A Russian deal, an Indian election, Libya & more

While the Europeans are busy squabbling about how to diversify their natural gas supplies and reduce reliance on Russia, the country's President Vladimir Putin hedged his bets earlier this week and reacted smartly by inking a 30-year supply deal with China.

No financial details were revealed and the two sides have been haggling over price for better parts of the last decade. However, yet again the Russian president has proved more astute than the duds in Brussels! Nevertheless, the Oilholic feels Russia would have had to make substantial compromises on price levels. By default, the Ukraine standoff has undoubtedly benefitted China National Petroleum Corp (CNPC), and Gazprom has a new gas hungry export destination.

Still there is some good news for the Europeans. Moody's believes that unlike in 2008-09, when gas prices spiked in the middle of the winter due to the cessation of Russian gas supplies to Europe via Ukraine, any temporary disruption via Ukraine would have only have a muted impact.

"This opinion factors in a combination of (1) lower reliance on Ukraine as a transit route, owing to alternative supply channels such as the Nord Stream pipeline which became operational in 2011; (2) low seasonal demand in Europe as winter has come to an end; and (3) gas inventories at high levels covering a full month of consumption," the ratings agency noted in a recent investment note.

Meanwhile, a political tsunami in India swept the country's Congress party led government out of power putting an end to years of fractious and economic stunting coalition politics in favour of a right-wing nationalist BJP government. The party's leader Narendra Modi delivered a thumping majority, which would give him the mandate to revive the country's economic fortunes without bothering to accommodate silly whims of coalition partners.

Modi was the chief minister of Gujarat, one of the country's most prosperous provinces and home to the largest in the refinery in the world in the shape of Jamnagar. In many analysts' eyes, regardless of his politics, the Prime Minister elect is a business friendly face.

Moody's analyst Vikas Halan expects that the new BJP-led government will increase natural gas prices, which would benefit upstream oil & gas companies and provide greater long term incentives for investment. Gas prices were originally scheduled to almost double in April, but the previous government put that increase on hold because of the elections.

This delay has meant that India's upstream companies have been losing large amounts of revenue, and a timely increase in gas prices would therefore cushion revenues and help revive interest in offshore exploration.

"A strong majority government would also increase the likelihood of structural reform in India's ailing power sector. Closer co-ordination between the central and state governments on clearances for mega projects and land use, two proposals outlined in the BJP's manifesto, would address investment delays," Halan added.

The Oilholic agrees with Moody's interpretation of the impact of BJP's victory, and with majority of the Indian masses who gave the Congress party a right royal kick. However, one is sad to see an end to the political career of Dr Manmohan Singh, a good man surrounded by rotten eggheads.

Over a distinguished career, Singh served as the governor of the Reserve Bank of India, and latterly as the country's finance minister credited with liberalising and opening up of the economy. From winning the Adam Smith Prize as a Cambridge University man, to finding his place in Time magazine's 100 most influential people in the world, Singh – whose signature appears on an older series of Indian banknotes (see right) – has always been, and will always be held in high regard.

Still seeing this sad end to a glittering career, almost makes yours truly wish Dr Singh had never entered the murky world of mainstream Indian politics in the first place. Also proves another point, that almost all political careers end in tears.

Away from Indian politics, Libyan oilfields of El Sharara, El Feel and Wafa, having a potential output level 500,000 barrels per day, are pumping out the crude stuff once again. However, this blogger is nonplussed because (a) not sure how long this will last before the next flare up and (b) unless Ras Lanuf and Sidra ports see a complete normalisation of crude exports, the market would remain sceptical. We're a long way away from the latter.

A day after the Libyan news emerged on May 14, the Brent forward month futures contract for June due for expiry the next day actually extended gains for a second day to settle 95 cents higher at US$110.19 a barrel, its highest settlement since April 24.

The July Brent contract, which became the forward-month contract on May 16, rose 77 cents to settle at US$109.31 a barrel. That's market scepticism for you right there? Let's face it; we have to contend with the Libyan risk remaining priced in for some time yet.

Just before taking your leave, a couple of very interesting articles to flag-up for you all. First off, here is Alan R. Elliott's brilliant piece in the Investor’s Business Daily comparing and contrasting fortunes of the WTI versus the LLS (Louisiana Light Sweet), and the whole waterborne crude pricing contrast Stateside.

Secondly, Claudia Cattaneo, a business columnist at The National Post, writes about UK political figures' recent visit to Canada and notes that if the Americans aren't increasing their take-up of Canada's energy resources, the British 'maybe' coming. Indeed, watch this space. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: Pipeline, India © Cairn Energy

On a Libyan farce, refining capacity & Kentz

Atop its contribution to geopolitical spikes and dives in the price of the crude stuff, an episode that unfolded over the past four weeks in Libya was nothing short of a farce. However, pay heed to a crucial figure mentioned in a precis of events detailed here. On March 11, Libyan armed rebels, who have been blockading the country's key ports on the pretext of demanding a greater share of oil export revenue since last July, decided to ratchet things up a notch.

The so called Cyrenaica Political Bureau loaded up 234,000 barrels of the finest Libyan Light Sweet on to a North Korea-flagged oil tanker Morning Glory at the port of Sidra, defying orders from Tripoli. The then (but not anymore) Prime Minister Ali Zeidan threatened action calling the move an act of piracy.

Going one step further, Zeidan said he'd bomb the tanker if it left Sidra! Thankfully while a bombing didn't take place, a naval blockade did. Yet, a brief tussle aside, the tanker escaped Libyan waters intact. Then rather dramatically North Korea said the tanker was "no longer" under its flag.

No sooner had it departed Libyan shores, the egregious Zeidan saw himself scurrying to seek sanctuary in Germany, after being charged with "mishandling of the situation and embezzlement" by his peers in the General National Congress; the country's acting parliament. No claimant came forward for the cargo in international waters. Finally, a US Navy Seals squad boarded the tanker south of Cyprus and commandeered it back to Libya putting an end to the sorry tale!

Farcical the episode might well have been, but it did flag up one crucial figure – 234,000 barrels. That's roughly what Libyan daily output is currently averaging down from a pre-July 2013 figure of 1.4 million barrels per day (bpd). The latter itself is well below levels seen prior to the uprising.

Now on to the prologue – this week, as a "goodwill gesture", the Cyrenaica Political Bureau allowed two ports – Zueitina (south of Benghazi) and Hariga (East) to revert back to Tripoli's control. Ras Lanuf and Sidra would also reopen soon, according to the Libyan National Oil Corporation. So tension may well be easing as is reflected in the Brent price over the past few days. However, one thing is for sure, this 'post-Gaddafi democracy' Western governments have created, surely has no fans in the importers brigade!

From upstream unpredictability in Libya to the predictable and rather mundane global downstream world, as BP announced it would cease production at its Bulwer Island refinery on the outskirts of Brisbane, Australia by the second quarter of 2015.

The reason for closure is similar to reasons outlined for closures and refining & marketing divestment on the other side on the planet in Europe – i.e. lower consumption in developed markets coupled with the opposite being true in emerging markets. Economies of scale provided by mega-refineries from China to India that are cheaper to operate, make the likes of Bulwer Island, with a relatively tiny capacity of 102,000 bpd, uncompetitive.

Or to quote Andy Holmes, president of BP Australasia: "Market reality is that global refining capacity is shifting to service the energy growth areas of the globe and is doing so with very large port-based refineries. We have concluded that the best option for strengthening BP's long-term supply position in the east coast retail and commercial fuels markets is to purchase product from other refineries."

And in line with that sentiment, Holmes said Bulwer Island refinery, which has been refining since the 1960s, would become a multi-product import terminal. That's not a new concept either as Caltex is about to do something similar with its Sydney refinery. Additionally, Shell has exited the Aussie refining business altogether shuttering its Sydney refinery and selling the rest of the portfolio to Vitol.

As of now, BP is still holding on to its 146,000 bpd Kwinana refinery on the Aussie west coast. But one wonders for how long? The news does not surprise this blogger. The Oilholic and several supply-side analysts have been harping on for a while that capacity additions will be necessity led in pockets of the globe where there is a need, and even these won't be very profitable enterprises.

According to Moody's, only a modest rise in global demand for refined products of 1.2 million bpd is expected over 2014-15. Most of it would be met by net capacity additions in the Middle East and Asia. In fact, if projected Chinese capacity additions alone are taken into account, we're looking at a figure of above 1.2 million bpd through to 2015. A Middle Eastern guesstimate would be similar and we haven't even taken India into the equation. These additions would dilute earnings growth for the whole sector.

Moody's says the end result could mean flat growth over the next 12 to 18 months in Europe, with a pressing need for meaningful capacity rationalisation to prevent margin erosion in 2015 and beyond. Asian refiners would see a 2% EBITDA growth this year, while their North American counterparts could retain their advantage over competitors elsewhere, with cheaper feedstock, natural gas prices, and lower costs contributing to 10% or higher EBITDA growth through mid to late 2015.

However, Moody's reckons refiners with a big presence in California, including Valero and Tesoro, would face tougher days in 2015, when the state's environmental rules become stricter (Read The Oilholic's March 2012 note from San Francisco for more, follow-up to follow soon)

Finally, Latin American growth for refined products will remain strong through mid to late 2015, with few capacity additions, but the region's reliance on costly refined product imports will hold back EBITDA growth to no more than 2%. Colombia's Ecopetrol is the only player likely to add regional capacity, however modestly, by 2015. Ironically, it's the one region that could do with additional capacity. Anyone from Pemex or Petrobras reading this blog?

Just before one takes your leave, a news snippet worth flagging-up – engineering services provider Kentz will see its chief financial officer Ed Power retire in May following 24 years of service. His cool hand at the till along with that of former CEO Dr Hugh O'Donnell (whom this blogger had the pleasure of meeting at the 20th World Petroleum Congress in 2011) was crucial in guiding the company out of troubled times and into the FTSE 250.

While wishing Power a happy retirement, Kentz has also played an absolute blinder in naming Meg Lassarat, the current CFO of Houston-based UniversalPegasus International, as his very worthy successor. Lassarat is widely credited for driving a five-fold increase in the revenue of UniversalPegasus to over US$1 billion (£603 million). So you can see why Kentz have headhunted her.

Meanwhile, Ichthys LNG project in Australia continues to provide the company with good news. Kentz has bagged a $570 million contract for electrical and instrumentation construction packages at the project.

The latest contract is atop a 50% stake in the structural, mechanical and pipeline construction contract for Ichthys with a headline valuation of $640 million. Put it all together and we're getting close to the $1 billion mark or to quote analysts at Investec – "an addition of 14% to Kentz's order book that underpins visibility into 2017". That's all for the moment folks! Keep reading, keep it 'crude'!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2014. Photo: Refinery, Baton Rouge, Louisiana, USA © Michael Melford / National Geographic

Brent’s liquidity, Nexen, 'crude' Vancouver & more

Last Friday, the Brent forward month futures price plummeted to US$110.65 per barrel thereby losing all of the gains it made in 2013. The WTI price declined in near furious tandem to US$91.92; the  benchmark's lowest intraday price since January 4. An Italian political stalemate and US spending cuts enforced by Congressional gridlock have unleashed the bearish trends. Quite frankly, the troublesome headwinds aren’t going anywhere, anytime soon.

Prior to the onset of recent bearish trends, Bank of America said the upper limit for Brent crude will rise from US$140 per barrel this year to US$175 in 2017 because of constraints on supply. It added that WTI may slip to “US$50 within the next two years” amid booming North American supply. Meanwhile, ratings agency Moody’s expects strong global crude prices in the near term and beyond, with a continued US$15 per barrel premium in favour of Brent versus WTI over 2013.

Moody's still assumes that Brent crude will sell for an average US$100 per barrel in 2013, US$95 in 2014, and US$90 in the medium term, beyond 2014. For WTI, the agency leaves its previous assumptions unchanged at US$85 in 2013, 2014 and thereafter. Away from the fickle pricing melee, there was a noteworthy development last month in terms of Brent’s liquidity profile as a benchmark, which is set to be boosted.

On February 19, Platts proposed the introduction of a quality premium for Ekofisk and Oseberg crudes; two of the four grades constituting the Dated Brent marker. A spokesperson said the move would increase transparency and trading volumes in Dated Brent. The proposal came a mere fortnight after Shell’s adjustments to its trading contract for three North Sea blends including Brent.

The oil major said it would change its contract (SUKO 90) for buying and selling to introduce a premium for the delivery of higher quality Brent, Ekofisk and Oseberg grades. Previously, it only used the Forties grade which was typically the cheapest Brent blend and thus used to price the benchmark by default. BP has also agreed to Shell’s amended pricing proposals in principle.

The Oilholic thinks it is prudent to note that even though Platts is the primary provider of price information for North Sea crude(s), actual contracts such as Shell’s SUKO 90 are the industry’s own model. So in more ways than one, a broad alignment of the thinking of both parties (and BP) is a positive development. Platts is requesting industry feedback on the move by March 10 with changes being incorporated with effect from shipments in May.

However, there are some subtle differences. While Shell has proposed an inclusion of Brent, Platts is only suggesting premiums for Oseberg and Ekofisk grades. According to published information, the oil major, with BP’s approval, has proposed a 25% premium for Brent and Oseberg based on their difference to the Forties differential, and a 50% premium for Ekofisk.

But Platts, is seeking feedback on recommending a flat 50% premium for both Oseberg and Ekofisk. Nonetheless, at a time of a dip in North Sea production, a change of pricing status quo aimed at boosting liquidity ought to be welcomed. Furthermore, there is evidence of activity picking up in the UK sector of the North Sea, with Oil and Gas UK (OGUK), a body representing over 320 operators in the area, suggesting last month that investment was at a 30-year high.

OGUK said companies invested £11.4 billion in 2012 towards North Sea prospection and the figure is expected to rise to £13 billion this year. It credited UK Chancellor George Osborne’s new tax relief measures announced last year, which allowed gas fields in shallow waters to be exempt from a 32% tax on the first £500 million of income, as a key factor.

However, OGUK warned that reserves currently coming onstream have not been fully replaced with new discoveries. That is hardly surprising! In fact, UK production fell to the equivalent of 1.55 million barrels per day (bpd) in 2012, down by 14% from 2011 and 30% from 2010. While there may still be 24 billion barrels of oil to be found in the North Sea, the glory days are not coming back. Barrel burnt per barrel extracted or if you prefer Petropounds spent for prospection are only going to rise.

From the North Sea’s future, to the future of a North Sea operator – Canada’s Nexen – the acquisition of which by China’s state-owned CNOOC was finally approved on February 26. It took seven long months for the US$15.1 billion takeover to reach fruition pending regulatory approval in several jurisdictions, not least in Canada.

It was announced that shareholders of the Calgary, Alberta-based Nexen would get US$27.50 in cash for each share, but the conditions imposed by Canadian (and US) regulators for the deal to win approval were not disclosed. More importantly, the Harper administration said that CNOOC-Nexen was the last deal of its kind that the Canadian government would approve.

So it is doubtful that a state-controlled oil company would be taking another majority stake in the oil sands any time soon. The Nexen acquisition makes CNOOC a key operator in the North Sea, along with holdings in the Gulf of Mexico and West Africa, Middle East and of course Canada's Long Lake oil sands project (and others) in Alberta.

Meanwhile, Moody’s said the Aa3 ratings and stable outlooks of CNOOC Ltd and CNOOC Group will remain unchanged after the acquisition of Nexen. The agency would also continue to review for upgrade the Baa3 senior unsecured rating and Ba1 subordinated debt rating of Nexen.

Moving away from Nexen but sticking with the region, the country’s Canadian Business magazine asks, “Is Vancouver the new Calgary?”  (Er…we’re not talking about changing weather patterns here). The answer, in 'crude' terms, is a firm “Yes.” The Oilholic has been pondering over this for a good few years. This humble blogger’s research between 2010 and present day, both in Calgary and Vancouver, has always indicated a growing oil & gas sector presence in BC.

However, what is really astonishing is the pace of it all. Between the time that the Oilholic mulled about the issue last year and February 2013, Canadian Business journalist Blair McBride writes that five new oil & gas firms are already in Vancouver. Reliable anecdotal evidence from across the US border in general, and the great state of Texas in particular, suggests more are on their way! Chevron is a dead certain, ExxonMobil is likely to follow.

One thing is for certain, they’re going to need a lot more direct flights soon between Vancouver International and Houston’s George Bush Intercontinental airport other than the solitary Continental Airlines route. Hello, anyone from Air Canada reading this post?

Continuing with corporate news, Shell has announced the suspension of its offshore drilling programme in the Arctic for the rest of 2013 in order to give it time to “ensure the readiness of equipment and people.” It was widely expected that prospection in the Chukchi and Beaufort Seas off Alaska would be paused while the US Department of Justice is looking into safety failures.

Shell first obtained licences in 2005 to explore the Arctic Ocean off the Alaskan coastline. Since then, £3 billion has been spent with two exploratory wells completed during the short summer drilling season last year. However, it does not mask the fact that the initiative has been beset with problems including a recent fire on a rig.

Meanwhile, Repsol has announced the sale of its LNG assets for a total of US$6.7 billion to Shell. The deal includes Repsol’s minority stakes in Atlantic LNG (Trinidad & Tobago), Peru LNG and Bahia de Bizkaia Electricidad (BBE), as well as the LNG sale contracts and time charters with their associated loans and debt. It’s a positive for Repsol’s credit rating and Shell’s gas reserves.

As BP’s trial over the Gulf of Mexico oil spill began last month, Moody’s said the considerable financial uncertainty will continue to weigh on the company’s credit profile until the size of the ultimate potential financial liabilities arising from the April 2010 spill is known.

Away from the trial, the agency expects BP's cash flows to strengthen from 2014 onwards as the company begins to reap benefits of the large roster of upstream projects that it is working on, many of which are based in high-margin regions. “This would help strengthen the group's credit metrics relative to their weaker positioning expected in 2013,” Moody’s notes.

One final bit of corporate news, Vitol – the world's largest oil trading company –  has posted a 2% rise in its 2012 revenue to US$303 billion even though volumes traded fell and profit margins remained under pressure for much of the year. While not placing too much importance on the number, it must be noted that a US$300 billion-plus revenue is more than what Chevron managed and a first for the trading company.

However, it is more than safe to assume Chevron’s profits would be considerably higher than Vitol’s. Regrettably, other than relying on borderline gossip, the Oilholic cannot conduct a comparison via published sources. That’s because unlike listed oil majors like Chevron, private trading houses like Vitol don’t release their profit figures.

That’s all for the moment folks. But on a closing note, this blogger would like to flag-up research by the UK’s Nottingham Trent University which suggests that Libya could generate approximately five times the amount of energy from solar power than it currently produces in crude oil!

The university’s School of Architecture, Design and the Built Environment found that if the North African country – which is estimated to be 88% desert terrain – used 0.1% of its landmass to harness solar power, it could produce almost 7 million crude oil barrels worth of energy every day. Currently, Libya produces around 1.41 million bpd. Food for thought indeed! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2013. Photo 1: Oil tanker, English Bay, BC, Canada. Photo 2: Downtown Vancouver, BC, Canada © Gaurav Sharma

OPEC 'maintains' production at 30 million bpd

In line with market expectations and persistent rumours heard here all morning in Vienna, OPEC has agreed to officially maintain its crude production quota at 30 million barrels per day (bpd) at its 160th meeting, thereby legitimising the increase the Saudis triggered after the acrimony of the last meeting in June.

The OPEC Secretary General Abdalla Salem El-Badri said the heightened price volatility witnessed during the course of 2011 is predominantly a reflection of increased levels of speculation in the commodities markets, exacerbated by geopolitical tensions, rather than a result of supply/demand fundamentals.

Ministers also expressed concern regarding the downside risks facing the global economy including the Euro-zone crisis, persistently high unemployment in the advanced economies, inflation risk in emerging markets and planned austerity measures in OECD economies.

“All these factors are likely to contribute to lower economic growth in the coming year. Although world oil demand is forecast to increase slightly during the year 2012, this rise is expected to be partially offset by a projected increase in non-OPEC supply,” El-Badri noted.

Hence, OPEC decided to maintain the production level of 30 million bpd curiously “including production from Libya, now and in the future”. The quota would be reviewed in six months and does not include Iraqi supply. The cartel also agreed that its members would, if necessary, take steps including voluntary downward adjustments of output to ensure market balance and reasonable price levels.

The last bit stirred up the scribes especially as El-Badri, himself a Libyan, noted that his country’s production will be back to 1 million bpd “soon” followed by 1.3 million bpd end-Q1 2012, and 1.6 million at end of Q2 2010; the last figure being the pre-war level.

Despite persistent questioning, the Secretary General insisted that Libyan production will be accommodated and 30 million bpd is what all members would be asked to adhere to formally. He added that the individual quotas would be reset when Libyan production is back to pre-war levels.

El-Badri also described the "meeting as amicable, successful and fruitful" and that OPEC was not in the business of defending any sort of crude price. “We always have and will leave it to market mechanisms,” he concluded.

Iran's Rostem Ghasemi said the current OPEC ceiling was suitable for consumers and producers. “We and the Saudis spoke in one voice.” He also said his country was "cool" on possible oil export embargoes but neither had any news nor any inclination of embargoes being imposed against his country yet. OPEC next meets in Vienna on June 14th, 2012.

Following OPEC’s move, the Oilholic turned the floor over to some friends in the analyst community. Jason Schenker, President and Chief Economist of Prestige Economics and a veteran at these events, believes OPEC is addressing a key question of concern to its members with the stated ceiling.

“That question is how to address the deceleration of global growth and pit that against rising supply. And what OPEC is doing is - not only leaving the production quota essentially unchanged but also holding it at that unchanged level,” Schenker said.

“When the Libyan production does indeed come onstream meaningfully or to pre-war levels between now and Q2 or Q3 of 2012, smart money would be on an offsetting taking place via a possible cut from Saudi Arabia,” he concluded.

Myrto Sokou, analyst at Sucden Financial Research, noted that an increase (or rather the acknowledgement of an increase) in the OPEC production limit after three years might add further downward pressure to the crude price for the short-term with a potential for some correction lower in crude oil prices.

“On top of this, the uncertain situation in the Eurozone continues to dominate the markets, weighting heavily on most equity and commodity prices and limiting risk appetite,” he said. And on that note, it is goodbye from the OPEC HQ. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2011. Photo: OPEC's 160th meeting concludes in Vienna, Austria - seated (R to L) OPEC Secretary General Abdalla Salem El-Badri and President Rostem Ghasemi © Gaurav Sharma 2011.