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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

To follow The Oilholic on Twitter click here.

 

To email: gaurav.sharma@oilholicssynonymous.com
 

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

Crude thoughts, an event, few articles & a lecture!

Brent’s decline continues with the forward month futures contract now well and truly below the US$110 per barrel level. In fact, when the Oilholic last checked, a price of US$108.41 was flashing on the ticker. Given that over the past seven days – OPEC, EIA and IEA – have all come out with bearish reports, the current price level should hardly be a surprise.

 

Additionally, both OPEC and IEA appear to be in broad agreement that overall concerns about economic growth in the US and the Eurozone will continue to persist over the short term at the very least. As if that wasn’t enough, the US dollar has reached a seven-month high against a basket of currencies, not least the pound sterling!

 

At such points in recent trading history, geopolitics always lends support to the oil price. Yet further evidence is emerging about the oil & gas community largely regarding the risk premium to be neutral, a theme which this blogger has consistently stressed on since September last year. Many delegates at the recently concluded International Petroleum Week (IP Week) in London, a signature European event, expressed pretty much the same sentiments.

 

Rather than relying on the Oilholic’s anecdotal evidence, here’s an observation from Société Générale analyst Michael Wittner who wrote in an investment note that, “On the geopolitical front, there seemed to be a sort of fatigue (at the IP Week), if not boredom, with the various issues and countries. In addition to Syria and Iran, there was talk about risks in Iraq and Nigeria, and even Chinese-Japanese tensions. Given recent events in Algeria, Egypt, and Mali, we were surprised at how little concern there was about North Africa.”

 

“All agreed that the geopolitical elephant in the room was still Iran, but even here, the fatigue was evident. People were well aware of Israel’s late spring/early summer “deadline”, but they were not excited about it. Some pointed to higher Saudi spare capacity (after recent cuts) and much higher pipeline capacity that could be used to avoid the Straits of Hormuz. Others simply thought that, posturing aside, there was little real appetite for a war against Iran, and that an Iranian bomb was inevitable,” he wrote further. Need we say more?

 

So in summation – tepid crude demand plus fatigued risk premium equals to no short term hope for the bulls! But at least there’s hope for the Brent-WTI spread to narrow, with the former falling and the latter rising on the back of the supply glut at Cushing, Oklahoma showing signs of abating.

 

Away from pricing matters, given that yours truly has been travelling a lot within good old England these past few weeks, there has also been plenty of time to do some reading up on trains! Four interesting articles came up while the Oilholic was experiencing the joys (or otherwise) of British railways.

 

First off, the Wall Street Journal’s Jerry A. Dicolo screams: “Brent barrels to prominence: European oil benchmark poised to overtake WTI as a global gauge.” The Oilholic has some news for the WSJ – Er…Brent is not ‘poised’ to overtake WTI as a global gauge, it has already overtaken it in terms of market sentiment! This blog first mulled the subject as far back as May 2010! Since then, even the EIA has decided to adopt Brent as a benchmark that’s more reflective of global conditions.

 

The second interesting piece of reading material yours truly encountered was a republished Bloomberg wire copy that carried feedback from an Indian refiner. In it, he suggested that the country’s refiners may be forced to halt purchases of Iranian crude as local insurers refuse to cover the risks for any Indian refinery using the Islamic Republic’s oil.

 

Bloomberg cites a certain P.P. Upadhya, Managing Director of the Mangalore Refinery in Southern India as having said, “There’s a problem with getting insurance for refineries processing Iranian oil. If there’s no clarity very soon, we all have to stop buying from Iran or risk operating the refineries without insurance.” Looks like the squeeze on Iran is going into overdrive!

 

Moving on to the third article, here is The Economist's sound take on the late Hugo Chavez’s rotten economic legacy. And finally, a Reuters’ exclusive would have you believe we Brits are planning to bid for US gas to be imported to our shores.

 

An abundance of gas, courtesy of the country’s shale bonanza has certainly lent credence to the US’ gas exporting potential. One would think if the US were to export gas, it would one fine day make its way to the UK. However, a “source” spoken to by Reuters seems to suggest that day is not that far away.

 

Speaking of shale, the Oilholic had the pleasure of listening to a brilliant lecture on the subject from Prof. Paul Stevens, the veteran energy economist and Chatham House fellow. Delivering the Institution of Engineering and Technology’s Clerk Maxwell Lecture for 2013, Prof. Stevens set about exploding the myth of a shale gas revolution taking place in Europe anytime soon.

 

He joked that North Dakota might become the next member of OPEC, but one thing is for certain Poland and other European shale enthusiasts are not getting there any time soon. Apart from the usual concerns, often mulled over by the Oilholic, such as jurisdictional prospection moratoriums and population density, pipeline access, environmental regulations etc. being very different between the US and Europe, the good professor pointed out a very crucial point.

 

“Shale rock formation in Europe is very different from what it is in North America. When ExxonMobil was disappointed in Poland, it was not for want of trying. Rather US technology was found lacking when it came to Polish geology. There is no one size fits all! The American shale revolution got where it is today through massive investment and commitment towards research and development (and over two decades of perseverance). I don’t see that level of commitment in Europe,” he said.

 

Speaking to the Oilholic, following his lecture, Prof. Stevens said the export of US gas to the UK was plausible, but that Asia was a much more natural export market for the Americans. “Plus, let’s not forget that the moment US exports start to rise meaningfully, there is always a chance the likes of Congressman Ed Markey might take a nationalistic tone and try to stunt them,” he added.

 

Quite true, after all we got a glimpse of Markey’s intellect via his ‘Bolshoi’ Petroleum remark! That’s all for the moment folks! Keep reading, keep it ‘crude’!

 

To follow The Oilholic on Twitter click here.
 

To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Sullom Voe Terminal, UK © BP Plc