On oil price direction and EMF 2019

The Oilholic returned overnight from a visit to Fujairah, United Arab Emirates, for the 9th Gulf Intelligence Energy Markets Forum; the burgeoning shipping and storage port's annual gathering of industry minds. 

And on everyone's mind - unsurprisingly - was the direction of the oil price. This blogger has maintained the market is stuck in the modest middle, given that even 58% of Saudi capacity being temporarily knocked offline last month was not enough to keep Brent futures above $70 per barrel for a sustained period of time. 

Demand concerns have returned with a vengeance to temper risk driven upticks. The Oilholic remains in the $65 per barrel Brent average bracket. But majority of the delegates to the Forum were even more bearish for the quarter, based on the findings of an instant poll conducted at Gulf Intelligence's behest by yours truly (see image top left, click to enlarge). Many are bracing for a Q4 2019 Brent price in the range of $60-$65 per barrel. 

As part of the proceedings, one also got a chance to interview Mele Kyari, Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), both to discuss the spot poll's findings, as well as how Nigeria views the current market dynamic. 

Kyari stressed that Nigeria expects global demand to continue at pace driven by petrochemicals and aviation fuel. Tied into that is of course NNPC's own, and much-needed push to both invest, as well as court investment in its downstream sector. 

And away from the main auditorium, were several informative industry roundtables. Fujairah itself is undergoing significant changes in light of current geopolitics, inward investment, and the likes of ADNOC and Saudi Aramco mulling trading and storage outposts there. Will be penning thoughts on that subject for Forbes and Rigzone shortly, but that's all from Fujairah for the moment folks. Keep reading, keep it 'crude'!

Addendum I - 06.10.19: Thoughts via Forbes - ADNOC Gets Serious About Its Oil Exports Bypassing Strait Of Hormuz Via Fujairah, here.

  

Addendum II - 07.10.19: And via Rigzone - Oil Hub of Fujairah Thriving Amid Rising Geopolitical Risk, here.

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© Gaurav Sharma 2019. Chart 1: Findings of oil price direction survey at Energy Markets Forum in Fujairah, Oct 1, 2019 © Gulf Intelligence. Photos 1 & 2: Gaurav Sharma interviews Mele Kyari, Group Managing Director of the Nigerian National Petroleum Corporation (NNPC) © Photo 1 - Samantha Morris, © Photo 2 - Gulf Intelligence, October 1, 2019.

Oil prices, OPEC shenanigans & the North Sea

It has been a crude fortnight of ups and downs for oil futures benchmarks. Essentially, supply-side fundamentals have not materially altered. There’s still around 1.3 million barrels per day (bpd) of crude oil hitting the markets in excess of what’s required.

Barrels put in storage are at an all time high, thanks either to those forced to store or those playing contango. US inventories also remain at a record high levels. 

However, the biggest story in the oil market, as well as the wider commodities market, is the strength of the US dollar. All things being equal, the dollar’s strength is currently keeping both Brent and WTI front month futures contracts at cyclical lows. The past five trading days saw quite a few spikes and dives but Friday’s close came in broadly near to the previous week’s close (see graph on the left, click to enlarge).

In the Oilholic’s opinion, a sustained period of oil prices below $60 is not ideal for unconventional exploration. Nonetheless, not all, but a sufficiently large plethora of producers just continue to grin and bear it. While that keeps happening, and the dollar remains strong, oil prices will not find support. We could very well be in the $40-60 range until June at the very least. Unless excess supply falls from 1.3 million bpd to around 750,000 bpd, it is hard to see how the oil price will receive support from supply constriction. 

Additionally, Fitch Ratings reckons should Brent continue to lurk around $55, credit ratings of European, Middle Eastern and African oil companies would take a hit. European companies that went into the slump with stretched credit profiles remain particularly vulnerable.

In a note to clients, Fitch said its downgrade of Total to 'AA-' in February was in part due to weaker current prices, and the weaker environment played a major part in the downgrade and subsequent default of Afren.

"Our investigation into the effect on Western European oil companies' credit profiles with Brent at $55 in 2015 shows that ENI (A+/Negative) and BG Group (A-/Negative) were among those most affected. Both outlooks reflect operational concerns, ENI because of weakness in its downstream and gas and power businesses, BG Group due to historical production delays. Weaker oil prices exacerbate these problems," the agency added.

Of course, Fitch recognises the cyclical nature of oil prices, so the readers need not expect wholesale downgrades in response to a price drop. Additionally, Afren remains an exception rather than the norm, as discussed several times over on this blog.

Moving on, the Oilholic has encountered empirical and anecdotal evidence of private equity money at the ready to take advantage of the oil price slump for scooping up US shale prospects eyeing better times in the future. For one’s Forbes report on the subject click here. The Oilholic has also examined the state of affairs in Mexico in another detailed Forbes report published here.

Elsewhere, a statement earlier this week by a Kuwaiti official claiming that there is no appetite for an OPEC meeting before the scheduled date of June 5, pretty much ends all hopes of the likes of Nigeria and Venezuela in calling an emergency meeting. The official also said OPEC had “no choice” but to continue producing at its current levels or risk losing market share.

In any case, the Oilholic believes chatter put out by Nigeria and Venezuela calling for an OPEC meeting in the interest of self-preservation was a non-starter. Given that we’re little over two months away from the next meeting and the fact that it takes 4-6 weeks to get everyone to agree to a meeting date, current soundbites from the ‘cut production’ brigade don’t make sense.

Meanwhile, the UK Treasury finally acknowledged that taxation of North Sea oil and gas exploration needed a radical overhaul. In his final budget, before the Brits see a General Election on May 7, Chancellor George Osborne cut the country’s Petroleum Revenue Tax from its current level of 50% to 35% largely aimed at supporting investment in maturing offshore prospects.

Furthermore, the country’s supplementary rate of taxation, lowered from 32% to 30% in December, was cut further down to 20% and its collection at a lower rate backdated to January. Altogether, the UK’s total tax levy would fall from 60% to 50%.

Osborne’s move was widely welcomed by the industry. Some are fretting that he’s left it too late. Yet others reckon a case of better late than never could go a long way with the North Sea’s glory days well behind it. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Graph: Tracking Friday oil prices close, year to date 2015 © Gaurav Sharma, March 20, 2015.

On oil windfalls and African progress

Is the discovery of crude oil a blessing or curse for emerging economies? Does it further or hinder democracy and development? Is an oil rich nation’s currency destined to suffer from Dutch Disease?

These are profound questions and nowhere do they need to be answered more than in the continent of Africa. John Heilbrunn’s book Oil, Democracy and Development in Africa published by Cambridge University Press tackles the socioeconomic and political impact of oil in sub-Saharan Africa head on. 

In a somewhat refreshing take, Heilbrunn suggests that should historical and economic situations faced by African petrostates prior to the discovery of their oil be contextualised and discounted, there’s little evidence of a curse. Taking on a more optimistic tone than most, the author sets about a fascinating explanation of why he thinks even the most despotic and least accountable of African heads of state do use some proportion of oil revenues to improve their citizens' living standards.

Improvements have “failed to be uniform”, he admits, but that’s not to say there have been none. In a book of 270 pages, split by six detailed chapters, Heilbrunn writes there is much to be positive about while not losing sight of the biggest puzzle of them all – how the discovery of a natural resource changes the national and political psyche, as it is virtually impossible to predict “how political leaders respond to resource windfalls.”

While sum of all its parts makes this book a great read, Heilbrunn’s take on resource revenues, corruption and contracts in latter stages of the narrative should strike a chord with most readers. It has to be acknowledged that some African producers are pretty high on the corruption scale, but not every producer can be tarred with the same brush. 

All said, as Heilbrunn notes, oil can do nothing, being a mere mineral of variable qualities and marketability. “People choose how to oversee their extractive industries and the effects of oil production are consequences of policy choices.”

These choices alone determine the pace and scale of progress anywhere and not just Africa. Some of the book’s conclusions might surprise many readers, some might find the narrative a bit too optimistic for their linking, but for the Oilholic it’s a book containing some unassailable truths on African progress.

Heilbrunn is not attempting to gloss over what’s wrong at African petrostates. On the contrary, he puts forward what they are doing to get it right, with all their imperfections, following on from decolonisation and the inevitable expectations (plus subsequent windfall) a resource discovery brings with it.

The Oilholic would be happy to recommend it to fellow analysts, those interested in the oil and gas business, African development, politics and the resource curse hypothesis. Last but not the least, that growing chorus of commentators calling upon the wider world to ditch archaic conclusions and reassess the impact of natural resources on developing economies would also enjoy many of Heilbrunn’s conclusions.

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© Gaurav Sharma 2014. Photo: Front Cover – Oil, Democracy and Development in Africa © Cambridge University Press, June, 2014.

The acknowledgement: OPEC flags-up US output

There should be no shock or horror – it was coming. Ahead of taking a decision on its production quota, president of the 164th OPEC conference Mustafa Jassim Mohammad Al-Shamali, who is also the deputy prime minister and minister of oil of Kuwait, openly acknowledged the uptick in US oil production here in Vienna.

 

“In the six months that have passed since the Conference met here in Vienna in May, we have seen an increasingly stable oil market, which is a reflection of the gradual recovery in the world economy. This positive development stems mainly from a healthy performance in the US, in addition to the Eurozone countries returning to growth,” Al-Shamali told reporters in his opening remarks.

 

It follows on from an acknowledgement by OPEC at its last summit in May about the impact of shale, which up and until then it hadn’t. But the latest statement was more candid and went further. “Non-OPEC oil supply is also expected to rise in 2014 by 1.2 million barrels per day (bpd). This will be mainly due to the anticipated growth in North America and Brazil,” Al-Shamali added.

 

You can add Canada and Russia to that mix as well even though the minister didn’t.

 

Turning to the wider market dynamics, Al-Shamali said that although the market had started to gradually emerge from the tough economic situation of the past few years, the pace of world economic growth remains slow. “Clearly, there are still many challenges to overcome.”

 

Finally, a few footnotes before the Oilholic takes your leave for the moment. Here is the BBC’s take why OPEC is losing control of oil prices due to US fracking – not entirely accurate but largely on the money. Meanwhile, Nigerian oil minister Diezani Alison-Madueke has just told Platts that her country supports OPEC’s current 30 million bpd crude output ceiling, at least for the next few months until the group's next meeting.

 

Alison-Madueke also said she was keen to see how OPEC saw the impact of the US shale oil and gas boom on itself. "We would like to see that we continue with volumes we have held for the last year or so at least between now and the next meeting. I think that would be a good thing. We would like to see a review of the situation referencing the shale oil and gas to see where we are at this stage as OPEC among other things."

 

Earlier, the Saudi oil minister Al-Naimi poured cold water over the idea of a production cut lest some people suggest that. He sounded decidedly cool on the subject at this morning's media scrum. So that’s three of the ministers saying the quota is likely to stay where it was. The Oilholic would say that removes all doubt. That's all from OPEC HQ for the moment folks, more from Vienna later as we gear up for an announcement! Keep reading, keep it ‘crude’! 

 

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© Gaurav Sharma 2013. Photo: OPEC media briefing room, Vienna, Austria © Gaurav Sharma 2013.

Initial soundbites before things kick-off at OPEC

The delegates and ministers have walked in, the press scrum (or should you choose the term g*ng b*ng) is over and the closed door meeting has begun – all ahead of a decision on production quotas and the possible appointment of a new secretary general.

Smart money is on OPEC maintaining output at its current level of 30 million barrels per day (bpd), with the Saudis curbing their breaches of set quotas and the cartel reporting a real terms cut in November. No one smart would put money on who the new OPEC Secretary General might be.

But before that, there are as usual some leaks here and some soundbites there to contend with. These generally nudge analysts and journalists alike in the general direction of what the decision might be. Arriving in Vienna ahead of the meeting, Saudi Arabia’s oil minister Ali al-Naimi, the key man at the table, shunned the international media to begin with and chose to issue a statement via his country’s national press agency.

In his statement, Naimi said the main aim of the December 12 meeting is to keep the balance of the global crude markets in order to serve the interests of producers and consumers. He added that balancing the market will help the growth of the global economy. Since then, he has maintained the same line in exchanges with journalists.

As expected, the Iranians feel a cut in production was needed, saying their fellow members are producing 1 million bpd more than they ought to be. Iran said OPEC’s statement last month, that economic weakness in some major consuming countries could shave off 20% from its global demand growth outlook for 2013, lends credence to their claim. However, a delegate admitted there was "little need to change anything" and that the current US$100-plus OPEC basket price was "ok."

Walking in to OPEC HQ, UAE Energy Minister Mohammad bin Dhaen al-Hamli told the Oilholic that he "hopes to solve" the issue of who will be the next Secretary General. Libya's new oil minister Abdelbari al-Arusi, said he was "happy with OPEC production levels.”

Meanwhile, two key men are not in Vienna – namely Kuwait’s oil minister Hani Abdulaziz Hussein and Venezuela’s Rafael Ramirez. According to a Venezuelan scribe, the latter has sent Bernard Mommer, the OPEC representative for Venezuela’s oil ministry, in his place so he could support President Hugo Chavez, who is undergoing cancer surgery in Cuba. Ramirez added that Venezuela did not believe it was necessary for OPEC to increase production quotas and that the market was “sufficiently” supplied.

Finally, in his opening address, Iraqi oil minister and president of the conference Abdul-Kareem Luaibi Bahedh said OPEC faces a period of continuing uncertainty about the oil market outlook. "To a great extent, this reflects the lack of a clear vision on the economic front. The global economy has experienced a persistent deceleration since the beginning of the year...In the light of this, world oil demand growth forecasts for this year have been revised down frequently," he added.

Turning to the oil price, he said it had strengthened in the six months since June. "For its part, OPEC continues to do what it can to achieve and maintain a stable oil market...However, this is not the responsibility of OPEC alone. If we all wish to benefit from a more orderly oil market, then we should all be prepared to contribute to it. This includes consumers, non-OPEC producers, oil companies and investors, in the true spirit of dialogue and cooperation," said the Iraqi oil minister.

Meanwhile, as a footnote, the IEA raised its projections for non-OPEC supply in 2013 in its Monthly Oil Market Report published on December 12. The agency said global oil production increased by 730,000 bpd to 91.6 million bpd in November. With non-OPEC production rebounding "strongly" in November to 54.0 million bpd, the IEA revised up its forecasts for non-OPEC fourth quarter supply by 30,000 bpd to 53.8 million bpd. For next year, IEA expects non-OPEC production to rise to 54.2 million bpd; the fastest pace since 2010.

It also added that OPEC supply rose by "a marginal" 75,000 bpd to "31.22 million bpd". IEA said the OPEC crude supply increases were led by Saudi Arabia, Angola, Algeria and Libya but offset by recent production problems in Nigeria. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo:  OPEC briefing room at 162nd meeting of OPEC, Vienna, Austria © Gaurav Sharma, December 2012.

Crude talking points of the last two weeks

In a fortnight during which the Bank of England hired a man whose signature appears on Canadian banknotes as its new governor, the oil & gas world reiterated its own cross-border nature, when an American firm sold a Kazakh asset to an Indian company. That firm being ConocoPhillips, the asset being its 8.4% stake in Kazakh oil field Kashagan and the Indian buyer being national oil company (NOC) ONGC Videsh – all signed, sealed and delivered in a deal worth around US$5.5 billion.

 

Even with an after-tax impairment of US$400 million, the deal represents a tidy packet for ConocoPhillips as it attempts to cut its debt. Having divested its stake in Russia’s Lukoil, the American oil major has already beaten its asset sale programme target of US$20 billion. So when the final announcement came, it was not much of a surprise as Kazakhstan government officials had revealed much earlier that a move was on the cards.

 

Still it is sobering to see ConocoPhillips divest from Kashagan – the world's biggest oilfield discovery by volume since 1968. It may hold an estimated 30 billion barrels of oil. Phase I of the development, set to begin next year, could yield around 8 billion barrels, a share of which ONGC is keenly eyeing.

India imports over 75% of the crude oil it craves and is in fact the world's fourth-biggest oil importer by volume. Given this dynamic, capital expenditure on asset with a slower turnaround may not be an immediate concern for an Indian NOC, but certainly is for investors in the likes of ConocoPhillips and its European peers.

On the back of a series of meetings between investors and its EMEA natural resources & commodities team in London, Fitch Ratings recently revealed that elongated upstream investment lead times and a (still) weak refining environment in Western Europe remain a cash flow concern for investors.

 

They seemed most concerned about the lead time between higher upstream capex and eventual cash flow generation and were worried about downward rating pressure if financial metrics become strained for an extended period. It is prudent to mention that Fitch Ratings views EMEA oil & gas companies' capex programmes as measured and rational despite a sector wide revised focus on upstream investment.

 

For example, the two big beasts – BP and Royal Dutch Shell – are rated 'A'/Positive and 'AA'/Stable respectively; both have increased capex by more than one-third for the first 9 months of 2012 compared to the same period last year. Elsewhere in their chats, unsurprisingly Fitch found that refining overcapacity and weak utilisation rates remain a concern for investors in the European refining sector. Geopolitical risk is also on investors' minds as they look to 2013.

 

While geopolitical events may drive oil prices up, which positively impact cash flow, interruptions to shipping volumes may more than offset gains from these price increases – negatively impacting both operating cash flow and companies' competitive market positions. Away from capex concerns, Fitch also said that shale gas production in Poland could improve the country's security of gas supplies but is unlikely to lead to large declines in gas prices before 2020.

In a report published on November 26, Arkadiusz Wicik, Fitch’s Warsaw-based director and one of the most pragmatic commentators the Oilholic has encountered, noted that shale gas production in Poland, which has one of the highest shale development potentials in Europe, would lower the country's dependence on gas imports. Most of Poland's imports currently come from Russia.

 

However, Wicik candidly noted that even substantial shale gas production by 2020, is unlikely to result in large declines in domestic gas prices.

 

"In the most likely scenario, shale gas production, which may start around 2015, will not lead to a gas oversupply in the first few years of production, especially as domestic gas demand may increase by 2020 as several gas-fired power plants are planned to be built. If there is a surplus of gas because shale gas production reaches a significant level by 2020, this surplus is likely to be exported," he added.

 

In actual fact, if the planned liberalisation of the Polish gas market takes place in the next few years, European spot gas prices may have a larger impact on gas prices in Poland than the potential shale gas output.

 

From a credit perspective, Fitch views shale gas exploration as high risk and capital intensive. Meanwhile, the UK government was forced on the defensive when a report in The Independent newspaper claimed that it was opening up 60% of the country’s cherished countryside for fracking.

 

Responding to the report, a government spokesperson said, "There is a big difference between the amount of shale gas that might exist and what can be technically and commercially extracted. It is too early to assess the potential for shale gas but the suggestion more than 60% of the UK countryside could be exploited is nonsense."

 

"We have commissioned the British Geological Survey to do an assessment of the UK's shale gas resources, which will report its findings next year," he added.

 

Barely had The Independent revealed this ‘hot’ news, around 300 people held an 'anti-fracking' protest in London. Wow, that many ‘eh!? In defence of the anti-frackers, it is rather cold these days in London to be hollering outside Parliament.

 

Moving on to the price of the crude stuff, Moody’s reckons a constrained US market will result in a US$15 per barrel difference in 2013 between the two benchmarks – Brent and WTI – with an expected premium in favour of the former. Its recently revised price assumptions state 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. While the price assumption for Brent beyond 2014 is unchanged, the agency has revised both the 2013 and 2014 assumptions.

 

For WTI, Moody’s has left its previous assumptions unchanged at US$85 in 2013, 2014 and thereafter. Such a sentiment ties-in to the Oilholic’s anecdotal evidence from the US and what many in City concur with. So Moody’s is not alone in saying that Brent’s premium to WTI is not going anywhere, anytime soon. Even if the Chinese economy tanks, it’ll still persist in some form as both benchmarks will plummet relative to market conditions but won’t narrow up their difference below double figures.

 

Finally, on the noteworthy corporate news front, aside from ConocoPhillips’ move, BP was in the headlines again for a number of reasons. Reuters’ resident Oilholic Tom Bergin reported in an exclusive that BP is planning a reorganisation of its exploration and production (E&P) operations. Citing sources close to the move, Bergin wrote that Lamar McKay, currently head of BP's US operations, will become head of a new E&P unit; a reinstatement of a role that was abolished in 2010 in the wake of the oil spill.

 

Current boss Bob Dudley split BP's old E&P division into three units on his elevation to CEO to replace Tony Hayward, whose gaffes in during the Gulf of Mexico oil spill led to his stepping down. BP declined to comment on Bergin’s story but few days later provided an unrelated newsworthy snippet.

 

The oil giant said it had held preliminary talks with the Russian government and stakeholders in the Nordstream pipeline about extending the line to deliver gas to the UK. BP said any potential extension to the pipeline was unlikely to be agreed before mid-2013.

 

The pipeline’s Phase I, which is onstream, runs under the Baltic Sea bringing Russian gas into Germany. A source described the move as “serious” and aimed at diversifying the UK’s pool of gas supplying nations which currently include Norway and Qatar as North Sea production continues to wane. As if that was not enough news from BP for one fortnight, the US government decided to "temporarily" ban the company from bagging any new US government contracts.

 

The country's Environmental Protection Agency (EPA) said on November 28 that the move was standard practice when a company reaches an agreement to plead guilty to criminal charges as BP did earlier in the month. New US E&P licences are made available regularly, so BP may miss out on some opportunities while the ban is in place but any impact is likely to be relatively ephemeral at worst. No panic needed!

 

On a closing note, in a move widely cheered by supply side industry observers, Shell lifted its force majeure on Nigeria's benchmark Bonny Light crude oil exports on November 21 easing supply problems for Africa’s leading oil producer. The force majeure, implying a failure to meet contractual obligations due to events outside of corporate control, on Bonny Light exports came into place on October 19 following a fire on a ship being used to steal oil. It forced the company to shut down its Bomu-Bonny pipeline and defer 150,000 barrels per day of production.

 

However, Shell said that force majeure on Nigerian Forcados crude exports remains in place. Forcados production was also stopped owing to damage caused by suspected thieves tapping into the Trans Forcados Pipeline and the Brass Creek trunkline. As they say in Nigeria - it’s all ok until the next attempted theft goes awry. That’s all for the moment folks! Keep reading, keep it 'crude'!

 

© Gaurav Sharma 2012. Photo: Oil Rig, USA © Shell

‘Oh Frack’ for OPEC, ‘Yeah Frack’ for IEA?

In a space of a fortnight this month, both the IEA and OPEC raised “fracks” and figures. Not only that, a newly elected President Barack Obama declared his intentions to rid the USA of “foreign oil” and the media was awash with stories about American energy security permutations in wake of the shale bonanza. Alas, the whole lot forgot to raise one important point; more on that later.

 

Starting with OPEC, its year-end calendar publication – The World Oil Outlook – saw the oil exporters’ bloc acknowledge for the first time on November 8 that fracking and shale oil & gas prospection on a global scale would significantly alter the energy landscape as we know it. OPEC also cut its medium and long term global oil demand estimates and assumed an average crude oil price of US$100 per barrel over the medium term.

 

“Given recent significant increases in North American shale oil and shale gas production, it is now clear that these resources might play an increasingly important role in non-OPEC medium and long term supply prospects,” its report said.

 

The report added that shale oil will contribute 2 million barrels per day (bpd) towards global oil supply by 2020 and 3 million bpd by 2035. If this materialises, then the projected rate of incremental supply is over the daily output of some OPEC members and compares to the ‘official’ daily output (i.e. minus the illegal siphoning / theft) of Nigeria.

 

OPEC’s first acknowledgement of the impact of shale came attached with a caveat that over the medium term, shale oil would continue to come from North America only with other regions making “modest” contributions over the longer term at best. For the record, the Oilholic agrees with the sentiment and has held this belief for a while now based on detailed investigations in a journalistic capacity (about financing shale projects).

 

OPEC admitted that the global economy, especially the US economy, is expected to be less reliant on its members, who at present pump over a third of the world's oil and have around 80% of planet’s conventional crude reserves. Pay particular attention to the ‘conventional’ bit, yours truly will come back to it.

 

According to the exporters’ bloc, global demand would reach 92.9 million bpd by 2016, down over 1 million from its 2011 report. By 2035, it expects consumption to rise to 107.3 million bpd, over 2 million less than previous estimates. To put things into perspective, global demand in 2011 was 87.8 million bpd.

 

Partly, but not only, down to shale oil, non-OPEC output is expected to rise to 56.6 million bpd by 2016, up 4.2 million bpd from 2011, the report added. So OPEC expects demand for its crude to average 29.70 million bpd in 2016; much less than its current output (ex-Iraq).

 

"This downward revision, together with updated estimates of OPEC production capacity over the medium term, implies that OPEC crude oil spare capacity is expected to rise beyond 5 million bpd as early as 2013-14," OPEC said.

 

"Long term oil demand prospects have not only been affected by the medium term downward revisions, but by higher oil prices too…oil demand growth has a notable downside risk, especially in the first half of 2013. Much of this risk is attributed to not only the OECD, but also China and India," it added.

 

So on top of a medium term crude oil price assumption of US$100 per barrel (by its internal measure and OPEC basket of crudes, which usually follows Brent not WTI), the bloc forecasts the price to rise with inflation to US$120 by 2025 and US$155 by 2035.

 

Barely a week later, IEA Chief Economist Fatih Birol – who at this point in 2009 was discussing 'peak oil' – created ripples when he told a news conference in London that in his opinion the USA would overtake Russia as the biggest gas producer by a significant margin by 2015. Not only that, he told scribes here that by 2017, the USA would become the world's largest oil producer ahead of the Saudis and Russians. 

 

Realising the stirrings in the room, Birol added that he realised how “optimistic” the IEA forecasts were sounding given that the shale oil boom was a new phenomenon in relative terms.

 

"Light, tight oil resources are poorly known....If no new resources are discovered after 2020 and plus, if the prices are not as high as today, then we may see Saudi Arabia coming back and being the first producer again," he cautioned.

 

Earlier in the day, the IEA forecasted that US oil production would rise to 10 million bpd by 2015 and 11.1 million bpd in 2020 before slipping to 9.2 million bpd by 2035. It forecasted Saudi Arabia’s oil output to be 10.9 million bpd by 2015, 10.6 million bpd in 2020 but would rise to 12.3 million bpd by 2035.

 

That would see the world relying increasingly on OPEC after 2020 as, in addition to increases from Saudi Arabia, Iraq will account for 45% the growth in global oil production to 2035 and become the second-largest exporter, overtaking Russia.

 

The report also assumes a huge expansion in the Chinese economy, which the IEA said would overtake the USA in purchasing power parity soon after 2015 (and by 2020 using market exchange rates). It added that the share of coal in primary energy demand will fall only slightly by 2035. Fossil fuels in general will remain dominant in the global energy mix, supported by subsidies that, in 2011, rose by 30% to US$523 billion, due mainly to increases in the Middle East and North Africa.

 

Fresh from his re-election, President Obama promised to “rid America of foreign oil” in his victory speech prior to both the IEA and OPEC reports. An acknowledgement of the US shale bonanza by OPEC and a subsequent endorsement by IEA sent ‘crude’ cheers in US circles.

 

The US media, as expected, went into overdrive. One story – by ABC news – stood out in particular claiming to have stumbled on a shale oil find with more potential than all of OPEC. Not to mention, the environmentalists also took to the airwaves letting the great American public know about the dangers of fracking and how they shouldn’t lose sight of the environmental impact.

 

Rhetoric is fine, stats are fine and so are verbal jousts. However, one important question has bypassed several key commentators (bar some environmentalists). That being, just how many barrels are being used, to extract one fresh barrel? You bring that into the equation and unconventional prospection – including US and Canadian shale, Canadian oil sands and Brazil’s ultradeepwater exploration – all seem like expensive prepositions.

 

What’s more OPEC’s grip on conventional oil production, which is inherently cheaper than unconventional and is expected to remain so for sometime, suddenly sounds worthy of concern again.

 

Nonetheless “profound” changes are underway as both OPEC and IEA have acknowledged and those changes are very positive for US energy mix. Maybe, as The Economist noted in an editorial for its latest issue: “The biggest bonanza from all this new (US) energy would be if users paid the real cost of consuming oil and gas.”

 

What? Tax gasoline users more in the US of A? Keep dreaming sir! That’s all for the moment folks! Keep reading, keep it crude!

 

© Gaurav Sharma 2012. Oil prospection site, North Dakota, USA © Phil Schermeister / National Geographic.

The South Sudan question & other crude matters

Where South Sudan fits in the oil world has troubled ‘crudely’ inclined geopolitical analysts for some time now. The country celebrated the first anniversary of its creation on July 9th. But there is little to cheer about yet for South Sudan which inherited over 75% of parent Sudan’s proven oil reserves but is overtly reliant on the latter’s infrastructure to bring it to market. Sources with expertise as well as anyone with a modicum of interest in current events would agree that South Sudan’s outlook is bleak at best and abysmal at worst following decades of conflict. That’s notwithstanding a prolonged border dispute with the North, 170,000-plus refugees and tension over oil revenues which have only just shown signs of easing.

While it is early days, on August 4th a Reuters’ flash stating that the North and South sides had pulled back from the brink of war and finally agreed on oil transit payments was widely welcomed from trading floors to the Office of US Secretary of State Hillary Clinton. And what has emerged so far is a relief for everyone from Elf to Total, from OMV to CNPC; the Chinese being the biggest players in Sudan. Of the seven exploration blocks, CNPC is majorly involved with four in case you didn’t know.

Yet deep down everyone, not least the Oilholic, is pragmatic enough to acknowledge that the time to uncork the champagne is not here yet. This humble blogger was not in the Ethiopian capital of Addis Ababa where the agreement was reached, but courtesy dispatches from kindred souls in diplomatic circles it is known that South Sudan agreed to pay North Sudan just over US$9.05 per barrel for usage of its transport, supply and logistics infrastructure to move the crude stuff to Port Sudan.

However, nearly a fortnight on from the announcement, we still await an announcement about when the South will resume oil exports which were stopped in January. That said North Sudan will receive US$3 billion as compensation for revenue lost in that period.

The agreement is not the end of South Sudan’s problems. Without even having meaningfully exploited its precious resources, the world's newest nation is already a case study for the resource curse hypothesis. With oil production having only begun in 2005 and anti-graft measures either side of the border being ‘less than worse’, it can be safely concluded that South Sudan is more likely to resemble a 1970s Nigeria than a 2012 Botswana.

If the Americans press South Sudan to act on graft they are labelled as arrogant, the South Africans as patronising, the Brits as colonials and so on in populist circles even if the government is partially listening. The Chinese way to calm the situation either side of the disputed border and improving things is by offering to buy the crude stuff at above existing market rates (as they did in February).

Clue – nothing is going to change meaningfully anytime soon. Alas, with a production peak for existing facilities forecast for 2020, a turnaround is needed and fast! At least a plan to move away from overreliance on the North by building a pipeline to Kenya is a positive if it materialises. Happy Belated Birthday South Sudan!

Away from Sudanese problems, but sticking with the African continent – Nigeria has signed an ‘initial’ agreement with USA’s Vulcan Petroleum Resources Ltd.; a Vulcan Capital Management SPV, to build six new oil refineries worth US$4.5 billion. If ‘initial’ becomes ‘final’ and the deal materialises, it would add to the four refineries Nigeria already has increasing refining capacity by 180,000 barrels per day.

For a country which is Africa’s largest oil exporter but a net importer of refined distillates, the Oilholic has always opined that seeing is believing. So we’ll believe when we see and greet the announcement with cautious optimism.

Moving to some corporate news which also has an African flavour, its emerged that Edinburgh-based independent upstart Melrose Resources has announced a merger with Ireland’s Petroceltic. Both companies will now merge operations in North Africa along with Black Sea and the Mediterranean.

The new company will have Petroceltic’s branding and will be headquartered in Ireland. The merger values Melrose at £165 million with Petroceltic shareholders having a 54% stake in the merged company and Melrose shareholders having the rest. Sounds like a sound move!

Finally, a new computer virus is doing the rounds targeting energy infrastructure being dubbed by the security firms as the “Shamoom” attack. A notice from Symantec (available here) describes the virus as “a destructive malware that corrupts files on a compromised computer and overwrites the MBR (Master Boot Record) in an effort to render a computer unusable.”

On Wednesday, Saudi Aramco said it was subject to a virus attack but did not acknowledge whether it was a Shamoom attack. A spokesperson said Aramco had now isolated its computer networks as a precautionary measure while stressing that the attack had no impact on its production. Virulent times in the crude world. That’s all for the moment folks! Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Oil worker © Shell

An OPEC seminar & an Indian minister

Indian oil minister S. Jaipal Reddy is rather sought after these days. You would be, if you represented one of the biggest consumers of the crude stuff. So it is just about right that OPEC’s 5th international seminar here in Vienna had Reddy speak at a session titled: “Oil and the World Economy.”

In face of growing international pressure to reduce its dependence on Iranian oil and running out of capital market mechanisms to actually pay for the stuff in wake of US/EU sanctions, the Indian minister certainly had a few things to say and wanted to be heard.

India is the world's fourth-largest oil importer with all of its major suppliers being OPEC member nations, viz. - Saudi Arabia, Iraq and Iran. Given what is afoot from a global macroeconomic standpoint, Reddy has called upon oil producing and consuming countries to work together to build trust and share market data to establish demand certainty in international oil markets.

Unsurprisingly, he admitted that in an oil-importing country like India, higher oil prices lead to domestic inflation, increased input costs, an increase in the budget deficit which invariably drives up interest rates and slows down the economic growth.

“There could not be a more direct cause and effect relation than high oil prices retarding economic growth of oil-importing countries,” Reddy said adding that a sustained US$10 per barrel increase in crude prices reduces growth in developing countries by 1.5%.

“We are meeting in difficult times. The Eurozone crisis, the continuing recession in the global economy, rising geopolitical tensions, a sustained phase of high and volatile international oil prices, extraneous factors continuing to influence the price formation of oil – all these pose serious challenges to the health of the global economy and stability of the world’s financial system. The current global financial crisis, which has lasted longer than we thought in 2008, is the greatest threat faced by the global economy since the Great Depression eight decades ago,” he said further.

Reddy revealed that between the Financial Year 2010-11 and 2011-12, India’s annual average cost of imported crude oil increased by US$27 per barrel, making India’s oil import bill rise from US$100 billion to a whopping US$140 billion.

“Furthermore, since we could not pass on the full impact of high international oil prices, we had to shell out subsidies to consumers amounting to US$25 billion dollars...India’s GDP grew at 6.9% during the last financial year down from the 8% plus growth rate experienced in the past few years,” he continued.

India and perhaps many others see themselves distinguishing two schools of thoughts here in Vienna. One school holds that the global economy has built up enough resilience to absorb oil price hikes due to (a) stronger demand from emerging economies and, (b) more enlightened Central Bank policies; the other school is categorical that high oil prices are one of the primary reasons for the weak conditions in the economies of the US and Europe.

“We subscribe to the latter view and hold that very high and volatile oil prices will continue to weaken global efforts for an expeditious recovery from the ongoing global economic recession and financial crisis,” Reddy concluded.

The viewpoint of an importers’ club member is always welcome at an exporting cartel’s event. For good measure, the representatives of Nigeria, Ecuador and Iran provided the exporters’ perspective and IFC’s spokesperson did the balancing act as a sideshow. As for the word “Iran” and the sanctions it faces; the Oilholic has been told in no uncertain terms by quite a few key people that it’s...er...ahem...a taboo subject at this meeting. That's all for the moment folks. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Indian Gas Station © Indian Oil Corporation Ltd.

Farewell to India, global spills & crude pricing!

After a short trip to India, the Oilholic bids farewell to Delhi via its swanky impressive new terminal at Indira Gandhi International airport which the city's residents can be justifiably proud of. However, the financial performance of its national carrier – Air India – which is bleeding cash and could not possibly survive without government subsidy leaves a lot to be desired. Just as the Oilholic was checking in thankfully, for his British Airways flight home, news emerged that Air India had been denied jet fuel for almost four hours overnight on account of non-payment of bills.

Doubly embarrassing was the fact that those holding back fuel for the beleaguered national carrier were NOCs - Indian Oil, Bharat Petroleum and Hindustan Petroleum! Who can blame the trio, for Indian newspapers claimed that Air India owed in excess of INR 40 billion (US$812.8 million) in unpaid fuel bills.

So much so that in 2011 Indian NOCs put the airline on a “cash-and-carry” deal, requiring it to pay every time it refuelled its planes, rather than get a 90-day grace period usually given to airlines. Despite a merger with Indian Airlines in 2007, Air India continues to struggle even in a market as busy and vibrant as India where domestic, regional and international carriers are mushrooming (though not all of them successfully; just ask Kingfisher Airlines).

Away from Indian airports and airlines to crude matters, the US Eastern District Court of Louisiana issued a partial summary judgment on January 31, 2012 on BP’s indemnity obligations in wake of the Gulf of Mexico oil spill versus Halliburton’s liability. The summary states that BP must indemnify Halliburton for any third party claims related to pollution and contamination that did not arise from Halliburton's own actions. In addition, the indemnity is valid even if Halliburton is found to be grossly negligent, although the indemnity could be voided if Halliburton committed fraud. Ratings agency Moody's says the ruling is “modestly credit positive” for Halliburton and does not affect it its A2 rating with a stable outlook at this time.

Meanwhile, in an ongoing offshore spill in Nigeria, agency reports suggest that it may take Chevron around 100 days to drill a relief well at the site of a deadly blowout incident off the country’s soiled coastline last month. A Bloomberg report published in Business Week notes that another environmental catastrophe may be unfolding.

Continuing with the depressing subject of spills, Petrobras says that no more traces of oil were found in the sea during overflights carried out on Friday in the Carioca Nordeste spill site, in the Santos Basin. Therefore, in accordance with the procedures laid down in the country’s Emergency Plan, the contingency actions have been demobilised.

Petrobras says it will now only request approval to resume the Carioca Nordeste Extended Well Test after the investigation concerning the causes of the incident has been completed. The company emphasises that the rupture took place in the pipeline connecting the well to the platform. So no oil leaked at the well, which was closed automatically after the pipeline broke. As such, the incident did not take place in the pre-salt layer, which is nestled at a depth of over 2,000 meters under the seabed.

On a crude pricing note before flying home – while in India, the Oilholic notes that none of the main global equity indices have provided market direction as the weekend approaches and the Greek situation weighs heavily on investor sentiment. Amid crudely bearish trends, caution is the byword ahead of US employment data and the continuing Greek tragedy. The fact that both benchmarks - Brent and WTI - are resisting their current levels is down to the rhetoric by and on Iran. Thats all for the moment folks, keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Indira Gandhi International airport Terminal 3, Delhi, India © Gaurav Sharma 2012.

Looming embargo on Iran, Nigeria & few other bits

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

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

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

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

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

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

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

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

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

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

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

No OPEC Production Change & No Surprise

As expected, no major surprises came out of OPEC's 158th Meeting in the Ecuadorian capital Quito where the cartel left its production quotas unchanged this weekend. Some four of the twelve oil ministers from member nations – namely those of Kuwait, Qatar, Nigeria and Iraq – did not even turn up and sent junior officials instead.

It was interesting listening to an APTV recording of a press conference prior to the commencement of the OPEC meeting wherein none other than the Saudi Arabian Oil Minister Ali al-Naimi told a media scrum, “You guys really worry too much about prices. They go up, they go down. What’s new?”

We ask only because there is the little matter of the price of black gold capping US$90 per barrel either side of the pond for the first time in two years. He predicted a few seconds later that there would be no increase in OPEC production and here we are a few days hence. Interestingly, on the same day as Naimi was chiding reporters in Quito, the Paris-based International Energy Agency (IEA) opined that OPEC may come under pressure over 2011 to raise production.

IEA currently expects oil demand in 2011 to rise by 1.3 million bpd; 260,000 bpd more than previously forecast. In an accompanying statement, it said, "Although economic concerns remain skewed to the downside, not least if current high prices begin to act as a drag on growth, more immediately demand could surprise to the upside."

Overall, Global oil supply reached 88.1 million barrels a day last month, hitherto its highest ever level. Furthermore, the IEA forecasts world demand to expand 1.5 per cent in 2011 to 88.8 million barrels a day, which if recorded would also be a record. Its medium term projections for world oil demand for 2009-2015 is an average rise of 1.4 million bpd each year; an increment from its June assessment.

© Gaurav Sharma 2010. Photo: OPEC Logo © Gaurav Sharma

Nigeria is a Crude Spot with Crude Oil, Says Peel

Nigeria is a complicated country - a confused ex-colonial outpost with a complex ethnic and tribal mix turned into a unified nation and given its independence by the British some five decades ago. Having crude oil in abundance complicates things even further.

Some say the history of crude oil extraction has a dark and seedy side; most say nowhere is it more glaringly visible than in Nigeria. On the back of having interviewed Nigeria's petroleum minister - Diezani Kogbeni Alison-Madueke for Infrastructure Journal, I recently read a candid book on the country titled - A Swamp Full of Dollars: Pipelines and Paramilitaries at Nigeria's Oil Frontier written by Michael Peel, a former FT journalist, who spent many-a-year in Nigeria. He presents a warts n' all account about this most chaotic and often fascinating of African countries shaped by oil, driven by oil and in more ways than one - held to ransom by oil.

The author dwells on how the discovery of black gold has not been quite the bonanza for its peoples who remain among the poorest and most deprived in this world. End result is growing dissent and chaos - something which was glaringly visible between 2006-2009 when the oil rich Niger Delta went up in flames.

Peel's book is split into three parts, comprising of nine chapters, containing a firsthand and first rate narration of the violence, confusion, partial anarchy and corruption in Nigeria where its people who deserve better have to contend with depravity and pollution. Some have risen up and abide by their own rule - the rule of force, rather than the law.

If you seek insight into this complex country, Peel provides it. If you seek a travel guide - this is one candid book. If you seek info on what went wrong in Nigeria from a socioeconomic standpoint, the author duly obliges. Hence, this multifaceted work, for which Peel deserves top marks, is a much needed book.

I feel it addresses an information gap about a young nation, its serious challenges, addiction to its oil endowment and the sense of injustice the crude stuff creates for those who observe the oil bonanza from a distance but cannot get their hands into the cookie jar.

Peel notes that the chaos of Niger delta is as much a story of colonial misadventure, as it is about corporate mismanagement, corruption in the bureaucracy and a peculiar and often misplaced sense of entitlement that creates friction between the country's haves and have nots.

Drop into the mix, an unfolding ecological disaster and you get a swamp full of dollars whose inhabitants range from impromptu militias with creative names to Shell, from terrorists to ExxonMobil, from leaking pipelines to illegal crude sales.

© Gaurav Sharma 2010. Book Cover © I.B. Tauris

Final Thoughts From the 157th OPEC Conference

Alongside Thursday’s decision by OPEC to hold its official oil production target at 24.84 million barrels a day, i.e. the level set following a production cut in December 2008; the cartel also noted that global oil demand had dipped in two concurrent years; a situation unseen since the 1980s.

It bemoaned the “rollercoaster” ride in crude prices, particularly between Q4 2007 and Q1 2009. As usual speculators were blamed, with OPEC noting that oil had increasingly emerged as an asset class, with “excessive speculation adding appreciably to market volatility.”

It also appears that the cartel is irked by renewable energy initiatives or at least the talk of renewable energy. OPEC believes that the ambiguity of a number of energy and environmental policies, often with “evidently over-ambitious targets”, particularly in developed regions, has led to uncertainty in regards to future oil demand requirements.

The 158th OPEC conference would be held in Quito, Ecuador on December 11th, where the cartel hopes to publish its Long Term Strategy, as discussed by its 12 member nations here in Vienna on Thursday. Following that, OPEC would meet again in June 2011 in Vienna.

In a surprise move, it was confirmed Iran would assume OPEC presidency in January 2011; it last held the post in 1975. And last but not the least, there is finally a lady at the OPEC table – Nigeria's petroleum minister - Diezani Kogbeni Alison-Madueke, who having been a Shell executive took a certain amount of delight in telling the assembled press scrum that she had been in male dominated industries before and pretty much held her own!

To summarise, OPEC – in line with prevailing sentiment – noted that the market remains well supplied and given the downside risk to the global economy, did not feel the need to raise production.

That’s it from Vienna – time to say Auf Wiedersehen!

© Gaurav Sharma 2010. Photo: Nigeria's petroleum minister Diezani Kogbeni Alison-Madueke (Centre), © Gaurav Sharma, OPEC 157th Conference, Vienna, Oct 14, 2010