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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To email: gaurav.sharma@oilholicssynonymous.com
 

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

OPEC's politics is the main show, not the quota

The Oilholic finds himself in a decidedly chilly Vienna ahead of the 164th meeting of OPEC ministers. This blogger's correspondence on all crude matters from the lovely capital of Austria goes back a good few years and to the old OPEC HQ.

However, in all these years of journeying here from London, there has been one constant - nearly every leading financial newspaper one could pick up at Heathrow Airport carried a report about expectations from the ministers' meeting ahead of the actual event taking place. Yet this morning, most either didn't flag up the meeting or had a perfunctory brief on it. The FT not only omitted a report, but with eerie symmetry had a special report on the future of NAFTA containing an article on shale transforming North American fortunes!

There is clear sense of anti-climax here as far as the decision on the production quota goes. Analysts think OPEC will hold its quota at 30 million barrels per day (bpd), traders think so too, as do "informed sources", "sources close to sources", "sources of sources", etc, etc. Making it even more official, Algerian oil minister Youcef Yousfi has quite candidly told more than one scribe here today that quota fiddling was unlikely.

So why are we all here? Why for the sideshow of course! Silly you, for thinking it was anything but! Only thing is, cometh the meeting tomorrow - it's going to be one hell of a sideshow. Weaved into it is the Oilholic's own agenda of probing the hypothesis of the incremental barrel a bit further.

For not only are additional barrels available globally owing to a decline in US imports courtesy shale, Iraq - which hasn't had an OPEC quota since 1998 - is seeing a massive uptick in production. Additionally Iran, apart from being miffed with Iraq for pumping so much of the crude stuff, could itself be welcomed back to market meaningfully over the coming months, adding its barrels to that 'crude' global pool.

While that is likely to take another six months at the very least - the Iraqis are pumping on regardless. You wouldn't expect anything else, but it has made Iran's new oil minister Bijan Zanganeh come up with the crude quote of the month (ok, last month) when he noted: “Iraq has replaced Iran's oil with its own. This is not friendly at all." Yup, tsk, tsk not nice and so it goes with the Saudis, who pumped in overdrive mode when the Iranians were first hit by sanctions in 2012.

To put things into context, without even going on a tangent about Shia-Sunni Muslim politics in the Middle East, Iraqi production has risen to 3 million bpd on the back of increasing inward investment. On the other hand, Iran has seen stunted investment following US and EU sanctions with production falling from 3.7 million bpd to 2.7 million bpd as the move hit it hard in 2012. Even if the Iranians go into overdrive, reliable sources suggest they'd be hard pressed to cap 3.5 million bpd over the next 12 months.

As for the Saudis, they have always been in a different league vying with Russia (and now the US) for the merit badge of being the world's largest producer of the crude stuff. Meanwhile, the price of Brent stays at three figures around US$111-plus - not a problem for the doves such as Saudi Arabia, but not high enough for the hawks such as Venezuela.

The Oilholic seriously doubts if political problems will be ironed out at this meeting. But what's crucial here is that it could mark a start. Can OPEC unite to effectively manage the issue of both its and the global pool's incremental barrels in wake of shale and all that? Appointing a new secretary general to replace Libya's Abdalla Salem el-Badri would be a start.

El-Badri is long due to step down but has carried on as the Iranians and Saudis have tussled over whose preferred candidate should be his successor. The quota decision is not the main talking point here, this OPEC sideshow most certainly is, especially for supply-side analysts and students of geopolitics. That's all from OPEC HQ for the moment folks, more from Vienna later! Keep reading, keep it ‘crude’! 

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To email: gaurav.sharma@oilholicssynonymous.com 

© Gaurav Sharma 2013. Photo: OPEC flag © Gaurav Sharma 2013.

A chat at Platts, ‘LHS’ & the Houston glut

The 'Houston glut debate' gained further traction this summer as the metropolitan area has been a recipient of rising inland crude oil supplies heading towards the US Gulf Coast. New light and heavy grades of crude are showing up – principally from the Eagle Ford, Permian Basin, North Dakota and Western Canada.

The ongoing American oil production boom complements existing Texas-wide E&P activity which is getting ever more efficient courtesy horizontal drilling. Yet, infrastructural impediments stunt the dispatch of crude eastwards from Texas to the refineries in Louisiana.

In fact, many analysts in Chicago and New York have long complained that Houston lacks a benchmark given it has the crude stuff in excess. It seems experts at global energy and petrochemical information provider Platts thought exactly the same.

Their response was the launch of the Platts Light Houston Sweet (or should we say ‘LHS’) in July. Nearly four months on, the Oilholic sat down with Platts Associate Editorial Director Sharmilpal Kaur to get her thoughts on the benchmark and more. So first off, why here and why now?

"We launched the new crude assessment this year as we felt it was finally time for a benchmark that reflected the local dynamic. I’d also say the US was ripe for a fresh benchmark and we went for one based on the price of physical crude oil basically FOB out of three major terminals in Houston."

These include Magellan East Houston Terminal, Enterprise Houston Crude Oil (ECHO) Terminal, and the Oil Tanking Houston Terminal – the location markers for the assessment. Kaur says as the Houston crude transportation infrastructure develops, Platts may consider additional terminals for inclusion in its LHS assessment basis.

Specifically, completion of the Kinder Morgan/Mercuria 210,000 barrels per day (bpd) rail terminal on the Houston Ship Channel could potentially provide another avenue for both WTI Midland and Domestic Sweet quality crudes to enter the Houston market.

The chances of Platts making a fist of LHS are good according to anecdotal evidence, especially as half of the supply side analyst community has been calling for such an assessment. The minimum volume considered by the information provider is 25,000 barrels, or 1,000 bpd rateable, in line with other US domestic pipeline grades.

Platts publishes LHS as a flat price; which is assessed using both fixed as well as floating price information. In the case of floating prices against WTI, Platts generally calculates the fixed price assessment using calendar month average (CMA) WTI or front-month WTI as the floating basis, depending on the WTI basis reported in bids, offers, and transactions.

In the case of light sweet price information reported against the Louisiana Light Sweet (LLS), Platts calculates the fixed price using LLS trade month. In the case of ICE Brent light sweet crude market, Platts calculates the resulting fixed price using an ICE Brent strip that reflects the value of ICE Brent for the relevant pipeline month. Additionally, in the absence of spot activity for light sweet crude in Houston, Platts will look at related markets such as WTI at Midland or WTI at Cushing and adjust its daily LHS assessment accordingly.

That absence won’t be all that frequent as the Houston crude oil distribution system looks set to receive new supplies of over 1.7 million bpd in terms of pipeline capacity delivering into the region by the end of June 2014.

A regional trading market for producers and dispatchers selling the crude stuff to Gulf Coast refiners is well past infancy. Kaur reckons Houston’s spot trading market could rival those at Cushing, Oklahoma and St. James, Louisiana. (See Platts map illustrating the area’s crude oil storage and distribution projections on the right, click to enlarge).

 

So far so good, but in the ancillary infrastructure development and supply sources to Texas, does Kaur include Keystone XL at some point in the future?

"Yes, the pipeline extension will be built and despite the uptick in US crude oil production remains as relevant as ever. There are facets of Keystone XL which are hotly contested by those for and against the project – from its job creation potential to environmental concerns. My take is that Keystone XL would offer is incremental supply of heavy crude out of Canada that comes all the way down to the Gulf Coast and then gets blended."

"What’s produced domestically in the US (say in the Eagle Ford and Bakken) is light crude. What Gulf Coast refiners actually like are heavier crudes blended to form a middle blend. Canadian crude has started pushing out the Latin American crudes and the reason for that is pure pricing as Canadian crude is cheaper than Latin American crude. That trend is basically continuing…it’s why the pipeline extension was planned, and why every refiner in Houston will tell you its needed. President Barack Obama will get there once the legacy component of Keystone XL has been worked out."

As for the hypothesis that Canada may look elsewhere should the project not materialise, Kaur doesn’t quite see it that way. Simple reason is that the Americans know the Canadians and vice versa with very healthy trading relations between the two neighbours for better parts of a century.

"China as an export market is an option for Canada. It’s being explored vigorously by Canadian policymakers – but I see two impediments. Pulling a pipeline from Alberta to British Columbia in order to access the Chinese market via the West Coast won’t be easy. It will, as Keystone XL will, eventually get built, but not overnight. Secondly, the Chinese have diversified their importation sources more than any other country in the world – OPEC, Latin America, West Africa and Russia, to name a few."

Furthermore, US crude imports from West Africa are on the decline. That cargo has to go somewhere and industry evidence suggests its going to China, followed by Japan and to a much lesser extent India.

 

"The Indians would like to get their hands on Canadian crude too – no doubt about that; but logistics and cost of shipping complicates matters. A simple look at the world map would tell you that. Don’t get me wrong; China needs Canadian exports, but given the global supply dynamic Canada probably needs China more as a major export market."

In sync with what the ratings agencies are saying, Kaur sees also E&P capex going up over the next two to three years. "Most IOCs and NOCs see it that way. If you drove through exploration zones in the Bakken Shale, you’d be a busy man counting all the logos of oil & gas firms dotting the landscape, ditto for the Canadian oil sands where foreign direct investment is clearly visible."

Sharmilpal Kaur, Associate Editorial Director, Platts

The Platts expert flags up a fresh example – that of Hess Corporation which recently sold its US trading operations to Centrica-owned Direct Energy.

"Here is a company indicating quite clearly that it’s selling up the trading book and using that money to invest in Bakken wells as well as globally. Right now, in terms of E&P – the market is so lucrative, with an oil price level to sustain it, that people are making sure they find the capex for it and in many cases preferably from their balance sheets." The integrated model is not dead yet, but IOCs holding refineries on their balance sheet have clearly indicated that their priorities are elsewhere.

"You see ageing refineries in trouble within the OECD; at least 15 have faced problems in Europe owing to overcapacity. Yet China, India and Middle East continue to build new refineries – often out of need."

"China has indicated that it wants to be a regional exporter of refined products at some point. That’s a trading model it wants to adopt because it now has access to multiple crude oil supply sources. As a follow-up to its equity stakes in crude production sites, China now has ambitions and wherewithal of becoming a global refining power. In the Chinese government’s case – its need and ambition combined!"

The Oilholic and Kaur agreed that the chances of US crude oil ending up in the hands of foreign refiners, let alone Chinese ones, were slim to none for the moment. In the fullness of time, the US may actually realise it is in its own interest to export crude. Yet, given the politics it is still a question of 'if' and not an imminent 'when'. 

Hypothetically, should the US employ free market principals and export its light crude which is surplus to its requirements, but get heavier crude in return more in sync with its refining prowess – the exchange would work wonders.

"It could command a better price for its light crude and actually buy the heavier crude cheaper. My thinking is that the US would actually come out on top and the rest of the world would benefit too. Here we have too much light crude, the rest of the world craves it – so there’s the opportunity in theory. In the unlikely event that this was to happen, we would see a very different supply dynamic. Price spikes associated with disruptions - for example as we saw during the Libyan conflict in 2011 - would be mitigated," says Kaur

Nonetheless, even with a ban on crude oil exports, the US oil & gas bonanza has weakened OPEC. There are two ways of approaching this – concept of incremental barrels on a virtual supply ledger and the constantly declining level of US imports.

"As US imports decline, barrels originally heading to these shores will be diverted elsewhere. That’s where the US has a voice when it speaks to OPEC. Supply side analysts such as you are tallying US, Russia and [OPEC heavyweight] Saudi Arabia’s production level. Now add Canada, prospects of a Mexican and Iraqi revival, a gradual Libyan uptick and some semblance of a resolution to the Iranian standoff – then there’s a lot of it around and OPEC understands it."

While Platts does not comment on the direction of the oil price, what Kaur sums up above is precisely why the Oilholic has constantly quipped over the course of 2013 that a three-figure Brent price is barmy and unreflective of supply side scenarios in an uncertain macroeconomic climate. Blame the blithering paper barrels!

"At least, you can take comfort from the fact that the peak oil theorists have temporarily disappeared. I haven’t seen one in Houston for while," Kaur laughs. In fact, the Oilholic hasn’t either – in Houston and beyond. That’s all for the moment from Platts' Houston hub! Keep reading, keep it ‘crude’!

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo 1: Oil pipeline, Fairfax, Virginia, USA © O. Louis Mazzatenta / National Geographic. Photo 2: Sharmilpal Kaur, Associate Editorial Director at Platts © Gaurav Sharma. Graphic: Map of Houston crude oil storage and distribution © Platts

On a 'crude' UK raid, IEA & the 'Houston glut'

There was only story in London town last week, when late in the day on May 14, European Commission (EC) regulators swooped down on the offices of major oil companies having R&M operations in the UK, investigating fuel price fixing allegations. While the EC did not name names, BP, Shell and Statoil confirmed their offices had been among those ‘visited’ by the officials.

 

More details emerged overnight, as pricing information provider Platts admitted it was also paid a visit. The EC said the investigation relates to the pricing of oil, refined products and biofuels. As part of its probe, it will be examining whether the companies may have prevented others from participating in the pricing process in order to "distort" published prices.

 

That process, according to sources, is none other than Platts’ Market On Close (MOC) price assessment mechanism. "Any such behaviour, if established, may amount to violations of European antitrust rules that prohibit cartels and restrictive business practices and abuses of a dominant market position," the EC said, but clarified in the same breath that the raids itself did not imply any guilt on part of the companies.

 

The probe extends to alleged trading malpractices dating back almost over 10 years. All oil companies concerned, at least the ones who admitted to have been visited by EC regulators, said they were cooperating with the authorities. Platts issued a similar statement reiterating its cooperation.

 

So what does it mean? For starters, the line of inquiry is nothing new. Following a very vocal campaign led by British parliamentarian Robert Halfon, the UK's Office of Fair Trading (OFT) investigated the issue of price fixing and exonerated the oil companies in January. Not satisfied, Halfon kept up the pressure and here we are.

 

"I have been raising the issue of alleged fuel price fixing time and again in the House of Commons. With the EC raids, I'd say the OFT has been caught cold and simply needs to look at this again. The issue has cross-party support in the UK," he said.

 

In wake of the raids, the OFT merely said that it stood by its original investigation and was assisting the EC in its investigations. Question is, if, and it’s a big if, any wrongdoing is established, then what would the penalties be like and how would they be enforced? Parallels could be drawn between the Libor rate rigging scandal and the fines that followed imposed by US, UK and European authorities. The largest fine (to date) has been CHF1.4 billion (US$1.44 billion) awarded against UBS.

 

So assuming that wrongdoing is established, and fines are of a similar nature, Fitch Ratings reckons the companies involved could cope. "These producers typically have between US$10 billion and US$20 billion of cash on their balance sheets. Significantly bigger fines would still be manageable, as shown by BP's ability to cope with the cost of the Macondo oil spill, but would be more likely to have an impact on ratings," said Jeffrey Woodruff, Senior Director (Corporates) at Fitch Ratings.

 

Other than fines, if an oil company is found to have distorted prices, it could face longer-term risks from damage to its reputation. While these risks are less easy to predict and would depend on the extent of any wrongdoing, scope does exist for commercial damage, even for sectors with polarising positions in the public mind, according to Fitch. Given we are in the 'early days' phase, let's see what happens or rather doesn't.

 

While the EC was busy raiding oil companies, the IEA was telling the world how the US shale bonanza was sending ripples through the oil industry. In its Medium-Term Oil Market Report (MTOMR), it noted: "the effects of continued growth in North American supply – led by US light, tight oil (LTO) and Canadian oil sands – will cascade through the global oil market."

 

While geopolitical risks persist, according to the IEA, market fundamentals were indicative of a more comfortable global oil supply/demand scenario over the next five years at the very least. The MTOMR projected North American supply to grow by 3.9 million barrels per day (mbpd) from 2012 to 2018, or nearly two-thirds of total forecast non-OPEC supply growth of 6 mbpd.

 

World liquid production capacity is expected to grow by 8.4 mbpd – significantly faster than demand – which is projected to expand by 6.9 mbpd. Global refining capacity will post even steeper growth, surging by 9.5 mbpd, led by China and the Middle East. According to the IEA, having helped offset record supply disruptions in 2012, North American supply is expected to continue to compensate for declines and delays elsewhere, but only if necessary infrastructure is put in place. Failing that, bottlenecks could pressure prices lower and slow development.

 

Meanwhile, OPEC oil will remain a key part of the oil mix but its production capacity growth will be adversely affected by "growing insecurity in North and Sub-Saharan Africa", the agency said. OPEC capacity is expected to gain 1.75 mbpd to 36.75 mbpd, about 750,000 bpd less than forecast in the 2012 MTOMR. Iraq, Saudi Arabia and the UAE will lead the growth, but OPEC's lower-than-expected aggregate additions to global capacity will boost the relative share of North America, the agency said.

 

Away from supply-demand scenarios and on to pricing, Morgan Stanley forecasts Brent's premium to the WTI narrow further while progress continues to be made in clearing a supply glut at the US benchamark’s delivery point of Cushing, Oklahoma, over the coming months. It was above the US$8 mark when the Oilholic last checked, well down on the $20 it averaged for much of 2012.However, analysts at the investment bank do attach a caveat.

Have you heard of the Houston glut? There is no disguising the fact that Houston has been the recipient of the vast majority of the "new" inland crude oil supplies in the Gulf Coast [no prizes for guessing where that is coming from]. The state's extraction processes have become ever more efficient accompanied by its own oil boom to complement the existing E&P activity.

 

Lest we forget, North Dakota has overtaken every other US oil producing state in terms of its oil output, but not the great state of Texas. Yet, infrastructural limitations persist when it comes to dispatching the crude eastwards from Texas to the refineries in Louisiana.

 

So Morgan Stanley analysts note: "A growing glut of crude in Houston suggests WTI-Brent is near a trough and should widen again [at least marginally] later this year. Houston lacks a benchmark, but physical traders indicate that Houston is already pricing about $4 per barrel under Brent, given physical limitations in moving crude out of the area."

 

The Oilholic can confirm that anecdotal evidence does seem to indicate this is the case. So it would be fair to say that Morgan Staley is bang-on in its assessment that the "Houston regional pricing" would only erode further as more crude reaches the area, adding that any move in Brent-WTI towards $6-7 a barrel [from the current $8-plus] should prove unsustainable.

 

Capacity to bring incremental crude to St. James refineries in Louisiana is limited, so the Louisiana Light Sweet (LLS) will continue to trade well above Houston pricing; a trend that is likely to continue even after the reversal of the Houston-Houma pipeline – the main crude artery between the Houston physical market and St. James.

 

On a closing note, it seems the 'Bloomberg Snoopgate' affair escalated last week with the Bank of England joining the chorus of indignation. It all began earlier this month when news emerged of Bloomberg's practice of giving its reporters "limited" access to some data considered proprietary, including when a customer looked into broad categories such as equities or bonds.

 

The scoop – first reported by the FT – led to a full apology by Matthew Winkler, Editor-in-chief of Bloomberg News, for allowing journalists "limited" access to sensitive data about how clients used its terminals, saying it was "inexcusable". However, Winkler insisted that important and confidential customer data had been protected. Problem is, they aren't just any customers – they include the leading central banks in the OECD.

 

The US Federal Reserve, the European Central Bank and the Bank of Japan have all said they were examining the use of data by Bloomberg. However, the language used by the Bank of England is the sternest so far. The British central bank described the events at Bloomberg as "reprehensible."

 

A spokesperson said, "The protection of confidential information is vital here at the bank. What seems to have happened at Bloomberg is reprehensible. Bank officials are in close contact with Bloomberg…We will also be liaising with other central banks on this matter."

 

In these past few days there have been signs that 'Bloomberg Snoopgate' is growing bigger as Brazil’s central bank and the Hong Kong Monetary Authority (the Chinese territory's de facto central bank) have also expressed their indignation. Having been a Bank of England and UK Office for National Statistics (ONS) correspondent, yours truly can personally testify how seriously central banks take issue with such things and so they should.

 

Yet, in describing Bloomberg's practice as "reprehensible", the Bank of England has indicated how serious it thinks the breach of confidence was and how miffed it is. The UK central bank has since received assurances from Bloomberg that there would be no repeat of the issue! You bet! 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: Abandoned gas station © Todd Gipstein / National Geographic 

Brent’s liquidity, Nexen, 'crude' Vancouver & more

Last Friday, the Brent forward month futures price plummeted to US$110.65 per barrel thereby losing all of the gains it made in 2013. The WTI price declined in near furious tandem to US$91.92; the  benchmark's lowest intraday price since January 4. An Italian political stalemate and US spending cuts enforced by Congressional gridlock have unleashed the bearish trends. Quite frankly, the troublesome headwinds aren’t going anywhere, anytime soon.

Prior to the onset of recent bearish trends, Bank of America said the upper limit for Brent crude will rise from US$140 per barrel this year to US$175 in 2017 because of constraints on supply. It added that WTI may slip to “US$50 within the next two years” amid booming North American supply. Meanwhile, ratings agency Moody’s expects strong global crude prices in the near term and beyond, with a continued US$15 per barrel premium in favour of Brent versus WTI over 2013.

Moody's still assumes 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. For WTI, the agency leaves its previous assumptions unchanged at US$85 in 2013, 2014 and thereafter. Away from the fickle pricing melee, there was a noteworthy development last month in terms of Brent’s liquidity profile as a benchmark, which is set to be boosted.

On February 19, Platts proposed the introduction of a quality premium for Ekofisk and Oseberg crudes; two of the four grades constituting the Dated Brent marker. A spokesperson said the move would increase transparency and trading volumes in Dated Brent. The proposal came a mere fortnight after Shell’s adjustments to its trading contract for three North Sea blends including Brent.

The oil major said it would change its contract (SUKO 90) for buying and selling to introduce a premium for the delivery of higher quality Brent, Ekofisk and Oseberg grades. Previously, it only used the Forties grade which was typically the cheapest Brent blend and thus used to price the benchmark by default. BP has also agreed to Shell’s amended pricing proposals in principle.

The Oilholic thinks it is prudent to note that even though Platts is the primary provider of price information for North Sea crude(s), actual contracts such as Shell’s SUKO 90 are the industry’s own model. So in more ways than one, a broad alignment of the thinking of both parties (and BP) is a positive development. Platts is requesting industry feedback on the move by March 10 with changes being incorporated with effect from shipments in May.

However, there are some subtle differences. While Shell has proposed an inclusion of Brent, Platts is only suggesting premiums for Oseberg and Ekofisk grades. According to published information, the oil major, with BP’s approval, has proposed a 25% premium for Brent and Oseberg based on their difference to the Forties differential, and a 50% premium for Ekofisk.

But Platts, is seeking feedback on recommending a flat 50% premium for both Oseberg and Ekofisk. Nonetheless, at a time of a dip in North Sea production, a change of pricing status quo aimed at boosting liquidity ought to be welcomed. Furthermore, there is evidence of activity picking up in the UK sector of the North Sea, with Oil and Gas UK (OGUK), a body representing over 320 operators in the area, suggesting last month that investment was at a 30-year high.

OGUK said companies invested £11.4 billion in 2012 towards North Sea prospection and the figure is expected to rise to £13 billion this year. It credited UK Chancellor George Osborne’s new tax relief measures announced last year, which allowed gas fields in shallow waters to be exempt from a 32% tax on the first £500 million of income, as a key factor.

However, OGUK warned that reserves currently coming onstream have not been fully replaced with new discoveries. That is hardly surprising! In fact, UK production fell to the equivalent of 1.55 million barrels per day (bpd) in 2012, down by 14% from 2011 and 30% from 2010. While there may still be 24 billion barrels of oil to be found in the North Sea, the glory days are not coming back. Barrel burnt per barrel extracted or if you prefer Petropounds spent for prospection are only going to rise.

From the North Sea’s future, to the future of a North Sea operator – Canada’s Nexen – the acquisition of which by China’s state-owned CNOOC was finally approved on February 26. It took seven long months for the US$15.1 billion takeover to reach fruition pending regulatory approval in several jurisdictions, not least in Canada.

It was announced that shareholders of the Calgary, Alberta-based Nexen would get US$27.50 in cash for each share, but the conditions imposed by Canadian (and US) regulators for the deal to win approval were not disclosed. More importantly, the Harper administration said that CNOOC-Nexen was the last deal of its kind that the Canadian government would approve.

So it is doubtful that a state-controlled oil company would be taking another majority stake in the oil sands any time soon. The Nexen acquisition makes CNOOC a key operator in the North Sea, along with holdings in the Gulf of Mexico and West Africa, Middle East and of course Canada's Long Lake oil sands project (and others) in Alberta.

Meanwhile, Moody’s said the Aa3 ratings and stable outlooks of CNOOC Ltd and CNOOC Group will remain unchanged after the acquisition of Nexen. The agency would also continue to review for upgrade the Baa3 senior unsecured rating and Ba1 subordinated debt rating of Nexen.

Moving away from Nexen but sticking with the region, the country’s Canadian Business magazine asks, “Is Vancouver the new Calgary?”  (Er…we’re not talking about changing weather patterns here). The answer, in 'crude' terms, is a firm “Yes.” The Oilholic has been pondering over this for a good few years. This humble blogger’s research between 2010 and present day, both in Calgary and Vancouver, has always indicated a growing oil & gas sector presence in BC.

However, what is really astonishing is the pace of it all. Between the time that the Oilholic mulled about the issue last year and February 2013, Canadian Business journalist Blair McBride writes that five new oil & gas firms are already in Vancouver. Reliable anecdotal evidence from across the US border in general, and the great state of Texas in particular, suggests more are on their way! Chevron is a dead certain, ExxonMobil is likely to follow.

One thing is for certain, they’re going to need a lot more direct flights soon between Vancouver International and Houston’s George Bush Intercontinental airport other than the solitary Continental Airlines route. Hello, anyone from Air Canada reading this post?

Continuing with corporate news, Shell has announced the suspension of its offshore drilling programme in the Arctic for the rest of 2013 in order to give it time to “ensure the readiness of equipment and people.” It was widely expected that prospection in the Chukchi and Beaufort Seas off Alaska would be paused while the US Department of Justice is looking into safety failures.

Shell first obtained licences in 2005 to explore the Arctic Ocean off the Alaskan coastline. Since then, £3 billion has been spent with two exploratory wells completed during the short summer drilling season last year. However, it does not mask the fact that the initiative has been beset with problems including a recent fire on a rig.

Meanwhile, Repsol has announced the sale of its LNG assets for a total of US$6.7 billion to Shell. The deal includes Repsol’s minority stakes in Atlantic LNG (Trinidad & Tobago), Peru LNG and Bahia de Bizkaia Electricidad (BBE), as well as the LNG sale contracts and time charters with their associated loans and debt. It’s a positive for Repsol’s credit rating and Shell’s gas reserves.

As BP’s trial over the Gulf of Mexico oil spill began last month, Moody’s said the considerable financial uncertainty will continue to weigh on the company’s credit profile until the size of the ultimate potential financial liabilities arising from the April 2010 spill is known.

Away from the trial, the agency expects BP's cash flows to strengthen from 2014 onwards as the company begins to reap benefits of the large roster of upstream projects that it is working on, many of which are based in high-margin regions. “This would help strengthen the group's credit metrics relative to their weaker positioning expected in 2013,” Moody’s notes.

One final bit of corporate news, Vitol – the world's largest oil trading company –  has posted a 2% rise in its 2012 revenue to US$303 billion even though volumes traded fell and profit margins remained under pressure for much of the year. While not placing too much importance on the number, it must be noted that a US$300 billion-plus revenue is more than what Chevron managed and a first for the trading company.

However, it is more than safe to assume Chevron’s profits would be considerably higher than Vitol’s. Regrettably, other than relying on borderline gossip, the Oilholic cannot conduct a comparison via published sources. That’s because unlike listed oil majors like Chevron, private trading houses like Vitol don’t release their profit figures.

That’s all for the moment folks. But on a closing note, this blogger would like to flag-up research by the UK’s Nottingham Trent University which suggests that Libya could generate approximately five times the amount of energy from solar power than it currently produces in crude oil!

The university’s School of Architecture, Design and the Built Environment found that if the North African country – which is estimated to be 88% desert terrain – used 0.1% of its landmass to harness solar power, it could produce almost 7 million crude oil barrels worth of energy every day. Currently, Libya produces around 1.41 million bpd. Food for thought indeed! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2013. Photo 1: Oil tanker, English Bay, BC, Canada. Photo 2: Downtown Vancouver, BC, Canada © Gaurav Sharma

Talking geopolitics & refineries at Platts event

Following on from earlier conversations with contacts in the trading community about the direction of the Brent crude price versus geopolitics, the Oilholic extended his queries to the Platts Energy Risk Forum, held in London earlier this week. At the event, Dave Ernsberger, global editorial director of oil coverage at Platts, summed-up the market mood as we near the final quarter of 2012 (see graphic above, click to enlarge). “This year has been one of two realities, namely the dire economic climate and upward geopolitical risk. H1 2012 saw anxiety about a war in the Middle East and H2 sees renewed fears of a demand slowdown,” he told delegates.

“The oil price is poised to break away from the mean – but which way? So far it has been chained and shackled in the US$15-20 range either way falling below US$90 and rising above US$115 over the course of this year. The threat of an Iran versus Israel conflict which might draw the US in by default has not gone away. On the other hand a European recession could bring a new oil price crash. Additionally, there is a perception that supply-demand and spare capacity scenarios are not what they are made out to be,” Ernsberger added.

Over a break in proceedings, the Oilholic quizzed the Platts man about the actual influence of the geopolitical or instability premium on the price of the crude stuff and market conjecture about it being broadly neutral for 2013.

“I think the current geopolitical dynamic is fairly well understood at this point. The big touching points which are at play for instance, but not limited to, the US-Iran-Israel issue and the China-Japan and Asia Pacific energy politics have been with us for a while. I feel it is hard to see how those geopolitical arenas will evolve significantly in 2013 because we are at a stalemate point. In a sense, if you look forward they should be neutral,” Ernsberger said.

However, both of us were in agreement that one always needs to be careful about a geopolitical trigger as a single tiny flashpoint could offset the placidness. But from where Ernsberger and the Oilholic sit at present – geopolitical influences are in a kind of suspended animation for next year. The Platts Energy Risk Forum also noted that demand forecasts for 2012 have stabilised and that Chinese demand, on a standalone basis, had slowed considerably. As such, the price outlook for 2013 is overwhelmingly bearish.

One unintended result of the European crisis brings us to another area of interest - refining. Platts noted that the EU-wide recession is speeding up refinery closures. It suggested that 3 to 5 million barrels per day (bpd) of oil refining capacity is under immediate threat of closure or actually did close recently. Additionally, an estimated 7 million bpd needs to close to adjust for more efficient refining in Asia and Middle East. But the closures are lifting refining margins over the short-term in a business that remains volatile (see graphic above right, click to enlarge). Ernsberger also brought forth a very valid observation for the readers of this humble blog – the striking similarity between the survival (or vice versa) statistics within the refining and civil aviation sectors.

“Refining and aviation are two industries where it’s a race to the bottom! There is so much competition in both these industries that basically whatever environment you are operating in – even if you are operating in India or China – it’s a race to the bottom…Typically, what you’ll find is that every company would try and stay in the business as long as it can and will only leave when it runs out of money. It’s also why refining and aviation have more bankruptcies than any other sector I can think of,” he said.

At the same forum, it was also a pleasure running into Dr. Vincent Kaminski, a former Enron executive who repeatedly raised strong objections to the financial practices at the company prior to its scandal-ridden collapse in 2002. In the aftermath of the scandal, Dr. Kaminski was praised for being among the voices of reason at a company riddled with malpractices. (For background read Bethany McLean and Peter Elkind’s brilliant book – The Smartest Guys in the Room)

Dr. Kaminski, who is an academic on the faculty of Houston’s Rice University at present, told the forum that by the time of its collapse Enron had mutated from an energy company to one which traded practically everything and one which was not alone in devising trading strategies based on exploiting geographical constraints.

“Energy markets have evolved over the last 20 years into an integrated global system. Markets for different physical commodities form what can be called a tightly coupled system. While market participants learn and adjust their behaviour in order to survive and prosper in a changing world, the system itself evolves and remains far removed from a stable equilibrium at any point in time,” he added.

Dr. Kaminski also dwelt on the Shale Gas revolution in the US which was decades in the making but transformed the country's energy landscape upon fruition leading to the availability of natural gas in abundance and a dip in gas price-contracts (see graphic on the left, click to enlarge). “As US production sky-rocketed, conventional wisdom about the possibility of LNG shortages barely five years ago was turned on its head. By April 2012 we even noted a sub-US$2/mBtu front-month settlement on the NYMEX,” he added.

Later in the afternoon, Dr. Kaminski told the Oilholic that US LNG import terminals currently being prepped to export gas in wake of the shale bonanza could one day be sending tanker-loads to Europe in direct competition with Qatar and Russia.

“On the flipside for the US consumer, the moment a viable gas export market is established for US gas, the impact on the country’s domestic gas market would be a bullish one. That is the nature of market forces,” he added.

When asked about the prospects of shale prospection in Europe – most notably in Poland, Ukraine, Sweden and the UK – Dr. Kaminski said he was a ‘realist’ rather than a ‘sceptic’. “What happened in the US, did not take place overnight. Technology, legislative facilitation and public will – all played a part and gradually fell into place. I do not see it being replicated in Europe over the short term and certainly not with the speed that some are hoping it would,” he concluded.

Just as the Oilholic was winding down from a discussion on shale with Dr. Kaminski, it seems the UK Institution of Mechanical Engineers (IMechE) was talking up the economic benefits of a British Shale Gale! In a policy statement circulated to parliamentarians, the IMechE said shale gas was ‘no silver bullet’ for UK energy security but will provide long-term economic benefits in the shape of thousands of jobs.

Dr. Tim Fox, Head of Energy and Environment at IMechE and lead author of the shale gas policy statement, said, “Shale gas has the potential to give some of the regions hit hardest by the economic downturn a much-needed economic boost. The engineering jobs created will also help the Government’s efforts to rebalance the UK’s skewed economy.”

However, Dr. Fox added that shale gas "is unlikely to have a major impact on energy prices and the possibility that the UK might ever achieve self-sufficiency in gas is remote." 

IMechE projects that 4,200 jobs would be created per year over a ten-year drill programme. The engineering skills developed could then be sold abroad, just as the oil and gas experience built up in North Sea oilfields is now being sold across the world. Well, we shall see but that’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Graphic 1: Platts dated Brent – January 2011 to August 2012 © Platts September 2012. Graphic 2: International cracking margins snapshot © Platts / Turner Mason & Co. September 2012. Graphic 3: US Natural Gas futures contract © Dr. Vincent Kaminski, Rice University, Texas, USA /Bloomberg.