EU’s Russian gas, who gets what & BP’s Bob

The vexing question for European Union policymakers these days is who has what level of exposure to Russian gas imports should the taps get turned off, a zero storage scenario at importing nations is assumed [hypothesis not a reality] and the Kremlin's disregard for any harm to its coffers is deemed a given [easier said than done].

Depending on whom you speak to, ranging from a European Commission mandarin to a government statistician, the figures would vary marginally but won't be any less worrying for some. The Oilholic goes by what Eurogas, a non-profit lobby group of natural gas wholesalers, retailers and distributors, has on its files.

According to its data, the 28 members of the European Union sourced 24% of their gas from Russia in 2012. Now before you say that's not too bad, yours truly would say that's not bad 'on average' for some! For instance, Estonia, Finland, Lativia and Lithuania got 100% of their gas from Russia, with Bulgaria, Hungary and Slovakia not far behind having imported 80% or more of their requirements at the Kremlin's grace and favour.

On the other hand, Belgium, Croatia, Denmark, Ireland, Netherlands, Portugal, Spain, Sweden and the UK have nothing to worry about as they import nothing or negligible amounts from Russia. Everyone in between the two ends, especially Germany with a 37% exposure, also has a major cause for concern.

And it is why Europe can't speak with one voice over the Ukrainian standoff. In any case, the EU sanctions are laughable and even a further squeeze won't have any short term impact on Russia. A contact at Moody's says the Central Bank of the Russian Federation has more than enough foreign currency reserves to virtually guarantee there is no medium term shortage of foreign currency in the country. Industry estimates, cited by the agency, seem to put the central bank's holdings at just above US$435 billion. EU members should know as they contributed handsomely to Russia's trade surplus!

Meanwhile, BP boss Bob Dudley is making a habit of diving into swirling geopolitical pools. Last November, Dudley joined Iraqi Oil Minister Abdul Kareem al-Luaibi for a controversial visit to the Kirkuk oilfield; the subject of a dispute between Baghdad and Iraqi Kurdistan. While Dudley's boys have a deal with the Iraqi Federal government for the oilfield, the Kurds frown upon it and administer chunks of the field themselves to which BP will no access to.

Now Dudley has waded into the Ukrainian standoff by claiming BP could act as a bridge between Russia and the West. Wow, what did one miss? The whole episode goes something like this. Last week, BP's shareholders quizzed Dudley about the company's exposure to Russia and its near 20% stake in Rosneft, the country's state-owned behemoth.

In response, Dudley quipped: "We will seek to pursue our business activities mindful that the mutual dependency between Russia as an energy supplier and Europe as an energy consumer has been an important source of security and engagement for both parties for many decades. We play an important role as a bridge."

"Neither side can just turn this off…none of us know what can happen in Ukraine," said the man who departed Russia in a huff in 2008 when things at TNK-BP turned sour, but now has a seat on Rosneft's board.

While Dudley's sudden quote on the crisis is surprising, the response of BP's shareholders in recent weeks has been pretty predictable. Russia accounts for over 25% of the company's global output in barrels of oil equivalent per day (boepd) terms. But, in terms of booked boepd reserves, the percentage rises just a shade above 33%.

However, instead of getting spooked folks, look at the big picture – according to the latest financials, in petrodollar terms, BP's Russian exposure is in the same investment circa as Angola and Azerbaijan ($15 billion plus), but well short of anything compared to its investment exposure in the US.

Sticking with the  crudely geopolitical theme, this blogger doesn't always agree with what the Henry Jackson Society (HJS) has to say, but its recent research strikes a poignant chord with what yours truly wrote last week on the Libyan situation.

The society's report titled - Arab Spring: An Assessment Three Years On (click to download here) - noted that despite high hopes for democracy, human rights and long awaited freedoms, the overall situation on the ground is worse off than before the Arab Spring uprisings.

For instance, Libyan oil production has dramatically fallen by 80% as neighbouring Tunisia's economy is now dependent on international aid. Egypt's economy, suffering from a substantial decrease in tourism, has hit its lowest point in decades, while at the same time Yemen's rate of poverty is at an all-time high.

Furthermore, extremist and fundamentalist activity is rising in all surveyed states, with a worrying growth in terror activities across the region. As for democracy, HJS says while Tunisia has been progressing towards reform, Libya's movement towards democracy has failed with militias now effectively controlling the state. Egypt remains politically highly-unstable and polarised, as Yemen's botched attempts at unifying the government has left many political splits and scars.

Moving on to headline crude oil prices, both benchmarks have closed the gap, with the spread in favour of Brent lurking around a $5 per barrel premium. That said, supply-side fundamentals for both benchmarks haven't materially altered; it's the geopolitical froth that's gotten frothier. No exaggeration, but we're possibly looking at a risk premium of at least $10 per barrel, as quite frankly no one knows where the latest Eastern Ukrainian flare-up is going and what might happen next.

Amidst this, the US EIA expects the WTI to average $95.60 per barrel this year, up from its previous forecast of $95.33. The agency also expects Brent to average $104.88, down 4 cents from an earlier forecast. Both averages and the Brent-WTI spread are within the Oilholic's forecast range for 2014. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: Sullom Voe Terminal, UK © BP

The Kurdish question & a ‘Dudley’ sin?

The autonomous region of Kurdistan within Iraq's borders is drawing 'crude' headlines yet again. It's that old row about who controls what and gives rights for E&P activity in the region – the Federal administration in Baghdad or the provincial administration in Erbil?

 

The historical context is provided by Gulf War I, when allied forces imposed a no-fly zone, and the Kurds subsequently pushed Saddam Hussein's forces back outside the provincial border. That was 1991, this is 2013 – a lot has changed for Iraq, but one thing hasn't – Iraqi Kurdistan is as autonomous today, as it was back then.

 

In fact, it is more prosperous and an oasis of calm compared to the rest of the Federal state. One simple measure is that the rest of Iraq ravaged by sectarian conflict and Gulf War II still only provides its citizens with about an average of 6 to 7 hours of electricity per day. The average resident of Erbil gets 22 hours and sees infrastructural spending all around, driven by targeted revenue from oil and gas licensing and exports.

Since 2006, the Kurdistan Regional Government (KRG) has been granting rights for exploration within its borders to firms from Norway to the US, with much gusto and on better terms, many say, than the Federal administration in Baghdad. The Iraqi government in turn says KRG has no right to do so.

 

Mutual consternation came to a head in January when BP and Baghdad reached an agreement to revitalise the northern Kirkuk oilfield. Since jurisdictional mandate over the oilfield and the city is hotly contested by both sides, KRG declared the deal to be illegal on grounds that it was not consulted.

 

Firing a return salvo, Iraqi Oil Minister Abdul Kareem al-Luaibi called the production and export of oil from Kurdistan to be an act of "smuggling" and threatened to cut the region's [17%] spending allocation from the federal budget as well as take legal action against Western firms digging up Kurdistan, beginning with London-listed Genel Energy (the first such firm to export from the region).

Neither Genel Energy nor the administration paid heed to that threat. Baghdad and BP did likewise with KRG's moans over Kirkuk. Then the US State Department issued an advisory to all American oil firms operating in Kurdistan that they could be liable for legal damages from Baghdad. Doubtless, the rather handsomely rewarded legal eagles at their end advised them not to worry too much.

An "as-you-were" lull lasted for roughly 10 months, when last week in an extraordinary development, Bob Dudley, CEO of BP, joined al-Luaibi and officials from the Iraqi state-run North Oil Company to pay a controversial visit to the Kirkuk oilfield in a show of support. Why Dudley took the decision to go himself instead of sending a deputy is puzzling and paradoxically a bit obvious as well.

 

In making an appearance himself, Dudley wanted to show how important the Kirkuk deal is. Yet a deputy of his would have drawn a similar two-fingered gesture from KRG, as his visit did. Playing it cool, a source at BP said its only intention is to revive production at Kirkuk, an oilfield which at the turn of millennium saw an output of 900,000 barrels per day (bpd), but can barely manage less than a third of it today.

 

BP has the technical know-how to improve the field's output, but how it will extricate itself from the quagmire of the area's politics is anybody's guess. An Abu Dhabi based source says both sides are entrenched at Kirkuk. BP will have access to the Federally-administered side of the Kirkuk field, namely the Baba and Avana geological formations. But one formation – Khurmala – is inside the Kurdish provincial borders and being is developed by the KAR group.

 

Furthermore, there is another twist in the linear fight between Baghdad and Erbil – Kirkuk's governor Najimeldin Kareem, a man of Kurdish origin, has backed the Federal deal with BP. Dudley left the oilfield without saying anything concrete on record, leaving it to the Iraqis to do most of the talking.

 

The Iraqi Oil Ministry chose to describe Kareem's backing "as securing the complete support from the local government of Kirkuk" in order to commence developing Kirkuk. Hmm…but whose Kirkuk is it anyway? The primary beneficiary of Kurdish oil exports is Turkey; the closest market where the aforementioned Genel Energy delivers most of its output to.

 

Where the tussle will lead to is unpredictable – but it hasn't deterred either BP from signing up a deal with Baghdad or the likes of ExxonMobil, Chevron and Total with Erbil. This brings us back to why Dudley went himself – well, when his peers such as Rex Tillerson, ExxonMobil's boss, have showed-up in Erbil, there was perhaps little choice left. If the regional politics goes out of control, the bosses of oil firms would have only themselves to blame for getting so close to the Iraqi wrangles most say they are least interested in.

 

At the centre of it all is the thirst for black gold. KRG is providing generous production sharing and contract conditions within its autonomous borders, while Baghdad has quite possibly given equally generous terms to BP for Kirkuk. The oil major has already announced a US$100 million investment in the oilfield.

 

Giving KRG the last word in the verbal melee – in September 2012, even before the recent salvos had been fired in earnest and the CEOs had come calling, Ashti Hawrami, Minister for Natural Resources of KRG, said something rather blunt on BBC’s Hard Talk programme which explains it all: "To put it politely, if I have million barrels of oil to produce in two years time, the market needs it, Iraq needs it and at the end of the day we are going to win that battle."

 

There are 50 plus firms already helping him achieve that objective. With geological surveys projecting that Kurdistan potentially has 45 billion barrels of the crude stuff, many of these firms are working with the KRG contrary to advice given by their own governments.

 

And as if to rub it in further into his Federal counterpart, Hawrami quipped, "Kurdistan's investment and spending plans are more structured…Why is Baghdad buying F-16s when Iraqis have little more than 4 hours of electricity per day on average [much worse than the inhabitants of Iraqi Kurdistan]." OUCH!

 

Moving away from Iraqi politics, Brent's $106 per barrel floor has not only been breached, but was smashed big time last week. As noted, hedge funds are indeed feeling the pinch, for instance high-flier Andy Hall's $4 billion baby – Astenbeck Capital Management.

 

According to Reuters, Astenbeck is down 5% as of Oct-end, largely due to the slump in Brent prices. Even though Hall's team have diversified into palladium, platinum and soft commodities, it'd be remarkable if the fund is able to avoid its first annual loss in six years. However, one shouldn't be too hard on Astenbeck as the average energy fund on Chicago's Hedge Fund Research Index, is down 4.45%. 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: Exploration site in Kurdistan © Genel Energy plc