive industries. It follows revelations that many mining companies use complex ownership structures in the Netherlands and Switzerland to avoid paying taxes on the natural resources they extract in developing countries. Hence, the G8 agreed that mining companies should disclose all the payments they make, and that "minerals should not be plundered from conflict zones".

 

Speaking after the declaration was signed, UK Prime Minister David Cameron said, "We agreed that oil, gas and mining companies should report what they pay to governments, and that governments should publish what they receive, so that natural resources are a blessing and not a curse." Good luck with that Sir!

 

And that dear reader is that! Here are the links to this blogger's reports for CFO World on tax, trade, economy and US President Barack Obama’s soundbites (to students in Belfast), should they interest you. Also on a lighter note, here is a report from The Sun about Obama's idiotic gaffe of calling UK Chancellor of the Exchequer George Osborne – "Jeffery" Osborne on more than one occasion and his bizarre explanation for it.

 

So the leaders' motorcades have left, the ministerial delegations are out and the police – who did a great job – are packing it in. Out of the eight leaders and EU officials in Lough Erne, the Oilholic felt Canadian PM Stephen Harper looked the most relaxed while German Chancellor Angela Merkel looked least cranky among her European peers. Guess they would be, as both economies are the only ones in the G8 still rated as AAA by all three ratings agencies.

 

That's all from Enniskillen folks! Should you wish to read the so called Lough Erne Declaration in full, it can be downloaded here. Despite the pressures of reporting, the buzz of a G8 Summit and the hectic schedule, yours truly could not have left without visiting Enniskillen Castle (above right) in this lovely town full of welcoming, helpful people with big smiles.

The location's serenity is a marked contrast from the Russians versus West goings-on at Lough Erne. It's a contrasting memory worth holding on to. And on Syria, both sides agreed to disagree, but expressed the urgency to hold a 'peace summit.' Sigh! Not another summit? Keep reading, keep it 'crude'!

 

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© Gaurav Sharma 2013. Photo 1: Lough Erne Resort, Enniskillen, Northern Ireland © Invest NI. Photo 2: Enniskillen Castle, Northern Ireland © Gaurav Sharma, June 18, 2013.

The 2013 G8 summit, Syria & crude prices

There is a certain measure of positive symbolism in being here in Northern Ireland for the 2013 G8 summit. Who would have imagined when the Good Friday agreement was signed in 1998, that 15 years later the then sectarian strife-torn province would host the leaders of the eight leading industrialised nations for their annual shindig?

That point was not lost on US President Barack Obama, among the few who didn’t express apprehensions, when UK PM David Cameron announced the venue for the summit last year. Cameron wanted to send a message out to the world that Northern Ireland was open for business and based on what yours truly has seen and heard so far, that's certainly a view many share.

 

Addressing an audience of students in Belfast, Obama said, "Few years ago holding a summit of world leaders in Northern Ireland would have been unthinkable. That we are here today shows the progress made in the path to peace and prosperity [since 1998]."

"If you continue your courageous path towards permanent peace, and all the social and economic benefits that come with it, that won't just be good for you. It will be good for this entire island, for the United Kingdom, for Europe; and it will be good for the world," he added.

Here we all are in Belfast heading to a quaint old town called Enniskillen. Of course, the Oilholic won’t be making his way there in a style befitting a president, a prime minister or a gazillion TV anchors who have descended on Northern Ireland, but get there - he most certainly will - to examine the 'cruder' side of things.

It has barely been a year since the G8 minus Russia (of course) griped about rising oil prices and called on oil producing nations to up their production. "We encourage oil producing countries to increase their output to meet demand. We stand ready to call upon the International Energy Agency (IEA) to take appropriate action to ensure that the market is fully and timely supplied," the G7 said in a statement last August.

Of course since then, we’ve had the US 'Shale Gale', dissensions at OPEC and rising consumption of India and China according to the latest data. The smart money would be on the G7 component of the G8 not talking about anything crude, unless you include the geopolitical complications being caused by Syria, which to a certain extent is overshadowing a largely economic summit.

That wont be a shame because its not for politicians to fiddle with market mechanisms. Nonetheless, the Brent forward month futures touched a 10-week high close to US$107 a barrel on Monday before retreating. Despite a lull, if not a downturn, in OECD economic activity, the benchmark remains in three figures.

Syria's impact on oil markets is negligible, but a prolonged civil war there could affect other countries in the Middle East, worse still drag a few oil producers in. Yet a stalemate between Russian President Vladimir Putin and the West has already become apparent here at the G8. There will, as expected, be no agreement on Syria with the Russians supporting the Assad regime and the West warily fretting over whether or not to supply the Syrian rebels with arms.

Away from geopolitics and the G8, in an investment note to clients, analysts at investment bank Morgan Stanley said the spread between WTI and Brent crude will likely widen in the second half of 2013, with a Gulf Coast "oversupply driving the differential".

The banks notes, and the Oilholic quotes, "WTI-Brent may struggle to narrow below US$6-7 per barrel and likely needs to widen in 2H13 (second half 2013)." That’s all for the moment from Belfast folks, as the Oilholic heads to Enniskillen! In the interim, yours truly leaves you with a view of Belfast's City Hall. Keep reading, keep it 'crude'

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© Gaurav Sharma 2013. Photo: City Hall, Belfast, Northern Ireland © Gaurav Sharma, June 17, 2013

US LNG exports to the UK: The ‘Stateside’ Story

The Oilholic finds himself in Chicago IL, meeting old friends and making new ones! A story much discussed this week in the Windy City is US firm Cheniere Energy’s deal to export LNG to UK’s Centrica. More on why it is such a headline grabber later, but first the headline figures related to the deal.

The agreement, inked by Centrica and Cheniere on March 25, sees the latter provide 20-years' worth of LNG shipments starting from September 2018, which according to the former is enough to fuel 1.8 million British homes.

Centrica said it would purchase about 1.75 million metric tonnes per annum of annual LNG volumes for export from the Sabine Pass Project in Louisiana. (see Cheniere Energy’s graphic on the left, click image to enlarge). The contract covers an initial 20-year period, with an option for a 10-year extension.

Centrica, which owns utility British Gas, has fished overseas in recent years as the North Sea’s output plummets. For instance, around the 20th World Petroleum Congress in 2011, it inked deals with Norway’s Statoil and Qatar Petroleum. US companies have also flirted with the export market. So the nature of the deal is not new for either party; the timing and significance of it is.

According to City analysts and their peers here in Chicago, the announcement is a ground breaking move owing to two factors – (1) it’s the first ever long-term LNG supply deal for the Brits and (2) a market breakthrough for a US gas exporter in Europe.

Additionally, it blows away the insistence by the Russians and Qataris to link longer term supply contracts to the crude oil price (hello?? keep dreaming) instead of contracts priced relative to gas market movements. As for gas market prices, here is the math – excluding the recent (temporary) spike, gas prices in the UK are on average 3 to 3.5 times higher than the current price in the US. So we’re talking in the range of US$9.75 to $10.25 per million British thermal units (mmBtu). The Americans want to sell the stuff, the Brits want to buy – it’s a no brainer.

Except – as a contact in Chicago correctly points out – things are never straightforward in this crude world. Sounding eerily similar to what Chatham House fellow Prof. Paul Stevens told the Oilholic earlier this month, he says, “Have you forgotten the politics of ‘cheap’ US gas exports landing up on foreign shores? Even if it’s to our old friends the Brits?”

The US shale revolution has been price positive for American consumers – the exchequer is happy, the political classes are happy and so is the public which sees their country edging towards “energy independence.” (A big achievement in the current geopolitical climate and despite the quakes in Oklahoma).

The only people who are not all that happy, apart from the environmentalists, are the pioneers who persevered and kick-started this US shale gas revolution which was three decades in the making. To quote one who is now happily retired in Skokie, IL, “We no longer get more bang for our bucks anymore when it comes to domestic contracts.”

Another valid argument, from some in the trading community here in Chicago, is that as soon as US gas exports gain traction, bulk of which would head to Asia and not mother England, domestic prices will start climbing. So the Centrica-Cheniere deal, while widely cheered in the UK, has got little more than a perfunctory, albeit positive, acknowledgement from the political classes stateside.

In contrast, across the pond, none other than the UK Prime Minister David Cameron himself took to the airwaves declaring, “Future gas supplies from the US will help diversify our energy mix and provide British consumers with a new long term, secure and affordable source of fuel.”

The Prime Minister is quite right – the UK would rather buy from a ‘friendly’ country. Problem is, the friendly country might cool off on the idea of gas exports, were US domestic prices to pick-up in tandem with a rise in export volumes.

That’s all for the moment from Chicago folks! More from here over the next few days; keep reading, keep it ‘crude’!

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© Gaurav Sharma 2013. Photo: Sabine Pass Project, USA © Cheniere Energy Inc.

UK & Norway: A ‘crudely’ special relationship

Unconnected to the current systemic financial malaise in Europe, a recent visit to Oslo by British Prime Minister David Cameron for a meeting with his Norwegian counterpart Jens Stoltenberg went largely unnoticed. However, its ‘crude’ significance cannot be understated and Cameron’s visit was the first by a British Prime Minister since Margaret Thatcher’s in 1986.

Beaming before the cameras, Stoltenberg and Cameron announced an "energy partnership" encompassing oil, gas and renewable energy production. As production from established wells has peaked in the Norwegian and British sectors of the North Sea, a lot has changed since 1986. The two principal proponents of exploration in the area are now prospecting in hostile climes of the hitherto unexplored far North – beyond Shetland Islands and in the Barents Sea.

Reading between PR lines, the crux of what emerged from Oslo last week is that both governments want to make it easier for firms to raise money for projects and to develop new technologies bearing potential benefits in terms of energy security. That Cameron is the first British PM to visit Norway in decades also comes as no surprise in wake of media reports that the Norwegian sector of the North Sea is witnessing a second renaissance. So of the growing amount of oil the UK imports since its own production peaked in 1999 – Norway accounts for over 60% of it. The percentage for British gas imports from Norway is nearly the same.

"I hope that my visit to Oslo will help secure affordable energy supplies for decades to come and enhance investment between our two countries. This will mean more collaboration on affordable long-term gas supply, more reciprocal investment in oil, gas and renewable energies and more commercial deals creating thousands of new jobs and adding billions to our economies," Cameron said.

For their part the Norwegians, who export over five times as much energy as they use domestically, told their guest that they see the UK as a reliable energy partner. We hear you sir(s)!

Meanwhile, UK Office for National Statistics’ (ONS) latest production data released this morning shows that extractive industries output fell by 15% on an annualised basis in April with oil & gas production accounting for a sizeable chunk of the decline.

A further break-up of data suggests oil & gas production came in 18.2% lower in April 2012 when compared with the recorded data for April 2011. Statisticians say production would have been higher in April had it not been for the shutdown of Total’s Elgin platform in the North Sea because of a gas leak.

Elsewhere, farcical scenes ensued at the country’s Manchester airport where the airport authority ran out of aviation fuel causing delays and flight cancellations for hours before supplies were restored. Everyone in the UK is asking the same question – how on earth could this happen? Here’s the BBC’s attempt to answer it.

Finally the Oilholic has found time and information to be in a position to re-examine the feisty tussle for Cove Energy. After Shell’s rather mundane attempt to match Thai company PTTEP’s offer for Cove, the Thais upped the stakes late last month with a £1.22 billion takeover offer for the Mozambique-focused oil & gas offshore company.

PTTEP’s 240 pence/share offer improves upon its last offer of 220 pence or £1.12 billion in valuation which Shell had matched to nods of approval from Cove’s board and the Government of Mozambique. The tussle has been going on since February when Shell first came up with a 195 pence/share offer which PTTEP then bettered.

Yours truly believes Cove’s recommendation to shareholders in favour of PTTEP’s latest offer does not guarantee that the tussle is over. After all, Cove recommended Shell’s last offer too which even had a break clause attached. Chris Searle, corporate finance partner at accountants BDO, feels the tussle for control may end up with someone overpaying.

“I’m not surprised that PTTEP have come back in for Cove since the latter’s gas assets are so attractive. Of course the danger is that we now get into a really competitive auction that in the end will lead to one of the bidders overpaying. It will be interesting to see how far this goes and who blinks first,” he concludes.

Cove’s main asset is an 8.5% stake in the Rovuma Offshore Area 1 off the coast of Mozambique where Anadarko projects recoverable reserves of 30 tcf of natural gas. Someone just might end-up overpaying.

On the pricing front, instead of the Spanish rescue calming the markets, a fresh round of volatility has taken hold. One colleague in the City wonders whether it had actually ever left as confusion prevails over what messages to take from the new development. Instead of the positivity lasting, Spain's benchmark 10-year bond yields rose to 6.65% and Italy's 10-year bond yield rose to 6.19%, not seen since May and January respectively.

Last time yours truly checked, Brent forward month futures contract was resisting US$97 while WTI was resisting US$82. That’s all for the moment folks! The Oilholic is off to Vienna for the 161st OPEC meeting of ministers. More from Austria soon; keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil Rig in the North Sea © Royal Dutch Shell.

UK PM flags up crude credentials

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

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

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

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

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

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

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

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

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

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

Greece isn’t hitting crude on a standalone basis

Now how many times have we been here in recent times when yet another week begins with market chatter about Eurozone contagion and Greece weighing on the price of Black Gold? Quite frankly it is now getting excruciatingly painful – the chatter that is! The linkage between the abysmal state of affairs in Greece and lower crude prices is neither simple nor linear and a tad overblown from a global standpoint.

Bearish trends are being noted owing to an accumulation of macro factors. Worries about state of the US economy, should lead and actually led the bearish way not Greece. Nonetheless, since Greece’s economic woes have become the poster children of wider problems in the Eurozone for a while now, concerns about its economy never fail to dampen intraday trade on a Monday.

Sucden Financial Research’s Myrto Sokou notes that crude oil prices have started the week on a negative side, as weaker global equity markets and persistent concerns about Greek debt crisis weighed heavily on market sentiment and prompted investors to lock in recent profits. WTI crude oil slid lower 1% toward US$87 per barrel, while Brent oil contract retreated to retest the US$111 per barrel area.

Simply put, European leaders’ decision to delay the Greek tranche payment and EFSF expansion decisions until October, has hit futures trading this side of the Atlantic. Additionally, in the absence of major economic indicators this week, Sokou notes that investors will now be watching for currency movements that could give some direction to the energy market. In any case, investors are being cautious ahead of the two-day US FOMC meeting which concludes on Wednesday.

This week comes on the back of Société Générale’s research published last week which suggested a meaningful slide in oil prices should begin in the next 30-45 days. It is worth rewinding to last Christmas when a stunted recovery was taking hold and people were forecasting oil prices in the circa of US$120 per barrel for 2012. Here’s an example of a JP Morgan research note to clients from December 2010. This not to say that a US$120 price is not achievable – but the last six weeks of ‘over’ listening (or not) to the Greeks’ problems, economic stagnation in the US and even declining consumption forecasts for Asian markets has seen most analysts revise their 2012 forecasts down by almost US$10 per barrel on average.

OPEC Secretary General Abdalla Salem el-Badri certainly thinks there isn’t one economic woe without the other – not just Greece! Speaking at a forum, el-Badri noted that global demand for oil was seen rising at a level which was below expectations. He attributed this to fiscal woes in Europe (sigh!), high unemployment in the US and possible Chinese government action to prevent overheating of their economy.

El-Badri, a Libyan himself, also expressed hope that Libyan production would rise by 500,000 to 600,000 barrels per day (bpd) sometime in the near future. Club all bearish sentiments together, and even the OPEC secretary general is surprised that there has not been an even greater price correction in the crude markets.

Moving away from pricing, two noteworthy corporate stories these past few days have come from the US and Falkland Islands. On September 12, French engineering firm Technip announced its intention to acquire 100% of shares of US-based subsea company Global Industries Ltd. for a total transaction value of US$1.073 billion in cash, including approximately US$136 million of net debt.

The deal is slated for completion over Q1 2012. Elsewhere, British company Rockhopper Exploration, which is searching for crude stuff off the coast of Falkland Islands said on September 15 that it has made further significant finds.

It now expects to start pumping oil by 2016 and would need US$2.1 billion to develop its Sea Lion prospect. Company estimates are for 350 million barrels of recoverable reserves and production peak of 120,000 bpd is expected in 2018. Given the figure, smart money is on Rockhopper either partnering with another company or being taken over by a major. While Rockhopper continues to surprise, that the Argentines are moaning is hardly a surprise.

The Falkland Islands have always be a bone of contention between Argentina and UK who went to war over the Islands in 1982 after the former invaded. UK forces wrested back control of the islands, held by it since 1833, after a week long war that killed 649 Argentine and 255 British service personnel according to UK archives.

The prospect of oil in the region has renewed diplomatic spats with the Argentines complaining to the UN and launching fresh claims of sovereignty. Since, most Falkland islanders want to retain British sovereignty – UK PM David Cameron has declared the issue “non-negotiable”, while Argentina has declared him “arrogant”. It is at present, as the Oilholic noted last year, nothing more than a bit of diplomatic argy-bargy with an oily dimension and is highly likely to stay there.

Finally, concluding on a much lighter note, the London Stock Exchange (LSE), a preferred destination for oilholics, energy majors and miners for their listings, has quite literally become a hive of activity. One is reliably informed via its press office that the LSE has introduced 60,000 bees to their new home in hives situated on the roof of its City HQ at Paternoster Square (see photo on the left).

The introduction of the busy bees is aimed at encouraging growth of the urban bee population in the UK. The initiative is in a partnership with award-winning UK social enterprise - The Golden Company - which works with young people to develop viable businesses that produce, market and sell honey and honey-based natural cosmetics.

Xavier Rolet, CEO of LSE Group describes the move as the perfect example of community and business working together. Ilka Weissbrod, Director of The Golden Company says bees on the roof will be looked after by their ‘Bee Guardians’ together with members of LSE staff and everyone was looking forward to seeing the bees settle in their new home. Sounds like fun!

© Gaurav Sharma 2011. Photo 1: Pump Jacks Perryton, Texas, USA © Joel Sartore / National Geographic. Photo 2: Bees atop the London Stock Exchange © LSE Press Office, September 2011.