He’s making an inventory, checking it twice...

Full of festive cheer, he’s making a crude inventory, checking it thrice, gonna find out whose Iranian (sorry naughty) and nice – Saudi oil minister is coming to town. Nah, not really! 

For what it’s worth Khalid Al Falih actually turned up pretty late on Tuesday, just on the eve of the 171st OPEC Ministers' meeting. Having initially told a Saudi newspaper, an Opec production cut may not be needed, speaking at a pre-conference media scrum, Al-Falih said a deal could be done and would need wider cooperation within OPEC.

Separately, Suhail Al Mazroui, oil minister of the United Arab Emirates, told yours truly, for an IBTimes UK interview, that the ongoing OPEC meeting was not a make or break scenario for the oil market.

Al Mazroui admitted the last few months had seen “intense” negotiations, but added that: "However, from all signs I have seen, things are positive." 

We shall see. The Oilholic believes a final decision would go right down to the wire, and puts the chance of an agreement only at 50%. Watch this space! More from Vienna shortly folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma, November 2016. Photo: Khalid Al-Falih, Oil Minister of Saudi Arabia, speaks to reporters at the 171st OPEC Ministers' Meeting in Vienna, Austria on 30 November, 2016 © Gaurav Sharma, 2016.

‘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.

A Saudi briefing, Iran's barrels & OPEC’s Sec Gen

Half of the world’s press descended on the OPEC HQ, in Vienna, Austria, half expecting that not much will transpire here. And well, that is exactly what happened when proceedings ended on 2 June – except that there were certain key developments before, after and during the 169th OPEC ministers’ meeting, some subtle and some not so subtle!

Let’s start with the subtle – for the first time in three years, a Saudi prince accompanied his country’s delegation to OPEC flanked by a new oil minister in the shape of Khalid Al-Falih. The Saudi delegation largely kept mum as far as the press goes in the lead up to the conference, but the prince himself took time to hold and address an off-record briefing with oil market analysts away from the prying eyes of the media.

Off-record means what it says on the tin dear readers, as the Saudis wanted the press out of it. So the Oilholic has to respect that; even though one got a 100% lowdown via third parties! Yours truly can however share some nuggets minus specifics.

The Saudi delegation, a veritable who’s who of the country’s energy industry, made the slickest presentation in recent memory and in the Oilholic’s opinion perhaps the most data heavy one too. It sounded like Saudi Arabia was making a concerted effort to tell the wider world it meant business when it comes to the diversification of its economy, but make no mistake - the briefing on the eve of the 169th OPEC conference was about something else entirely.

The proverbial kings – as they are of the oil and gas world – appeared to be preparing for a game of chess. As the Oilholic and selected colleagues yours truly has known for years read it – ‘wethinks’ the Kingdom has thrown the production stakes gauntlet back to Iran, which has been asserting its right to pump as much oil as it likes in a post sanctions-era.

The Islamic Republic has made no secret of its desire to bump up production to 4 million barrels per day (bpd) within a year. Never say ‘never’, but the Oilholic has made no secret of his conjecture either that the chances of that happening given infrastructural impediments, above anything else, are slim to negligible. One suspects experts advising the Saudis know just as much.

So the Saudis reckon they may as well throw the gauntlet back to Iran. “You want to pump 4 million bpd let’s see you do it, and if you do well and good – our ‘crude’ client base is intact we’ll pump what we want to.” Now you might think that suggests OPEC stays where it is, but not quite.

That’s because the Saudis (and by extension other Gulf exporters) would potentially use this as the basis of future OPEC dialogue, whether or not Iran gets to that level. Moving on from the subtle off-record stuff to the not-so-subtle on-record buzz on summit day, an ancillary thought was whether or not OPEC will appoint a new Secretary General to replace the long standing Abdalla Salem El-Badri, who has been officiating in an “acting capacity” since 2013.

Internal discord, and tension between the Iranians and the Saudis meant the oil producers’ collective, while even agreeing to readmit a net importer in the shape of Indonesia, could not get itself to agree on a compromise candidate for the post. And so El-Badri went on and on, and well on and on. 

However, finally Mohammed Sanusi Barkindo, from Nigeria, was named as Secretary General with effect from 1st August 2016, for a period of three years, bringing to a close a near decade-long term of his predecessor. Additionally, Gabon was readmitted to OPEC after having left in 2014. 

So all-in-all, it was not a mundane affair at all, with some sense of solidarity within what is soon to become a 14 member oil producing block. Perhaps a little solidarity is all what the market was seeking from OPEC at a time of low expectations. That’s all from the 169th OPEC ministers’ meeting folks! Keep reading, keep it crude!

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© Gaurav Sharma 2016. Photo: Exterior of OPEC Secretariat in Vienna, Austria © Gaurav Sharma.

Adios Ali: Saudi oil minister retires

Alas all 'crude' things in life come to an end, with King Salman replacing Ali Al-Naimi – Saudi Arabia’s oil minister who has been a regular feature at OPEC for over 20 years – with Khalid Al-Falih, chairman of state-owned oil giant Saudi Aramco.

It seems Al-Naimi’s outing to OPEC in December 2015 was the eighty-year old industry veteran’s last. For over two decades as oil minister, and a professional career extending well beyond that, Al-Naimi witnessed the oil price soar to $147 per barrel and plummet as low as $2, and by his own admission everything that needed to be seen in the oil markets in his service to Riyadh.

Every single OPEC minister’s summit the Oilholic has attended since 2006 has almost exclusively revolved around what Al-Naimi had to say, and with good reason. For the mere utterance of a quip or two from the man, given the Saudi spare capacity, was enough to move global oil markets. 

Since 2014, he doggedly defended the Saudi policy of maintaining oil production for the sake of holding on to the Kingdom’s market share in face of crude oversupply. Both under, King Fahd and King Abdullah, Al-Naimi near single-handedly conjured up the Saudi oil policy stance. But King Salman has gone down a different route.

The new oil minister Al-Falih will undoubtedly draw the biggest crowd of journalists yet again at OPEC given the Saudi clout in this crude world. However, Al-Naimi leaves behind some big running shoes to fill, and perhaps his predecessor’s signature pre-OPEC power walk (or was it a jog) on Vienna’s ring road with half of the world’s energy journalists in tow chasing him around the Austrian capital!

For the Oilholic it has been an absolute joy interacting with Al-Naimi at OPEC. Somehow things will never be the same again at future oil ministers' meetings, and that’s just for the scribes to begin with. That’s all for the moment folks! Keep reading, keep it crude!

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© Gaurav Sharma 2016. File photo: Ali Al-Naimi, former oil minister of Saudi Arabia © Gaurav Sharma.

Beyond a crude April Fool’s joke

There’s still just too much oil around, with physical traders reporting anything between 1.75 to 2.5 million barrels per day (bpd) of excess supply on the market.

Only thing that’s changed is that anecdotes of a 3 million bpd surplus have declined, particularly so in Asia. That is a positive of sorts, but unless excess supply falls to around the 1 million bpd level – geopolitical risk premium won’t kick in like it used to before the glut took hold.

In the backdrop of course, is a Saudi-Iranian spat on the level of each others oil exports that’s extending well beyond a crude April Fool’s day joke. On Thursday, Saudi Deputy Crown Prince Mohammed bin Salman told Bloomberg: “If all countries agree to freeze production, we will be among them.”

He added that Iran needed to be among those countries “without a doubt.” The comments come as Iran has decided not to attend oil producers' talks in Doha on April 17. Tehran has called the idea of such a meeting daft.

In response to the Saudi comments, Iranian oil minister Bijan Zanganeh told the Mehr News agency that the Islamic republic would “continue increasing its oil production” and exports. Meanwhile, a Reuters survey published last week indicated that OPEC’s oil production rose in March, after a period of stability in February, following higher production from Iran and near-record exports from southern Iraq.

Its 4 million bpd-plus output was second only to Saudi Arabia among all of OPEC's 13 member nations. Lest we forget, Russian output remains at Soviet era highs of 10.91 million bpd.

Simple truth of the matter is, the Iranians cannot flood the market and are highly unlikely to match their rhetoric of 1 million bpd, not least because they lack the infrastructure and means to do so in a short period of time, and were they to do so, the resulting price dip would come straight back to haunt them.

The Russians have already said they'll look for “alternative means” to curb a production rise, but not by cancelling new exploration. In any case, they lack the means to ramp up output further. As for the Saudis, who still have spare capacity and are willing to freeze were others to do so, it is purely a case of meeting client demands.

As the Oilholic has noted before, they are producing to a level that meets existing export demand for their longstanding clients. As such, they have no need to ramp up the output levels. So phoney chatter of “will they, won’t they” is purely for market consumption and has little connection with reality when it comes to net volume additions or declines, something which would be dictated by market economics!

As for what this blogger expects would come out of Doha – probably an agreement big on public relations spin than a real-terms cut. For argument sake, even if there is a cut of 1 million bpd, the reprieve would be temporary. Futures would rise over the short-term before the reality of tepid demand and considerable oil held in storage triggers another round of correction. Get used to the $40-50 per barrel range. That’s all for the moment folks, keep reading, keep it crude!

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© Gaurav Sharma 2016. Photo: Offshore oil exploration site in India © Cairn Energy.

Ho hum moves for fewer oil drums

In case you have been on another planet and haven’t heard, after weeks of chatter about coordinated oil output cuts by OPEC and non-OPEC producers, we finally had some movement. The Oilholic deploys the word 'movement' here rather cagily.

Three OPEC members led by heavyweight Saudi Arabia, with Qatar and Venezuela in tow, joined hands with the Russians, to announce a production ‘freeze’ at January’s output levels  on Tuesday, provided ‘others’ agree to do likewise. 

The most important others happen to be Iraq and Iran who haven’t exactly come out in support of the said freeze just yet. Even if they do agree, or in fact all OPEC members agree, the freeze would come at production levels deemed to be historical highs for both the Russians and OPEC. In case of the latter, industry surveys and data from aggregators as diverse as Platts and Bloomberg points to all 12 exporting OPEC nations collectively pumping above 32 million barrels per day.

Predictably, the oil futures market treated the news of the 'freeze' with the sort of disdain it deserved. The price remains stuck in the range where it has been and short-term volatility is likely to last; so much of what transpired was, well, exceedingly boring from a market standpoint, excepting that it was the first instance of OPEC and non-OPEC coordinated action in 15 years. 

If OPEC really wants to support prices, an uptick in the region of $7-10 per barrel would require the cartel to introduce a real terms cut of 1.5 million bpd. Even then, the gains would short-term, and the only people benefitting would be North American players. Some of them are the very wildcatters, whose tenacity for surviving when oil is staying ‘lower for longer’, OPEC has so far failed to work out with any strategic coherence. Expect more of the same in a market that's still awash with crude oil. 

Finally, just before one takes your leave, it seems Moody's has placed on review for downgrade the Aa3 ratings of China National Petroleum Corporation (CNPC), Sinopec Group, Sinopec Corp, China National Offshore Oil Corporation (CNOOC Group) and CNOOC Limited.

The ratings agency has also placed on review for downgrade the ratings of the Chinese national oil companies' rated subsidiaries, including Kunlun Energy Company Limited, CNPC Finance (HK) Limited, CNPC Captive Insurance Company Limited, CNOOC Finance Corporation Ltd, and Sinopec Century Bright Capital Investment Limited.

In a statement, Moody’s said global rating actions on many energy companies, reflect its efforts to "recalibrate the ratings in the energy portfolio to align with the fundamental shift in the credit conditions of the global energy sector." Can’t argue with that! That’s all for the moment folks! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo: Oil exploration site in Russia © LukOil

Are you serious Mr President?

Ah, the joys of the oil market! Yet another day of volatility is all but guaranteed. Nearly a fortnight into February, it’s increasingly looking like how it was in January, and how it’s likely to be in March - an uptick of 2-6% followed by a slump of 2-6% in headline oil futures prices on repeat mode.

In the meantime, we have descended into the realm of the ridiculous. If you believe market chatter – it goes something like the Russians will cut oil production, only if the Saudis agree. They’ll cut only if the Iranians agree, who say it’s the Saudis and their allies who should make room for additional Iranian production. 

It is manifestly apparent, that should there be a coordinated OPEC and non-OPEC oil production cut excluding Canada and the US, the only producers to benefit would be the ones in North America. Such a cut would at most provide a short-term bounce of $7-10 per barrel, enabling shale producers, who were coping and managing just fine at $35 per barrel, to come back into the game and hedge better for another 12-18 months, as one wrote on Forbes. 

The Oilholic suspects both Russian and Saudi policymakers know that already. Which is why, it is a borderline ridiculous idea for parties who know very well that the market will take its own course, and any attempts to manipulate it artificially could have the very opposite effect some in OPEC such as Nigeria and Venezuela are hoping for. 

Meanwhile, each US oil inventory update makes Brent and WTI dance. With the latter currently below $30 barrel, US President Barack Obama has come up with his own sublime contribution to a ridiculous market. 

News emerged earlier this week that Obama has proposed a $10.25 per barrel levy on oil extracted in the US! According to Treasury projections, the levy, which would be applied to both imported and domestically-produced oil but won’t be collected on US oil shipped overseas, would raise  $319 billion over 10 years.

The plan would temporarily exempt home-heating oil from the tax. According to Obama, it "creates a clear incentive for private sector innovation to reduce America's reliance on oil and invest in clean energy technologies that will power our future."

The levy would be collected from oil companies to boost spending on transportation infrastructure, including mass transit and high-speed rail, and autonomous vehicles. However, noble the intention might be, its timing, execution and rate cap are completely barmy. In fact so barmy, the President knows there is no chance a Republican-controlled Congress would pass it. 

Without going into a costing analysis, oil companies would (a) be hit hard, and (b) almost certainly attempt to pass it over to consumers. Domino effect in terms of jobs and consumer spending adds another layer, making it extremely unpopular. So only a President who has no more elections to fight can come up with such a policy at such a time for the industry! That’s all for the moment folks! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo: White House, Washington DC, USA © Gaurav Sharma, April 2008.

‘Unfit’ Brent, OPEC’s health & market volatility

As the August Brent futures contract traded firmly below US$65 a barrel days after publication of the latest Saudi production data, London played host to the ninth round of the World National Oil Companies Congress.

In case you haven’t heard, the Saudis pumped 10.31 million barrels per day in May – the subject of many a chat at the event, atop of course why Algerian and Iranian officials, who usually turn up in numbers at such places (going by past experience), were conspicuous by their absence.

The congress threw up some interesting talking points. To enliven crude conversations, you can always count on Chris Cook (pictured above), former director of the International Petroleum Exchange (now ICE) and a research fellow at UCL, who told the Oilholic that Brent – deemed the global proxy benchmark by the wider market – has had its day and was unfit for purpose.

“I have been saying so since 2002. The number of crude oil cargoes from the North Sea has been diminishing steadily. On that basis alone, how can such a benchmark be representative of a global market?”

Cook would not speculate on what might or might not happen at the Iranian nuclear talks, but said the entry of additional Iranian crude into the global supply pool was inevitable. “With India and China at the ready to import Iranian crude, Europeans and Americans would have to come to some sort of accommodation with rest of the world’s take on the country's oil.”

In line with market conjecture among supply-side analysts, the industry veteran agreed it would be foolhardy to assume Iran might try to flood the oil market with its crude, a move that is likely to drive the oil price even lower in an already oversupplied market. Cook also declared that OPEC was on life support as it struggles to grapple with current market conditions.

With oil benchmarks stuck in the $50-75 range, Keisuke Sadamori, Director of Energy Markets & Security at the International Energy Agency, said a “firmer dollar” and current oversupply would make a short to medium term escape from the said price bracket pretty unlikely. (Here is one’s Sharecast report for reference). 

Earlier in the day, Andy Brogan, global oil and gas transactions leader at EY, noted that the industry would have to contend with volatility for a while. “There appears to be little confidence in a medium term bounce in the price of oil. With the industry in the midst of a profound change, IOCs have recently gone through a very rigorous review of their portfolio.”

Brogan opined that this would have implications for their partnerships with NOCs and fellow IOCs going forward. With the old tectonic plates shifting, IOCs wanting to conserve cash, NOCs craving a bout of further independence and the oil price stuck in a rut, that’s something worth pondering over. But that's all for the moment folks. Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Chris Cook, former director of the International Petroleum Exchange and research fellow at UCL, speaking at World National Oil Companies Congress, London, UK, June 16, 2015 © Gaurav Sharma.