OPEC hawks are back in town (too)!

So the crude games have begun, the camera crews have begun arriving and the Saudis have begun throwing down the gauntlet by first suggesting that OPEC actually raise its output and then indicating that they might well be happy with the current production cap at 30 million bpd. However, hawks demanding a cut in production are also in Vienna in full flow.

With benchmark crude futures dipping below US$100, the Venezuelans say they are “concerned” about fellow members violating the agreed production ceiling. In fact, Venezuelan President Hugo Chavez expressed his sentiments directly over the air-waves rather than leave it to his trusted minister at the OPEC table - Rafael Ramirez.

For his part, on arrival in Vienna, Ramirez said, “We are going to make a very strong call in the meeting that the countries that are over-producing cut. We think we need to keep the ceiling on production of 30 million that was agreed at our last meeting in December."

Iraq's Abdul Kareem Luaibi, told a media scrum that a “surplus in OPEC supplies” exists which has led to “this severe decline in prices in a very short time span.” Grumblings also appear to be coming from the Algerian camp, while the Kuwaitis described the market conditions as “strange.”

Speaking to reporters on Monday, Kuwait’s Oil Minister Hani Hussein said, “Some of OPEC members are concerned about the prices and what’s happening…about what direction prices are taking and production.”

However, Hussein refused to be drawn into a discussion over a proposed OPEC production cut by the hawks.

Meanwhile, one cartel member with most to fear from a dip in the crude price – Iran – has also unsurprisingly called for an adherence to the OPEC production quota. Stunted by US and EU sanctions, it has seen its production drop to 3 million bpd - the lowest in eight quarters. Much to its chagrin, regional geopolitical rival Saudi Arabia has lifted its global supply to make-up the absence of Iranian crude in certain global markets.

At the cartel’s last meeting in December, OPEC members agreed to hold ‘official’ output at 30 million bpd. Yet, extra unofficial production came from Saudi Arabia, Iraq and Kuwait. Say what you will, the Oilholic is firmly in the camp that a reintroduction of individual OPEC quotas to help the cartel control its members’ production is highly unlikely. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Broadcast media assembly point outside OPEC HQ, Vienna, Austria © Gaurav Sharma 2011.

Three Months, Three Cities, Three ‘crude’ reports

The three cities being – Delhi, Doha and Vienna, the three reports being Oilholic’s work on Latin American Offshore, Shale Oil & Gas and Refineries projects outlook, research for which was spread over December, January and February from the 20th World Petroleum Congress to the 160th OPEC Meeting to the streets of ‘crude’ Delhi.

The last of the three reports was published by Infrastructure Journal on Feb 29th and while the analysis in the reports remains the preserve of the Journal’s subscribers, the Oilholic is more than happy to share a few snippets starting with the Latin American offshore landscape, which shows no signs of a post ‘Macondo’ hangover [1].

In fact, the month of May, will be a momentous one for the region’s offshore oil & gas projects market in general and Brazil in particular, as the country would dispatch its first shipment of oil from ultradeepwater pre-sal (‘below the salt layer’) sources. The said export consignment of 1 million barrels destined for Chile is a relatively minor one in global crude oil volume terms. However, its significance for offshore prospection off Latin American waters is immense.

When thinking about Latin American offshore projects think Brazil; think Brazil and think Petrobras’ Lula test well in the Santos basin, named after the former president, which is producing 100,000 barrels per day (bpd). Almost over a third of the Chilean consignment originated from the Lula well according to the Oilholic’s sources.

What should excite project financiers, corporate financiers and technical advisers alike is the fact the company expects to pump nearly 5 million bpd by 2020 and its ambitious drive needs investment.

However, ignoring other jurisdictions in the region and focussing only on Brazil, its promise and problems would be a fallacy. Others such as Argentina, Columbia and prospection in Falkland Islands waters are worth examining, the latter especially from the standpoint of corporate financed asset acquisitions.

Data always helps in contextualising the market movements. Using the present Infrastructure Journal data series on project finance, which commenced in 2005, figures certainly suggest the sun is shining on the Brazilian offshore industry. Of the 15 Latin American offshore projects on record which reached financial close between October 2006 and Sept 2011, 13 were Brazilian along with one apiece from Panama and Peru (Click on pie-chart above to enlarge). With a cumulative deal valuation of just under US$9.3 billion, among these Brazil’s Guara FPSO valued at US$1.2 billion led the way reaching financial close in June 2011.

The year 2010, was a particularly good one for Brazil with five projects reaching financial close. Over the last three years, sponsors of offshore projects in the country have been consistent in approaching the debt markets and bringing three to five projects per annum to financial close, with 2011 following that trend.

Moving on to the Oilholic’s second report, for all intents and purposes, Shale oil & gas prospection has been the energy story of the last half decade and Q1 2012 would be an apt time to scrutinise the ‘Fracks’ and figures[2].

To say that shale gas has altered the American energy landscape would be the understatement of the decade, or to be more specific at least half a decade. Courtesy of the process of hydraulic ‘fracking’, shale gas prospection – most of which was initially achieved in the US by independent upstart project developers – has been an epic game changer.

US shale gas production stood at 4.9 trillion cubic feet (tcf) by end-2011, which is 25% of total US production up from 4% in 2005. Concurrently, net production itself is rising exponentially owing to the shale drive according to the EIA.

Project finance aside, it is in the corporate finance data where the shale story is truly reflected – i.e. one of a steady rise both in terms of deal valuation as well as the number of projects. From four corporate infrastructure finance deals valued at US$1.89 billion in 2009, both data metrics posted an uptick to seven deals valued at US$8.35 billion in 2010 and 10 deals valued at US$7.58 billion in 2011 (Click on bar-chart above to enlarge).

However, a short term global replication of a US fracking heaven is unlikely and not just because there isn’t a one size fits all model to employ. While American success with shale projects has not escaped the notice of Europeans; financiers and sponsors in certain quarters of the ‘old continent’ are pragmatic enough to acknowledge that Europe is no USA. The recent shale projects bonanza stateside is no geological fluke; rather it bottles down to a combination of geology, American tenacity and inventiveness.

Europe’s best bet is Poland, but European shale oil & gas projects market is unlikely to record an uptick between 2012 to 2017 on a scale noticed in North America in general and the USA in particular between 2007 and 2012. The financing for shale projects – be it corporate finance or project finance – would be a slow, but steady trickle rather than a stream beyond North America.

Finally, to the Refineries report, given the wider macroeconomic climate, refinery infrastructure investment continues to face severe challenges in developed jurisdictions and Western markets[3]. Concurrently, the balance of power in this subsector of the oil & gas infrastructure market is rapidly tipping in favour of the East.

Even if refinery investment of state-owned Chinese oil & gas behemoths, which rarely approach the debt markets, is ignored – there is a palpable drive in emerging economies elsewhere in favour of refinery investment as they do not have to contend with overcapacity issues hounding the EU and North America.

For some it is a needs-based investment; for others it makes geopolitical sense as their Western peers holdback on investing in this subsector. The need for refined products is often seen superseding concerns about low refining margins, especially in the Indian subcontinent and Asia Pacific.

Industry data, empirical, anecdotal evidence and direct feedback from industry participants do not fundamentally alter the Oilholic’s view of tough times ahead for refinery infrastructure. As cracking crude oil remains a strategic business, investing in refinery infrastructure reflects this sentiment, investor appetite and financiers' attitudes.

According to current IJ data, investment in refinery infrastructure via private or semi-private financing continues to remain muted; a trend which began in 2008. In fact, 2011 has been the most wretched year since the publication began recording refinery project finance data.

Updated figures suggest the year 2010, which saw the artificial fillip of Saudi Arabia’s mega Jubail refinery project (valued at US$14.04 billion) reach financial close, has been the best year so far for refinery project finance valuation despite closing a mere two projects. However, industry pragmatists would look at 2008 which saw ten projects valued at US$9.39 billion as a much better year (Click on bar-chart above to enlarge).

From there on it has been a tale of post global financial crisis woes with the market struggling to show any semblance of a recovery and most of the growth coming from non-OECD jurisdictions. In 2009, three projects valued at US$4.79 billion reached financial close, followed by two projects including Jubail valued at US$15.04 billion in 2010, and another two projects valued at US$1.49 billion in 2011. By contrast, the pre-crisis years of 2005, 2006 and 2007 averaged US$6.71 billion in terms of transaction valuations.

A general market trend in favour of non-OECD project finance investment in refineries is obviously mirrored in the table of the top deals between 2005 and 2011 (above). Of the five, four are in non-OECD countries – led by Jubail Refinery (Saudi Arabia) valued at US$14.04 billion which closed in 2010, followed by Guru Gobind Singh Bhatinda Refinery, India (valued at US$4.69 billion, financial close – 2007), Jamnagar 2 Refinery, India (US$4.50 billion, financial close – 2006) and Paradip refinery, India (US$2.99 billion, financial close – 2009).

Only one deal from an OECD nation, which is a very recent member of the club, made it to the top five, namely Poland’s Grupa Lotos Gdansk Refinery Expansion valued at US$2.85 billion which reached financial close in 2008. Simply put, the future of infrastructure investment in this sub-component of the oil & gas business lies increasingly in the East wherein India could be a key market. That’s all for the moment folks! Keep reading, keep it ‘crude’!

NOTES:

[1] Latin American Offshore O&G Outlook 2012: Brazil’s decade, By Gaurav Sharma, Infrastructure Journal, January 17, 2012. Available here.

[2] Shale Oil & Gas Outlook 2012: The ‘Fracks’ and figures, By Gaurav Sharma, Infrastructure Journal, January 25, 2012. Available here.

[3] Refinery Projects Outlook 2012: ‘Cracking’ times for Eastern markets, By Gaurav Sharma, Infrastructure Journal, February 29, 2012. Available here.

© Gaurav Sharma 2012. Graphics: Pie Chart 1 – Latin American Offshore Project Finance transactions (October 2006 to Sept 2011), Bar Chart 1 – Number of Shale Corporate Finance transactions (2009-2011), Bar Chart 2 – Refinery Project Finance Valuation (2005-2011) © Infrastructure Journal.

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.

Keystone XL, politics & the King’s Speech

Even before the original Keystone cross-border pipeline project aimed at bringing Canadian crude oil to the doorstep of US refineries had been completed, calls were growing for an extension. The original pipeline which links Hardisty (Alberta, Canada) to Cushing (Oklahoma) and Patoka (Illinois) became operational in June 2010, just as another, albeit atypical US-Canadian tussle was brewing.

The extension project – Keystone XL first proposed in 2008, again starting from Hardisty but with a different route and an extension to Houston and Port Arthur (Texas) is still stuck in the quagmire of US politics, environmental reticence, planning laws and bituminous mix of the Canadian oil sands.

The need for extension is exactly what formed the basis of the original Keystone project – Canada is already the biggest supplier of crude oil to the US; and it is only logical that its share should rise and in all likelihood will rise. Keystone XL according to one of its sponsors – TransCanada – would have the capacity to raise the existing capacity by 591,000 barrels per day though the initial dispatch proposal is more likely to be in the range of 510,000 barrels.

Having visited both the proposed ends of the pipeline in Alberta and Texas, the Oilholic finds the sense of frustration only too palpable more so because infrastructural challenges and the merits (or otherwise) of the extension project are not being talked about. To begin with the project has a loud ‘fan’ club and an equally boisterous ‘ban’ club. Since it is a cross-border project, US secretary of State Hillary Clinton has to play the role of referee.

A pattern seems to be emerging. A group of 14 US senators here and 39 there with their counterparts across the border would write to her explaining the merits only for environmental groups, whom I found to be very well funded – rather than the little guys they claim to be – launching a counter representation. That has been the drill since Clinton took office.

One US senator told me, “If we can’t trust the Canadians in this geopolitical climate then who can we trust. Go examine it yourself.” On the other hand, an environmental group which tries to get tourists to boycott Alberta because of its oil sands business tried its best to convince me not to land in Calgary. I did so anyway, not being a tourist in any case.

Since 2008, TransCanada has held nearly 100 open houses and public meetings along the pipeline route; given hundreds of hours of testimony to local, state and federal officials and submitted thousands of pages of information to government agencies in response to questions. The environmentalists did not tell me, but no prizes for guessing who did and with proof. This is the kind of salvo being traded.

Send fools on a fool’s errand!

It is not that TransCanda, its partner ConocoPhillips and their American and Canadian support base know something we do not. It is a fact that for some years yet – and even in light of falling gasoline consumption levels – the US would remain the world’s largest importer of crude oil. China should surpass it, but this will not happen overnight.

The opponents of oil sands have gotten the narrative engrained in a wider debate on the environment and the energy mix. Going forward, they view Keystone XL and other incremental pipeline projects in the US as perpetuating reliance on crude oil and are opposing the project on that basis.

Given the current geopolitical climate, environmental groups in California and British Columbia impressed upon this blogger that stunting Alberta’s oil sands – hitherto the second largest proven oil reserve after Saudi Arabia’s Ghawar extraction zone – would somehow send American oilholics to an early bath and force a green age. This is a load of nonsense.

Au contraire, it will increase US dependency on Middle Eastern oil and spike the price. Agreed the connection is neither simple nor linear – but foreign supply will rise not fall. Keystone XL brings this crude foreign product from a friendly source.

Everyone in Alberta admits work needs to be done by the industry to meet environmental concerns. However, a 'wells to wheels' analysis of CO2 emissions, most notably by IHS CERA and many North American institutions has confirmed that oil sands crude is only 5 to 15 per cent ‘dirtier’ than US sweet crude mix.

The figure compares favourably with Nigerian, Mexican and Venezuelan crude which the US already imports. So branding Canadian crude as dirty and holding up Keystone XL on this basis is a bit rich coming from the US. Keystone XL increases US access to Canadian crude. Who would the Americans rather buy from Canada or Venezuela? Surveys suggest the former.

The pragmatists at CAPP

Over a meeting in Calgary, Dave Collyer, President of Canadian Association of Petroleum Producers (CAPP) told the Oilholic that they have always viewed Keystone XL as an opportunity to link up Western Canada to the US Gulf coast market, to replace production that would otherwise be imported by the US from overseas sources most notably Venezuela and Mexico where production is declining according to available data. There are also noticeable political impediments in case of the former.

“We don’t see this pipeline extension as incremental supply into that orbit, rather a replacement of existing production through a relatively straightforward pipeline project, akin to many other pipeline projects and extensions that have been built into the US,” Collyer said.

Energy infrastructure players, market commentators and CAPP make another valid point – why are we not debating scope of the Keystone XL project and its economic impact and focussing on the crude stuff it would deliver across the border? CAPP for its part takes a very pragmatic line.

“Do we think there is legitimacy in the argument that is being made against Keystone? No (for the most part) but the reality is that there has to be due consideration in the US. I would assume the US State Department is in a position where it has no alternative but to employ an abundance of caution to ensure that all due processes are met. What frustrates Canadians and Americans alike is the length of time that it has taken. However, at the end of the day when we get that approval and it is a robust one which withstands a strict level of scrutiny then it’s a good thing,” Collyer said.

T I M B E R!

Canadians and Americans first started bickering about timber, another Canadian resource needed in the US, about taxation, ethics, alleged subsidies and all the rest of it way back in 1981. Thirty years later, not much has changed as they are still at it. But these days it barely makes the local news in Canada each time the Americans take some reactive action or the other against the timber industry. Reason – since 2003 there has been another buyer in town – China.

In 2010, timber sales from Canada to China (and Japan to a lesser extent) exceed those to the US. Over the last half-decade timber exports from the province of British Columbia alone to China rose 10 times over on an annualised basis. Moral of the story, the US is not the only player in town whatever the natural resource. Canadians feel a sense of frustration with the US, and rightly so according to Scott Rusty Miller, managing partner of Ogilvy Renault (soon to be part of Norton Rose) in Calgary.

“We are close to the US, we are secure and we have scruples. Our industry is more open to outside scrutiny and environmental standards than perhaps many or in fact any other country the US imports crude oil from – yet there are these legal impediments. Scrutiny is fine. It’s imperative in this business, but not to such an extent that it starts frustrating a project,” Miller noted.

Ask anyone at CAPP or any Toronto-based market analyst if Canada could look elsewhere – you would get an answer back with a smile; only the Americans probably would not join them. The Oilholic asked Collyer if Americans should fear such moves.

His reply was, “As our crude production grows we would like access to the wider crude oil markets. Historically those markets have almost entirely been in the US and we are optimistic that these would continue to grow. Unquestionably there is increasing interest in the Oil sands from overseas and market diversification to Asia is neither lost on Canadians nor is it a taboo subject for us.”

CAPP has noted increasing interest from Chinese, Korean and other Asian players when it comes to buying in to both crude oil reserves and natural gas in Western Canada. Interest alone does not create a market – but backed up by infrastructure at both ends, it strengthens the relationship between markets Canadians have traditionally not looked at. All of this shifts emphasis on Canadian West coast exports.

“Is it going to be straightforward to get a pipeline to the West coast – we’ll all acknowledge that it’s not. For instance, Enbridge has its challenges with the Gateway pipeline. There is an interest in having an alternative market. There are drivers in trying to pursue that and I would say collectively this raises the “fear” you mention and with some factual basis. However, the US has been a great market and should continue to be a great market...while some caution is warranted,” he concluded.

The King’s speech

We’re not talking about Bertie, (King George VI of England) but Barack (The King of gasoline consumers and the US President). On March 30th, the King rose and told his audience at Georgetown University that he would be targeting a one-third reduction in US crude imports by 2025.

“I set this goal knowing that we’re still going to have to import some oil. And when it comes to the oil we import from other nations, obviously we have got to look at neighbours like Canada and Mexico that are stable, steady and reliable sources,” he added. While I am reliably informed that the speech was not picked up by Chinese state television, the Canadian press went into overdrive. The Globe and Mail, the country’s leading newspaper, declared “Obama signals new reliance on oil sands.”

Shares of Canadian oil and service companies rose the next day on the Toronto Exchange, even gas producers benefited and 'pro-Keystone XL' American senators queued up on networks to de facto say “We love you, we told you so.” Beyond the hyped response, there is a solid reason. Keystone XL bridges both markets – a friendly producer to a friendly consumer with wide ranging economic benefits.

According to Miller, “Refining capacity exists down south. Some refineries on the US Gulf coast could be upgraded at a much lower cost compared to building new infrastructure. There are economic opportunities for both sides courtesy this project – we are not just talking jobs, but an improvement of the regional macro scenario. Furthermore, however short or long, it could be a shot in the arm for the much beleaguered and low-margin haunted refining business.”

The pipeline could also help Canadians export surplus crude using US ports in the Gulf and tax benefits could accrue not just at the Texan end but along the route as well. That the oil sands are in Canada is a geological stroke of luck, given the unpredictability of OPEC and Russian supplies. The US State Department says it will conclude its review of Keystone XL later this year. Subjecting this project to scrutiny is imperative, but bludgeoning it with impediments would be ‘crudely’ unwise.

This post contains excerpts from an article written by the Oilholic for UK's Infrastructure Journal. While the author retains serial rights, the copyright is shared with the publication in question.

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

Discussing Offshore, BP & all the rest on TV

After researching the impact of BP’s disaster on offshore drilling stateside using Houston as a hub to criss-cross North America for almost a month, I published my findings in a report for Infrastructure Journal noting that both anecdotal and empirical evidence as well as industry data suggested no material alteration when it comes to offshore drilling activity. The reason is simple enough – the natural resource in question – crude oil has not lost its gloss. Consumption patterns have altered but there is no seismic shift; marginally plummeting demand in the West is being more than negated in the East.

So over a year on from Apr 20, 2010, on that infamous day when the Deepwater Horizon rig at the Macondo oil well in Gulf of Mexico exploded and oil spewed into the ocean for 87 days until it was sealed by BP on July 15, 2010, the oilholic safely observes that if there was a move away from offshore – its clearly not reflected in the data whether you rely on Smith bits, Baker Hughes or simply look at the offshore project finance figures of Infrastructure Journal.

After publication of my report on the infamous first anniversary of the incident, I commented on various networks, most notably CNBC (click to watch), that (a) while offshore took a temporary hit in the US, that did not affect offshore activity elsewhere, (b) no draconian knee-jerk laws were introduced though the much maligned US Minerals Management Service (MMS) was deservedly replaced by Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) and (c) Brazil is fast becoming the “go to destination” for offshore enthusiasts. Finally as I blogged earlier, the sentiment that BP is somehow giving up or is going to give up on the lucrative US market – serving the world biggest consumers of gasoline – is a load of nonsense!

So what has happened since then? Well we have much more scrutiny of the industry – not just in the US but elsewhere too. This increases what can be described as the diligence time load – i.e. simply put the legal compliance framework for offshore projects. Furthermore, without contingency plans and costly containment systems, the US government is highly unlikely to award offshore permits. So the vibe from Houston is that while the big players can take it; the Gulf may well be out of reach of smaller players.

Now just how deep is 'deepwater' drilling as the term is dropped around quite casually? According a Petrobras engineer with whom I sat down to discuss this over a beer – if we are talking ultra-deepwater drilling – then by average estimates one can hit the ocean floor at 7,000 feet, followed by 9800 feet of rock layer and another 7,000 feet of salt layer before the drillbit hits the deep-sea oil. This is no mean feat – its actually quite a few feet! Yet no one is in a mood to give-up according to financial and legal advisers and the sponsors they advise both here in London and across the pond in Houston.

To cite an example, on Oct 12, 2010 – President Obama lifted the moratorium on offshore drilling in the Gulf. By Oct 21, Chevron had announced its US$7.5 billion offshore investment plans there – a mere 9 days is all it took! Whom are we kidding? Offshore is not dead, it is not even wounded – we are just going to drill deeper and deeper. If the demand is there, the quest for supply will continue.

As for the players involved in Macondo, three of the five involved – BP, Anadarko Petroleum and Transocean – may be hit with severe monetary penalties, but Halliburton and Cameron International look less likely to be hit by long term financial impact.

How Transocean – which owned the Deepwater Horizon rig – manages is the biggest puzzle for me. Moody's currently maintains a negative outlook on Transocean's current Baa3 rating. This makes borrowing for Transocean all that more expensive, but not impossible and perhaps explains its absence from the debt markets. How it will copes may be the most interesting sideshow.

© Gaurav Sharma 2011. Photo: Gaurav Sharma on CNBC, April 20, 2011 © CNBC

There’s Something about the Chronicle

The largest daily newspaper in Texas – is still the Houston Chronicle, but while its reach extends well beyond the city, its character is uniquely Houstonian. It is that and that alone, makes the paper Oilholics approved.

The content or better still – the coverage is much attuned to crude developments local, global or should we say glocal. You might say that in a town with deep historic ties with the oil & gas business that should not come as a surprise. However, it is how the coverage is slanted and present which I love reading both online and well nothing beats a paper copy when you can get a hold of it.

So on this visit to Houston, I see The Chronicle split as front section, city & state, sports, business (my favourite), the ‘Lone Star’ and classifieds and on Mar 26th there were four ‘crude’ stories. One mute point - the Hearst Corporation has owned it since 1987 and according to local sources it employs over 2000 people including 300 fellow scribes.

The publication will celebrate its 110th anniversary in October this year, and seeped in its rich history is the fact that Jesse Holman Jones, a local politician, US Secretary of Commerce during World War II and President Hoover’s stalwart for reconstruction and development owned/published the publication from 1926-56.

The late Jesse H. Jones' life is celebrated and commemorated in several monuments (and parks) in the city, but The Chronicle’s connection with the great man is a unique component of his legacy to his city & his country. While retaining the title of publisher until his death in 1956, Jones passed on the ownership to a trust in 1937.

Sources suggest it has over 70 million page views in the internet age and amen to that! I had the pleasure of walking past its modern downtown headquarters earlier and couldn’t but help clicking the imposing building.

© Gaurav Sharma 2011. Photo 1: Houston Chronicle, Front Page, Mar 26, 2011, Image - Gaurav Sharma © Houston Chronicle, 2011. Photo 2: Photo: Headquarters, Houston Chronicle, Houston, Texas, USA © Gaurav Sharma, March 2011

Libya & OPEC’s “Will they, Won’t they” Routine

As the situation in Libya worsens, depending on differing points of view of Gaddafi goons and rebel fighters, OPEC’s routine of sending conflicting messages does not harm the price of crude – something which I don’t think the cartel minds all that much over the short term. In fact the OPEC basket price of crude seems to be following Brent’s price more closely than ever.

In a nutshell according to various newswires, Gaddafi militia and rebel fighters are toughing it out near oil terminals over 500km east of the capital Tripoli. Heaviest of the skirmishes have been outside (& within) the oil town Ras Lanuf, with both sides claiming a position of strength. A rebel spokesperson even gave out a statesman like statement, telling the BBC they would “honour” oil contracts.

However, anyone looking towards OPEC to calm the markets got a ‘crude’ response and mixed signals in keeping with the cartel's well practised drill of letting the wider world indulge in a guessing game of whether a production increase was on cards or not. The Saudis sought to calm, the Venezuelans and Iranians tried to confuse and the rest were quite simply confused themselves.

Moving away to a corporate story, pre-tax profits announced last week by UK independent upstart Tullow Oil have jumped 361% to US$152 million with a 19% rise in revenues to US$1 billion in the year to 31 December. In a statement to investors, its chief executive Aidan Heavey said the outlook was "very positive". I’d say its much more than that sir!

Finally, one of UK’s signature refineries – Pembroke – would now be a proud member of San Antonio, Texas-based refining major Valero Energy Corp. That’s after its current owner Chevron announced on March 11 that Valero had agreed to pay US$730 million for the refinery and US$1 billion for the assets. Ratings agency Moody's views Valero's acquisition of Pembroke and associated marketing and logistics assets as credit neutral. It may well be noted that it took Chevron nearly a year to...ahem....get rid of it (??)

© Gaurav Sharma 2011. Photo © Gaurav Sharma 2009

Of PetroChina, Gazprom and Hackers!

But first...Brent remains well into US$100+ per barrel territory while WTI remains in sub-US$90 region. Let’s face it the Nymex WTI-ICE Brent spreads remain extremely weak and it is becoming a recurring theme. The front-month spread even capped -US$16 per barrel mark (US$16.29 to be exact) on Feb 11; the date of expiry of the Brent forward month futures contract.

Moving away from pricing, it emerged last week that Russia’s Gazprom reported a fall in profits from RUR173.5 billion to RUR160.5 billion; an annualised dip of 9% for the quarter from July to Sept 2010 period. The cost of purchasing oil and gas jumped 29% according to the state owned firm while operational costs rose 12%. Dip in profit even prompted Russian PM Putin to “ask” them to raise their game.

Elsewhere, the “All Hail Shale” brigade had to contend with PetroChina – the Chinese state-controlled energy firm – acquiring a 50% stake in a Canadian Shale Gas project run by Encana. The stake cost is pegged at a cool US$5.4 billion. PetroChina already has majority stakes in two oil projects in Canada with Encana. There doesn’t appear to be much of a ruckus about the Chinese shopping in Canada. I guess Canadians are less uptight about Chinese investment in perceived strategic energy assets than the Americans.

Finally, computer security firm McAfee claimed in a report published on February 10th that hackers have attacked networks of a number of oil and gas firms for a good few years now. The full report is available for downloading here and it makes for interesting reading. However, I am not entirely surprised by the revelations.

In a nutshell, McAfee claims that in a series of co-ordinated attempts at least a dozen multinational oil, gas and energy companies were targeted – named by it as Night Dragon attacks – which began in November 2009. Five firms have now confirmed the attacks, it adds.

© Gaurav Sharma 2011. Photo: Oil tanker © Michael S. Quinton/National Geographic Society

Of IEA, OPEC and the Hoo-Hah over BP & Rosneft

Both the IEA and OPEC are now more upbeat about the global economic recovery over 2011, which could mean only one thing – an upward revision of global crude oil demand. Starting with the IEA, the agency says it now expects global crude demand to rise by 1.4 million barrels a day in year over year terms over 2011 to 89.1 million barrels per day; a revision of 360,000 barrels per day compared to its last forecast.

OPEC also revised its global oil demand forecast putting demand growth at 1.2 million barrels a day for the year; an upward revision of 50,000 barrels per day from its last estimate. In its monthly report, the cartel also noted that demand for its own crude is expected to average 29.4 million barrels of oil per day in 2011; an upward revision of 200,000 barrels over the previous forecast.

Both OPEC and IEA expect the increase in crude oil demand to be driven entirely by emerging markets, while OECD demand is projected to reverse to its "underlying, structural decline in 2011," according to the latter. Their respective response to the forecasts is one of understandable contrasts.

Nobuo Tanaka, head of the IEA, said a subsequent "alarming" rise in the oil price would be damaging. "We are concerned about the speed of the rising oil price, which can harm the growth of economies. If the current price continues, it will have a negative impact," he added. However, OPEC remains unmoved, as the forward month futures spread between Brent and WTI crude continues to widen to US$5-plus in favour of the latter. Both benchmarks lurk close to the US$100-mark.

OPEC’s position unsurprisingly is that the market remains well supplied. Cartel members UAE, Iran, Venezuela and Algeria say they are not concerned about a US$100 per barrel price. In fact, Venezuela's Energy Minister, Rafael Ramirez, described the price of $100 as "fair value" while speaking to the Reuters news agency. There are no prizes for guessing that an emergency meeting of the cartel to raise production is highly unlikely!

Now to the BP-Rosneft tie-up which sent the markets into a tizzy. In a nutshell, news of BP’s acquisition of a 9.5% stake in Rosneft which in turn would bag a 5% stake in BP was good, but it did not quite merit the response it got. Markets cheered it; environmentalists jeered it (given the open invitation to dig in the Arctic).

Rest of the narrative is a bit barmy. First of all, agreed it is a solid deal but given the involvement of a company 75% owned by the Russian government – I am unsure how it would be instrumental or for that matter detrimental to the UK’s petroleum security. Surely, the jury should still be out on that one. Secondly, this in no way implies that BP has turned its back on the US market in light of recent events as some market commentators have opined.

Finally, it is more of a marriage of convenience rather than a historic deal. Rosneft needed technical expertise and does not care much for political rhetoric in western markets about digging deeper and deeper for crude. BP needs access to resources. Both parties should be happy and it is rumoured in the Russian press that TNK-BP would also like a slice of the potentially lucrative Arctic ice cake. Away from the main event, the sideshow was just as engaging.

Curiously city sources revealed that BP did not use its preferred broker JPMorgan Cazenove, but rather opted to go with London-based Lambert Energy Advisory. It did amuse some in the City. All I can say is good luck to Philip Lambert. Finally, talking of the little guys in this crude world – have you heard of AIM-listed Matra Petroleum?

Last I checked, this independent upstart expects to be producing a rather modest 600-700 barrels per day by H1 2011 and its share price is around 3.52p. So assuming, Brent caps US$100-plus by end of H1 2011 and Matra delivers – the share price could treble in theory. I am not making a recommendation – let’s call it an observation!

© Gaurav Sharma 2011. Photo © Adrian R. Gableson

Crude Year 2011 Begins With a Bang

I must say the New Year has commenced with a flurry of crude news. Traders and oil men had barely resumed work for the first trading day of 2011 that the IEA declared rising oil prices to be a risk to economic recovery. In a publication on Jan 5th, the agency said oil import costs for OECD countries had risen 30% in the past year to US$790 billion which is equal to a loss of income of 0.5% of OECD gross domestic product (GDP).

Speaking to the BBC’s world service, IEA’s Fatih Birol said, "There is definitely a risk of major negative implications for the global economy." I agree and accept this, but truth be told we are some way away from a US$150-plus per barrel high. This morning though, the Brent forward month futures contract was flirting with the US$100 mark. The cold weather we have had either side of the pond does generally tend to support crude prices.

Analysts at SocGen believe the Alaska pipeline shutdown, following a leak, provided only limited support to WTI. Last weekend, a minor leak was discovered at Pump Station 1 on the Trans-Alaska Pipeline System (TAPS) causing a shutdown on the pipeline and prompting Alaska North Slope (ANS) production to be cut from 630,000 bpd to just 37,000 bpd. The pipeline, which carries almost 12% of US crude output, should be restarted "soon", according to its operator Alyeska which is 47% owned by BP, while ConocoPhillips and ExxonMobile have 28% and 20% stakes respectively.

Continuing with forecasts, a new report from ratings agency Moody’s notes that oil prices should stay "moderately high" in 2011, boosting energy companies that produce crude and natural gas liquids, but weak natural gas prices will continue to dog the energy sector this year. More importantly, rather than the volatility of recent years, Moody's expects a continuation of many of the business conditions seen in 2010, despite the Macondo incident.

Steven Wood, managing director of Moody's Oil and Gas/Chemicals group believes that certain business conditions will tighten during the year, and pressures could emerge beyond the near term. Moody's price assumptions – which are not forecasts, but guidelines that the agency uses in its evaluations of credit conditions – call for moderately high crude prices of US$80 per barrel for 2011, along with natural gas prices of US$4.50 per million Btus.

Elsewhere, a US government commission opined in a report that 'bad management' led to BP disaster. Across the pond in London, a parliamentary committee of British MPs raised "serious doubts" about the UK's ability to combat offshore oil spills from deep sea rigs. However, they stopped short of a calling for a moratorium on deep sea drilling noting that it would undermine British energy security.

© Gaurav Sharma 2011. Photo: Veneco Oil Platform, California © Rich Reid / National Geographic

Talking Refinery Infrastructure on CNBC

This week marked the culmination of almost a month and a half of my research work for Infrastructure Journal on the subject of oil refinery infrastructure and how it is fairing. Putting things into context, like many others in the media I too share an obsession with the price of crude oil and upstream investment. I wanted to redress the balance and analyse investment in the one crucial piece of infrastructure that makes (or cracks) crude into gasoline, i.e. refineries. After all, the consumer gets his/her gasoline at the gas station – not the oil well. The depth of Infrastructure Journal's industry data (wherein a project’s details from inception to financial close are meticulously recorded) and the resources the publication made available to me made this study possible. It was published on Wednesday, following which I went over to discuss my findings with the team of CNBC’s Squawk Box Europe.

I told CNBC (click to watch) that my findings suggest activity in private or public sector finance for oil refinery projects, hitherto a very cyclical and capital-intensive industry currently facing poor margins, is likely to remain muted, a scenario which is not going to materially alter before 2012.

The evidence is clear, integrated oil companies have and will continue to divest in downstream assets particularly refineries because upstream investment culture of high risk, high rewards trumps it.

Growth in finance activity is likely to come from Asia in general and surprise, surprise India and China in particular. It is not that margins are any better in these two countries but given their respective consumers’ need for gasoline and diesel – margins become a lesser concern.

However, in the west, while refiners’ margins remain tight, new and large refinery infrastructure projects would see postponements, if not cancellations. In order to mitigate overcapacity, a number of mainly North American and European refiners or integrated companies will shutdown existing facilities, albeit quite a few of the shutdowns will be temporary.

Geoff Cutmore and Maithreyi Seetharaman probed me over what had materially changed, after all margins have always been tight? Tight yes, but my conjecture is that over the last five years they have taken a plastering. On a 2010 pricing basis, BP Statistical Review of World Energy notes that the 2009 refining average of US$4.00 per barrel fell below the 2008 figure of $6.50 per barrel; a fall of 38.5%. In fact, moving away from the average, on an annualised basis, margins fell in all regions except the US Midwest last year while margins in Singapore were barely positive.

Negative demand has in effect exasperated overcapacity both in Europe and North America. BP notes that global crude runs fell by 1.5 million bpd in 2009 with the only growth coming from India and China where several new refining capacities, either private or publicly financed, were commissioned. Its research further reveals that most of the 2 million bpd increase in global refining capacity in 2009 was also in China and India. Furthermore, global refinery utilisation fell to 81.1% last year; the lowest level since 1994.

In fact does it surprise anyone that non-OECD refinery capacity exceeded that of the OECD for the first time in 2009? It doesn’t surprise me one jot. I see this trend continuing in 2010 and what happens thereafter would depend on how many OECD existing refineries facing temporary shutdown are brought back onstream and/or if an uptick in demand is duly noted by the OECD nations. A hope for positive vibes on both fronts in the short to medium term is well...wishful thinking.

Refineries were once trophy assets for integrated oil companies but in the energy business people tend to have short memories. Alas, as I wrote for Infrastructure Journal (my current employers) and told CNBC Europe (my former employers), now they are the unloved assets of the energy business.

© Gaurav Sharma 2010. Photo 1: Gaurav Sharma on Squawk Box Europe © CNBC, Nov 10, 2010, Photo 2: Oil Refinery Billings, Montana © Gordon Wiltsie / National Geographic Society