‘Cash-all-gone’ project and [Too Much] Oil and [Less] Money Conference

After billions of dollars being spent, delays and pipeline leaks, Kazakhstan's offshore Caspian Sea located Kashagan oilfield – often dubbed ‘cash-all-gone’ by the wider energy industry – is back onstream with its first cargo having been dispatched and a gradual uptick in production to 370,000 barrels per day (bpd) expected by the fourth quarter of 2017.

Discovered at the turn of the millennium, the much maligned Kashagan has cost at least $50 billion so far. A report by CNN Money back in 2012 claimed a staggering $116 billion had been spent, something that those involved hotly contest. Deemed the main source of supply for the Kazakhstan-China Oil pipeline, the field also has a $5 billion stake in it owned by China.

While its good news all around, the only issue is that one of the most expensive offshore oil projects in the world is coming onstream at a time when the oil price is lurking around $50 per barrel and the market is wishing there were fewer barrels of the crude stuff rather than more.

With all gathering and processing infrastructure in place for a 2013 start, including 20 pre-drilled production wells, Kashagan could have captured the upside of record high oil prices if had production continued as planned back then, say the good folks at research and consulting outfit GlobalData. However, a pipeline leak scuppered it all back then and triggered another protracted delay.

Anna Belova, GlobalData’s Senior Oil & Gas Analyst, says,"Instead, the project has restarted in today's oversupplied market, and while the oil price has rebounded, the current levels would not justify Kashagan's full cycle capital expenditure (capex), which exceeds $47 billion to date."

One thing is all but guaranteed; more oil barrels are on their way to the global supply pool. Belova adds: "Current processing capacity for Kashagan’s Phase 1 with all three lines online targets 370,000 bpd, potentially increasing to 450,000 bpd but under the 495,000 bpd capacity.

"With a large number of pre-drilled wells and a multi-stage processing build-up, Kashagan is well positioned to reach its targeted capacity for Phase 1 by 2018. This paves the way for negotiations on full-field development that has a potential bring over 1.1 million bpd to global crude markets."

Wonder if someone has sent the projections to Russia and OPEC? For a real-terms cut of say 1.5 million bpd – should there by one from the first quarter of 2017 onward coordinated by Riyadh and Moscow – would be more or less made up by Kashagan alone within 12 months, forget other non-OPEC producers. What's more, much of it would be going straight via pipeline to China, currently the world's largest importer of crude.

As for the oil price, despite net-shorts being at their lowest in weeks, if US Commodity Futures Trading Commission (CFTC) data is anything to go by, we are still stuck pretty much either side of $50 per barrel. Here's the Oilholic’s latest take in a Forbes post.

Meanwhile, a veritable who’s-who of oil and gas industry arrived in London last week for the Oil and Money Conference 2016, an industry jamboree that could well have been renamed – "Too Much Oil and Less Money" Conference for its latest installment. Beyond the soundbites and customary  schmoozing, this year's Petroleum Executive of the Year was Khalid Al-Falih, who has been in his job as Saudi Energy Minister for a really long five months, but the accolade one suspects was for his role as Chairman of Saudi Aramco.

However, the good thing about these annual industry shindigs is that you get to meet old friends, among whom the Oilholic counts Deborah Byers, EY’s Oil & Gas Leader and Managing Partner of its Houston Practice as one.

While EY is not in the business of price forecasting, Byers suggests the industry is adjusting to a new normal in the $40-60 per barrel range, one that would be hard to shake-off over the short-term barring a high magnitude geopolitical event.

“Even if OPEC cuts production in November, I believe market rebalancing in its wake would only last for a little while, with non-OPEC production also benefitting from any decision taken in Vienna.”

The pragmatic EY expert also doesn’t buy the argument made in certain quarters that the US either is or could be a swing producer. "In a classic sense, Saudi Arabia is the only global swing producer – it has significant reserves, the tapping of which it can turn up or down at will. You cannot replicate that scenario in non-OPEC markets, including the US. What the American shale sector can do is put a ceiling on the oil price and keep the market in check."

Away from oil prices, one final snippet before the Oilholic takes your leave; Moody's has upgraded all ratings of the beleaguered Petrobras, including the company's senior unsecured debt and corporate family rating (CFR), to B2 from B3, given "lower liquidity risk and prospects of better operating performance" in the medium term.

In a move following the close of markets on Friday, the ratings agency said that Petrobas' liquidity risk has declined over the last few months on the back of $9.1 billion in asset sales so far in 2016 and around $10 billion in exchanged notes during the third quarter, which extended the company's debt maturity profile

However, Moody’s cautioned that plenty still needs to be resolved. For instance, sidestepping existing financial woes, low oil prices, a class action lawsuit, the US Securities Exchange Commission (SEC)'s civil investigation and the US Department of Justice (DoJ)'s criminal investigation related to bribery and corruption will negatively affect the company's cash position. Afterall, ascertaining the settlement amount remains unclear, and won't be known for some time yet. That’s all for the moment folks! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo: Abandoned petrol station in Preston, Connecticut, USA ©

Todd Gipstein/National Geographic.

Dilma and the Petrobras scandal's aftermath

Bidding Adiós to Buenos Aires, the Oilholic has landed in the bursting metropolis of Sao Paulo, Brazil, one’s penultimate stop in South America before returning to Bogota and flying back home following a two week trip to South America.

Walking down the city’s vibrant Avenida Paulista, a 1.75 mile thoroughfare that has several businesses, financial and cultural institutions (including the Museu de Arte de São Paulo), glitzy skyscrapers, malls, hotels and shops lining up either side of it, one gets a real buzz of modern Brazil.

However, the country’s President Dilma Rousseff would get a largely unwelcome buzz were she to walk down the avenue. Most in Brazil’s commercial heart lay the blame for the Petrobras corruption scandal, uncovered earlier in February, firmly on Rouseff’s door even tough she has not been directly implicated in anything uncovered by corruption investigators so far.

There have been several mass protests here in Sao Paulo, along with Rio de Janeiro and other major Brazilian cities calling for the President to be impeached. As the Oilholic noted earlier this year in a Forbes column, the scandal has politically scarred Rouseff, a former chairwoman of Petrobras’ board of directors, beyond repair in the unforgiving world of Brazilian politics.

Many of those facing investigations and jail time happen to be from her side of the Brazilian political spectrum – the Workers’ Party. That’s what fuels people’s anger. Mass protests grab headlines, but sporadic smaller protests – like one this blogger witnessed on Avenida Paulista – are commonplace (see above left).

For people who call the Americas third-largest oil producer behind the United States and Canada their home, Petrobras has always held a special place in hearts and minds. So to see it humiliated on the world stage and financially wounded by a corruption scandal plays on peoples minds in a struggling economy.

In global terms, according to BP’s latest statistics on the industry, Brazil is the world’s 9th largest oil and gas producer pumping out some 2.95 million barrels per day, with Petrobras as its custodian.  

Furthermore, as the US Energy Information Administration, notes, “Increasing domestic oil production has been a long term goal of the Brazilian government, and discoveries of large offshore, presalt oil deposits have already transformed Brazil into a top-10 liquid fuels producer.”

However, weak economic growth and the scandal implicating several high profile people at Petrobras has reduced the chances for production growth over the short term; at least of the kind that was hoped for back in 2010 according local sources. 

Clearly, going by the mood in Sao Paulo, not many want to let Rouseff off the hook, whether rightly or wrongly. That’s all from Brazil folks, as one leaves you with a view of the magnificent Catedral da Se de Sao Paulo (above right). Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo I: Anti-Dilma Rousseff protests on Avenida Paulista, Sao Paulo, September 23, 2015. Photo II:  Catedral da Se de Sao Paulo, Brazil © Gaurav Sharma, October 2015.

21 WPC Moscow: Who is here & said what so far

The Oilholic finds himself in Moscow for the 21st World Petroleum Congress, following on from the last one in Doha three years ago. However, what's different here is that while the Congress is a global event – often dubbed the Olympics of the oil & gas business – the 2014 host government Russia is involved in a face-off with the West over Ukraine.

There were whispers on Sunday that some governments and corporates alike would boycott the Congress. However, based on evidence here on the ground over the first day and half, the gossip seems to be unfounded.

At the mammoth Crocus Expo Centre, mingling with some 5,000 delegates are IOC and NOC bosses of every colour, stripe or nationality. Government representatives from around the world seem to be in solid attendance too. For instance, India's new Petroleum and Natural Gas Minister Dharmendra Pradhan seems to be a popular man with delegates doubtless wishing to gain insights into Prime Minister Narendra Modi's energy policy.

On the other hand, the US government has sent no high level representative and while the Canadians are here, the all important oil producing province of Alberta has decided, as one source says "not to participate." That aside, doing a like-for-like comparison with Doha, this blogger sees no reduced levels of participation.

Those who are here saw ExxonMobil chief executive Rex Tillerson, attending (and addressing) his fourth WPC. Tillerson called for a push on unconventional including Arctic drilling accompanied by "wise environmental stewardship."

"We must recognise the global need for energy is projected to grow, and grow significantly," he added. Close on Tillerson's heels, OPEC Secretary General Abdalla Salem El-Badri told the Congress: "In a global energy future, and with connected markets, no one party can act alone. We need shared solutions for market stability."

Acknowledging his hosts, El-Badri added that there were healthy partnerships between Russian oil companies and OPEC member NOCs choosing to flag-up the global footprint of Lukoil as an example."Russia a key partner in the global energy supply equation as the world's second-largest oil exporter," El-Badri said further.

This morning, BP's boss Bob Dudley said the US shale bonanza had to be taken into context before jumping to global conclusions.

"Not all shale is good from a commercial standpoint," he said sharing the stage with Daniel Yergin (Pulitzer Prize winning author and IHS Vice chairman) and Jose Alcides Santoro Martins (Director of energy & gas and board member of Petrobras).

Dudley also said oil & gas sector project investment these days was driven by much better capital discipline. The industry had learnt and there was ever greater ROCE (return on capital employed) scrutiny.

Earlier, Dudley's PR boys managed a bit of a coup by timing the release of the company's latest Statistical Review of World Energy, one of the industry's most recognised annual research reports, on the first day of the Congress. BP's 63rd annual statistical trend update since 1952 noted that last year China, USA and Russia were the three largest consumers of oil and gas.

US and China collectively accounted for 70% of global crude oil demand. More generally, non-OECD demand for 2013 came in below average, while OECD demand, propped up by the US was above average, according to BP Chief Economist Christof Ruhl, soon to be Abu Dhabi Investment Authority's inaugural global head of research.

Tight oil plays edged US production up by over 1 million barrels per day (bpd) to 10 million bpd; the country's highest production rate since 1996. Ruhl opined that this was largely behind relatively stable global oil prices as North American output matched each supply disruption in the Middle East and North Africa virtually "barrel for barrel."

Finally, general analyst consensus here about Iraq is that the trouble itself is not as worrying as the speed with which it has unfolded, raising serious questions about the territorial integrity of the country. Additionally, there could be some long term implications for the oil price.

Alex Griffiths, head of natural resources and commodities at Fitch Ratings, acknowledges that the seizure of Mosul and attacks on Tikrit by ISIS are not an immediate threat to Iraq's oil production, or the ratings of Western investment-grade oil companies.

The areas under attack are not in Iraq's key oil-producing regions in the south or the additional fields in the northeast as discussed earlier on this blog.

"However, if conflict spreads and the market begins to doubt whether Iraq can increase its output in line with forecasts there could be a sharp rise in world oil prices because Iraqi oil production expansion is a major contributor to the long-term growth in global oil output," Griffiths added. That's all from Moscow for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo 1: Logo of the 21st World Petroleum Congress, Moscow, Russia. Photo 2: (Left to Right) Jose Alcides Santoro Martins (Petrobras), Daniel Yergin (IHS) and Bob Dudley (BP) © Gaurav Sharma, June 2014.

Final ‘crude’ points of 2012

As 2012 draws to a close, a few developments over the last fortnight are worth mulling over, ahead of uncorking the champagne to usher in the New Year. But first, a word on pricing - the final ICE Brent February futures contract price cut-off noted by the Oilholic came in at US$110.96 per barrel with US budget talks in the background.

 

Over the last two weeks, and as expected, the cash market trade was rather uneventful with a number of large players starting the countdown to the closure of their books for the year. However, the ICE’s weekly Commitment of Traders report published on Christmas Eve made for interesting reading.

 

It suggested that money managers raised their net long positions in Brent crude futures (and options) by 11.2% in the week that ended on December 18; a trend that has continued since November-end. Including hedge funds, money managers held a net long position of 106,138 contracts, versus 95,447 contracts the previous week.

 

Away from Brent positions, after due consideration the UK government finally announced that exploration for shale gas will resume albeit with strict safety controls. Overall, it was the right decision for British consumers and the economy. It was announced that there would be a single administrative authority to regulate and oversee shale gas and hydraulic fracking. A tax break may also apply for shale gas producers; further details are due in the New Year.

 

Close on the heels of UK Chancellor George Osborne’s autumn statement and the shale announcement, came a move by Statoil to take a 21-year old oil discovery in the British sector of the North Sea off its shelf.

 

On December 21, the Norwegian company approved a US$7 billion plan to develop its Mariner project, the biggest British offshore development in over a decade. According to Statoil, it could produce around 250 million barrels of oil or more over a 30-year period and could be brought onstream as early as 2017 with a peak output of 55,000 barrels per day.

 

Mariner, which is situated 150 km southeast of the Shetland Islands, was discovered in 1981. The Oilholic thinks Statoil’s move is very much down to the economics of a Brent oil price in excess of US$100 per barrel. Simply put, now would be a good time to develop this field in inhospitable climes and make it economically viable.

 

Being the 65.11% majority stakeholder in Mariner, Statoil would be joined by minority stakeholders JX Nippon E&P (28.89%) and Cairn Energy (via a subsidiary with a 6% stake).

 

Elsewhere, Moody's changed the outlook for Petrobras’ A3 global foreign currency and local currency debt to negative from stable. It said the negative outlook reflects the company's rising debt levels and uncertainty over the timing and delivery of production and cash flow growth in the face of a massive capital budget, rising costs and downstream profit pressures.

 

“We also see increasing linkage between Petrobras and the sovereign, with the government playing a larger role in the offshore development, the company's strategic direction, and policies such as local content requirements that will affect its future development plans,” said Thomas S. Coleman, senior vice president, Corporate Finance Group at Moody’s.

 

That’s all for 2012 folks! A round-up of crude year 2012 to follow early in the New Year; in the interim here’s wishing you all a very Happy New Year. Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo: Vintage Shell pump, San Francisco, USA © Gaurav Sharma.

On Brent's direction, OPEC, China & more

Several conversations last week with contacts in the trading community, either side of the pond, seem to point to a market consensus that this summer’s rally in the price of Brent and other waterborne crudes was largely driven by geopolitical concerns. Tight North Sea supply scenarios in September owing to planned maintenance issues, the nagging question of Iran versus Israel and Syrian conflict continue to prop-up the so called ‘risk premium’; a sentiment always difficult to quantify but omnipresent in a volatile geopolitically sensitive climate.

 

However, prior to the announcement of the US Federal Reserve’s economic stimulus measures, contacts at BofAML, Lloyds, Sucden Financial, Société Générale and Barclays seemed to opine that the current Brent prices are nearing the top of their projected trading range. Then of course last Thursday, following the actual announcement of the Fed’s plan – to buy and keep buying US$40 billion in mortgage-backed securities every month until the US job market improves – Brent settled 0.7% higher or 78 cents more at US$116.66 per barrel.

 

Unsurprisingly, the move did briefly send the WTI forward month futures contract above the US$100 per barrel mark before settling around US$99 on the NYMEX; its highest close since May 4. But reverting back to Brent, as North Sea supply increases after September maintenance and refinery crude demand witnesses a seasonal drop, the benchmark is likely to slide back downwards. So for Q4 2012 and for 2013 as a whole, Société Générale forecasts prices at US$103. Compared to previous projections, the outlook has been revised up by US$6 for Q4 2012 and by US$3 for 2013 by the French investment back.

 

Since geopolitical concerns in the Middle East are not going to die down anytime soon, many traders regard the risk premium to be neutral through 2013. That seems fair, but what of OPEC production and what soundbites are we likely to get in Vienna in December? Following on from the Oilholic’s visit to the UAE, there is more than just anecdotal evidence that OPEC doves have begun to cut production (See chart above left, click to enlarge).

 

Société Générale analyst Mike Wittner believes OPEC production cuts will continue with the Saudis joining in as well. This would result in a more balanced market, especially for OECD inventories. “Furthermore, moderate demand growth, led – as usual – by emerging markets, should be roughly matched by non-OPEC supply growth, driven by the US and Canada,” Wittner added.

 

Of course, the soundbite of last week on a supply and demand discussion came from none other than the inimitable T. Boone Pickens; albeit in an American context. The veteran oilman and founder of investment firm BP Capital told CNBC that the US has the natural resources to stop importing OPEC crude oil one fine day.

 

Pickens noted that there were 30 US states producing oil and gas; the highest country has ever had. In a Presidential election year, he also took a swipe at politicians saying neither Democrats nor Republicans had shown “leadership” on the issue of energy independence.

 

At the Democratic convention the week before, President Obama boasted that the US had already cut imported oil by one million barrels per day (bpd). However, Pickens said this had little to do with any specific Obama policy and the Oilholic concurs. As Pickens explained, “The economy is poorer and that will get you less imports. You can cut imports further if the economy gets worse.”

 

He also said the US should build the Keystone XL oil pipeline, currently blocked by the Obama administration, to help bring more oil in to the country from Canada. Meanwhile, US Defense Secretary Leon Panetta is in Japan and China to calm tempers on both sides following a face-off in the East China Sea. On Friday, six Chinese surveillance ships briefly entered waters around the Senkaku Islands claimed by Japan, China and Taiwan.

 

After a stand-off with the Japanese Coastguard, the Chinese vessels left but not before the tension level escalated a step or two. The Chinese reacted after Japan sealed a deal to buy three of the islands with resource-rich waters in proximity of the Chunxiao offshore gas field. Broadcaster NHK said the stand-off lasted 90 minutes, something which was confirmed over the weekend by Beijing.

 

With more than just fish at stake and China’s aggressive stance in other maritime disputes over resource-rich waters of the East and South China Sea(s), Panetta has called for “cooler heads to prevail.”

 

Meanwhile some cooler heads in Chinese boardrooms signalled their intent as proactive players in the M&A market by spending close to US$63.1 billion in transactions last year according a new report published by international law firm Squire Sanders. It notes that among the various target sectors for the Chinese, energy & resources with 30% of deal volume and 70% of deal value and chemicals & industrials sectors with 21% of deal volume and 11% of deal value dominated the 2011 data (See pie-chart - courtesy Squire Sanders - above, click to enlarge). In deal value terms, the law firm found that North America dominates as a target market (with a share of 35%) for the Chinese, with oil & gas companies the biggest attraction. However, in volume terms, Western Europe was the top target market with almost a third (29%) of all deals in 2011, and with industrials & chemicals companies being the biggest focus for number of deals (29%) but second to energy & resources in value (at 18% compared to 61%).

 

Big-ticket acquisitions by Chinese buyers were also overwhelmingly concentrated in the energy & resources industries where larger transactions tend to predominate. Sinopec, the country’s largest refiner, brokered a string of the largest transactions. These include the acquisition of a 30% stake in Petrogal Brasil for US$4.8 billion in November last year, a US$2.8 billion deal for Canada's Daylight Energy and the 33.3% stake in five oil & gas projects of Devon Energy for US$2.5 billion.

 

Squire Sanders notes that Sinopec, among other Chinese outbound buyers, often acquires minority stake purchases or assets, in a strategy that allows it to reduce risks and gain familiarity with a given market. This also reduces the likelihood of any political backlash which has been witnessed on some past deals such as CNOOC’s hostile bid for US-based oil & gas producer Unocal in 2005, which was subsequently withdrawn.

 

Since then, CNOOC has found many willing vendors elsewhere. For instance, in July this year, the company announced the US$17.7 billion acquisition of Canadian firm Nexen. To win the deal, which is still pending Ottawa’s approval, CNOOC courted Nexen, offering shareholders a 15.8% premium on the price shares had traded the previous month.

 

Squire Sanders’ Hong Kong-based partner Mao Tong believes clues about direction of Chinese investment may well be found in the Government’s 12th five-year plan (2011-2015).

 

“It lays emphasis on new energy resources, so the need for the technology and know-how to exploit China’s deep shale gas reserves will maintain the country’s interest in US and Canadian companies which are acknowledged leaders in this area,” Tong said at the launch of the report.

 

Away from Chinese moves, Petrobras announced last week that it had commenced production at the Chinook field in the Gulf of Mexico having drilled and completed a well nearly five miles deep. The Cascade-Chinook development is the first in the Gulf of Mexico to prospect for offshore oil using a floating, production, storage and offloading vessel instead of traditional oil platforms.

 

Finally, after the forced nationalisation of YPF in April, the Argentine government and Chevron inked a memorandum of understanding on Friday to explore unconventional energy opportunities. Local media reports also suggest that YPF has reached out to Russia's Gazprom as well since its nationalisation in a quest for new investors after having squeezed Spain’s Repsol out of its stake in YPF.

 

In response, the previous owner of YPF said it would take legal action against the move. A Repsol spokesperson said, “We do not plan to let third parties benefit from illegally confiscated assets. Our legal teams are already studying the agreement."

 

Neither Chevron nor YPF have commented on possible legal action from Repsol. That’s all for the moment folks. Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Graph: OPEC Production 2010-2012 © Société Générale CIB 2012. Chart: Chinese M&A activity per sector by deal valuation and volumes © Squire Sanders. 

Talking global 'crude' capex in the Emirates

It is good to be back in the Emirate of Dubai to catch-up with old friends and make yet newer ones! In the scorching heat of 41 C, sitting inside an English Pub (sigh…someone tell these guys yours truly just got off the plane from England) at a hotel right next to ENOC’s Bur Dubai office, new research of a ‘crude’ nature has thrown-up plenty of talking points here.

 

It seems that a report published this morning by business intelligence provider GlobalData projects capital expenditure in the global oil & gas business to come in at US$1.039 trillion by the end of December 2012; a rise of 13.4% on an annualised basis. However, no prizes for guessing that E&P activity would be the primary driver.

 

GlobalData predicts Middle Eastern and African capital spend would be in the region of US$229.6 billion. The figure has been met with nods of approval here in Dubai though one contact of the Oilholic’s (at an advisory firm) reckons the figure is on the conservative side and could be exceeded by a billion or two.

 

North America is likely to witness the highest capex with a US$254.3 billion spend; a 24.5% share of the 2012 figure. GlobalData reckons that renewed market confidence is a direct consequence of the increasing number of oil & gas discoveries (which stood at 242 over 2011 alone), high (or rather spiky) oil prices and emerging and cost effective drilling technologies making deep offshore reserves technically and financially viable.

 

So the ‘All hail shale brigade’ and ‘shale gale’ stateside along with Canadian oil sands would be the big contributors to the total North American spend. The Asia Pacific region could pretty much spend in the same region with a capex of US$253.1 billion.

 

However another facet of the GlobalData report fails to surprise punters at the table wherein it notes that National Oil Companies (NOCs) will lead the way in terms of capex. Though there were some “Hear, Hear(s)” from somewhere. (We try not to name names here of loyal NOC employees, especially if they’ve just walked in from a building next door!)

 

Only thing is, while the Middle Eastern and Chinese NOCs are in the predictable data mix, GlobalData notes that for the 2012–2016 period it is Petrobras which ranks first for capex globally amongst NOCs. As a footnote, ExxonMobil will be atop the IOC list. That’s all for the moment folks! More from Dubai later. Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo: View of city skyline from Jumeriah beach, Dubai, UAE © Gaurav Sharma 2012.

‘Crude’ views from across the pond

The view on the left is that of the Point Reyes Lighthouse, but more on that later. The Oilholic landed in California on Wednesday to begin yet another North American adventure and instantly noted the annoyance in our American cousins’ voices about rising gasoline prices at the pump.

The extent to which the average American is miffed depends on where he/she buys gasoline which is comfortably in excess of US$4 per gallon with regional and national disparities. For instance in Sunnyvale and Santa Clara CA, gasoline is retailing in the region of US$4.19 to US$4.49 per gallon.

However, head to downtown San Francisco and it jumps by at least 10 cents on average and cross the Golden Gate Bridge towards outlying gas stations and it jumps another 15 cents on top of the Bay Area price. In an election year, President Obama does not want his voters to be miffed, especially as Republican opponents are conjuring up uncosted phantasmal visions of prices at the pump of US$2.50 per gallon.

The President’s answer, based on a credible rumour mill and the US media, might involve diving (again) into the US Strategic Petroleum Reserves (SPR). The signs are all there – grumbling American motorists, Obama discussing releasing strategic stockpiles with British PM David Cameron, Iranians issuing threats about closing the Strait of Hormuz and overall bullish trends in crude markets.

For its worth, when Obama dived into the SPR last summer, he had the IEA’s support – something which he does not have at the moment. The Oilholic believes it was a silly idea then and would be a silly idea now. Although it pains one to say so, grumbling American motorists do not constitute a genuine emergency like the Gulf War(s) or Hurricane Katrina (in 2005); there is no supply shock of a catastrophic proportion or shall we say a ‘strategic’ need. North Sea Maintenance work, Sudanese tiffs, Nigeria and minor market jitters do not qualify were it not for an US presidential election year.

Besides, a release of IEA’s strategic pool of reserves collectively did very little to curb the price rise last summer. In its wake, price dropped momentarily but rose back to previous levels in a relatively short period of time. On this occasion driven by Asian consumption, a drive to seek alternative supplies away from Iran by consuming nations and short term supply constriction will do exactly that - were its SPR to be raided again by the US.

In fact, most contacts in financial circles on the West Coast share the Oilholic’s viewpoint; even though the WTI closed lower at US$103.22 a barrel on persistent talk of strategic reserve releases in the US media on Friday. The price also breached support in the US$104.20 to US$103.78 circa. Respite will be temporary; Moody’s raised its price assumptions for benchmarks WTI and Brent for 2012 and 2013, on Wednesday (while lowering assumptions for the benchmark Henry Hub natural gas).

The agency assumes an average WTI price of US$95 per barrel for crude in 2012, and US$90 per barrel in 2013. Brent will rise by US$10 per barrel from the agency’s previous assumption, with average prices of US$105 per barrel in 2012 and US$100 per barrel in 2013. That – says Moody’s – is due to the higher risk of a potential supply squeeze caused by the Iran embargo and continued strong demand from China.

Meanwhile, with customary aplomb in an election year, President Obama, “authorised” the usage of new sanctions on buyers of Iranian oil with punitive actions against those who continue to trade in Iranian crude. In a nutshell, if a country or one of its banks, trading houses or oil companies tries to source oil from the Iranian central bank then, at least in theory, they could face being cut off from the US banking system should they not comply by June 28.

However, following on from a law signed in December, Obama admitted that the US has had to make exceptions to countries like Japan, who have already made moves to cut back on Iranian oil. Some like India and China will find innovative ways to get around the sanctions as the Oilholic blogged from Delhi earlier in the year.

One does find it rather humorous that in order to defend his stance on Iran, Obama said US allies boycotting Iranian oil would not suffer negative consequences because there was "enough" oil in the world market and that he would continue to monitor the global market closely to ensure it could handle a reduction of oil purchases from Iran.

A statement from the White House acknowledged that "a series of production disruptions in South Sudan, Syria, Yemen, Nigeria and the North Sea have removed oil from the market" over Q1 2012. "Nonetheless, there currently appears to be sufficient supply of non-Iranian oil to permit foreign countries to significantly reduce their import of Iranian oil. In fact, many purchasers of Iranian crude oil have already reduced their purchases or announced they are in productive discussions with alternative suppliers," it adds.

Good, then that settles the argument about the need to raid the SPR (or not?). Meanwhile, Moody’s (and others) also reckon the short term scenario is positive for the E&P industry, at least for the next 12-18 months since the global demand for oil that led to a strong price rally for crude and natural gas liquids (NGLs) shows little sign of abating.

In addition, E&P companies could benefit further from heightened geopolitical risk. Moody's crude assumptions hinge on reduced deliveries in Iran beginning mid-summer, when an embargo takes effect, but crude prices could move even higher if Saudi Arabia fails to fill in the supply shortfall. On the flipside, the industry faces some risk from the fragile European economy and could face lower demand if the euro area destabilises in 2012 and 2013.

Meanwhile, back home in the UK, there have been several crude developments. First panic buying ensued when Government issued advice to British motorists that they ought to stock-up in case oil tanker drivers go on strike leading to long queues at the pump. Then the government issued advice not to “panic.”

Now the petrol station owners’ lobby group is demanding talks, according to the BBC. Seven crude hauliers at the heart of the tanker drivers’ dispute are Wincanton, DHL, BP, Hoyer, JW Suckling, Norbert Dentressangle and Turners. They are responsible for supplying 90% of the UK's petrol stations and some of the country's airports. Workers at DHL and JW Suckling voted against strike action but backed action short of a strike in a dispute over “safety and work conditions”.

The run on petrol retail outlets could continue until Easter Monday according to some sources. Continuing with the UK, Total’s leak from the Elgin gas platform, 150 miles off Aberdeen, which has been leaking gas for the past three days is rumoured to be costing the French giant US$1.5 million per day.

Total is the operator (46.17% stake) of the Elgin/Franklin complex, with Eni and BG Energy holding 21.9% and 14.1% interests respectively. Production on the Elgin, Franklin and West Franklin fields, which averages 130,000 barrel of oil equivalent per day (boepd), is now temporarily shut but ratings agencies Fitch Rating’s and Moody’s believe it is not another “Deepwater Horizon.”

“We have not factored into the company's ratings any catastrophic accident on the platform resulting in an explosion, or a dramatic worsening of the current situation. However, we have considered a "worse-than-base-case" scenario where Total may have to shut down the Elgin field to stop the gas leak. This would imply the loss of a producing field that is worth, in net present value terms, €5.7 billion according to third party valuations. Were the field to become permanently unusable it would cost Total €2.6 billion - its share in Elgin - and the company might have to compensate its partners for the remaining €3.1 billion,” notes a Fitch statement.

Total had around €14 billion in cash on balance sheet at December 2011, and about €10 billion in available unused credit lines. Elsewhere, Petrobras' average oil and natural gas output in Brazil and abroad was 2,700,814 barrels of oil equivalent per day (boepd) in February. Considering only the fields in Brazil, production added up to 2,455,636 boepd. In February, oil output exclusively from domestic fields reached 2,098,064 barrels per day, while natural gas production totaled 56,849,000 cubic meters.

Finally, the Oilholic leaves you with a view of the windiest place on the Pacific Coast and the second foggiest place on the North American continent – Point Reyes and its lighthouse built in 1870.

According to the US National Park Service, weeks of fog, especially during the summer months, frequently reduce visibility to hundreds of feet and the historic lighthouse has warned mariners of danger for more than a hundred years.

A US Park Ranger on duty at the Lighthouse said the lens in the Point Reyes Lighthouse is a "first order" Fresnel lens, the largest size of Fresnel lens courtesy Augustin Jean Fresnel of France who revolutionised optics theories with his new lens design in 1823.

Before Fresnel developed this lens, lighthouses used mirrors to reflect light out to sea. The most effective lighthouses could only be seen eight to twelve miles away. After his invention, the brightest lighthouses – including this one – could be seen all the way to the horizon, about twenty-four miles. The Point Reyes Headlands, which jut 10 miles out to sea, pose a threat to each ship entering or leaving San Francisco Bay (click on map to enlarge).

The Lighthouse was retired from service in 1975 when the US Coast Guard installed an automated light. They then transferred ownership of the lighthouse to the National Park Service, which has taken on the job of preserving this fine specimen of American heritage. It is an amazing site and it was a privilege to have seen it and the famous fog.

The area also has a very British connection. The road leading up the rocky shoreline where the lighthouse is situated is named – Sir Francis Drake Boulevard – after the legendary British Navy Vice Admiral and a Crown explorer of the seas. It is thought that Sir Francis’ ship The Golden Hinde landed somewhere along the Pacific coast of North America in 1579, claiming the area for England as "Nova Albion."

The road itself is an east to west traffic linkage in Marin County, California, running just west of the Richmond-San Rafael Bridge to the trailhead for the Lighthouse right at the end of the Point Reyes Peninsula. His landing place has often been theorised to be at what is now called Drakes Bay on Point Reyes, the western terminus for the boulevard. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Oilholic at the Point Reyes Lighthouse, California, USA. Photo 2: Valero Gas Station Price Board, Sunnyvale, California, USA. Photo 3: Point Reyes Lighthouse © Gaurav Sharma. Photo 4: Archive photo of Point Reyes Lighthouse in 1870. Photo 5: Map of Point Reyes © Point Reyes Visitor Center / US National Parks Service. Photo 6: Oilholic on Sir Francis Drake Boulevard © Gaurav Sharma.

Mr. Gabrielli, an IEA revision & the Kuwaiti situation

This Monday, the crude world bid farewell to Petrobras’ inimitable CEO José Sergio Gabrielli de Azevedo who stepped down from his position having been at the Brazilian major's helm since July 2005. Over his tenure, Petrobras took great strides towards ultradeepwater offshore exploration and made several overseas forays. Rumours had been lurking around since January that Gabrielli was in the twilight of his career at Petrobras following differences with Brazilian President Dilma Rouseff – but both the government and the company strenuously denied it.

The reins of Petrobras have now passed on to Maria das Graças Silva Foster (pictured left) a corporate veteran who has worked at Petrobras for 31 years. In addition to occupying various executive level positions in the company, Foster has been CEO of Petroquisa - Petrobras Química, and CEO and CFO of Petrobras Distribuidora. In her career, she was also Secretary of Oil, Natural Gas and Renewable Fuels at the Brazilian Ministry of Mines and Energy from January 2003 to September 2005.

Earlier, Petrobras approved the contract for 21 offline rigs with Sete Brasil, at an average daily rate of US$530,000 and the contract for 5 dual activity rigs with Ocean Rig, at the average day rate of US$548,000, both for a 15-year term. All units, which have local content requirements ranging from 55% to 65%, are to be delivered within 48 to 90 months, according to the schedules established in the contracts.

The project includes the construction of new shipyards in the country and the use of existing infrastructure. Petrobras expects to reduce the average daily rates to US$500,000 for the Sete Brasil contract and to US$535,000 for the Ocean Rig contract. These amounts may suffer further reductions if the parties detect and agree to mechanisms that reduce operating costs.

With these contracts, the plan to contract 28 drilling rigs to be built in Brazil to meet the demands of the long-term drilling program, primarily for use in pre-salt wells has been completed. Based on the conditions submitted by the companies and on the current demand for the development of future projects, Petrobras, in its own words, "chose to take advantage of the negotiated conditions and contract five additional which were not originally planned."

All this is fine and dandy, but since the timelines of construction and delivery are so lengthy, a hike in construction costs is likely – more so because some yards where the rigs are expected to be built, haven’t yet been built themselves. But the Oilholics loathes being too sceptical about what is a reasonably positive agreement.

Meanwhile, the IEA has cut its oil demand forecast again! In an announcement last week, the agency said a weak global economy had prompted its sixth successive monthly revision to forecasts by 250,000 barrels per day (bpd) to 800,000 barrels for 2012. Before the IEA, the US EIA actually made an upward revision of 50,000 barrels to 1.32 million bpd while OPEC cut its forecast by 120,000 bpd to 940,000. All three forecasters are looking towards non-OECD jurisdictions for demand growth.

Elsewhere, the Oilholic would like to highlight two very interesting corporate client notes. In one issued on February 7th, Fitch Ratings observed that following the recent parliamentary elections in Kuwait, marked frictions between an elected Parliament and the appointed government will continue to weigh on the reform agenda and hamper political effectiveness.

The agency feels that difficulties in reaching agreement at the political level will continue to affect economic reforms, including the implementation of a four-year development plan (worth 80% of GDP over 2010-11 and 2013-14), which aims at boosting the country's infrastructure and diversifying the economy away from oil.

Nonetheless, Fitch rates Kuwait as 'AA' with a Stable Outlook. As relatively high oil prices are being forecast, Fitch’s own being at US$100/barrel for 2012, Kuwait’s earnings should continue to ensure double digit current account and fiscal surpluses which lend support to the rating.

Moving on to the second note, on the expected impact of US' QE3 on the commodity market circulated on February 10th, Société Générale analysts Michael Haigh and Jesper Dannesboe opine that an increase of expected inflation during QE3 Stateside coupled with the impact of the EU embargo on Iran could result in the DJ-UBS commodity index rising 20% and Brent prices rising to US$130/barrel.

“Sep12 Brent call spread with strikes at US$117 (long) and US$130 (short). The current net up-front cost: about US$4.6/barrel. This results in a maximum net profit of US$8.4/barrel. If one also sells a Sep12 US$100/barrel put, the overall structure would have zero upfront cost and the maximum net profit would be US$13.7/barrel. We consider a price drop below US$100 to be very unlikely,” they wrote and the Oilholic quotes. That’s all for the moment folks! Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Petrobras CEO Maria das Graças Silva Foster © Petrobras Press Office.

Corporate crude chatter: Xstrata, Glencore & more

There appears to be only one story in town these past few days - the valuation and implication of a Glencore and Xstrata merger. According to communiqués issued yesterday poured over the Oilholic and his peers, the Switzerland based commodities trader and the mining major aim to create a merged natural resources, mining and trading company with a combined equity market value of US$90 billion.

Xstrata’s operating businesses and Glencore’s marketing functions will continue to operate under their existing brands. It is proposed that the combined entity will be called Glencore Xstrata International plc, listed on the London and Hong Kong Stock Exchanges, with its headquarters in Switzerland and will continue as a company incorporated in Jersey. The deal was labelled by the two firms as a "merger of equals" but the Oilholic suspects Glencore would carry the upper hand.

While the new corporate entity will be the world's biggest exporter of coal for power plants and the largest producer of zinc, the ever secretive Glencore’s involvement gives the merger a ‘crude’ dimension. The latter’s Chief Executive Ivan Glasenberg has made a fortune for his company selling crude oil and oil products alongside other commodities. Controversy and Glencore go hand in hand as its Wikipedia page records.

Where from here remains to be seen as ratings agency Moody's has placed all the ratings of Glencore and Xstrata, as well as those of their guaranteed subsidiaries, on review for possible upgrade following the announced all-share merger. The initiation of this review reflects Moody's favourable assessment of the planned merger in terms of diversification and synergies, as well as the uncertainties surrounding the final details and execution of the proposed transaction.

Moving away from the Glencore-Xstrata story but sticking with Moody's, the agency also commented on the completion of Sunoco Inc.'s strategic review. It notes that the American petroleum company is better positioned to focus on midstream logistics and retail product marketing as its core operations, with greater clarity around its plans to re-deploy a sizeable portion of its cash liquidity.

Sunoco announced a number of steps last week to allow it to focus on its large investment in Sunoco Logistics Partners LP and on retail marketing as the drivers of its future growth and returns. It began shuttering the Marcus Hook refinery in December and is likely to do the same with its Philadelphia refinery by July 2012 unless it can conclude a suitable sale. These exposures and the limited sales prospects for the refineries have resulted in an additional pre-tax charge of US$612 million in Q4 2011, including non-cash book charges and provisions for severance and other cash expenses.

Continuing with corporate news, Petrobras announced another discovery of a new oil and natural gas accumulation – this time in the Solimões Basin (Block SOL-T-171), in the State of Amazonas. The discovery took place during drilling of Igarap é Chibata Leste well located in Coari, 25 km from the Urucu Oil Province. The well was drilled to a final depth of 3,295 meters and tests have indicated a production capacity of 1,400 barrels per day of good quality oil (41º API) and 45,000 m3 of natural gas. Obviously, Petrobras holds 100% of the exploration and production rights in the Concession.

The Brazilian major also closed the issuance of global notes in the international capital markets worth US$7 billion on Monday. The transaction was executed in one day, with a demand of approximately US$25 billion as a result of more than 1,600 orders coming from more than 700 investors. The final allocation was more concentrated in the United States (58.4%), Europe (28.1%) and Asia, mostly dedicated to the high grade market. The oversubscription is symptomatic of the huge interest in Brazilian offshore.

Finally, BP raised its dividend payout after quarterly earnings rose on rising crude prices. Replacement cost profit for the three months to December-end 2011 was US$7.6 billion up on US$4.6 billion for the corresponding period in 2010. For FY 2011, BP's profit was US$23.9 billion versus a US$4.9 billion loss in 2010. This meant allowing for a 14% rise in the dividend to 8c (5p) per share, a first increase since the 2010 Gulf of Mexico spill.

Away from corporate matters, the UK government launched its 27th offshore oil and gas licensing round last Wednesday making 2,800 blocks available to prospectors. The last British licensing round set an all-time high at 190 awards with high crude prices enticing exploration companies big and small. Lets see how it all shapes up this time around especially as the British government maintains that some 20 billion barrels of the crude stuff is still to be extracted. The Oilholic cannot possibly dispute the figure with authority, but what one can note with some conviction is that all the easy (to extract) oil has already been found. Extracting the remaining 20 billion would be neither easy nor cheap, especially in a tough macroclimate.

Meanwhile, as tensions mount over Iran, Saudi Arabia’s crown prince has said the Kingdom would not let the price of crude oil stay above US$100 using the WTI as a benchmark. Concurrently, and in order to allay Asian fears about crude oil supplies, the UAE government says it is looking to export more to Asia should there be a need to mitigate the supply gap caused by a ban on Iranian oil by Asian importers. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Offshore oil rig in North Sea © Cairn Energy Plc.

We’re nowhere near “Peak oil” er...perhaps!

The 20th World Petroleum Congress could not have possibly gone without a discussion on the Peak Oil hypothesis. In fact, every single day of the Congress saw the topic being discussed in some way, shape or form. So the Oilholic decided to summarise it after the event had ended and before the latest OPEC meeting begins.

Discussing the supply side, starting with the hosts Qatar, Emir Sheikh Hamad bin Khalifa said his country was rising to challenge to secure supplies of oil and gas alongside co-operating with members of the energy organisations to which they were aparty, in order to realise this goal. Close on the Qatari Emir’s heels, Kuwaiti oil minister Mohammed Al-Busairi said his country’s crude production capacity is only expected increase between now and 2015 from the current level of 3 million barrels per day (bpd) to 3.5 million bpd, before rising further to 4 million bpd.

Then came the daddy of all statements from Saudi Aramco chief executive Khalid al-Falih. The top man at the world’s largest oil company by proven reserves of barrel of oil equivalent noted that, “rather than the supply scarcity which many predicted, we have adequate oil and gas supplies, due in large part to the contributions of unconventional resources.”

Rising supplies in al-Falih’s opinion will result in deflating the Peak Oil hypothesis. “In fact, we are on the cusp of what I believe will be a new renaissance for petroleum. This belief emanates from new sweeping realities that are reshaping the world of energy, especially petroleum,” he told WPC delegates.

Meanwhile, in context of the wider debate, Petrobras chief executive Jose Sergio Gabrielli, who knows a thing or two about unconventional told delegates that the speed with which the new sources of oil are entering into production has taken many people by surprise, adding to some of the short-term volatility.

“The productivity of our pre-salt offshore drilling moves is exceeding expectations,” he added. Petrobras now hopes to double its oil production by 2020 to over 6.42 billion barrels of oil equivalent. It seems a veritable who’s-who of the oil and gas business lined up in Doha to implicitly or explicitly suggest that Marion King Hubbert – the patron saint of the Peak Oil hypothesis believers – had always failed to take into account technological advancement in terms of crude prospection and recent developments have proven that to be the case.

But for all that was said and done, there is one inimitable chap who cannot possibly be outdone –Total CEO Christophe de Margerie. When asked if Peak Oil was imminent, de Margerie declared, “There will be sufficient oil and gas and energy as a whole to cover the demand. That’s all! Even using pessimistic assumptions, I cannot see how energy demand will grow less than 25% in twenty years time. Today we have roughly the oil equivalent of 260 million bpd (in total energy production), and our expectation for 2030 is 325 million bpd.”

He forecasts that fossil fuels will continue to make up 76% of the energy supply by 2050. “We have plenty of resources, the problem is how to extract the resources in an acceptable manner, being accepted by people, because today a lot of things are not acceptable,” the Total CEO quipped almost to the point of getting all worked up.

He concluded by saying that if unconventional sources of oil, including heavy oil and oil shale, are exploited, there will be sufficient oil to meet today’s consumption for up to 100 years, and for gas the rough estimate is 135 years. Or enough to make Hubbert stir in his grave.

© Gaurav Sharma 2011. Photo: Total's CEO De Margerie discusses Peak Oil at the 20th World Petroleum Congress © Gaurav Sharma 2011.

An intensely ‘crude’ few days @WPC

In keeping with the intensity of World Petroleum Congresses of the past, the Oilholic’s first two days here have been – well – intense. The 20th WPC opened with customary aplomb on Dec 4th with an opening ceremony where feeding 5,000 delegates was a bit slow but the Qatari Philharmonic Orchestra tried its best to perk things up and make up for it.

When things began in earnest on Dec 5th – the Oilholic was spoiled for choice on what to and not to blog about and finding the time for it. Beginning with our hosts, in his inaugural address to Congress, Sheikh Hamad Bin Khalifa Al-Thani, Emir of the State of Qatar highlighted that the event was being held in the Middle East for the first time; a wrong has been right – after all the region exports bulk of the world’s oil.

Welcoming and thanking aside, the Emir made a very important point about why cooperation here among crude importers and exporters is really necessary now more than ever.

“The growing needs for oil and gas requires enormous investments by the exporting countries. The financing of these investments and securing their profitability require the most accurate information possible about the factors affecting the global demand for oil & gas to reduce the degree of risk that these investments may be subjected to,” he said.

“It is not reasonable to ask the Exporting Countries to meet the future needs for these two commodities while at the same time the consumer countries carryout unilateral activities that augment the risks facing these investments,” the Emir concludes. Well said sir – consumers need to get their act together too.

Three of the biggest consumers are here in full force, i.e. the US, Indian and Chinese delegations; the size of latter’s delegation rivals even the Qatari participation. Completing the BRICs – Brazil and Russia are here seeking partners. Lukoil is looking to expand via investments while Rosneft is seeking a greater interaction with Norway’s Statoil. Brazilian behemoth Petrobras has been flagging its wares including details about the presence of oil at a prospection well (4-BRSA-994-RJS), located in Campos Basin, in the area known as Marlin Complex.

The well, commonly known as Tucura, lies between the production fields of Voador and Marlim, at a water depth of 523 meters. Located 98 km from the shore of Rio de Janeiro State, the well is 3km from Marlin's Field and 2.3 km from the P-20 platform. The discovery was confirmed by sampling in post-salt rock in a reservoir located at a water depth of 2,694 meters.

It follows Petrobras’ confirmation on Nov. 23 about the presence of a good quality oil in well (4-BRSA-1002-SPS), in south Santos Basin, in an area known as Tiro and Sidon. Petrobras CEO José Sergio Gabrielli de Azevedo is busy outlining future plans and the company's activities in Brazil and in the world.

It seems the Brazilian major intends to invest US$225 billion between 2011 and 2015 with almost 60% of this going towards exploration and production projects.

Gabrielli highlighted Brazil as one of the largest and fastest growing markets in the world in terms of oil consumption. By way of comparison, Brazil's annual oil consumption in 2010 was up 2.1%, in contrast to a decline of 0.04% in OECD countries for the same period.

More later; keep reading, keep it crude!

© Gaurav Sharma 2011. Photo: 20th World Petroleum Congress Opening Ceremony & Dinner, Dec 4th, 2011 © Gaurav Sharma 2011.

Of Argentina, Petrobras & a few odd pipelines

Last ten days has seen the crude focus shift to Argentina for a multitude of reasons which may be construed as good or bad depending on your point of view. To begin with, BP’s move to sell assets in Argentina has fallen through after its partner withdrew from the deal. BP wanted to sell its 60% stake in Pan American Energy (PAE) to its partner in Argentina, Bridas Energy Holdings, which is subsequently owned by CNOOC, China's largest offshore oil producer.

However, on November 6th CNOOC said it was terminating the deal, signed a year ago as BP was grappling with the fallout from the Gulf of Mexico oil spill. The stake sale was worth an estimated US$7 billion and was one of the largest sales agreed by the firm following the disaster. It is understood that BP will now have to repay its US$3.5 billion deposit on the agreement which had been contingent on regulatory approval.

Barely days later, on November 8th, Spanish giant Repsol’s Argentine subsidiary – YPF Sociedad Anónima – said it had found 927 million barrels of recoverable shale oil in Argentina which could catapult the country to the energy elite league.

In a statement, YPF said the discovery – located in the Vaca Muerta basin of Argentina's Neuquen province – "will transform the energy potential of Argentina and South America, boasting one of the world's most significant accumulations of non-conventional resources".

The discovery is likely to give renewed impetus to the country’s creditors who have been chasing the Argentine government for almost a decade since its default in 2002. Most bondholders took part in debt exchanges in 2005 and 2010, but a brave crew of EM and NML Capital – an affiliate of Elliott management – along with a group of 60,000 individual Italian investors have been bravely holding out and using legal avenues to recoup the US$6 billion-worth of debt plus interest. They may think it’s about time the country paid courtesy of a commodities-led boom.

Regrettably for YPF though, the find came only days after Moody's downgraded Argentine oil & gas companies. These included YPF, Pan American LLC, Petrobras Argentina, Petersen Energia and Petersen Energia Inversora.

According to Moody’s, the ratings downgrade and review for further downgrade were prompted by the new presidential decree requiring oil, gas and mining companies to repatriate 100% of their export proceeds and convert them to Argentine pesos. Previously, oil and gas companies operating in Argentina were permitted to keep up to 70% of their export proceeds offshore.

Neighbouring Brazil’s oil & gas behemoth Petrobras has been busy too. On November 3rd, it announced a new oil discovery in the extreme South Western part of the Walker Ridge concession area, located in the Gulf of Mexico’s ultra-deep waters. The discovery confirms the Lower Tertiary's potential in this area. (see map on the left; click to enlarge)

The discovery – Logan – is approximately 400km southwest of New Orleans, at a water depth of around 2,364 meters (or 7,750 feet). The discovery was made by drilling operations of well WR 969 #1 (or Logan 1), in block WR 969. Further exploration activities will define Logan's recoverable volumes and its commercial potential.

Norway’s Statoil is the consortium's operator, with 35% stake. Petrobras America Inc. (a subsidiary of Petrobras headquartered in Houston, Texas) holds 35% of the stake, while Ecopetrol America and OOGC hold 20% and 10%, respectively.

Petrobras holds other exploratory concession areas in this region, which will be tested later on, growing the Company's operations in the Gulf of Mexico. The Brazilian major is the operator of Cascade (100%) and Chinook (66.7%) oilfields and holds stakes in the Saint Malo (25%), Stones (25%) and Tiber (20%) discoveries, all with significant oil reserves in the Lower Tertiary. Additionally, Petrobras has stakes in the very recent Hadrian South (23.3%), Hadrian North (25%) and Lucius (9.6%) discoveries, all with significant oil reserves and in the Mio-Pliocene.

The company has been pretty busy at home as well, announcing that the first well drilled after the execution of the Transfer of Rights agreement confirmed the extension of the oil reserves located northwest of the Franco area discovery well, in the Santos Basin pre-salt cluster (see map on the left; click to enlarge).

The new well, informally known as Franco NW, is at a water depth of 1860 meters, approximately 188km from the city of Rio de Janeiro and 7.7km northwest of discovery well Franco (or 2-ANP-1-RJS).

The discovery was confirmed by oil samples of good quality (28º API) obtained through cable tests. The well is still in the drilling phase with the aim of reaching the base of the reservoirs containing oil. Once the drilling phase is complete, Petrobras will continue with the investment activities provided in the Mandatory Exploratory Program (or Programa Exploratório Obrigatório, PEO as it’s referred to locally).

From South American discoveries to North American pipelines as it emerged last night that the Obama administration has chickened-out of making a decision on Keystone XL. Faced with the environmental lobby on one side and the Unions craving jobs on the other, the US government has requested further studies on the project which would in theory delay the decision to build the 2700km pipeline well after 2012 presidential election. Frustration across the border in Canada is likely to grow as the Oilholic noted from Calgary earlier this year.

If he rejected the project, Obama could be accused of destroying jobs. If allowed it to go ahead, it could lose him the support of some activists who helped him win the Presidency. So he chose to do what political jellyfish usually do before a crucial vote – nothing.

Additionally, reports surfaced earlier in the week that Houston-based Cardno Entrix – a company involved in the environmental review – had listed developer TransCanada, the pipeline’s sponsor, as a "major client".

A review is now likely to look into this as well as state department emails related to a TransCanada lobbyist who had worked in Secretary of State Hillary Clinton's 2008 presidential campaign. TransCanada says that while it is disappointed with the delay, it continues to “conduct affairs with integrity and in an open and transparent manner.”

Continuing with pipelines, Moody's has assigned a Baa3 rating to Ruby Pipeline's US$1.075 billion senior unsecured notes. The senior unsecured notes have staggered maturities and will be used to refinance US$1.5 billion of project construction loans. The rating outlook is stable.

Stuart Miller, Moody's Vice President and Senior Analyst, said last week that the pipeline is a strategic link that provides diversity of supply to the utilities and industrial markets in Northern California and the Pacific Northwest.

"Hence, the primary drivers for Ruby's Baa3 rating are its initially high leverage tempered by a high level of ship-or-pay firm contracts with counterparties with a weighted average credit rating of Baa1 as well as our expectation that the ratio of debt to EBITDA will rapidly decline to below 4.5x," he concluded.

Ruby's leverage is expected to improve over the next five years as its capital structure includes a five year amortising term loan. Because of the required amortisation, Ruby's leverage, as measured by debt to EBITDA, should decline from approximately 5.2x to less than 4.5x by the end of 2013. Any revenue earned from the 28% un-contracted pipeline capacity would reduce leverage quicker, the agency noted. Finally, Nordstream I gas pipeline came onstream earlier in the week. Here's the WSJ's Oilholic approved take on it.

© Gaurav Sharma 2011. Map 1: Petrobras prospections in Gulf of Mexico © Petrobras 2011. Map 2: Petrobras in Santos Basin, Brazil (Courtesy: Petrobras)