Gazing at DJ Basin’s ‘Shale Gale’ with Highlands Natural Resources

Last month, the Oilholic headed stateside to get a 'crude' glimpse of drilling activity in the Denver Julesburg or 'DJ' Basin in Colorado; this blogger's first visit to the region. The basin has been a key hydrocarbon producing region of the US since 1901. Over a century later, it's still going strong courtesy of the state of Colorado's very own 'Shale Gale.' 

Colorado's legislative climate might be a bit onerous compared to Texas, but the basin still remains a relatively benign place for exploration and production, and yes the oil majors are all there poking around the place.

Also, what won't surprise regular readers of this blog one bit is that regional activity is being bolstered by - you guessed it - the independent upstarts, or new-age shale wildcatters as the Oilholic prefers to call them. 

In this august group is London-listed Highlands Natural Resources (HNR), the brainchild of entrepreneur and local oilman Robert Price, and his close-knit group of geologists, engineers, financiers and consultants. The company's simple but effective motto – in Price's own words – is to deliver projects "safely, on time and on budget."

The company has farmed out acreage from ConocoPhillips out in East Denver, is not only trialling Halliburton's cost and process optimising Integrated Asset Management (IAM) suite of techniques to the fullest, but also has a stake in its operations from the global oilfield services company itself; a rather unique scenario. 

HNR's site in the Lowry Bombing Range, East Denver (see above left), visited by this blogger in Price's company, sees just the sort of savvy operations predicated on big data that we often hear about in the popular press. For example, in an area where players are attempting to drill 16 or 24 wells in the same pad, Domingo Mata, HNR's Vice President of Engineering, says his company has opted for 8 wells, as studies have convinced the management that fewer wells will provide a better yield.

"We also keep an eye on the minutiae of the drilling process via a plethora of sensors. That's how we gather data and learn lessons from the drilling process in the case of each well, and bring about a sequential reduction in drilling times by improving upon past processes based on what the data revealed about the last round of works," Mata adds.

In some cases, that drilling time has come down to 10-14 days; and we're talking depths in the range of 17,000 to 19,000 feet. Price says optimised operations are the bedrock of his company and together with his chief geologist Paul Mendell, HNR is "astute and prudent" in managing its exposure to what has been, is, and will always remain, a high risk, high reward business. 

On the East Denver site the Oilholic had a walkabout, HNR now has a 7.5% carried interest in first 8 wells to produce at the project with additional upside potential to own 7.5% interest in up to 24 wells at no extra cost. The arrangement is boosted by a strong working relationship with majority holder True Oil. 

The site carries a potential yield of 5,000 barrels per day (bpd) of one of the sweetest and best crudes (see right) this blogger has seen since a visit to Oman back in 2013. The product is currently being brought to market via tanker trucks, but will soon be hooked up to ConocoPhillips' pipeline infrastructure. 

And HNR has received £2.9 million of income during four months up to 31 March 2018 from just two wells – Powell and Wildhorse – which sit in the top 3% of all horizontal DJ Basin (Niobrara) wells in Colorado. 

Not wanting to sit on its existing plays, the company is now eyeing West Denver prospects. HNR owns a direct 100% working interest in leases covering 2,721 acres in the area, where Price reckons his team, partners, contractors and affiliates can collaboratively drill at least 48 wells.

What's more the surface area is largely free of urban development and consolidated into closely grouped parcels, and may allow HNR to move through Colorado's permitting and development processes quicker relative other statewide plays.  

Price and Mendell have also made it their mission to diversify HNR. The company is looking to market and monetise its DT Ultravert technology for enhanced oil recovery, which it claims will help the wider industry achieve at least a 15% increase in production. 

It has been proven to prevent 'well bashing' in horizontal and vertical wells. If the monetisation of DT Ultravert takes off, it could be a game-changer for the company, which is incidentally also in the business of Helium and Nitrogen plays.

All things considered, could Team HNR be described as 'Shale Gale' mavericks? "I think prudent, efficient, low-risk operators would be what I'd humbly describe us as," says Price. Well there you have it folks! It was a pleasure exchanging views with Team HNR (above) and seeing what they are up to.

Depending on whom you rely on, ranging from the US Energy Information Administration's projections to estimates by the likes of Anadarko Petroleum, the DJ basin could hold up to 4.5-5 billion barrels of oil equivalent for viable extraction (including natural gas liquids). 

That suggests there's plenty going around for the likes of HNR to continue tapping away at the reserves in their own cost optimised way. So here's to ingenuity and the spirit of private enterprise that has come to symbolise the shale revolution. That's all for the moment; keep reading, keep it ‘crude’!

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© Gaurav Sharma 2018. Photo I: Highlands Natural Resources' East Denver drilling site. Photo II: Glimpse of Denver light sweet crude produced by Highlands Natural Resources. Photo III: (Left to Right) Gaurav Sharma with Robert Price, CEO & Chairman, Highlands Natural Resources, and Domingo Mata, Vice President of Engineering, Highlands Natural Resources © Gaurav Sharma, 2018.

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

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

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

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

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

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

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

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

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

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

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The subtle rise of the OFS innovators

Going back to the turn of 1990s, vertical drilling or forcing the drill bit down a carefully monitored well-shaft into a gentle arc was the best E&P companies could hope from contractors in their quest for black gold.

That’s until those innovators at Oilfield Services (OFS) firms - the guys who often escape notice despite having done much of heavy work involved in prospection and extraction - came up with commercially viable ways for directional drilling. The technique, which involves drilling several feet vertically before turning and continuing horizontally thus maximising the extraction potential of the find, transformed the industry. But more importantly, it transformed the fortunes of the innovators too.

The Oilholic has put some thought into how 21st century OFS firms ought to be classified, if a linear examination by market capitalisation and size is ignored for a moment. After acquiring gradual industry prominence from the 1970s onwards, OFS firms these days could be broadly grouped into three tiers.

The first tier would be the makers and sellers of equipment used in onshore or offshore drilling. Some examples include Cameron International, FMC Technologies and National Oilwell Varco with a market capitalisation in the range of US$10 billion to $30 billion. Then come the 'makers-plus' who also own and lease drill rigs – for example Seadrill, Noble and Transocean with a market cap in a similar sort of a range.

 

And finally there are the big three 'full service' OFS companies Baker Hughes, Halliburton and the world’s largest – Schlumberger. The latter has a market cap of $110 billion plus, last time the Oilholic checked. That’s more than double that of its nearest rival Halliburton. Quite literally, Schlumberger's market cap could give many big oil companies a run for their money. However, if someone told you back in the 1980s that this would be the case in August 2013 – you could be excused for thinking the claimant was on moonshine!

 

The reason for the rise of OFS firms is that their innovation has been accompanied by growing global resource nationalism and maturing wells. The path to prosperity for the services sector began with low margin drilling work in the 1980s and 1990s being outsourced to them by the IOCs. Decades on, the firms continue to benefit from historical partnerships with the oil majors (and minors) aimed at maximising production at mature wells alongside new projects.

 

However, with a rise in resource nationalism, while NOCs often prefer to keep IOCs at arm's length, the same does not apply to OFS firms. Instead, many NOCs choose to project manage exploration sites themselves with the technical know-how from OFS firms. In short, the innovators are currently enjoying, in their own understated way, the best of both worlds! Unconventional prospection from deepwater drilling to the Arctic is an added bonus.

 

If you excluded all of North America, drilling activity is at a three-decade high, according to the IEA and available rig data trends. The Baker Hughes rig count outside North America climbed to 1,333 in June, the highest level in 30 years. Presenting his company’s seventh straight quarterly profit last month, a beaming Paal Kibsgaard, chief executive of Schlumberger, named China, Australia, Saudi Arabia and Iraq among his key markets.

 

Of the four countries named by Kibsgaard, Australia is the only exception where an NOC doesn’t rule the roost, vindicating the Oilholic’s conjecture about the benefits of resource nationalism for OFS firms.

 

Rival Halliburton also flagged up its increased activity and sales in Malaysia, China and Angola and added that it is banking on a second half bounceback in Latin America this year. By contrast, Baker Hughes reported a [45%] fall in second quarter profit, mainly due to weak margins in North America, given the gas glut stateside.

 

Resource nationalism aside, OFS players still continue (and will continue) to maintain healthy partnerships with the IOCs. None of the big three have shown any inclination of owning oil & gas reserves and most of the big players say they never will.

 

Some have small equity stakes here and a performance based contract there. However, this is some way short of ownership. Besides, if there is one thing the OFS players don’t want – it's taking asset risk on their balance sheets in a way the likes of Shell and ExxonMobil do and are pretty good at.

 

Furthermore, the IOCs are major OFS clients. Why would you want to upset your oldest clients, a relationship that is working so well even as the wider industry is undergoing a hegemonic and technical metamorphosis?

 

Success though, does not come cheap especially as it's all about innovation. As a share of annual sales, Schlumberger spent as much on R&D as ExxonMobil, Shell and BP, did using 2010-11 exchange filings. And sometimes, unwittingly, taking the BP 2010 Gulf of Mexico oil spill as an example, the guys in background become an unwanted part of a negative story; Transocean and Halliburton could attest to that. None of this should detract observers from the huge strides made by OFS firms and the ingenuity of the pioneers of directional drilling. And there's more to come!

 

Moving on from the OFS subject, but on a related note, the Oilholic read an interesting Reuters report which suggests oil & gas shareholder activism is coming to the UK market. Many British companies, according to the agency, have ended up with significant assets, including cash, relative to their shrunken stock market value.

 

Some of these have lost favour with mainstream shareholders and are now attracting investors who want to push finance bosses and board members out, access corporate cash and force asset sales. An anonymous investment banker specialising the oil & gas business, told Reuters, rather candidly: "It's a very simple model. You don't have to take a view on the value of the actual assets or know anything about oil and gas. You just know the cash is there for the taking."

 

Finally, linked here is an interesting Bloomberg report on how much the Über-environmentally friendly Al Gore is worth and what he is up to these days. Some say he is 'Romney' rich! That's all for the moment folks! Keep reading, keep it 'crude'!

 

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo: Rig in the North Sea © BP

BP’s settlement expensive but sound

As BP received the biggest criminal fine in US history to the tune of US$4.5 billion related to the 2010 Gulf of Mexico oil spill, the Oilholic quizzed City analysts over what they made of it. Overriding sentiment of market commentators was that while a move to settle criminal charges in this way was expensive for BP, it was also a sound one for the oil giant.

 

Beginning with what we know, according to the US Department of Justice (DoJ), BP has agreed to plead guilty to eleven felony counts of misconduct or neglect of ships officers relating to the loss of 11 lives, one misdemeanour count under the Clean Water Act, one misdemeanour count under the Migratory Bird Treaty Act and one felony count of obstruction of Congress.

 

Two BP workers - Robert Kaluza and Donald Vidrine - have been indicted on manslaughter charges and an ex-manager David Rainey charged with misleading Congress according to the Associated Press. The resolution is subject to US federal court approval. The DoJ will oversee BP handover US$4 billion, including a US$1.26 billion fine as well as payments to wildlife and science organisations.

 

BP will also pay US$525 million to the US SEC spread over three years. The figure caps the previous highest criminal fine imposed on pharmaceutical firm Pfizer of US$1.2 billion. City analysts believe BP needed this settlement so that it can now focus on defending itself against pending civil cases.

 

“It was an expensive, but necessary closure that BP needed on one legal fronts of several,” said one analyst. The 2010 Deepwater Horizon disaster killed 11 workers and released millions of barrels of crude into the Gulf of Mexico which took 87 days to plug.

 

The company is expected to make a final payment of US$860 million into the US$20 billion Gulf of Mexico compensation fund by the end of the year. BP’s internal investigation about the incident had noted that, “multiple companies, work teams and circumstances were involved over time.”

 

These companies included Transocean, Halliburton, Anadarko, Moex and Weatherford. BP has settled all claims with Anadarko and Moex, its co-owners of the oil well and contractor Weatherford. It received US$5.1 billion in cash settlements from the three firms which was put into the Gulf compensation fund.

 

BP has also reached a US$7.8 billion settlement with the Plaintiffs' Steering Committee, a group of lawyers representing victims of the spill. However, the company is yet to reach a settlement with Transocean, the owner of the Deepwater Horizon rig and engineering firm Halliburton. A civil trial that will determine negligence is due to begin in New Orleans in February 2013.

 

Jeffrey Woodruff, Senior Director at Fitch Ratings, felt that the settlement was a positive move but key areas of uncertainty remained. “Although the settlement removes another aspect of legal uncertainty, it does not address Clean Water Act claims, whose size cannot yet be determined. It is therefore too early for us to consider taking a rating action,” he added.

 

Fitch said in July, when revising the company's Outlook to Positive, that BP should be able to cover its remaining legal costs without impairing its financial profile, and that a comprehensive settlement of remaining liabilities for US$15 billion or less would support an upgrade.

 

Recent asset sales have also strengthened BP's credit profile. Last month, BP posted a third quarter underlying replacement cost profit, adjusted for non-operating items and fair value accounting effects, of US$5.2 billion. The figure is down from US$5.27 billion recorded in the corresponding quarter last year but up on this year's second quarter profit of US$3.7 billion.

 

“The company has realised US$35 billion of its US$38 billion targeted asset disposal programme at end the end of the third quarter of 2012. Proceeds from the sale of its 50% stake in TNK-BP in Russia will further improve its liquidity, supporting our view that the company can meet legal costs without impairing its profile,” Woodruff concluded.

 

Meanwhile, Moody’s noted that the credit rating and outlook for Transocean (currently Baa3 negative), which is yet to settle with BP, was unaffected by the recent development.

 

Stuart Miller, Moody's Senior Credit Officer, said, "The big elephant in the room for Transocean is its potential exposure to Clean Water Act fines and penalties as owner of the Deepwater Horizon rig. The recent agreement between BP and DoJ did not address the claims under the Act."

 

However, he felt that Transocean will ultimately settle with the DoJ, and there was a good chance that the amount may be manageable given the company’s current provision level and cash balances.

 

“But if gross negligence is proven, a very high legal standard, the settlement amount could result in payments by Transocean in excess of its current provision amount,” Miller concluded.

Plenty more to unfold in this saga but that’s all for the moment folks. Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Gulf of Mexico spill containment area © BP Plc.

Farewell to India, global spills & crude pricing!

After a short trip to India, the Oilholic bids farewell to Delhi via its swanky impressive new terminal at Indira Gandhi International airport which the city's residents can be justifiably proud of. However, the financial performance of its national carrier – Air India – which is bleeding cash and could not possibly survive without government subsidy leaves a lot to be desired. Just as the Oilholic was checking in thankfully, for his British Airways flight home, news emerged that Air India had been denied jet fuel for almost four hours overnight on account of non-payment of bills.

Doubly embarrassing was the fact that those holding back fuel for the beleaguered national carrier were NOCs - Indian Oil, Bharat Petroleum and Hindustan Petroleum! Who can blame the trio, for Indian newspapers claimed that Air India owed in excess of INR 40 billion (US$812.8 million) in unpaid fuel bills.

So much so that in 2011 Indian NOCs put the airline on a “cash-and-carry” deal, requiring it to pay every time it refuelled its planes, rather than get a 90-day grace period usually given to airlines. Despite a merger with Indian Airlines in 2007, Air India continues to struggle even in a market as busy and vibrant as India where domestic, regional and international carriers are mushrooming (though not all of them successfully; just ask Kingfisher Airlines).

Away from Indian airports and airlines to crude matters, the US Eastern District Court of Louisiana issued a partial summary judgment on January 31, 2012 on BP’s indemnity obligations in wake of the Gulf of Mexico oil spill versus Halliburton’s liability. The summary states that BP must indemnify Halliburton for any third party claims related to pollution and contamination that did not arise from Halliburton's own actions. In addition, the indemnity is valid even if Halliburton is found to be grossly negligent, although the indemnity could be voided if Halliburton committed fraud. Ratings agency Moody's says the ruling is “modestly credit positive” for Halliburton and does not affect it its A2 rating with a stable outlook at this time.

Meanwhile, in an ongoing offshore spill in Nigeria, agency reports suggest that it may take Chevron around 100 days to drill a relief well at the site of a deadly blowout incident off the country’s soiled coastline last month. A Bloomberg report published in Business Week notes that another environmental catastrophe may be unfolding.

Continuing with the depressing subject of spills, Petrobras says that no more traces of oil were found in the sea during overflights carried out on Friday in the Carioca Nordeste spill site, in the Santos Basin. Therefore, in accordance with the procedures laid down in the country’s Emergency Plan, the contingency actions have been demobilised.

Petrobras says it will now only request approval to resume the Carioca Nordeste Extended Well Test after the investigation concerning the causes of the incident has been completed. The company emphasises that the rupture took place in the pipeline connecting the well to the platform. So no oil leaked at the well, which was closed automatically after the pipeline broke. As such, the incident did not take place in the pre-salt layer, which is nestled at a depth of over 2,000 meters under the seabed.

On a crude pricing note before flying home – while in India, the Oilholic notes that none of the main global equity indices have provided market direction as the weekend approaches and the Greek situation weighs heavily on investor sentiment. Amid crudely bearish trends, caution is the byword ahead of US employment data and the continuing Greek tragedy. The fact that both benchmarks - Brent and WTI - are resisting their current levels is down to the rhetoric by and on Iran. Thats all for the moment folks, keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Indira Gandhi International airport Terminal 3, Delhi, India © Gaurav Sharma 2012.

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

BP's still going ‘Beyond Petroleum’ in Houston

It is difficult to say whether Texans in general and Houstonians in particular are more irritated or more disappointed with BP. Perhaps the answer is a combination of both, but anti-British the Texans are not. Many here feel let down by the company, a sentiment which had already been on the rise following the Texas City refinery blast in March 2005. News that the company is now trying to sell the asset does not assuage that feeling here.

Many opine that when things were going horribly wrong in the Gulf of Mexico, BP could have done better, sought more cooperation from the government and not insisted it can handle things on its own. Some also blame their government of complacency for not intervening sooner and forcing BP’s hand.

Nearly a year on, while a sense of disappointment has not subsided, no one here seriously believes BP has turned its back on a lucrative American market – a withdrawal from refining and marketing ends of the business is more likely. I think it is a dead certainty from a strategic standpoint.

Now this ties in nicely to the company’s "Beyond Petroleum" campaign from a few years back. There was a fair bit of scepticism about it in England and elsewhere. However, it seems the company continues to go beyond petroleum in Houston. In 2006, BP said it would set up its alternative energy business in Houston on top of an existing solar business in Frederick, Maryland.

Five years hence and despite all what has happened, it is still going or rather has been kept going based on the 33rd floor of this city’s iconic Bank of America Center building on 700 Louisiana Street (see left). Asked about its prospects, the company did not return the Oilholics’ call. However, I visited the iconic building anyway courtesy of other occupants, especially Mayer Brown LLP, for which I am grateful.

The next 12 months are crucial for BP. Americans are a largely forgiving bunch, but as Texans say forgiving is one thing, forgetting is another matter! And many have pointed out their disgust at Transocean and Halliburton too. Unfortunately for BP – the 'crude' muck stops with them.

© Gaurav Sharma 2011. Photo: Bank of America Center, Houston, Texas, USA © Gaurav Sharma, March 2011

Eni’s Rating Downgrade & Other News

Moody's Investors Service lowered the long-term senior unsecured ratings of Eni S.p.A. (Eni) and its guaranteed subsidiaries to Aa3 from Aa2 and the senior unsecured rating of Eni USA Inc. to A1 from Aa3. In a note on Monday, it said the outlook for all ratings is stable.

Eni qualifies as a Government-Related Issuer (GRI) under Moody's methodology for such entities, given its 30.3% direct and indirect ownership by the Italian state. The downgrade reflects Moody's expectation that deleveraging process initiated by Eni management and recovery in the group's credit metrics will be gradual and unlikely to restore sufficient headroom to help underpin its business case analysis within the Aa range.

In other news, the U.S. EIA has cut its forecast for global oil demand in light of lower forecasts for global growth. EIA now expects global oil consumption to rise by 1.4 million barrels per day in 2011 against last month's projection of 1.5 million barrels. The consumption growth forecast for 2010 was unchanged at 1.6 million barrels per day.

On the pricing front, the EIA expects spot West Texas Intermediate crude prices to average US$77 a barrel in Q4 2010, down from its previous forecast of US$81. It added that crude prices are likely to climb to US$84 by the end of 2011.

Meanwhile, as you know, BP published its internal report into the Deepwater Horizon rig explosion in the Gulf of Mexico and the resultant oil spill last week. Given the ol’ day job of mine, I wanted to read it cover to cover – all 193 pages of it – before blogging about it. Having finally read it, goes without saying the oil giant is stressing on the fact that a "sequence" of failures caused the tragedy for which a "number of parties" were responsible. (To be read as Transocean and Halliburton)

In the report, conducted by BP's head of safety Mark Bly, the oil giant noted eight key failures that collectively led to the explosion. Most notably, BP said that both its staff as well and Transocean staff interpreted a safety test reading incorrectly "over a 40-minute period" which should have flagged up risks of a blowout and action could have been taken on the influx of hydrocarbons into the well.

BP was also critical of the cementing of the well - carried out by Halliburton - and the well’s blowout preventer. The report also notes that improved engineering rigour, cement testing and communication of risk by Halliburton could have identified flaws in cement design and testing, quality assurance and risk assessment.

It added that a Transocean rig crew and a team working for Halliburton Sperry Sun may have been distracted by "end-of-well activities" and important monitoring was not carried out for more than seven hours as a consequence.

Furthermore, BP said that there were "no indications" Transocean had tested intervention systems at the surface as was required by its company policy before they were deployed on the well. Crew may have had more time to respond before the explosion if they had diverted escaping fluids overboard, the report added.

BP’s outgoing Chief Executive Tony Hayward said, “To put it simply, there was a bad cement job and a failure of the shoe track barrier at the bottom of the well, which let hydrocarbons from the reservoir into the production casing. The negative pressure test was accepted when it should not have been, there were failures in well control procedures and in the blowout preventer; and the rig's fire and gas system did not prevent ignition.”

So there we have it – the oil giant is not absolving itself of the blame, but rather spreading it around. It came as no major surprise that both Halliburton and Transocean criticised and dismissed the report - though not necessarily in that order. The story is unlikely to go away as a national commission is expected to submit a report to President Barack Obama by mid-January 2011 followed by a Congressional investigation. The U.S. Justice department may yet step in as well if evidence of criminal wrongdoing of some sort emerges.

Away from the BP spill saga, French energy giant Total said last week that it could sell its 480 petrol stations in the UK as part of a strategic review of its British downstream operations as it refocuses on its core upstream strength and well something had to give.

© Gaurav Sharma 2010. Photo: US Oil rig © Rich Reid / National Geographic Society

Yachting, Golfing & Blogging after BP's Oil-spill

As the BP-spill, its containment, aftermath, costs and impact on the industry are scrutinised from all possible angles, side issues which dominate the headlines are about as farcical as they can be. It emerged on June 20 that BP’s egregious CEO Tony Hayward took a break from overlooking the Gulf of Mexico oil spill and committing a series of PR disasters, to spend a day with his teenage son on Father’s day, yachting off the “pristine” (as many American media outlets stress) coast of the UK.

US politicians never loathe showing false anger and lost no time in criticising him, with the charge being led by White House Chief of Staff Rahm Emanuel. However, it then emerged that President Obama, carted off for a few rounds of golf taking the Vice-President along for the ride, that’s after attending a baseball game for good measure. This enabled his opponents to level the same criticism at him and made his Chief of staff look like a jack-ass (as if he needed any help in that department).

Blogger Scott Coen asked why different rules should apply for both men facing criticism for the handling of the ongoing spill? As did UK's Telegraph newspaper. Republican Party Chairman Michael Steele couldn’t agree more putting in his two bits worth. Some were busy revealing how much in political campaign donations had President Obama taken from BP. Turns out he's on top of the pile. Wonder if they will even exchange Christmas cards this year.

Yours truly also felt the need to go beyond his own blog – say a thing or two on BBC reporter Robert Peston and Mark Mardell Blogs. (Click image icons below for text)

As everyone big or small exchanges hot air, tragically the oil spill is far from being plugged amid worries that Tropical storm Alex might hit the spill area this week thereby hampering containment operations.

© Gaurav Sharma 2010. Photo Courtesy © BBC

A Bashed-up BP and a Desperate President

Just how much political capital is worth is one tough question? President Obama is playing a strange and desperate game in his repetitive bashing of BP over the Deepwater Horizon oil spill. A clear strategy seems to be emerging – whenever the President feels the heat, he calculates that a rant (sprinkled with real or staged anger) against BP will help. It makes for good political theatre and to a certain extent it plays out well to an American audience. Having trawled the blogosphere as well as key US news reports, I found very little, if any, mention of Transocean or Halliburton or the fact that it was a rig built, operated and managed by Americans.

Obama can’t bash BP and see all of the pain being felt across the Pond. As many commentators on either side of the Atlantic, including the BBC’s Business Editor Robert Peston, have noted nearly 40% of its shares are held in the US. The financial pain will and perhaps already is being felt in Britain – whether we’re talking pension funds or investment trust ISAs. But the Brit’s wallets, Gulf Coastline Residents and wildlife would not be the only ones to suffer.

Long-term investors are not panicking (yet!) according to my investigations. If anything, from what I hear in the City, many opine now would be a “good time to buy BP shares” on the cheap. One mute point is that crude oil is trading in the circa of US$71 – 77 per barrel in recent weeks. It stood at $74-plus levels the last time I checked. It is not as if crude futures are trading at sub $10 levels, and the US is the only market BP operates in?

I would stress that no one denies the Deepwater Horizon Gulf oil spill is an appalling tragedy in more ways than one. However, drilling in the Gulf is crucial for the energy security of the United States. Obama acknowledged just as much in a speech in March prior to this incident. This morning the International Energy Agency (IEA) opined that a long-term impact on future off-shore supply was unlikely in wake of the incident.

“The longer-lasting impact of Deepwater Horizon on U.S. oil supplies may depend on whether operational negligence on the part of companies or regulators, or rather shortcomings in current operating procedures and regulatory structures, were the key cause. The former might suggest a less profound impact on future oil supply than the latter,” the agency said.

Additionally, the IEA made another interesting comment. It said the US government was now belatedly following the steps taken by the UK after the Piper Alpha disaster (1988) - but noted that scores of new offshore fields were developed in the subsequent demand.

In the interim, what’s influencing markets’ sentiment about BP momentarily is that both the US President and the company’s executives sound desperate given the battering they’ve taken in recent weeks. Neither is helping either which is a real shame.

© Gaurav Sharma 2010. Logo Courtesy © BP Plc