Assessing BP’s settlement with the US authorities

BP’s recent settlement with the US authorities does not end the company's legal woes related to the Gulf of Mexico oil spill, but it is a vital step in the direction of bringing financial closure to the accident.

When the oil major announced on July 2, that it had reached agreements in principle to settle all federal and state claims arising from the oil spill at a cost of up to $18.7 billion spread over 18 years, markets largely welcomed the move. On a day when the crude oil futures market was in reverse, BP’s share price rose by 4.69% by the close of trading in London, contrary to prevailing trading sentiment, as investors absorbed the welcome news. 

Above anything else, the agreement provides certainty about major aspects of BP's financial exposure in wake of the oil spill. As per the deal, BP’s US Upstream subsidiary – BP Exploration and Production (BPXP) – has executed agreements with the federal government and five Gulf Coast States of Alabama, Florida, Louisiana, Mississippi and Texas. Under the said terms, BPXP will pay the US government a civil penalty of $5.5 billion over 15 years under the country’s Clean Water Act.

It will also pay $7.1 billion to the US and the five Gulf states over 15 years for natural resource damages (NRD), in addition to the $1 billion already committed for early restoration. BPXP will also set aside an additional $232 million to be added to the NRD interest payment at the end of the payment period to cover any further natural resource damages that are unknown at the time of the agreement.

A total of $4.9 billion will be paid over 18 years to settle economic and other claims made by the five Gulf Coast states, while up to $1 billion will be paid to resolve claims made by more than 400 local government entities. Finally, what many thought was going to be a prolonged tussle with US authorities might be coming to an end via payments, huge for some and not large enough for others, spread over a substantially long time frame.

BP’s chief executive Bob Dudley described the settlement as a “realistic outcome” which provides clarity and certainty for all parties. “For BP, this agreement will resolve the largest liabilities remaining from the tragic accident and enable the company to focus on safely delivering the energy the world needs.”

The impact of the settlement on the company’s balance sheet and cashflow will be “manageable” and allow it to continue to invest in and grow its business, said chief financial officer Brian Gilvary. As individual and business claims continue, BP said the expected impact of these agreements would be to increase the cumulative pre-tax charge associated with the spill by around $10 billion from $43.8 billion already allocated at the end of the first quarter.

While the settlement is still awaiting court approval, credit ratings agencies largely welcomed the move, alongside many City brokers whose notes to clients were seen by the Oilholic. Fitch Ratings said the deal will considerably strengthen BP’s credit profile, which had factored in “the potential for a larger settlement that took much longer to agree”.

Should the agreement be finalised on the same terms, it is likely to result in positive rating action from the agency. Fitch currently rates BP 'A' with a ‘Negative Outlook.’

Alex Griffiths, Managing Director, Fitch Ratings, said: “While BP had amassed ample liquidity to deal with most realistic scenarios, the scale and uncertain timing of the payment of outstanding fines and penalties remained a key driver of BP's financial profile in our modelling, and had the potential to place a large financial burden on the company amid an oil price slump.

“The certainty the deal provides, and the deferral of the payments over a long period, gives BP the opportunity to improve its balance sheet profile and navigate the current downturn.”

Meanwhile, Moody's has already changed to ‘positive’ from ‘negative’ the outlook on A2 long-term debt and Prime-1 commercial paper ratings of BP and its guaranteed subsidiaries. In wake of the settlement, the ratings agency also changed to ‘positive’ from ‘negative’, its outlook on the A3 and Baa1 Issuer Ratings of BP Finance and BP Corporation North America, respectively.

Tom Coleman, a Moody's Senior Vice President, said: “While the settlement is large, we view the scope and extended payout terms as important and positive developments for BP, allowing it to move forward with a lot more certainty around the size and cash flow burden of its legal liabilities.

“It will also help clarify a stronger core operating and credit profile for BP as it moves into a post-Macondo era.”

The end is not within sight just yet, but some semblance of it is likely to attract new investors. BP's second quarter results are due on July 28, and quite a few eyes, including this blogger’s, will be on the company for clues about the future direction. But that’s all for the moment folks! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.
To follow The Oilholic on Google+ click here.
To follow The Oilholic on Forbes click here.
To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2015. Photo: Support ships in the Gulf of Mexico © 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.

On another BP sale, another Chavez term & more

A not so surprising news flash arrived this week that BP has finally announced the sale of its Texas City refinery and allied assets to Marathon Petroleum for US$2.5 billion. A spokesperson revealed that the deal included US$600 million in cash, US$1.2 billion for distillate inventories and another US$700 million depending on future production and refining margins.

 

Following the Carson oil refinery sale in California, the latest deal ratchets BP’s asset divestment programme up to US$35 billion with a target of US$38 billion within reach. It is time for the Oilholic to sound like a broken record and state yet again that – Macondo or no Macondo – the oil major would have still divested some of its refining and marketing assets regardless.

 

However, for fans of the integrated model – of which there are quite a few including ratings agencies who generally rate integrated players above R&M only companies – the head of BP's global R&M business Iain Conn said, "Together with the sale of our Carson, California refinery, announced in August, the Texas City divestment will allow us to focus BP's US fuel investments on our three northern refineries."

 

Things have also picked-up pace on the TNK-BP front. On Tuesday, Reuters reported that BP’s Russian partners in the venture Alfa Access Renova (AAR) would rather sell their stake than end-up in a ‘devalued’ partnership with Kremlin-backed rival Rosneft. On Wednesday, the Russian press cited sources claiming a sale of BP’s stake to Rosneft has the full backing of none other than Russian President Vladimir Putin himself. Now that is crucial.

On a visit to Moscow and Novosibirsk back in 2004, the Oilholic made a quick realisation based on interaction with those in the know locally – that when it comes to natural resources assets the Kremlin likes to be in control. So if BP and the Russian government have reached some sort of an understanding behind the scene, AAR would be best advised not to scream too loudly.

 

Another hypothesis gaining traction, in wake of AAR’s intention to sell, is that instead of being the seller of its stake in TNK-BP, the British oil major could now turn buyer. BP could then re-attempt a fresh partnership with Rosneft; something which it attempted last year only for it to be scuppered by AAR.

 

There can be any amount of speculation or any number of theories but here again a nod from the Kremlin is crucial. Away from ‘British Petroleum’ (as Sarah Palin and President Obama lovingly refer to it in times of political need) to the British Government which reiterated its support for shale exploration earlier this week.

 

On Monday, Minister Edward Davey of UK's Department of Energy and Climate Change (DECC) expressed hopes of lifting a suspension on new shale gas exploration. It was imposed in 2011 following environmental concerns about fracking and a series of minor earthquakes in Lancashire triggered by trial fracking which spooked the nation. In near sync with Davey, Chancellor of the Exchequer George Osborne told the Conservative Party conference in Birmingham that he was considering a 'generous new tax regime' to encourage investment in shale gas.

 

In case you haven’t heard by now, Hugo Chavez is back as president of Venezuela for another six year stint. This means it will be another rendezvous in Vienna for the Oilholic at the OPEC meeting of ministers in December with Rafael Ramirez, the crude Chavista likely to be hawkish Venezuela’s man at the table. Opposition leader Henrique Capriles believed in change, but sadly for the Venezuelan economy grappling with mismanagement of its ‘crude’ resources and 20% inflation, he fell short.

 

On January 10, 2012 when Chavez will be inaugurated for another term as Venezuela's president, he will be acutely aware that oil accounts for 50% of his government’s revenue and increasingly one dimensional economy. Bloomberg puts Chinese lending to Venezuela between 2006 and 2011 at US$42.5 billion. In a staggering bout of frankness, Ramirez admitted in September that of the 640,000 barrels per day (bpd) that Venezuela exported to China, 200,000 bpd went towards servicing government debt to Beijing.

 

The country's oil production is hardly rising. Just as Chavez’s health took a toll from cancer, national oil company PDVSA has not been in good health either. Its cancer is mismanagement and underinvestment. Most would point to an explosion in August when 42 people perished at the Amuay refinery – Venezuela’s largest distillate processing facility as an example. However, PDVSA has rarely been in good health since 2003 when it fired 40% of its workforce in the aftermath of a general strike aimed at forcing Chavez from power.

 

Staying with Latin America, the US Supreme Court has said it will not block a February 2011 judgement from an Ecuadorean court that Chevron must pay US$19 billion in damages for allegedly polluting the Amazonian landscape of the Lago Agrio region. The court’s announcement is the latest salvo in a decade-long legal tussle between Texaco, acquired by Chevron in 2001, and the people of the Lago Agrio.

 

The Ecuadorians and Daryl Hannah (who is not Ecuadorian) wont rejoice as Chevron it is not quite done yet. Far from it, the oil major has always branded the Ecuadorian court’s judgement as fraudulent and not enforceable under New York law. It has also challenged it under an international trade agreement between the US and Ecuador.

 

The latter case will be heard next month – so expect some more ‘crude’ exchanges and perhaps some stunts from Ms. Hannah. That’s unless she is under arrest for protesting about Keystone XL! That’s all for the moment folks! Keep reading, keep it ‘crude’ or Elle Driver might come after you!

 

© Gaurav Sharma 2012. Photo: East Plant of the Texas City Refinery, Texas, USA © BP Plc

BP’s sale, South Africa’s move & the North Sea

BP continues to catch the Oilholic’s eye via its ongoing strategic asset sale programme aimed at mitigating the financial fallout from the 2010 Gulf of Mexico spill. Not only that, a continual push to get rid of refining and marketing (R&M) assets should also be seen as positive for its share price.

 

This afternoon, the oil giant inked a deal to sell five of its oil & gas fields in the Gulf of Mexico for US$5.6 billion to Plains Exploration and Production; an American independent firm. However, BP Group Chief Executive Bob Dudley reiterated that the oil giant remains committed to the region.

 

"While these assets no longer fit our business strategy, the Gulf of Mexico remains a key part of BP's global exploration and production portfolio and we intend to continue investing at least US$4 billion there annually over the next decade," he said in statement following the announcement.

 

Last month BP agreed to sell the Carson oil refinery in California to Tesoro for US$2.5 billion. As a footnote, the agreement holds the potential to make Tesoro the largest refiner on the West Coast and a substantial coastal R&M player alongside the oil majors. While regulatory scrutiny is expected, anecdotal evidence from California suggests the deal is likely to be approved. Back in June, BP announced its intention to sell its stake in TNK-BP, the company's lucrative but acrimony fraught Russian venture.

 

One can draw a straight logic behind the asset sales which BP would not contest. A recent civil case filed by the US Department of Justice against BP does not mince its words accusing the oil giant of “gross negligence” over the Gulf of Mexico spill which followed an explosion that led to the death of 11 workers. Around 4.9 million barrels of oil spewed into the Gulf according to some estimates.

 

The charges, if upheld by the court, could see BP fined by as much as US$21 billion. The trial starts in January and BP, which denies the claim, says it would provide evidence contesting the charges. The company aims to raise US$38 billion via asset sales by Q4 2012. However, the Oilholic is not alone is his belief that the sale programme, while triggered by the spill of 2010, has a much wider objective of portfolio trimming and a pretext to get rid of burdensome R&M assets.

 

Meanwhile in Russia, the Kremlin is rather miffed about the European Commission’s anti-trust probe into Gazprom. According to the country’s media, the Russian government said the probe “was being driven by political factors.” Separately, Gazprom confirmed it would no longer be developing the Shtokman Arctic gas field citing escalating costs. Since, US was the target export market for the gas extracted, Gazprom has probably concluded that shale exploration stateside has all but ended hopes making the project profitable.

 

Sticking with Shale, reports over the weekend suggest that South Africa has ended its moratorium on shale gas extraction. A series of public consultations and environmental studies which could last for up to two years are presently underway. It follows a similar decision in the UK back in April.

 

Sticking with the UK, the country’s Office for National Statistics (ONS) says output of domestic mining & quarrying industries fell 2.4% in July 2012 on an annualised basis; the 22nd consecutive monthly fall. More worryingly, the biggest contributor to the decrease came from oil & gas extraction which fell 4.3% in year over year terms.

 

The UK Chancellor of the Exchequer George Osborne has reacted to declining output. After addressing taxation of new UKCS prospection earlier this year, Osborne switched tack to brownfield sites right after the ONS released the latest production data last week.

 

Announcing new measures, the UK Treasury said an allowance for "brownfield" exploration will now shield portions of income from the supplementary charge on their profits. It added that the allowance would give companies the incentive to "get the most out of" older fields. Speaking on BBC News 24, Osborne added that the long-term tax revenues generated by the change would significantly outweigh the initial cost of the allowance.

 

According to the small print, income of up to £250 million in qualifying brownfield projects, or £500 million for projects paying Petroleum Revenue Tax (PRT), would be protected from a 32% supplementary charge rate applied by the UK Treasury to such sites.

 

Roman Webber, tax partner at Deloitte, believes the allowance should stimulate investment in older fields in the North Sea where it was previously deemed uneconomical. Such investment is vital in preserving and extending the life of existing North Sea infrastructure, holding off decommissioning and maximising the recovery of the UK’s oil & gas resources.

 

“Enabling legislation for the introduction of this allowance was already included in the UK Finance Act 2012, announced earlier this year. The allowance will work by reducing the profits subject to the 32% Supplementary Charge. The level of the allowances available will depend on the expected project costs and incremental reserves, but will be worth up to a maximum of £160 million net for projects subject to PRT and £80 million for those that are not subject to the tax,” Webber notes.

 

Finally on the crude pricing front, Brent's doing US$114-plus when last checked. It has largely been a slow start to oil futures trading week either side of the pond as traders reflect on what came out of Europe last week and is likely to come out of the US this week. Jack Pollard of Sucden Financial adds that Chinese data for August showed a deteriorating fundamental backdrop for crude with net imports at 18.2 million metric tonnes; a 13% fall on an annualised basis.

 

Broadly speaking, the Oilholic sees a consensus in the City that Brent’s trading range of US$90 to US$115 per barrel will continue well into 2013. However for the remaining futures contracts of the year, a range of US$100 to US$106 is more realistic as macroeconomics and geopolitical risks seesaw around with a relatively stronger US dollar providing the backdrop. It is prudent to point out that going short on the current contract is based Iran not flaring up. It hasn't so far, but is factored in to the current contract's price. That’s all for the moment folks! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo: Oil Rig © Cairn Energy

BP to call time on 9 years of Russian pain & gain?

After market murmurs came the announcement this morning that BP is looking to sell its stake in Russian joint venture TNK-BP; a source of nine years of corporate pain and gain. As the oil major refocuses its priorities elsewhere, finally the pain aspect has made BP call time on the venture as it moves on.

A sale is by no means imminent but a company statement says, it has “received unsolicited indications of interest regarding the potential acquisition of its shareholding in TNK-BP.”

BP has since informed its Russian partners Alfa Access Renova (AAR), a group of Russian billionaire oligarchs fronted by Mikhail Fridman that it intends to pursue the sale in keeping with “its commitment to maximising shareholder value.”

Neither the announcement itself nor that it came over Q2 2012 are a surprise. BP has unquestionably reaped dividends from the partnership which went on to become Russia’s third largest oil producer collating the assets of Fridman and his crew and BP Russia. However, it has also been the source of management debacles, fiascos and politically motivated tiffs as the partners struggled to get along.

Two significant events colour public perception about the venture. When Bob Dudley (current Chief executive of BP) was Chief executive of TNK-BP from 2003-2008, the Russian venture’s output rose 33% to 1.6 million barrels per day. However for all of this, acrimony ensued between BP and AAR which triggered some good old fashioned Russian political interference. In 2008, BP’s technical staff were barred from entering Russia, offices were raided and boardroom arguments with political connotations became the norm.

Then Dudley’s visa to stay in the country was not renewed prompting him to leave in a huff claiming "sustained harassment" from Russian authorities. Fast forward to 2011 and you get the second incident when Fridman and the oligarchs all but scuppered BP’s chances of joining hands with state-owned Rosneft. The Russian state behemoth subsequently lost patience and went along a different route with ExxonMobil leaving stumped faces at BP and perhaps a whole lot of soul searching.

In wake of Macondo, as Dudley and BP refocus on repairing the company’s image in the US and ventures take-off elsewhere from Canada to the Caribbean – it is indeed time to for the partners to apply for a divorce. In truth, BP never really came back from Russia with love and the oligarchs say they have "lost faith in BP as a partner". Fridman has stepped down as TNK-BP chairman and two others Victor Vekselberg and Leonard Blavatnik also seem to have had enough according to a contact in Moscow.

The Oilholic’s Russian friends reliably inform him that holy matrimony in the country can be annulled in a matter of hours. But whether this corporate divorce will be not be messy via a swift stake sale and no political interference remains to be seen. Sadly, it is also a telling indictment of the way foreign direct investment goes in Russia which is seeing a decline in production and badly needs fresh investment and ideas.

Both BP and Shell, courtesy its frustrations with Sakhalin project back in 2006, cannot attest to Russia being a corporate experience they’ll treasure. The market certainly thinks BP’s announcement is for the better with the company’s shares trading up 2.7% (having reached 4% at one point) when the Oilholic last checked.

From BP to the North Sea, where EnQuest – the largest independent oil producer in the UK sector – will farm out a 35% interest in its Alma and Galia oil field developments to the Kuwait Foreign Petroleum Exploration Company (KUFPEC) subject to regulatory approval. According to sources at law firm Clyde & Co., who are acting as advisers to KUFPEC, the Kuwaitis are to invest a total of approximately US$500 million in cash comprising of up to US$182 million in future contributions for past costs and a development carry for EnQuest, and of KUFPEC's direct share of the development costs.

Away from deals and on to pricing, Brent dropped under US$100 for the first time since October while WTI was also at its lowest since October on the back of less than flattering economic data from the US, India and China along with ongoing bearish sentiments courtesy the Eurozone crisis. In this crudely volatile world, today’s trading makes the thoughts expressed at 2012 Reuters Global Energy & Environment Summit barely two weeks ago seem a shade exaggerated.

At the event, IEA chief economist Fatih Birol said he was worried about high oil prices posing a serious risk putting at stake a potential economic recovery in Europe, US, Japan and China. Some were discussing that oil prices had found a floor in the US$90 to US$95 range. Yet, here we are two weeks later, sliding down with the bears! That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: TNK-BP Saratov Refinery, Russia © TNK-BP

BP breathes a sigh; but end of legal woes not nigh!

It has been a crudely British fortnight in terms of Black Gold related news, none more so than BP’s announcement – on March 3 – that it has reached a settlement of US$7.8 billion with the Plaintiffs' Steering Committee (PSC) for civil charges related to the 201 Macondo oil spill in the Gulf of Mexico.

The settlement amount is at the upper end of market conjecture and certainly well above conservative estimates. However, it does not mean that the US government is going to in any way, shape or form, let up on BP – especially in an election year. Everyone knows that, especially BP. However for a second time, the trial case brought against it will have to be delayed as the US Judge in the case – Carl Barbier – noted the settlement would lead to a “realignment of the parties in this litigation and require substantial changes to the current Phase I trial plan, and in order to allow the parties to reassess their respective positions.”

The US government maintains that the US$7.8 billion deal does not address "significant damages" to the environment but PSC-BP agreement is expected to benefit regional 100,000 fishermen, local residents and clean-up workers who suffered following the spill.

BP says it expects the money to come from a US$20 billion compensation fund it had previously set aside and the response of the wider market and ratings agencies to the settlement has been positive. While reaffirming BP’s long term Issuer Default Rating (IDR) at ‘A’, Fitch Ratings notes that BP has adequate financial resources to meet its remaining oil spill related obligations currently estimated by the agency at US$20 billion between 2012 and 2014.

This figure includes the remainder of BP's provisioned costs of US$10.6 billion and approximately US$10 billion of Fitch assumed additional litigation related payments, excluding potential fines for gross negligence. As of end-December 2011, BP had adequate financial resources to meet this obligation with US$14.1 billion of ‘on balance sheet’ cash and US$6.9 billion of undrawn committed stand-by and revolving credit lines. Additionally, the company plans to dispose of assets for about US$18 billion by end-2013 within its US$38 billion asset disposal programme.

Fitch Ratings estimates BP's total Gulf of Mexico spill related payments, net of partner recoveries, will range between US$45 billion and US$50 billion assuming BP was not grossly negligent. BP's cash outflow related to the Gulf of Mexico oil spill amounted to US$26.6 billion by end-2011, net of partner recoveries.

S&P also views the settlement as “somewhat supportive” for its ‘A/A-1/Stable’ ratings on BP and consistent with the agency’s base-case assumptions. “This is because the settlement addresses some material litigation and payment uncertainties, and because we understand that the plaintiffs cannot pursue further punitive damages against BP as a condition of the settlement,” it says.

BP has not admitted liability and still faces other legal claims at State and Federal level. Nonetheless, while the settlement is credit supportive, market commentators in City feel the uncertainty related to the total oil spill liability is not ending any time soon. The Oilholic feels an investigation by US Department of Justice against BP into the oil spill incident encompassing possible violations of US civil or criminal laws could be a potential banana skin as no love has been lost between the two. With several cases still ongoing, a settlement with PSC was a first of many legal hurdles for BP; albeit an important one.

Away from the legal wrangles of “British Petroleum” as US politicians love to call it, Brits themselves had to contend with a record high price of petrol at the pump this week – an average gas station forecourt quote of 137.3 pence per litre on March 5, according to the UK Department of Energy and Climate Change (DECC). The previous record of 137.05p was set on May 9, 2011. However, private research by Experian Catalist says the high is a little “higher” at 137.44p per litre.

And if you thought, the Oilholic’s diesel-powered readership was faring any better, the diesel price is hit a record high of 144.7p per litre, up 0.8p from the previous UK record, which was set the week before! As if that wasn’t enough – the country’s (Markit/CIPS) Purchasing Managers' Index (PMI) for manufacturing slipped to 51.2 in February, down from 52 in January with analysts blaming the high cost oil for manufacturers which rose at the fastest rate in 19 years. It presents another serious quandary for UK Chancellor George Osborne who’s due to table his government’s Union budget on March 21st.

From the price of the refined stuff at British gas station forecourts to the price of a barrel of the crude stuff on the futures market – which saw Brent resisting the US$125 level and WTI resisting the US$106 level for the forward month contract. Myrto Sokou, analyst at Sucden Financial, reckons stronger US economic data brought back risk appetite and improved sentiment this week.

Greece is going to be a main focus for the market with hopes of a positive result on its debt bailout, Sokou adds, but amid renewed rumours whether it would be better for the country to leave the Euro. Cautious optimism is ‘crudely’ warranted indeed.

Elsewhere, the Indian government's attempt divest a 5% stake in one of its NOCs – the Oil and Natural Gas Corporation (ONGC) – via public share offering fell marginally short of expectations last week. Despite tall claims of oversubscription, only 98% of the shares on sale were subscribed. With high hopes of raising something in the region of US$2.5 billion, the government had offered 428 million shares at a price of INR290 per share (approximately US$5.85 and 2% higher than ONGC average share price for February).

However, the Oilholic thinks that even for a company which admittedly has a massive role in a burgeoning domestic market, the price offer was strange at best and overpriced at worst. This probably put off many of the country’s average middle tier investors, especially as many used February’s price as a reference point. Who can blame them and perhaps the Indian government is wiser for the experience too. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Aerial of the Helix Q4000 taken shortly before "Static Kill" procedure began at Macondo (MC 252) site in Gulf of Mexico, August 3, 2010 © BP Plc.

Spills, spin, morals & a trusty correspondent!

A corporate scandal, disaster or an implosion always creates an appetite for literature on the subject. Amid a cacophony of books – some hurried, some scrambled and some downright rubbish – you often have to wait for a book that is the real deal. The Oilholic is delighted to say that if BP, its culture, the mother of all oil spills and its underlying causes are of interest to you, then Reuters correspondent Tom Bergin’s book – Spills and Spin: The Inside Story of BP – is the real deal and was well worth the wait.

Perhaps for many potential readers of this book, the author - a former oil broker turned newswire correspondent - would be a familiar name; Bergin’s wire dispatches have been flickering on our Reuters monitors for some time. However, if you were a shade worried that so networked a man as the author would give some within BP an easy ride, then that worry gets smashed to pieces a few pages into the book.

The Oilholic can safely say that in the energy business there are no moral absolutes. On reading Bergin’s account, the “pre-spill” BP it seems lost sight of morals full-stop. In a book of just under 300 pages, split by ten chapters banking on his experience as an oil correspondent, the author notes that what transpired when Deepwater Horizon went up in flames was not some isolated incident. Via a fast paced and gripping narration, he provides an account as well as his conjecture about all things BP and where did it all start to go wrong.

In order to contextualise what led up to the Gulf of Mexico spill and its aftermath, Bergin first examines BP’s history and its trials in some detail, then the transformative impact – for better or for worse – of John Browne, his successor Tony Hayward and corporate decisions throughout their time which transformed a once troubled part player into a big league major.

For over a decade and more, accompanying this transformation was what the author describes as the most sophisticated PR machine of all times which failed miserably when the company faced its biggest modern day crisis thereby making the CEO at the time of the spill – Tony Hayward – the most hated or the most farcical man in America; some say both.

Browne’s ego, his protégés, advertising group WPP-devised “Beyond Petroleum” campaign, safety bungle after safety bungle from Texas to Alaska and boardroom politics are all there warts and all. It would be unfair to pick a component of the book and single it out as your favourite, for the whole book is. However, if one may take the liberty of doing so then Chapter 3 - "There's no such thing as Santa Claus" is the best passage of the book. Maybe the Oilholic is biased in favour of these few pages, for as a CNBC researcher working in the wee hours of the morning I had a firsthand feel of the "PR drive" Bergin refers to in that passage.

Lastly, if you thought a British, excuse me – an Irish writer (as he confesses to announcing himself when Stateside in the days of perceived anti-British sentiment) – may give former CEO Tony Hayward an easy ride then you are being unkind. In the spirit of journalistic integrity, Bergin gives Hayward – a man whom he often had unique access to – what we scribes describe as the “full treatment.”

When I met the author a few days prior to book’s release, he told me his work was not a damnation of a company based on a solitary incident, no matter how horrendous the Gulf spill was. Au contraire, Bergin notes the story of that spill itself did not begin on the night of April 20, 2010 but 20 years ago when a determined John Browne set out to create the largest corporation in the world followed by his successor Hayward’s own determination to succeed and then outdo his mentor.

Having read the book cover to cover and seen the author deliver on his promise, the Oilholic’s overriding thoughts are that Bergin’s Spills and Spin could in the fullness of time be as definitive a book on BP in wake of Macondo as Bethany McLean and Peter Elkind’s Smartest Guys in the Room was in wake of the Enron collapse.

This blogger is happy to recommend the book to fellow oilholics, students of the energy business, those interested in corporate history as well as the horrendous spill itself. Last but not the least, some from the PR industry might wish to read it as well; albeit as a lesson on what to omit from the PR playbook!

© Gaurav Sharma 2011. Photo: Front Cover – Spills and Spin © Random House Group

BP’s profit, Saudi price targets & CNOOC in Canada

Its quarterly results time and there is only one place to start – an assessment of how BP’s finances are coping in wake of Macondo. Its quarterly data suggests the oil major made profits of US$5.3 billion in the three months to June-end. This is down marginally from the US$5.5 billion it made in Q1 2011 and a predictable reversal of the US$17 billion loss over the corresponding quarter last year when the cost of the Gulf of Mexico spill weighed on its books.

Elsewhere in the figures, BP's oil production was down 11% for the quarter on an annualised basis and the company has also sold US$25 billion worth of assets to date, partly to offset costs of the clean-up operation in the Gulf. City analysts told the Oilholic that BP should count itself lucky as the crude price has been largely favourable over the last 12 months.

Moving away from BP, it is worth turning our attention to the perennially crude question, what price of black gold is the Saudi Arabian Government comfortable with? An interesting report published by Riyadh-based Jadwa Investment suggests that the “breakeven” price for oil that matches actual revenues with expenditures is currently around US$84 per barrel for the Kingdom, comfortably below the global price.

The Oilholic agrees with the report’s authors - Brad Bourland and Paul Gamble – that it is bit rich to assume the Saudis crave perennially high oil prices. Au contraire, high oil prices actually hurt Saudi Arabia’s long term future. Bourland and Gamble feel the Kingdom would be more comfortable with prices below US$100 per barrel; actually a range of US$70-90 per barrel is more realistic.

Using either benchmark, prices are comfortably above the range and are likely to stay there for the rest of the year, if that is what the Saudis are comfortable with. Analysts at Société Générale CIB maintain their view for Brent prices to be in the US$110-120 range in H2 2011 on mixed fundamental and non-fundamental drivers. They note that there may be some slight upside to their Brent forecast, and some moderate downside to their WTI forecast. At 8:00 GMT, ICE Brent forward month futures contract was trading at US$118.04 and WTI at US$99.56.

Looking from a long term macroeconomic standpoint, the Jadwa Investment report notes that after the benign decade ahead, unless the current spending and oil trends are changed, Saudi Arabia faces a very different environment. For instance, domestic consumption of oil, now sold locally for an average of around US$10 per barrel, will reach 6.5 million barrels per day in 2030, exceeding oil export volumes. Jadwa Investment does not expect total Saudi oil production to rise above 11.5 million barrels per day by 2030.

Even with a projected slowdown in growth of government spending, the breakeven price for oil will be over a whopping US$320 per barrel in 2030. Furthermore, the Saudi government will be running budget deficits from 2014, which become substantial by the 2020s. By 2030, foreign assets will be drawn down to minimal levels and debt will be rising rapidly.

Before you go “Yikes”, preventing this outcome, according to Bourland and Gamble, requires tough policy reforms in areas such as domestic pricing of energy and taxation, an aggressive commitment to alternative energy sources, especially solar and nuclear power, and increasing the Kingdom’s share of global oil production. By no means a foregone conclusion, but not all that easy either.

Continuing with the Middle East, apart from crushing dissent and chastising the US government for interference, the Syrian government is apparently also open for crude business. In an announcement on July 7th, the creatively named General Establishment for Geology and Mineral Resources (GEGMR) under auspices of the Syrian Petroleum and Mineral Resources Ministry invited IOCs to bid and develop oil shale deposits in the Khanser region in the north. The Ministry says total crude reserves at the site are “estimated” at 39 billion tonnes with the oil content rate valuation at 5 to 11%.

While the tender books, costing US$3,000 each were issued on July 1st, the Ministry declined to answer how many were sold, who took them up and how the bid round is supposed to work in face of international condemnation of what is transpiring within its borders.

Elsewhere, Chinese state behemoth CNOOC’s recent acquisition of a 100% stake in OPTI Canada Inc, a TSX-listed oil sands producer, made the headlines. The aggregate consideration for the transaction is about US$2.1 billion. OPTI owns a 35% working interest in four oil sands projects in Canada – Long Lake, Kinosis, Leismer and Cottonwood.

Kai Hu, Vice President and Senior Analyst at Moody’s, says "CNOOC investment in this transaction is in line with the company's strategy of growing reserves, partly through overseas acquisitions. This investment – as well as its the previous investments in Eagle Ford and Niobrara shale gas projects – indicate its strong interest in gaining experience in unconventional oil and gas reserves.”

As such, Moody’s feels CNOOC Aa3 issuer and senior unsecured ratings will not be immediately affected by its acquisition. It also helps that there are no US-style murmurings of dissent in Canadian political circles.

© Gaurav Sharma 2011. Photo: Pipeline in Alaska © Kenneth Garrett, National Geographic

Notes on a ‘Crude’ fortnight !

It has been a crude ol’ fortnight and there are loads of things to talk about. But first some “fused” thoughts from the Société Générale press boozer in London yesterday. There was consensus among crude commentators at the French investment bank most of whom asked that with commodities prices having been at or near record levels earlier this year, and subsequently subsiding only modestly, can anyone realistically say scribes or paranoid Western commentators are overstating the significance of China's presence in the global commodities markets? Nope! 

Additionally, should the existing commodities market conditions represent a bubble (of sorts); a deceleration in China could ultimately cause it to burst, they added. Most, but not all, also agreed with the Oilholic that IEA’s move to tap members’ strategic petroleum reserves (SPRs) may push Brent below US$100, but not US$90. At the moment it is doing neither. Finally, it is not yet time to hail shale beyond North America. Population concentration, politics and planning laws in Europe would make Poland a hell of a lot more difficult to tap than some American jurisdictions.

From an informal press party to a plethora of formal events at City law firms; of which there have been quite a few over the Q2 2011. Two of the better ones the Oilholic was invited to last quarter happened to be at Fulbright & Jaworski (May 10) and Clyde & Co (May 19).

The Fulbright event made Iraq and its “re-emergence” as an oil market as its central focus. Partners at the law firm, some of whom were in town from Houston, noted that since 2009 three petroleum licensing rounds have been held in Iraq with deals signed to cover of 51 billion barrels of reserves. There was enthusiastic chatter about the country’s ambitious plans to increase production from approximately 2.4 million barrels per day (bpd) to 12 million bpd by 2017. The Oilholic was also duly given a copy of the Legal guide to doing business in Iraq which regrettably he has so far not found the time to read.

Moving on, the Clyde & Co. event focussed on legal implications one year on from the BP Deepwater Horizon rig explosion. While much of the discussion was along predictable tangents, David Leckie and Georgina Crowhurst of Clyde & Co. drew an interesting comparison between the Piper Alpha tragedy of 1988 in the North Sea and the aftermath of the Gulf of Mexico spill. Agreed that regulatory regimes across the globe are fundamentally different, but observe this – Piper Alpha saw no corporate criminal prosecutions, no individual prosecutions and no top level political criticism. Deepwater Horizon will see FBI criminal and civil investigation, possible individual liability and we all remember President Obama’s “I am furious” remark. Shows how far we have come!

Continuing with Deepwater Horizon fiasco, met Tom Bergin last evening, a former broker turned Reuters oil & gas correspondent and a familiar face in crude circles. His book on BP – the aptly titled Spills and Spin: The Inside Story of BP – is due to be released on July 7th. Admittedly, books on the subject and on BP are aplenty since the infamous mishap of April 20th, 2010 and business book critics call them a cottage industry. However, the Oilholic is really keen to read Bergin’s work as he believes that akin to Bethany “Is Enron Overpriced?” McLean and Peter Elkind’s book on the Enron scandal which was outstanding (and surrounded by a cacophony of average “accounts”); this title could be the real deal  on BP and the spill.

Bergin knows his game, waited to present his thoughts and research in the fullness of time instead of a hurriedly scrambled “make a quick buck” work, has followed the oil major in question and the wider market for a while and has unique access to those close to the incident. Watch this space for a review!

Now, on to pricing and industry outlooks – nothing has happened since the Oilholic’s last blog on June 23rd that merits a crude change of conjecture. IEA’s move to tap in to members’ SPRs will not push Brent’s forward month futures contract below US$90 over the medium term. Feel free to send hate mail if it does! Analysts at ratings agency Moody's believe that (i) ongoing unrest in parts of the Middle East and North Africa (MENA); (ii) protracted supply disruptions in Libya; and (iii) lingering questions about OPEC supply are likely to keep crude at premium prices over the next 12-18 months.

In the past week, the press has received some ballpark figures from the agency. The release of 60 million barrels will take place in this month – but this will not be a straight cut case of two million bpd; the actual release will be much slower. The breakdown, as per IEA communiqués, will be -

• USA: 30 million barrels (or 50% of the quota comprising largely of light sweet with delivery of their lot to be complete by the end of August), 
• Europe: 18 million barrels (30%)
• Asia: 12 million barrels (20%)

Finally, the British Bankers Association (BBA) conference last week also touched on crude matters. Gerard Lyons, Chief Economist & Group head of Global Research at Standard Chartered opined that Western economies are two years into a recovery and that growth prospects are far better in the East than in the West. Hence, he also expects energy prices to firm up next year.

Douglas Flint, Group Chairman of HSBC Holdings noted that China is now a major destination for Middle Eastern exports (to be read oil and gas, as there is little else). So we’re back where we started this post – in the East that is!

© Gaurav Sharma 2011. Photo: Pipeline in Alaska © Michael S. Quinton, National Geographic

IEA, OPEC & a few more bits on BP

It has been a month of quite a few interesting reports and comments, but first and as usual - a word on pricing. Both Brent crude oil and WTI futures have partially retreated from the highs seen last month, especially in case of the latter. That’s despite the Libyan situation showing no signs of a resolution and its oil minister Shukri Ghanem either having defected or running a secret mission for Col. Gaddafi depending on which news source you rely on! (Graph 1: Historical average annual oil prices. Click on graph to enlarge.)

Either way, the 159th OPEC meeting in Vienna which the Oilholic will be attending in a few weeks promises to be an interesting one; we’re not just talking production quotas here. Iranian President Mahmoud Ahmadinejad is also expected to be in Austrian capital – so it should be fun. The market undoubtedly still craves and will continue to crave the quality of crude that Libya exports but other factors are now at play; despite whatever Gaddafi may or may not be playing at.

Contextualising the Libyan situation, Société Générale CIB analyst Jesper Dannesboe notes that Cushing (Oklahoma), the physical delivery point for WTI crude oil, has recently been oversupplied resulting in contango at the very front end of the WTI forward curve.

“This situation is likely to persist until at least mid-2012 as higher supply to Cushing from Canadian oil sands and from North Dakota should result in high Cushing stocks as new pipelines from Cushing to the coast will not be ready until late 2012 at the earliest. This makes it attractive to put on WTI time spreads further out the forward curve at backwardation as they should over time roll into contango,” he wrote in a note to clients.

Dannesboe also observes that while the entire Brent crude oil forward price curve is currently in backwardation (i.e. near-dated prices higher than further-dated prices) out to about 2017, the front-end of the WTI crude oil forward price curve has remained in contango.

The Brent forward curve flipped from contango to backwardation in late February as a result of the unrest in the Middle East & North Africa (MENA). However, contango at the front-end of the WTI forward curve has persisted because WTI's physical delivery point, Cushing (US midcontinent), has remained oversupplied despite a generally tight global market for sweet crude as a result of the loss of Libyan exports, he concludes.

Meanwhile, ahead of the OPEC meeting, the International Energy Agency (IEA) called for “action” from oil producers that will help avoid the negative global economic consequences which a further sharp market tightening could cause. Its governing board meeting last Thursday expressed “serious concern” that there are growing signs the rise in oil prices since September is affecting the economic recovery. As ever, the IEA said it stood ready to work with producers as well as non-member consumers.

The Oilholic also recently had the pleasure of reading a Fitch Ratings report, authored earlier this month in wake of the Libyan situation, which notes that the airline sector is by far the most vulnerable to rising oil and gas prices of all corporate sectors in the EMEA region given the heavy weight of fuel costs in operating cost structures (20%-30%), execution risks from companies' use of hedging instruments to mitigate their fuel exposure and fierce industry competition. (Graph 2: Price movement - Jet fuel vs. Brent oil. Click on graph to enlarge)

Erwin van Lumich, a Managing Director in Fitch's corporate departments, said, "The gap between the jet fuel price curve and the Brent curve narrowed to approximately 13% during 2010, with airlines in emerging markets generally most exposed to fuel price fluctuations due to a lack of market development for fuel hedging."

It gives food for thought that a temporary impact of the Icelandic volcanic ash can send jitters down the spine of airline investors but the jet fuel pricing spread, airlines’ hedging techniques (or the lack of it) and how it might impact operating margins is mostly raised at their AGMs. Where there are losers, there are bound to be winners but Fitch notes that the ratings of companies in the extractive industries are not expected to benefit from the price increases as the agency uses a mid-cycle pricing approach to avoid cyclical price changes having an impact on ratings. At this stage, Fitch does not anticipate a revision to its mid-cycle price deck to an extent that it would result in rating changes.

Finally, a couple of things about BP. To begin with, BP’s share swap deal with Rosneft failing to meet the May 16th deadline does not imply by default that that deal would not happen. In wake of the objection of AAR – its TNK-BP joint venture partner – there are still issues to be resolved and they will be in the fullness of time contrary to reports on the deal’s demise. A source close to the negotiations (at AAR not Rosneft) says talks are continuing.

Continuing with BP, it finally got recognition that blame for the Macondo incident is not exclusively its. Mitsui (which holds 10% of the well’s licence) and Anadarko (25%) had both blamed accident on BP’s negligence, refusing to pay or bear costs. However, Mitsui finally agreed to settle claims relating to the disaster with BP. It now agrees with BP that it was the result of oversights and mistakes by multiple parties. Undoubtedly, the pressure will now be on Anadarko to settle with BP.

According to US government figures, BP has paid out US$20.8 billion. It has invoiced Mitsui for approximately US$2.0 billion with the Japanese company expected to pay half of that at the present moment in time. A US trial on limitation of liabilities is expected to rule on the issue of gross negligence by parties concerned sometime over Q1 2012. Watch this space!

© Gaurav Sharma 2011. Graphics © Fitch Ratings, May 2011

North Sea murmurs, Q1 profits & Bin Laden

To begin with good riddance to Bin Laden! The tragedy of 9/11 still feels like yesterday. I can never forget that morning as a junior reporter watching the BBC when initial reports began trickling in and we were asked to vacate the Canary Wharf building I was at. Miles away across the pond a great tragedy was unfolding – this brings closure to the many who suffered, many known to me.

Being mechanical, there is a near negligible impact on the wider market or crude market despite brave efforts of the popular press to find connections. How markets fluctuated since morning has no direct connection with Bin Laden being killed and instability premium reflected in the price of crude remains untroubled. The threat of Al-Qaeda remains just as real in a geopolitical sense and a Middle Eastern context.

Moving away from today’s news, ratings agency Moody’s noted last week that sharply higher prices for oil and natural gas liquids have boosted business conditions for the independent exploration and production (E&P) industry, and should remain high well into 2012, offsetting persistently weak natural gas prices. In the same week, ExxonMobil and Royal Dutch Shell reported appreciable rises in Q1 profits.

ExxonMobil posted quarterly profits of US$10.7 billion, up 69% over the corresponding quarter last year. It also announced a spend of US$7.8 billion over the quarter on developing new energy supplies and said its shareholders had benefited to the tune of US$7 billion in Q1 dividends.

Shell for its part reported quarterly profits of US$6.9 billion on a current cost of supply basis, up 41% on an annualised basis. It said cost saving measures as well as higher oil prices had contributed to its Q1 profitability. Earlier, BP reported first quarter profits of US$5.5 billion, down marginally from the corresponding period last year. Its production over the quarter was also down 11% after asset sales to help pay for the cost of Macondo clean-up.

Finally, unhappy murmurs about rising taxation amid the North Sea oil & gas producers are growing. In his Budget tabled in March, UK Chancellor George Osborne raised supplementary tax on production from 20% to 32%. Reports in the British media this morning suggest the owner of British Gas Centrica says it might shut one of its major gas fields because of increased UK taxes. It is closing three fields in Morecambe Bay for a month of maintenance, may not reopen one of them.

A fortnight ago, Chevron warned of possible "unintended consequences" from the UK Budget decision to raise North Sea taxes. Its Chairman John Watson told the Financial Times, “When you increase taxes every few years, particularly without consulting with industry, there will be unintended consequences of that in terms of where we choose to invest."

In 2010, Chevron received UK government’s permission to drill an exploration well to evaluate a major prospect - the deep-water Lagavulin prospect - is 160 miles north of Shetland Islands. All this comes after a report published on April 8th by Deloitte’s Petroleum Services Group noted that North Sea offshore drilling activity fell 25% over Q1 2011.

The North West Europe Review, which documents drilling and licensing in the UK Continental Shelf (UKCS), reveals just five exploration and four appraisal wells were spudded in the UK sector between January 1 and March 31; compared to a total of 12 during the fourth quarter of 2010.

Analysts at Deloitte’s Petroleum Services Group said while the drop cannot be attributed to the recent Budget announcement, which proposed increased tax rates for oil and gas companies, it could set the pattern for activity in the future.

Graham Sadler, managing director of Deloitte’s Petroleum Services Group said, “It is important to clarify that we are talking about a relatively small number of wells that were drilled during the first quarter of the year - the traditionally quieter winter months - so this is not, in itself, an unexpected decrease. The lead-in time on drilling planning cycles can be long – even up to several years - so any impact from the recent changes to fiscal terms are unlikely to be seen until much later in the year.”

“What is clear is that despite the decrease in drilling activity towards the end of last year, and during the first months of 2011, the outlook for exploration and appraisal activity in the North Sea appeared positive. The oil price continued to rise and there were indications that this, combined with earlier UK government tax incentives, was encouraging companies to return to their pre-recession strategies. Since the Budget, a number of companies have announced that they intend to put appraisal and development projects on hold and we will have to wait to see the full effect of this change on North Sea activity levels over the coming months,” he concluded.

Deloitte’s review shows that the Central North Sea has seen the highest level of drilling activity, with the region representing 55% of all exploration and appraisal wells spudded on the UKCS during the first quarter of this year.

It also showed that the price of Brent Crude oil has experienced sustained growth throughout the period, rising 20% between December 2010 and March 2011 to a monthly average of US$114.38. This increase in price is a continuation of a trend that started in 2010, however, so far this year, the rate and pattern of growth has been much more constant with regular increases rather than the rise and dip pattern seen during 2010.

© Gaurav Sharma 2011. Photo: ExxonMobil plaque outside its building, Houston, Texas, USA © Gaurav Sharma, March 2011

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

Goodbye Houston; first thoughts from Calgary

Instability or risk premium is not being reflected in the US Mid West as much as it is in Europe in light of the Libyan situation. Following accidents in San Bruno, CA and Michigan, MI – pipeline safety legislation is likely to be added to the pile of regulatory activity related to the energy business which followed BP’s Gulf of Mexico fiasco. In fact, a bill on pipeline safety is already making its way through the US senate.

There is also common conjecture that retirement of coal-fired power plants may assist in shifting established gas flow patterns (& prices). However, the Oilholic feels while this is likely to happen at some point, it will not happen in a meaningful way any time soon. Mid West’s problem is akin to that of Australia’s when it comes to power generation – a traditional dependence on coal which is hard to tackle. Gas prices, in any case, are likely to remain low as there are abundant supplies and storage levels are solid.

Given that the US overtook Russia as the leading gas producer courtesy of shale gas, it is not bravado to assume that it could meaningfully export to Europe or that US-bound LNG could well be diverted to Europe.

Moving on to refining, some local analysts are following the “things can only get better” logic for North American refiners – who they feel are well positioned to demonstrate a recovery (or some form of stabilisation) of their margins after six troubled quarters to end-2010. The speed of the economic recovery will have a big say in the state of affairs.

After leaving Houston, the Oilholic has now arrived in its sister Canadian city of Calgary – quite a switch from a sweltering 30 C on a Texan morning to about -4 C on an Albertan evening. While both cities do not share their climate – they do share the same sense of frustration about the delays associated with the expansion project of the Keystone pipeline.

It seems Alberta and Texas are quite keen on the expansion – it’s just that everyone in between is the problem. The politics associated with this pipeline, as with other projects of its ilk is deeply complicated. However, this one involves cross-border politics, some of which has turned ugly especially in relation to the “cleanness” of Canadian oil.

And by the way its “oil sands” not “tar sands” stupid, say the locals! I’ll have more from Calgary shortly when I soak in and refine the local commentators’ viewpoints.

© Gaurav Sharma 2011. Photo: Calgary Tower, Alberta, Canada © Gaurav Sharma, March 2011

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

BP's loss, Brent’s Gain & Worries over Suez Traffic

To begin with, Brent’s strength relative to its American counterpart index continues, as the ICE Brent forward month futures contract climbed to US$101.01, last time I checked today. There are pressures to the upside bolstering the price rise, but impact of the Egyptian political crisis on traffic through the Suez Canal is not as clear cut as many popular media commentators make it out to be.

According to wires and international broadcasters, the Suez Canal is still functioning as normal and continues to be heavily guarded by the Egyptian forces. So while the potential of traffic disruption is there, I am not so sure how it can manifest itself so soon in a meaningful way. There are other factors behind, as I noted yesterday, in Brent’s strength.

Elsewhere, if you haven’t heard BP has reported an annual loss of US$4.9 billion for 2010, it’s first, though unsurprising annual loss since 1992. This compares rather unfavourably with a profit of US$13.9 billion the oil major recorded in 2009. The Gulf of Mexico oil spill has blown a Macondo sized whole in its books, though the company said it would restore its dividend payment to shareholders hitherto suspended in wake of the Gulf spill.

Another key announcement was BP’s decision to sell two US oil refineries in Texas and California thereby halving its refining capacity in the US. The sale includes the Texas City refinery, where 15 workers were killed in an explosion in 2005 – the site of BP’s last disaster in the States prior to Macondo.

The announcement vindicates my analysis for Infrastructure Journal back in November. BP is not alone; the oil majors no longer regard refining as central to their business. There’s a part of me that thinks BP would have sold its refinery assets, even if the Gulf of Mexico tragedy had not happened. The incident only brought the sale forward.

© Gaurav Sharma 2011. Photo: Macondo containment, Gulf of Mexico, USA © BP Plc