By ‘George’! In shale we (Brits) trust?

Delivering his 2013 budget speech on March 20, UK Chancellor of the Exchequer George Osborne told a boisterous bunch of British parliamentarians that "shale gas is part of the future and we will make it happen."

 

He added that the government will publish guidelines by June which would set out how local communities could benefit from “their” unconventional gas resources. The UK lifted a temporary moratorium on shale gas fracking in December 2012 after much procrastination.

 

At the time, it was announced that the government would establish a new Office for Unconventional Gas with an emphasis on shale gas and coal-bed methane and the role they could play in meeting the country's energy demand. If anyone doubted the UK government’s intent when it comes to shale prospection, this is your answer. Sadly, intent alone will not trigger a shale revolution.

 

The Oilholic has always maintained that a swift British replication, or for that matter a wider European replication, of a US fracking heaven is unlikely and not just because there isn’t a one size fits all model to employ.

 

The shale bonanza stateside is no geological fluke; rather it bottles down to a combination of geology, tenacity and inventiveness. Add to that a less dense population than the British Isles, a largely conducive legislative and environmental framework, and a far superior pipeline network and access equation.

 

Furthermore, as Chatham House fellow Prof. Paul Stevens pointed out last week, “The American shale revolution got where it is today through massive investment, commitment towards research and development and over two decades of perseverance. I don’t see that level of commitment here.” Neither does the Oilholic.

 

Agreeing with Stevens is Dr. Tim Fox, head of energy and environment at the UK Institution of Mechanical Engineers, who opined that it was important for government not to see shale gas as the “silver bullet many claim it is”.

 

“Shale gas is unlikely to impact greatly on energy prices in the UK and we must avoid becoming hostage to volatile gas markets by not being over-reliant on gas,” he added.

 

Well at least the Chancellor is trying to do something and you can’t beat a man down for that. Especially as that is not the only thing he’s trying on the energy front. Addressing the subject of decommissioning in the North Sea, Osborne said the government would enter into contracts with companies in the sector operating in the offshore region to provide "certainty" over tax relief measures.

 

The proposals are also designed to allow the tax effect of decommissioning costs to be sufficiently certain to allow companies to move to a post tax calculation in field security agreements. Andrew Lister, energy tax partner at KPMG, notes, "With hundreds of such agreements in the North Sea it will take many months to understand whether the proposals have had the desired result of freeing up capital and making late life assets more attractive for new investors."

 

"Nonetheless, the oil & gas industry in the North Sea – having endured the shock tax announced in the Budget two years ago – will welcome the announcements on decommissioning certainty, which should support extraction of the UK’s precious oil resources to the tune of billions. Certainty on tax relief for decommissioning costs will encourage companies to invest in the North Sea as the proposals should provide the assurance companies have been wanting on the availability of tax deductions," he added.

 

Osborne also revealed the two successful bidders for the government’s £1 billion support for Carbon Capture and Storage (CC&S) projects as – the Peterhead Project in Aberdeenshire and the White Rose Project in Yorkshire. Away from the direct fiscal measures, one particular move made by the Chancellor also has implications for the energy sector.

 

He pledged to abolish the stamp duty levied on small company shares traded on markets such as the London Stock Exchange's AiM, to end what he described as a "perceived bias" in the tax system "favouring debt financing over equity investment". You could hear the cheers in the City within minutes of the announcement.

 

The London Stock Exchange, for its part, described the move as a “bold and decisive growth-orientated policy…” to which the Oilholic would add, “a policy that would improve the take-up of shares in small independent oil & gas upstarts who often list on the AiM.”

 

Finally, moving away from the UK budget, but sticking with Parliament, the Oilholic recently had the pleasure of meeting and interviewing Margaret Hodge MP, chair of the UK public accounts committee, for CFO World (for the full interview click here). This veteran parliamentarian has taken upon herself and her committee to make the issue of corporate tax avoidance a mainstream subject in the UK.

 

Ever since it emerged last year that the likes of Starbucks, Amazon and many others were employing aggressive tax avoidance schemes to mitigate their British tax exposure, Hodge has been on the case. They quipped "we’re not doing anything illegal", she famously quipped back, "we’re not accusing you of being illegal; we’re accusing you of being immoral!"

 

End result, we’ve got everyone from the OECD to the G8 discussing corporate tax avoidance. And oh – Starbucks are 'voluntarily' paying more tax in the UK too! That’s all for the moment folks! Keep reading, keep it ‘crude’! 

 

To follow The Oilholic on Twitter click here.

 

To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo 1: Big Ben and the Houses of Parliament, London, UK © Gaurav Sharma. Photo 2: Margaret Hodge MP, chair of the UK public accounts committee (left) with the Oilholic (right) © Gaurav Sharma.

Looming embargo on Iran, Nigeria & few other bits

An EU ban on Iranian crude imports in response to the country’s continued nuclear programme is imminent but not immediate or so the City analysts and government sources would have you believe. Furthermore, news agency Bloomberg adds that the planned embargo is likely to be delayed by up to six months as European governments scramble to seek alternative sources.

The Japanese and Indian governments are also looking to reduce dependence on Iranian imports according to broadcasts from both countries while OPEC has indicated that it does not wish to be involved in row. Add the ongoing threats strike threats by Nigeria’s largest oil workers union, the Pengassan, as well the second largest, Nupeng, and political tension in the country to the Iranian situation and you don’t need the Oilholic to tell you that the short term risk premium is going mildly barmy.

It is nearly the end of the week and both benchmarks have rebounded with City analysts forecasting short term bullishness. With everyone scrambling for alternative sources, pressure is rising on already tight supply conditions notes Sucden Financial analyst Jack Pollard. “With the near-term geopolitical risk premium being priced in, Brent’s backwardation looks fairly assured as the front spreads continue to widen. Well-bid Italian and Spanish auctions have no doubt supported risk appetite, as the US dollar tracks back to lend upward pressure on commodities,” he adds.

When the Oilholic checked on Thursday, the Brent forward month futurex contract was resisting the US$110 per barrel level while WTI was resisting the US$99 level sandwiched between a bearish IEA report and geopolitical football. The next few weeks would surely be interesting.

Away from crude pricing, to a few corporate stories, ratings agency Moody’s has affirmed LSE-listed Indian natural resources company Vedanta Resources Plc's Corporate Family Rating of Ba1 but has lowered the Senior Unsecured Bond Rating to Ba3 from Ba2. The outlook on both ratings is maintained at negative following the completion of the acquisition of a controlling stake in Cairn India, on December 8, 2011.

Since announcing the move in August 2010, Vedanta has successfully negotiated the course of approvals, objections and amended production contract arrangements and now holds 38.5% of Cairn India directly, with a further 20% of the company held by Sesa Goa Ltd., Vedanta's 55.1%-owned subsidiary.

Moody’s believes the acquisition of Cairn India should considerably enhance Vedanta's EBITDA, but the agency is concerned with the sharply higher debt burden placed on the Parent company. In order to lift its stake from 28.5% to 58.5%, Vedanta drew US$2.78 billion from its pre-arranged acquisition facilities. Coupled with the issue of US$1.65 billion of bonds in June 2011, debt at the Parent company level is now in excess of US$9 billion on a pro forma basis. This compares with a reported Parent equity of US$1 billion at FYE March 2011.

Moving on, Venezuelan oil minister Rafael Ramírez said earlier this week that his country had decided to compensate ExxonMobil for up to US$250 million after President Hugo Chávez nationalised all resources in 2007. Earlier this month the International Chamber of Commerce in Paris, already stated that the country must pay Exxon Mobil a total of US$907 million, which after numerous reductions results in - well US$250 million.

Elsewhere, law firm Herbert Smith has been advising HSBC Bank Plc and HSBC Bank (Egypt) on a US$50 million financing for the IPR group of companies, to refinance existing facilities and to finance the ongoing development of IPR's petroleum assets in Egypt – one of a limited number of financings in the project finance space in Egypt since the revolution. It follows four other recent financings for oil and gas assets in Egypt on which Herbert Smith has advised namely – Sea Dragon Energy, Pico Petroleum, Perenco Petroleum and TransGlobe Energy.

On a closing note and sticking with law firms, McDermott Will & Emery has launched a new energy business blog – Energy Business Law – which according to a media communiqué will provide updates on energy law developments, and insights into the evolving regulatory, business, tax and legal issues affecting the US and international energy markets and how stakeholders might respond. The Oilholic applauds MWE for entering the energy blogosphere and hopes others in the legal community will follow suit to enliven the debate. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Pipeline, South Asia © Cairn Energy.

Greece isn’t hitting crude on a standalone basis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

IOC’s bonds, Dragon's shares & Shell’s spill

The Indian Oil Corporation Ltd (IOC) issued its much talked about bonds to the tune of US$500 million last week, with a 5.625% rate due in 2021 to fund ongoing and future domestic projects. Banking on the premise of burgeoning demand among other metrics, ratings agency Moody’s gave it a Baa3 rating with a stable outlook.

Through its 10 refineries with a combined capacity of 1.2 million barrels a day, IOC is India’s largest downstream company with a near 40% market share. While it is a publicly listed company, the Indian government owns 78.92% of it. From an Indian majority state-owned behemoth to a LSE-listed upstream company 51% owned by the government of the Emirate of Dubai – Dragon Oil – which was brought to the Oilholic’s attention recently.

Dragon’s share price is nowhere near its own 52-week high of 609p, but past few trading sessions following its H1 interim results have seen its price rise nearly 4% or 20p on average to about 490p in a decidedly bearish environment. (For the record, it is not the biggest LSE-listed riser of the day – that accolade goes to Heritage Oil but that’s a story for another day).

Question is do you buy it? Examining past performance seems to suggest so and Dragon has recorded a 25% average (gross) production growth for H1 2011. Furthermore, the upstream co has set itself a rather ambitious production growth target of 20% on an annualised basis for the year.

For 2011-2013, the company seeks to maintain target of average annual production growth in the range of 10% to 15%. Away from production projections and by force of habit the Oilholic always looks at the EPS which is up 125% year over year for the first half of this year. Additionally, it remains a takeover target for the majority owners (among others).

The Dragon’s central plank or prized asset is prospection in the Cheleken, an offshore Turkmen jurisdictional area in the eastern section of the Caspian Sea. This can be further narrowed down to an operational focus on the re-development of two oil-producing fields - Dzheitune (Lam) and Dzhygalybeg (Zhdanov).

On the ground Dragon looks promising; on paper it looks a shade one-dimensional. From an investor’s standpoint, that would make its shares a reasonable medium term investment. The Oilholic is always partial to the idea of going long; hence Dragon’s shares are appealing within reason.

Moving on to an offshore story of a grave kind, Royal Dutch Shell confirmed that a leak in a flow line leading to the Gannet Alpha oil platform, east of Aberdeen, Scotland, found on Wednesday is “under control with leakage considerably reduced.” According to local sources, a Remote-Operated Vehicle (ROV) has been deployed for inspection checks and to monitor the subsea leak.

Admittedly not much is coming out in terms of information, except for Shell’s claims that the oil would disperse naturally and not reach the UK coastline. The Oilholic finds the lack of information to be frustrating and sincerely hopes Shell is not doing a BP style “underestimation”. At this point there is no reason to believe that is the case.

Finally, both WTI and Brent are in the green up 1.83% and 1.31% in intraday at 15:15GMT. The bears are still in Crude town, but quite possibly taking a breather after last week’s mauling, or as Commerzbank analysts note, “Even if the short term trough appears to be reached, weak physical demand should keep oil prices in check.”

Update 16:45 GMT: Latest estimates from Shell’s press office suggest 216 tonnes or 1,300 barrels had been spilled.

Update 10:30 GMT, Aug 16: Shell says additional leakage has been discovered in the flow line beneath Gannet Alpha platform

© Gaurav Sharma 2011. Photo: Dzheitune Lam Platform B © Dragon Oil Plc.

Crude mood swings, contagion & plenty of chatter

There is a lot going on at the moment for commentators to easily and conveniently adopt a bearish short term stance on the price of crude. Take the dismal US jobs data, Greek crisis, Irish ratings downgrade and fears of contagion to begin with. Combine this with a relatively stronger dollar, end of QE2 liquidity injections, the finances of Chinese local authorities and then some 50-odd Chinese corporates being questioned and finally the US political standoff with all eyes on the Aug 2 deal deadline or the unthinkable.

Additionally, everyone is second guessing what crude price the Saudis would be comfortable with and MENA supply fears are easing. Quite frankly, all of these factors may collectively do more for the cause of those wishing for bearish trends than the IEA’s announcement last month – no not the one about the Golden Age of gas, but the one about it being imperative to raid strategic petroleum reserves in order to ‘curb’ rising prices! The Oilholic remains bullish and is even more convinced that IEA’s move was unwarranted and so are his friends at JP Morgan.

In an investment note, they opined that the effectiveness of IEA’s coordinated release is a matter of some debate and crude prices have rebounded quickly. “But while the US especially has demonstrated a willingness to use oil reserves as a stimulus tool in what has become a rather limited toolbox, a second release will require higher prices and a far more arduous task to achieve unity,” they concluded.

Now, going beyond the short to medium term conjecture, the era of cheap oil, or shall we say cheap energy is fading and fast. An interesting report titled – A new world order: When demand overtakes supply – recently published by Société Générale analysts Véronique Riches-Flores and Loïc de Galzain confirms a chain of thought which is in the mind of many but few seldom talk of. Both analysts in question feel that the last long cycle, which extended from the middle of the 1980s to the middle of the 2000s, was shaped by an environment that strongly favoured the development of supply; the next era will in all likelihood be dictated by demand issues.

Furthermore, they note and the Oilholic quotes: “According to our estimates, energy demand will at least double if not triple over the next two decades. This is significantly more than the IEA is currently projecting, with the difference being mainly attributable to our projections for emerging world energy consumption per capita, which we estimate will considerably rise as these countries develop. Applied to the oil market, these projections mean that today’s proven oil reserves, which are currently expected to meet 45 years of global demand based on the present rate of production, would be exhausted within 15-22 years.”

IEA itself estimates that demand will grow by an average of 1.47 million barrels a day (bpd) in 2012, up from the current 2011 average of 1.2 million bpd. Moving away from crystal ball gazing, Bloomberg’s latest figures confirm that record outflows from commodity ETPs (ETF, ETC and ETN) observed in May slowed abruptly. According to SG Cross Asset Research apart from net inflows into precious metals – the biggest sub-segment measured by assets under management – other categories such as Energy and base metals saw limited net outflows (see table on the left, click to enlarge).

Meanwhile, the London Stock Exchange (LSE) was busy welcoming another new issuer of ETFs – Ossiam – on to its UK markets on Monday. It is already the largest ETF venue in Europe by number of issuers; 20 to be exact. According to a spokesperson there are 481 ETFs listed on the LSE. In H1 2010 there were 369,600 ETF trades worth a combined £19 billion on the Exchange's order book, a 40.3% and 33.5% increase respectively on the same period last year.

Switching to corporates and continuing with the LSE, today Ophir Energy plc was admitted to the Main Market. The company listed on the Premium segment of the Main Market and raised US$375 million at admission and has a market capitalisation of US$1.28 billion.

Ophir is an independent firm with assets in a number of African countries particularly Tanzania and Equatorial Guinea. Since its foundation in 2004, the company has acquired an extensive portfolio of exploration interests consisting of 17 projects in nine jurisdictions in Africa.

The company is one of the top five holders of deepwater exploration acreage in Africa in terms of net area and could be one to watch. So far it has made five discoveries of natural gas off Tanzania and Equatorial Guinea and has recently started drilling in the offshore Kora Prospect in the Senegal Guinea Bissau Common Zone. For the LSE itself, Ophir brings the number of companies with major operations in sub-Saharan Africa listed on its books to 79.

Across the pond, Vanguard Natural Resources (VNR) announced on Monday that it will buy the rest of Encore Energy Partners LP it does not already own for US$545 million, gaining full access to the latter’s oil-heavy reserves. While its shares fell 8% on the news, the Oilholic believes it is a positive statement of intent by VNR in line with moves made by other E&P companies to secure reserves with an eye on bullish demand forecasts over the medium term.

Meanwhile, a horror story with wider implications is unfolding in the US, as ExxonMobil’s Silvertip pipeline leaked oil into the Montana stretch of the Yellowstone River on July 1. The company estimates that almost 42,000 gallons may have leaked and invariably questions were again asked by environmentalists about the wisdom of giving the Keystone XL project the go-ahead. This is not what the US needed when President Obama was making all the right noises – crudely speaking that is.

In March, he expressed a desire to include Canadian and Mexican oil in the US energy mix, in May he said new leases would be sold each year in Alaska's National Petroleum Reserve, and oil and gas fields in the Atlantic Ocean would be evaluated as a high priority. To cap it all, last month, the President reaffirmed that despite the BP oil spill in the Gulf of Mexico in 2010, drilling there remained a core part of the country's future energy supply and new incentives would be offered for on and offshore development. Leases already held but affected by the President's drilling moratorium, imposed in wake of the BP spill, would be eligible for extensions, he added. The ExxonMobil leak may not impact the wider picture but will certainly darken the mood on Capitol Hill.

Russians and Norwegians have no hang-ups about crude prospection in inhospitable climates – i.e. the Arctic. Details are now emerging about an agreement signed by the two countries in June which came into effect on July 7. Under the terms, both countries’ state oil firms – i.e. Russia’s Gazprom and Norway’s Statoil – will divide up their shares of the Barents Sea. USGS estimates from 2008 suggest the Arctic was likely to hold 30% of the world's undiscovered gas and 13% of its oil.

Finally, Sugar Land, Texas-based Industrial Info Resources (IIR) came-up with some interesting findings on the Canadian oil sands. In a report last week, the research firm noted that Canada's Top 10 metals and minerals industry projects are large scale oil sands and metal mining endeavours, with the No. 1 being in Alberta's oil sands.

IIR observed that what was once considered a “large project” was now being dwarfed by “megaprojects”. Not long ago a project valued at CAD$1 billion was considered a mega project; now the norm is more in the region of CAD$5 billion (and above) for a project to earn that accolade. Not to mention the fact that the Canadian dollar has been stronger in relative terms in recent years and not necessarily suffering from a mild case of the Dutch disease like its Australian counterpart. IIR’s findings take the Oilholic nicely back to his visit to Calgary in March, a report he authored for Infrastructure Journal and a conversation he had with veteran legal expert Scott Rusty Miller based in Canada's oil capital. We concurred that while the oil sands developments face myriad challenges they are certainly on the way up. The Canadians are developers with scruples and permit healthy levels of outside scrutiny more than many (or perhaps any) other jurisdictions.

IIR recorded US$176 billion worth of oil sands projects and all of the projected investment capital, except for one project in Utah, is in Alberta. It is becoming more likely than ever that Prime Minister Stephen Harper’s dream of Canada becoming an energy super power will be realised sooner rather than later.

© Gaurav Sharma 2011. Photo 1: Pump Jacks Perryton, Texas © Joel Sartore, National Geographic. Photo 2: Shell Athabasca Oil Sands site work © Royal Dutch Shell. Table: Global Commodity ETPs: Inflows analysis by category © Société Générale July 2011.