Gazing at DJ Basin’s ‘Shale Gale’ with Highlands Natural Resources

Last month, the Oilholic headed stateside to get a 'crude' glimpse of drilling activity in the Denver Julesburg or 'DJ' Basin in Colorado; this blogger's first visit to the region. The basin has been a key hydrocarbon producing region of the US since 1901. Over a century later, it's still going strong courtesy of the state of Colorado's very own 'Shale Gale.' 

Colorado's legislative climate might be a bit onerous compared to Texas, but the basin still remains a relatively benign place for exploration and production, and yes the oil majors are all there poking around the place.

Also, what won't surprise regular readers of this blog one bit is that regional activity is being bolstered by - you guessed it - the independent upstarts, or new-age shale wildcatters as the Oilholic prefers to call them. 

In this august group is London-listed Highlands Natural Resources (HNR), the brainchild of entrepreneur and local oilman Robert Price, and his close-knit group of geologists, engineers, financiers and consultants. The company's simple but effective motto – in Price's own words – is to deliver projects "safely, on time and on budget."

The company has farmed out acreage from ConocoPhillips out in East Denver, is not only trialling Halliburton's cost and process optimising Integrated Asset Management (IAM) suite of techniques to the fullest, but also has a stake in its operations from the global oilfield services company itself; a rather unique scenario. 

HNR's site in the Lowry Bombing Range, East Denver (see above left), visited by this blogger in Price's company, sees just the sort of savvy operations predicated on big data that we often hear about in the popular press. For example, in an area where players are attempting to drill 16 or 24 wells in the same pad, Domingo Mata, HNR's Vice President of Engineering, says his company has opted for 8 wells, as studies have convinced the management that fewer wells will provide a better yield.

"We also keep an eye on the minutiae of the drilling process via a plethora of sensors. That's how we gather data and learn lessons from the drilling process in the case of each well, and bring about a sequential reduction in drilling times by improving upon past processes based on what the data revealed about the last round of works," Mata adds.

In some cases, that drilling time has come down to 10-14 days; and we're talking depths in the range of 17,000 to 19,000 feet. Price says optimised operations are the bedrock of his company and together with his chief geologist Paul Mendell, HNR is "astute and prudent" in managing its exposure to what has been, is, and will always remain, a high risk, high reward business. 

On the East Denver site the Oilholic had a walkabout, HNR now has a 7.5% carried interest in first 8 wells to produce at the project with additional upside potential to own 7.5% interest in up to 24 wells at no extra cost. The arrangement is boosted by a strong working relationship with majority holder True Oil. 

The site carries a potential yield of 5,000 barrels per day (bpd) of one of the sweetest and best crudes (see right) this blogger has seen since a visit to Oman back in 2013. The product is currently being brought to market via tanker trucks, but will soon be hooked up to ConocoPhillips' pipeline infrastructure. 

And HNR has received £2.9 million of income during four months up to 31 March 2018 from just two wells – Powell and Wildhorse – which sit in the top 3% of all horizontal DJ Basin (Niobrara) wells in Colorado. 

Not wanting to sit on its existing plays, the company is now eyeing West Denver prospects. HNR owns a direct 100% working interest in leases covering 2,721 acres in the area, where Price reckons his team, partners, contractors and affiliates can collaboratively drill at least 48 wells.

What's more the surface area is largely free of urban development and consolidated into closely grouped parcels, and may allow HNR to move through Colorado's permitting and development processes quicker relative other statewide plays.  

Price and Mendell have also made it their mission to diversify HNR. The company is looking to market and monetise its DT Ultravert technology for enhanced oil recovery, which it claims will help the wider industry achieve at least a 15% increase in production. 

It has been proven to prevent 'well bashing' in horizontal and vertical wells. If the monetisation of DT Ultravert takes off, it could be a game-changer for the company, which is incidentally also in the business of Helium and Nitrogen plays.

All things considered, could Team HNR be described as 'Shale Gale' mavericks? "I think prudent, efficient, low-risk operators would be what I'd humbly describe us as," says Price. Well there you have it folks! It was a pleasure exchanging views with Team HNR (above) and seeing what they are up to.

Depending on whom you rely on, ranging from the US Energy Information Administration's projections to estimates by the likes of Anadarko Petroleum, the DJ basin could hold up to 4.5-5 billion barrels of oil equivalent for viable extraction (including natural gas liquids). 

That suggests there's plenty going around for the likes of HNR to continue tapping away at the reserves in their own cost optimised way. So here's to ingenuity and the spirit of private enterprise that has come to symbolise the shale revolution. That's all for the moment; keep reading, keep it ‘crude’!

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© Gaurav Sharma 2018. Photo I: Highlands Natural Resources' East Denver drilling site. Photo II: Glimpse of Denver light sweet crude produced by Highlands Natural Resources. Photo III: (Left to Right) Gaurav Sharma with Robert Price, CEO & Chairman, Highlands Natural Resources, and Domingo Mata, Vice President of Engineering, Highlands Natural Resources © Gaurav Sharma, 2018.

Shale gale blows from Appalachian fields to Grangemouth refinery

The Oilholic has bid farewell to the Big Apple, and finds himself visiting a shale gas drilling site in Switzerland Township, Eastern Ohio, via Pittsburgh, where there is something rather unique going on from a European perspective. 

It seems Ineos, the very Alpine and European Switzerland-headquartered petrochemicals firm, and Consol Energy (which owns several Marcellus hale drilling sites), have come together to dispatch shale gas from the US of A to the old continent.

Given serial British industrialist and founder of Ineos Jim Ratcliffe is involved in the enterprise – there are no half measures.

The company has commissioned eight-dragon class ships, with an investment of $2bn (£1.54bn) towards shipping more than 800,000 tonnes a year of ethane from Pennsylvania to Grangemouth (UK) and Rafnes (Norway). 

Each of the ships is capable of carrying over 27,500 cubic meters of gas sourced from the Marcellus shale. Norway has already received its first consignment with the UK tipped to receive its first one on September 27th. 

Ratcliffe’s petrochemicals business needs steady, reliable feedstock and exporters such as Consol, need buyers offering better proceeds than currently on offer stateside. So natural gas from Ohio and Pennsylvania is finding its way via a physical pipeline to Marcus Hook Terminal in Philadelphia, from where it gets dispatched via a virtual pipeline of these eight ships constantly moving the gas to Europe, providing Ineos with gas for the foreseeable future.

While implications for Europe are huge, what it means for US exporters is no less significant. Take Consol itself, a company moving away from its coal mining heritage dating back over 150 years, to natural gas exploration and production. 

It has one of the largest acreage in the Appalachian, and is slowly divesting coal assets, delving deeper into gas exploration. In more ways than one, Pennsylvania itself appears to be going through an economic renaissance along with much of the Rustbelt courtesy of shale gas exploration. 

Moving on from Eastern Ohio, and before hopping on the flight back home, the good folks at Consol took also yours truly to an onstream shale gas extraction facility actually on Pittsburgh airport land (see above right). Process refinements, extraction techniques and automation needed to drill such wells is also moving up in leaps and bounds. Compared to the Oilholic’s last visit to a shale gas extraction facility in 2013, drilling times have halved.

Automation also enables drilling to continue 24 hours a day, seven days a week with fewer personnel. Of course, the basics remain the same – i.e. drillers often drill vertically down 8,000 to 10,000 feet before horizontal drilling commences, followed by fracking.

As for the controversy that almost inevitably accompanies fracking, Tim Dugan, chief operating officer of Consol, says a well planned and thought out fracking process “does not cause earthquakes” with bulk of what's in the fracking fluid being water and rest of the materials fully revealed.

Dugan also says seismic studies have improved in step with the shale gas industry, helping drillers avoid faultlines that could potentially cause tremors.

Ineos is hoping to relay Dugan’s message, and the economic transformation shale has brought to the rustbelt, back to the UK.

Not only is Ineos instrumental in exporting US shale gas, it also holds 30 shale exploration licences in UK that it hopes will one day revive the British oil and gas industry. There's much promise, but its early days yet. That’s all from the USA for the moment folks, its been a memorable visit to another shale extraction site; one's first outside of Texas.

However, just before one takes your leave, a special shout out to Mike Fritz of Consol Energy, who accompanied this blogger over two days with various stopovers from Eastern Ohio to Pennsylvania, enduring traffic jams, pesky questions, site visits and information requests – all of which were met with a friendly smile. Keep reading, keep it crude! Next stop London Heathrow.

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© Gaurav Sharma 2016. Photo 1: Consol Energy's shale gas drilling site in Switzerland Township, Ohio, USA. Photo 2: Consol Energy's shale pad on Pittsburgh Airport Land, Pennsylvania. Photo 3: The Oilholic at a Shale drilling site, Ohio, USA © Mark Simpson, September 2016

The 2013 G8 summit, Syria & crude prices

There is a certain measure of positive symbolism in being here in Northern Ireland for the 2013 G8 summit. Who would have imagined when the Good Friday agreement was signed in 1998, that 15 years later the then sectarian strife-torn province would host the leaders of the eight leading industrialised nations for their annual shindig?

That point was not lost on US President Barack Obama, among the few who didn’t express apprehensions, when UK PM David Cameron announced the venue for the summit last year. Cameron wanted to send a message out to the world that Northern Ireland was open for business and based on what yours truly has seen and heard so far, that's certainly a view many share.

 

Addressing an audience of students in Belfast, Obama said, "Few years ago holding a summit of world leaders in Northern Ireland would have been unthinkable. That we are here today shows the progress made in the path to peace and prosperity [since 1998]."

"If you continue your courageous path towards permanent peace, and all the social and economic benefits that come with it, that won't just be good for you. It will be good for this entire island, for the United Kingdom, for Europe; and it will be good for the world," he added.

Here we all are in Belfast heading to a quaint old town called Enniskillen. Of course, the Oilholic won’t be making his way there in a style befitting a president, a prime minister or a gazillion TV anchors who have descended on Northern Ireland, but get there - he most certainly will - to examine the 'cruder' side of things.

It has barely been a year since the G8 minus Russia (of course) griped about rising oil prices and called on oil producing nations to up their production. "We encourage oil producing countries to increase their output to meet demand. We stand ready to call upon the International Energy Agency (IEA) to take appropriate action to ensure that the market is fully and timely supplied," the G7 said in a statement last August.

Of course since then, we’ve had the US 'Shale Gale', dissensions at OPEC and rising consumption of India and China according to the latest data. The smart money would be on the G7 component of the G8 not talking about anything crude, unless you include the geopolitical complications being caused by Syria, which to a certain extent is overshadowing a largely economic summit.

That wont be a shame because its not for politicians to fiddle with market mechanisms. Nonetheless, the Brent forward month futures touched a 10-week high close to US$107 a barrel on Monday before retreating. Despite a lull, if not a downturn, in OECD economic activity, the benchmark remains in three figures.

Syria's impact on oil markets is negligible, but a prolonged civil war there could affect other countries in the Middle East, worse still drag a few oil producers in. Yet a stalemate between Russian President Vladimir Putin and the West has already become apparent here at the G8. There will, as expected, be no agreement on Syria with the Russians supporting the Assad regime and the West warily fretting over whether or not to supply the Syrian rebels with arms.

Away from geopolitics and the G8, in an investment note to clients, analysts at investment bank Morgan Stanley said the spread between WTI and Brent crude will likely widen in the second half of 2013, with a Gulf Coast "oversupply driving the differential".

The banks notes, and the Oilholic quotes, "WTI-Brent may struggle to narrow below US$6-7 per barrel and likely needs to widen in 2H13 (second half 2013)." That’s all for the moment from Belfast folks, as the Oilholic heads to Enniskillen! In the interim, yours truly leaves you with a view of Belfast's City Hall. Keep reading, keep it 'crude'

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© Gaurav Sharma 2013. Photo: City Hall, Belfast, Northern Ireland © Gaurav Sharma, June 17, 2013

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'!

 

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© Gaurav Sharma 2013. Photo: Abandoned gas station © Todd Gipstein / National Geographic 

US LNG exports to the UK: The ‘Stateside’ Story

The Oilholic finds himself in Chicago IL, meeting old friends and making new ones! A story much discussed this week in the Windy City is US firm Cheniere Energy’s deal to export LNG to UK’s Centrica. More on why it is such a headline grabber later, but first the headline figures related to the deal.

The agreement, inked by Centrica and Cheniere on March 25, sees the latter provide 20-years' worth of LNG shipments starting from September 2018, which according to the former is enough to fuel 1.8 million British homes.

Centrica said it would purchase about 1.75 million metric tonnes per annum of annual LNG volumes for export from the Sabine Pass Project in Louisiana. (see Cheniere Energy’s graphic on the left, click image to enlarge). The contract covers an initial 20-year period, with an option for a 10-year extension.

Centrica, which owns utility British Gas, has fished overseas in recent years as the North Sea’s output plummets. For instance, around the 20th World Petroleum Congress in 2011, it inked deals with Norway’s Statoil and Qatar Petroleum. US companies have also flirted with the export market. So the nature of the deal is not new for either party; the timing and significance of it is.

According to City analysts and their peers here in Chicago, the announcement is a ground breaking move owing to two factors – (1) it’s the first ever long-term LNG supply deal for the Brits and (2) a market breakthrough for a US gas exporter in Europe.

Additionally, it blows away the insistence by the Russians and Qataris to link longer term supply contracts to the crude oil price (hello?? keep dreaming) instead of contracts priced relative to gas market movements. As for gas market prices, here is the math – excluding the recent (temporary) spike, gas prices in the UK are on average 3 to 3.5 times higher than the current price in the US. So we’re talking in the range of US$9.75 to $10.25 per million British thermal units (mmBtu). The Americans want to sell the stuff, the Brits want to buy – it’s a no brainer.

Except – as a contact in Chicago correctly points out – things are never straightforward in this crude world. Sounding eerily similar to what Chatham House fellow Prof. Paul Stevens told the Oilholic earlier this month, he says, “Have you forgotten the politics of ‘cheap’ US gas exports landing up on foreign shores? Even if it’s to our old friends the Brits?”

The US shale revolution has been price positive for American consumers – the exchequer is happy, the political classes are happy and so is the public which sees their country edging towards “energy independence.” (A big achievement in the current geopolitical climate and despite the quakes in Oklahoma).

The only people who are not all that happy, apart from the environmentalists, are the pioneers who persevered and kick-started this US shale gas revolution which was three decades in the making. To quote one who is now happily retired in Skokie, IL, “We no longer get more bang for our bucks anymore when it comes to domestic contracts.”

Another valid argument, from some in the trading community here in Chicago, is that as soon as US gas exports gain traction, bulk of which would head to Asia and not mother England, domestic prices will start climbing. So the Centrica-Cheniere deal, while widely cheered in the UK, has got little more than a perfunctory, albeit positive, acknowledgement from the political classes stateside.

In contrast, across the pond, none other than the UK Prime Minister David Cameron himself took to the airwaves declaring, “Future gas supplies from the US will help diversify our energy mix and provide British consumers with a new long term, secure and affordable source of fuel.”

The Prime Minister is quite right – the UK would rather buy from a ‘friendly’ country. Problem is, the friendly country might cool off on the idea of gas exports, were US domestic prices to pick-up in tandem with a rise in export volumes.

That’s all for the moment from Chicago folks! More from here over the next few days; keep reading, keep it ‘crude’!

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© Gaurav Sharma 2013. Photo: Sabine Pass Project, USA © Cheniere Energy Inc.

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Brent’s ‘nine-month high’, Aubrey, BP & more

Oh boy, what one round of positive data, especially from China, does to the oil market! The Brent forward month futures contract for March is within touching distance of a US$120 per barrel price and the bulls are out in force. Last Friday’s intraday price of US$119.17 was a nine-month high; a Brent price level last seen in May 2012. The cause – and you have heard this combination before – was healthy economic data from China, coupled with Syrian turmoil and an Iranian nuclear stalemate.

 

The Oilholic has said so before, and will say it again – the last two factors touted by market commentators have been broadly neutral in terms of their impact for the last six months. It is the relatively good macroeconomic news from China which is principally behind the rally that nearly saw the Brent price breach the US$120 level.

 

The bull-chatter is already in full force. In a note to clients, Goldman Sachs advised them last week to maintain a net long position in the S&P GSCI Brent Crude Total Return Index. The investment bank believes this rally is "less driven by supply shocks and instead by improving demand."

 

"Global oil demand has surprised to the upside in recent months, consistent with the pick-up in economic activity," the bank adds in an investment note. Really? This soon – on one set of data? One thing is for sure, with many Asian markets shut for the Chinese New Year, at least trading volumes will be lighter this week.

 

Nonetheless, the ‘nine-month high’ also crept into the headline inflation debate in the UK where the CPI rate has been flat at 2.7% since October, but commentators reckon the oil spike may nudge it higher. Additionally, the Brent-WTI spread is seen widening yet again towards the US$25 per barrel mark. On a related note, Enterprise Product Partners said that capacity on its Seaway pipeline to the US Gulf of Mexico coast from Cushing, Oklahoma will remain limited until much later this year.

 

Moving away from pricing, news arrived end-January that the inimitable Aubrey McClendon will soon vacate the office of the CEO of Chesapeake Energy. It followed intense scrutiny over the last nine months about revelations, which surfaced in May, regarding his borrowings to finance personal stakes in company wells.

 

As McClendon announced his departure on January 29, the company’s board reiterated that it had found no evidence to date of improper conduct by the CEO. McClendon will continue in his post until a successor is found which should be before April 1st – the day he is set to retire. The announcement marks a sad and unspectacular exit for the great pioneer who co-founded and led Chesapeake Energy from its 1989 inception in Oklahoma City and has been a colourful character in the oil and gas business ever since.

 

Whatever the circumstances of his exit may be, let us not forget that before the so called ‘shale gale’ was blowing, it was McClendon and his ilk who first put their faith in horizontal drilling and hydraulic fracturing. The rest, and US’ near self-sufficiency in gas supplies, is history.

Meanwhile, BP has been in the crude news for a number of reasons. First off, an additional US$34 billion in claims filed against BP by four US states earlier this month have provided yet another hurdle for the oil giant to overcome as it continues to address the aftermath of the 2010 Gulf of Mexico oil spill.

 

However, Fitch Ratings not believe that the new round of claims is a game changer. In fact the agency does not think that any final settlement is likely to be enough to interfere with BP's positive medium term credit trajectory. The latest claims come on top of the US$58 billion maximum liability calculated by Fitch. If realised, the cost of the spill could rise up to as much as US$92 billion.

 

The agency said the new claims should be put in the context of an asset sale programme that has raised US$38 billion. “This excludes an additional US$12 billion in cash to come from the sale of TNK-BP this year – upside in our analysis because we gave BP no benefit for the TNK-BP stake. BP had US$19 billion of cash on its balance sheet at 31 December 2012. That is after it has already paid US$38 billion in settlements or into escrow,” it added.

 

Away from the spill, the company announced that it had started production from new facilities at its Valhall field in the Norwegian sector of the North Sea on January 26 with an aim of producing up to 65,000 barrels of oil equivalent per day in the second half of 2013. Valhall's previous output averaged about 42,000 barrels per day (bpd), feeding crude into the Ekofisk oil stream.

 

Earlier this month, BP also said that both consortiums vying to link Azerbaijan's Shah Deniz gas field in the Caspian Sea, into Western European markets have an equal chance of success. BP operates the field which was developed in a consortium partnership with Statoil, Total, Azerbaijan’s Socar, LukAgip (an Eni, LUKoil joint venture) and others.

 

A decision, whether to pipe gas from the field into Austria via the proposed Nabucco (West) pipeline or into Italy through the rival Trans Adriatic Pipeline (TAP) project, is expected to be made by mid-2013. Speaking in Vienna, Al Cook, head of BP's Azeri operations, said, “I genuinely believe both pipelines at the moment have an equal chance. There's certainly no clear-cut answer at the moment.”

 

BP is aiming for the first gas from Shah Deniz II to be delivered to existing customer Turkey in 2018. Early 2019 is the more likely date for the first Azeri gas to reach Western Europe via this major development often touted as one which would reduce European dependence on Russia for its energy supplies.

 

The Shah Deniz consortium owns equity options in both the pipeline projects and Cook did not rule out that both Nabucco (West) and TAP could be built in the long term. Specifically, BP's own equity options, which are part of the Shah Deniz stakes, are pegged at 20% in TAP and 14% in Nabucco. Cook said BP was not “actively seeking” to increase its stake in either project – a wise choice indeed.

 

On February 4, BP said its Q4 2012 net profit, adjusted for non-operating items, currency and accounting effects, fell to US$3.98 billion from US$4.98 billion recorded over the corresponding quarter last year. Moving away from BP, Royal Dutch Shell posted a 6% dip in 2012 profits to US$27 billion on the back of weak oil and gas prices and lower exploration and production (E&P) margins.

 

The Anglo-Dutch oil major reported Q4 earnings of US$7.3 billion, a rise of 13%. However, on an adjusted current cost of supply basis and one-off asset sales, the profit came in at US$5.58 billion. In particular, Shell’s E&P business saw profits dip 14% to US$4.4 billion, notwithstanding an actual 3% increase in oil and gas production levels. However, the company did record stronger refining margins.

 

Ironically, while acknowledging stronger refining margins, Shell confirmed its decision to close most of its Harburg refinery units in Hamburg, Germany. The permanent shutdown of much of its 100,000 bpd refinery is expected next month in line with completing a deal made with Swedish refiner Nynas in 2011.

 

Finally, in a typical Italian muddle, several oil executives in the country are under investigation following a probe into alleged bribery offences related to the awarding of oil services contracts to Saipem in Algeria. Eni has a 43% stake in Saipem which is Europe’s biggest oil services provider. While the company itself denied wrongdoing, the probe was widened last Friday to include Eni CEO Paolo Scaroni.

 

The CEO’s home and office were searched as part of the probe. However, Eni is standing by their man and said it will cooperate fully with the prosecutor’s office in Milan. So far, Pietro Franco Tali (the CEO of Saipem) and Eni’s Chief Financial Officer Alessandro Bernini (who was Saipem’s CFO until 2008) have been the most high profile executives to step down in wake of the probe. Watch this crude space! That’s all for the moment folks! Keep reading, keep it ‘crude’!

 

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© Gaurav Sharma 2013. Photo 1: Asian oil rig © Cairn Energy. Photo 2: Gas extraction site © Chesapeake Energy.

A meeting, an appointment & Vienna’s icy chill!

The Oilholic finds himself back in Vienna for the 162nd meeting of OPEC ministers and his first snowfall of the festive season; the latter has eluded him back home in London. Here is a view of Vienna's snow-laced Auer Welsbach Park and it’s not the only place where things are a bit chilly. The OPEC HQ here could be one place for instance!

For this time around, accompanying the usual tussles between the Saudis and Iranians, the doves and the hawks, is the additional stress of appointing a successor to OPEC Secretary General Abdalla Salem el-Badri, a genial Libyan, who is nearing the end of his second term.

Finding a compromise candidate is usually the order of the day but not if 'compromise' is not a by-word for many of its members. Trouble has been brewing since OPEC members last met in June. As a long term observer of the goings-on at OPEC, the Oilholic can say for certain that all the anecdotal evidence he has gathered seems to suggest a clash is imminent. That’s hardly a surprise and it could not have come at a worse time.

OPEC has forecast a 5% drop in demand for its crude oil in wake of shale supply and other unconventional oil from non-OPEC jurisdictions hitting the market in a troubling global macroeconomic climate. It also acknowledged for the first time that shale oil was of concern and then got into a debate with the IEA whether (or not) US production could overtake Saudi Arabia’s by 2020. In light of all this, OPEC could seriously do with some strong leadership at this juncture.

Sources suggest three 'potential' candidates are in the running to succeed el-Badri. Two of these are Thamir Ghadhban of Iraq and Gholam-Hossein Nozari of Iran. Both have served as their country’s respective oil ministers. The third man is Majid Munif; an industry veteran and a former Saudi OPEC adviser. Now, the Oilholic uses the world ‘potential’ above for the three men only guardedly.

Historical and recent acrimony between the Iranians and Saudis needs no documentation. It has only been a year and half since an OPEC meeting broke-up in acrimony and er...highly colourful language! This puts the chances of either one of them settling for the other’s candidate as highly unlikely. Iran is also miffed about the lack of support it has received in wake of international sanctions on its oil industry by several importing jurisdictions.

Some here suggest that Ghadhban of Iraq would be the compromise candidate for the post. However, sources within four MENA OPEC member delegations have told the Oilholic that they are backing the Saudi candidate Munif. Yours truly cannot predict whether they’ll have a change of heart but as things stand, a compromise banking on the appointment of an Iraqi is just not working out.

Never say ‘never’ but the possibility of el-Badri continuing is remote as well. He is not allowed more than two terms under OPEC rules. In order to assuage both the Iranian and the Saudis, perhaps an Ecuadorian or an Angolan candidate might come forward. While such a candidate may well calm tempers in the room, he (or she, there is after all one lady at the table) is highly unlikely to wield the leverage, clout or respect that el-Badri has commanded over his tenure.

As Kuwait prepares to hold the rotating presidency of the cartel, a stalemate over the Secretary General’s appointment, according to most here, is detrimental to “market stability”. How about it being detrimental to OPEC itself at a time when a medium term, possibly long term, rewriting of the global oil trade is perhaps underway?

That's all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo:  Snowfall at Auer-Welsbach Park, Vienna, Austria © Gaurav Sharma, December 2012.

A ‘crude’ autumn statement in a freezing UK

UK Chancellor of the Exchequer George Osborne finally got around to delivering his 2012 ‘autumn’ budget on a freezing December afternoon here in London today and there was plenty in it for the Oilholic to mull over. To begin with, in a highly populist move, Osborne not only postponed a 3 pence (5 US cents) rise in UK fuel duty but scrapped the tax measure on motorists altogether. This was followed by an announcement that the Government will set up a new Office for Unconventional Gas with an emphasis on shale gas and coal-bed methane and the role they could play in meeting the country's energy demand.

 

Osborne also announced a consultation exercise with the possibility of new tax incentives for the shale gas industry which is currently in its infancy here. Shale could very well become a part-player in the UK government’s latest strategy as conventional North Sea gas production declines.

 

The Chancellor also said that the UK’s headline rate of corporation tax would fall to 21% in 2014, from 22% in 2013. Additionally, plant and machinery investment allowance was raised from £25,000 to £250,000; duly cheered by independent contractors. Summing up the motive behind his ‘crude’ moves, the Chancellor urged investors to: "Come here, create jobs here; Britain is open for business. This would be the lowest rate of (corporation) tax for any major Western economy."

 

Once Osborne's statement had ended, the Oilholic sought feedback from the crude men around.

 

Robin Cohen, partner in Deloitte’s Energy & Resources practice, felt the government’s positive messages on the potential for shale gas, although tempered by realism on the timelines and challenges for the sector, will be welcomed by those involved in developing a potentially significant future energy resource for the UK.

 

“Recent energy pronouncements from the government and its gas generation strategy reinforce the dramatic (recent) changes in the character of the country’s electricity market from an investor’s perspective. Rather than assessing the viability of future power generation projects by analysing supply, demand and the resulting market prices, investors now need to anticipate the aggregate effect of several key policy measures, some of which have no track record as yet,” he added.

 

These include the carbon price floor, contracts for differences (CFDs) within the levy control framework, the capacity mechanism and the UK’s response to the EU target model for electricity markets. “While the strategy will be broadly welcomed by investors, it highlights the limits to the level of future certainty that the Government can provide,” Cohen added.

 

Anthony Lobo, Head of Oil and Gas at KPMG UK, also said the government's plan to consult on an appropriate fiscal regime for shale gas exploration is a positive sign for the industry.

 

“The UK has been seen as a negative place to invest recently due to very high levels of fiscal uncertainty. The tax increases in 2011 resulted in lowest levels of investment in years. Production also plummeted by 19% in 2011 predominantly as a result of the increase in supplementary charge, this drop negated any tax revenues the government hoped to realise. The announcement today signals the government's intent to support investment in Oil and Gas,” he added.

 

Tim Fox, Head of Energy and Environment at the Institution of Mechanical Engineers, felt the Chancellor had provided some very welcome clarification as to the role of gas in bridging the looming energy gap mid-decade. “It is sensible for the UK to invest in gas-fired power plants at this point in time as they are cleaner than coal, needed to back-up intermittent renewable energy sources, and can be built quicker with much lower up-front costs than nuclear plants,” he said.

 

“News that the Government will set up a new Office for Unconventional Gas is positive…Unconventional has the potential to create thousands of high-skilled engineering jobs and export services over the next decade,” Fox added.

 

There you are! The advisory firms like what the Chancellor said, the engineers and tax consultants did too – now only future investors and big energy companies need convincing. That’s all from the UK House of Commons folks!

 

But before yours truly takes your leave, it emerged overnight that Aberdeen-based Faroe Petroleum has bagged a provisional Icelandic exploration licence in the Dreki area. The company said it was "very excited to get the opportunity to explore and de-risk these extensive prospects” encompassing seven blocks located inside the Arctic Circle to the north east of the Iceland.

 

Faroe added that the move was an important extension of its frontier exploration portfolio in the UK west of Shetlands, Norwegian Sea and Norwegian Barents Sea. Graham Stewart, chief executive of Faroe Petroleum, said, "As with our Norwegian Barents Sea licences, this new Icelandic (Jan Mayen Ridge) licence has significant hydrocarbon potential, and is located in ice-free waters."

 

So on an Arctic note, let’s hope Faroe has better luck than its Scottish cousin Cairn Energy has had (so far) in its icy foray. Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo: Oil Rig, North © Cairn Energy

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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.