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

Col Gaddafi, crude euphoria & last 7 days

The moment Libyan rebels or the National Transitional Council (NTC) as the media loosely describes them, were seen getting a sniff around the Libyan capital Tripoli and Col. Gaddafi’s last bastion, some crude commentators went into euphoric overdrive. Not only did they commit the cardinal sin of discarding cautious optimism, they also belied the fact that they don’t know the Colonel and his cahoots at all. Well, neither does the Oilholic for that matter – at least not personally. However, history tells us that this belligerent, rambling dictator neither has nor will give up that easily. In fact at the moment, everyone is guessing where he is?

To begin, while the end is nigh for the Gaddafi regime, a return to normalcy of oil production outflows will take months if not years as strategic energy infrastructure was damaged, changed hands several times or in some cases both. As a consequence production, which has fallen from 1.5 million barrels per day (bpd) in February to just under 60,000 bpd according to OPEC, cannot be pumped-up with the flick of a switch or some sort of an industrial adrenaline shot.

In a note to clients, analysts at Goldman Sachs maintain their forecast that Libya's oil production will average 250,000 bpd over 2012 if hostilities end as "it will be challenging to bring the shut-in production back online."

These sentiments are being echoed in Italy according to the Oilholic's, a country whose refineries stand to gain the most in the EU if (and when) Libyan production returns to pre-conflict levels. All Italy’s foreign ministry has said so far is that it expects contracts held by Italian companies in Libya to be respected by “whoever” takes over from Gaddafi.

Now, compound this with the fact that a post-Gaddafi Libya is uncharted geopolitical territory and you are likely to get a short term muddle and a medium term riddle. Saudi (sour) crude has indirectly helped offset the Libyan (sweet) shortfall. The Saudis are likely to respond to an uptick in Libyan production when we arrive at that juncture. As such the risk premium in a Libyan context is to the upside for at least another six months, unless there is more clarity and an abrupt end to hostilities.

Moving away from Libya, in a key deal announced last week, Russia’s Lukoil and USA’s Baker Hughes inked a contract on Aug 16th for joint works on 23 new wells at Iraq's promising West Qurna Phase 2 oil field. In a statement, Lukoil noted that drilling will begin in the fourth quarter of this year and that the projected scope of work will be completed “within two years.”

While tech-specs jargon regarding the five rigs Baker Hughes will use to drill the wells at a depth exceeding 4,000 meters was made available, the statement was conspicuously low on the cost of the contract. The key objective is to bring the production in the range of 145,000 to 150,000 bpd by 2013.

Switching tack to commodity ETFs, according to early data for August (until 11th) compiled by Bloomberg and as reported by SGCIB, energy ETPs have attracted their first net inflows in five months with US$9.5 billion under management. This represents a net inflow of US$0.7 billion in August versus an outflow of US$1.5 billion recorded in January. Interest in precious metals continues, even after a very strong July, but base metal ETPs have returned to net outflows. (See adjoining table, click to enlarge)

Meanwhile, Moody’s has raised the Baseline Credit Assessment (BCA) of Russian state behemoth Gazprom to 10 (on a scale of 1 to 21 and equivalent to its Baa3 rating) from 11. Concurrently, the ratings agency affirmed the company's issuer rating at Baa1 with a stable outlook on Aug 17th. The rating announcement does not affect Gazprom's assigned senior unsecured issuer and debt ratings given the already assumed high level of support it receives from the Kremlin.

Moody's de facto regards Gazprom as a government-related issuer (GRI). Thus, the company's ratings incorporate uplift from its BCA of 10 and take into account the agency's assessment of a high level of implied state support and dependence. In fact raising Gazprom's BCA primarily reflects the company's strengthened fundamental credit profile as well as proven resilience to the challenging global economic environment and negative developments on the European gas market in 2009-10.

"Gazprom has a consistent track record of strong operational and financial performance, which was particularly tested in 2009 - a year characterised by lower demand for gas globally and domestically, as well as a generally less favourable pricing environment for hydrocarbons," says Victoria Maisuradze, Senior Credit Officer and lead analyst for Gazprom at Moody's.

Rounding-off closer to home, UK Customs – the HMRC – raided a farm on Aug 17th in Banbridge, County Down in Northern Ireland, where some idiots had set-up a laundering plant with the capacity to produce more than two million litres of illicit diesel per year and evade around £1.5 million in excise duty. Nearly 6,000 litres of fuel was seized and arrests made; but with distillate prices where they are no wonder some take risks both with their lives, that of others and the environment. And finally, Brent and WTI are maintaining US$100 and US$80 plus levels respectively for the last seven days.

© Gaurav Sharma 2011. Photo: Veneco Oil Pumps © National Geographic. Table: Global commodities ETPs © Société Générale CIB/Bloomberg Aug 2011. 

OPEC, Libya, Vitol & the “No winners” brigade

Now that the meeting is all over, it is worth noting that the ‘acting’ Iranian oil minister – Mohammad Aliabadi – was not the only one new to the job. It would appear that half of his peers at the OPEC meeting were in fact new to the job as well but Alibadi had to carry the tag of “Conference President”. One question on everybody’s lips was who spoke for Libya at this OPEC meeting.

The man from Tripoli was the right honourable Omran Abukraa, Libya's OPEC delegation leader. His appearance follows the defection last week of a familiar face in these parts – that of Libyan oil minister Shukri Ghanem. The Oilholic is reliably informed that no one was representing the Libyan rebels in a meaningful way here. This, as someone from the Nigerian delegation told the Oilholic, removes a “point of tension.”

In the run up to this meeting, news from Tripoli was that Col. Gaddafi was controlling the oil assets that he could and was destroying those that he could not in order to prevent them from both falling into rebel hands or being used as a revenue generator. Once rebels took control of some of the country’s oil assets, troops loyal to Gaddafi set about knocking out the infrastructure.

Coastal road between Brega and Ras Lanuf, sites of the country’s two biggest refineries was taken out. Then the gas network linking up to rebel controlled areas fell to below 50% capacity. This was followed by Sarir and Mislah oilfields, south of Benghazi being hit by Gaddafi’s troops. While estimates vary, all this has collectively deprived the rebels access to up to 350,000 barrels of oil which they could have sold in open markets.

Now until these facilities can be repaired, the rebels cannot really export much even though the Qataris have volunteered to help them market the oil. Their only success so far, according to sources has been a sale facilitated by Vitol, a Swiss trading house, to the tune of just over one million barrels worth US$118.75 million at the current rate. Additionally, Gaddafi is not in ‘crude’ health either.

A source here suggests Libyan production is in the region of 215,000 b/d but output has ceased as admitted this afternoon by the OPEC Secretary General Abdalla Salem el-Badri. Given international sanctions, the buyers, at least on the open market, are hesitant. Additionally, Libyan consumers are facing shortages everywhere including the capital Tripoli where a litre of petrol is costing up to 6.5 Libyan dinars; about US$5.13 at the current rate. The Oilholic is unable to ascertain how much a litre costs in rebel held areas although it is thought to be a lower rate than Tripoli.

News from behind closed doors is that Col. Gaddafi’s representative did not find himself clashing with the Qatari delegation, who have helped the rebels to their market oil. However, there was an almighty collective clash between the OPEC member nations in which Gaddafi’s man did take the opposing view of what the market felt was right. This understandably overshadowed everything else. On that note its goodbye and goodnight from Vienna - thanks for reading.

© Gaurav Sharma 2011. Photo: Oil pipeline © Cairn Energy, India