Kerfuffle over fracking in the UK

Earlier this week the Oilholic noted plenty of predictable commotion as the UK finally got fracking following years of legal limbo. On Monday (October 15), Cuadrilla confirmed it had started fracking at its natural gas prospection site in Little Plumpton, Lancashire, after the failure of a legal challenge the previous week.

Here's the Oilholic's take on the development via Forbes, but amid the pro and anti-fracking hot air, shouty crackers and genteel debaters, statements and counter-statements, an interesting report from the pro-shale 'Global Warming Policy Foundation (GWPF)' found its way into this blogger's mailbox.

Having done a review of UK media coverage about fracking, it concludes that major outlets have been "hyping claims of environmentalists while playing down the benefits" of shale gas. GWPF's Andrew Montford is particularly scathing about the output of the Guardian and the BBC. 

"They tend to recount wild stories and then move on without correcting the record. The public should therefore be very cautious about what they read on the subject in the next few weeks, as shale gas fracking begins in the UK."

Here is Montford's review (PDF download); you be the judge of it! That's all for the moment folks! Keep reading, keep it 'crude'!

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'Crude' implications of Argentina's election

The Oilholic has hopped over from Santiago de Chile for a splash and dash pre-election visit to the Argentine capital of Buenos Aires. Braving fake banknotes, dodgy cab drivers, eateries where prices change daily and a services sector with few scruples if any, yours truly finds himself peeking at ongoing electioneering in the run-up to the October 25th presidential election, standing beside the Obelisco de Buenos Aires.

In all likelihood, a presidential run-off looms for a successor to Cristina Fernandez de Kirchner, who claims to be leaving behind a “crisis free” country where of course inflation is close to 30% by unofficial accounts and the IMF expects the economy to shrink further.

Centre-left candidate Daniel Scioli, handpicked by Kirchner (who cannot seek a third term under the constitution), is vying with centre-right man and Buenos Aires mayor Mauricio Macri. Not many in the Argentine capital, give the “third guy” Sergio Massa, a former ally of Kirchner's (before relations soured), much of a hope. However, his support – should a run-off happen – would be vital. 

The incoming president would have an almighty mess to deal with in a country that has the dubious title of slipping from being a developed economy at the turn of the previous century to a third world country in the 21st century. Both main candidates promise to lower inflation to single digits and stimulate growth. Some (but not all) in Buenos Aires are simply glad Kirchner would be gone.

Discussing what shape the country’s energy policy in general (and oil and gas policy in particular) takes would be pointless before we know who the next occupant of the President’s office is. Much still remains at stake, including Buenos Aires’ continued hostility to offshore oil and gas exploration in the Falkland Islands (or Las Malvinas) as the Argentines call it, given the history of the territory. Despite Kirchner’s whinging to deflect attention from internal political woes, oil and gas explorers in the contentious British territory, claimed by Buenos Aires, are not going to go away.

If anything, the oil price decline, rather than something Buenos Aires does, is likely to have a bigger impact on future prospects. Away from the contentious side issue, it’s the direction of Argentina’s shale exploration that’s of a much bigger significance in a global context.

As the US Energy Information Administration noted earlier this year, if you exclude the US and Canada – only Argentina and China happen to be producing either natural gas from shale formations or crude oil from tight formations (tight oil) at an international level. How the country’s promising Neuquen Basin develops further would have a massive bearing on the economy. But where we go from here, given for instance the Repsol versus Federal Government histrionics of the past, would be anyone’s guess. 

The Oilholic intends to probe the subject more deeply at a later stage both on this blog as well as for Forbes, once we know who the next Argentine president is.

However, for the moment, that’s all from Buenos Aires folks. Yours truly leaves you all with a breathtaking  view of the Andes Mountain range as seen from LAN Airlines flight 1447 coming from Santiago de Chile to Buenos Aires (right). Keep reading, keep it crude!

Update, October 26th: With 96% of the votes counted, according to the AFP, Scioli was marginally ahead with 36.7% of the vote, while Macri had 34.5%. Massa, who came a distant third has accepted defeat but not stated who he would be supporting. A presidential election run-off has been scheduled for November 22.

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© Gaurav Sharma 2015. Photo I: Obelisco de Buenos Aires, Argentina. Photo II: Andes Mountain as seen from flight LAN1447 Santiago de Chile to Buenos Aires, Argentina © Gaurav Sharma, October 2015

Downward revisions of gas price assumptions

While oil markets have grabbed all the headlines in recent weeks, there is something afoot in the natural gas markets that’s telling. Several analysts and rating agencies have revised their short to medium term gas price forecasts downwards over the past six weeks.

Earlier this month, Fitch Ratings revised its base case for Henry Hub down to US$3/mcf from $4/mcf in 2015, while not losing sight of a long-term value of $4.50/mcf. The agency’s stress case for credit ratings purposes this year has been revised to $2.75/mcf from $3.25/mcf, and the long run price to $3.25/mcf from $3.50/mcf.

There is nothing to sensationalise here, we’re not slipping down to April 2012 levels and sub-$2 prices. Yet, there is little to be broadly upbeat about over the medium term for US producers given the current abundance of gas. Alex Griffiths, Managing Director at Fitch Ratings, says the agency has merely reacted to rebounding inventories as noted by the EIA and other sources.

“A warmer US winter, and continued strong growth in domestic shale gas supply, including ongoing efficiency gains in drilling are having a bearing. The drop in forward oil prices is also likely to have a dampening effect on US gas demand over the medium term, as lower oil prices suggest lower profits and reduced economic feasibility for at least some US based LNG projects still at the planning stages,” he adds.

In fact, natural gas abundance could stunt the growth of new nuclear build in the eyes of many contacts. At present, nuclear power share of the overall US market is just shy of 20%. Cheap gas means the level is likely to be severely tested over the coming years. Only two new nuclear plants are currently under construction, with the first not expected to come online before 2018 at the earliest.

Gas producers, unlike their oil counterparts, can at least take some solace now in exporting their proceeds of shale to Europe and Asia as Sabine Pass LNG export terminal kicks into gear in 2017. However, Fitch says while the European gas price is in a much better place than the US, it too is going through testing times.

Fitch uses UK’s National Balancing Point (NBP) gas price as proxy, which it has also revised down to $6/mcf in 2015 from $8/mcf to reflect downward movements in the market price since last year. Overall, the NBP has fallen nearly 20% since a year ago to around $7.50/mcf.

“We believe that due to seasonal factors and the downward impact of oil-linked gas contracts elsewhere in the market, which typically readjust price with a six or nine-month lag, it is appropriate to reflect a weaker market as our base assumption for the rest of the year. From 2016, the base case price deck for NBP sees a gradual improvement back to $8 in the long run,” Griffiths adds.

So should US producers continue to look elsewhere in order to get more bang for their invested bucks? Exporting to Europe and Asia seems to be the answer. Invariably though, as pointed out by opponents of US gas exports, this would lead to a rise in domestic gas prices.

US gas will continue to trade at some discount to European prices and at a considerable discount to Asian prices. As the Oilholic noted last year in a Forbes column, the Henry Hub is not relocating to Wales or Singapore any time soon! Even in a depressed gas market, disparities will persist.

That the European market is the most depressed of all shouldn’t be in any doubt. On February 3, Russia’s Gazprom, still Europe’s leading provider of natural gas (Ukraine-related sanctions or not), said it would reduce gas imports from Turkmenistan and Uzbekistan, which it passes on to end clients, by 60% and 75% respectively, to compensate for weak demand.

Not only does it have heavy implications for both those countries, but Moody’s unsurprisingly views it as a credit negative for Intergas Central Asia (ICA, Baa3 positive), Kazakhstan's gas transmission company operating one of main Central Asian pipelines.

The agency says Gazprom’s move has the potential to trigger a 40% dip in ICA’s profits on an annualised basis. “Such revenue deterioration would weaken the credit metrics of ICA, which generates more than 50% of its revenue from the transportation of Asian gas under contract for Gazprom. It would also reduce the company's ability to generate cash, as well as its resilience to foreign currency risk associated with its predominantly US dollar-denominated debt,” it adds.

In summation, these are serious if not precarious times for the gas markets, and it’s not the just US players who ought to be worried.

On a closing note, here is the Oilholic’s recent chat for Forbes with US Department of Energy CIO Donald Adcock. Additionally, here is one’s take on how oil traders, trading houses and of course hedge funds are looking to play contango. As usual they’ll be winners, losers, sinners and pretty happy shippers.

That’s all for the moment folks! The Oilholic is off to gather fresh intel from Mexico City and Houston. Until next time, keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Offshore rig, USA  © Shell

Saudi oil minister & the Oilholic’s natter

Saudi Arabia’s oil minister Ali Al-Naimi said the global oil market remains well supplied, in response to a question from the Oilholic. Speaking here in Vienna, ahead of the closed session of oil ministers at the 163rd OPEC meeting, the kingpin said, “The supply-demand situation is balanced and the world oil market remains well supplied.”

Asked by a fellow scribe how he interpreted the current scenario. “Satisfactory” was the short response. Al-Naimi also said, “Enough has been said on shale. North American shale production adds to supply adequacy. Is it a bad thing? No. Does it enter into the geopolitical equation and hegemony? Yes of course. Geopolitics has evolved for decades along with the oil industry and will continue to. What’s new here?!” And that, dear readers, was that.

Despite being pressed for an answer several times, Al-Naimi declined to discuss the subject of choosing a successor to OPEC Secretary General Abdalla Salem El-Badri.

 

The Saudis are expected to battle it out with the Iranians for the largely symbolic role, but one that is nonetheless central to shaping OPEC policies and carries a lot of prestige. As in December, the Saudis are proposing Majid Munif, an economist and former representative to OPEC. Tehran wants its man Gholam-Hussein Nozari, a former Iranian oil minister, installed. Compromise candidate could be Iraq’s Thamir Ghadban.

 

The tussle between Iran and Saudi Arabia about the appointment has been simmering for a while and led to a stalemate in December. As a consequence, El-Badri’s term was extended. Anecdotal evidence suggests the Iranians, as usual, are being difficult.

Saudi Oil mins al-Naimi: Oil mrkt supply-demand situation ideal; equation is balanced & market remains well supplied twitter.com/The_Oilholic/s…
— Gaurav Sharma (@The_Oilholic) May 31, 2013

More so, Al-Naimi appeared to the Oilholic to be fairly relaxed about the Shale ruckus, but the Iranians are worried about perceived oversupply. (Only the Nigerians appear to be jumpier than them on the subject of shale). Iran's oil exports, it must be noted, are at their lowest since 2010 in wake sanction over its nuclear programme.

Away from the tussle, Abdel Bari Ali Al-Arousi, oil minister of Libya and alternate President of the OPEC Conference, said the world oil demand growth forecast for 2013 is expected to increase by 0.8 million barrels per day (bpd).

Total non-OPEC supply has seen a slight upward adjustment to 1.0 million bpd for the year. “This situation is likely to continue through the third and into the fourth quarters as we head into the driving season. Our focus will remain on doing all we can to provide stability in the market. This stability will benefit all stakeholders and contribute to growth in the world economy. However, as we have repeatedly said, this is not a job for OPEC alone. Every stakeholder has a part to play in achieving this,” he added.

Rounding off this post, on the subject of hegemony, it always makes the Oilholic smirk and has done so for years, that the moment the scribes are let in - the first minister they rush for (yours truly included) is the man from Saudi Arabia. That says something about hegemony within OPEC. That's all for the moment from Vienna folks, updates throughout the day and the weekend! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2013. Saudi Arabia’s oil minister Ali Al-Naimi speaking at the 163rd OPEC meeting of ministers © Gaurav Sharma, May 31, 2013.

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.

Final ‘crude’ points of 2012

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

For US President, the Oilholic endorses 'neither'!

Whilst lounging on Hawaii’s beautiful White Sands Beach in Kona, the Oilholic wondered if the dear readers of this blog know what is a Humuhumunukunukuāpuaʻa (pronounced ‘humu – humu – nuku – nuku – apa – wapa’)? Revelation on what it is and how it relates to energy policy stances of President Barack Obama and challenger Mitt Romney follows. The Presidential debates are over, all banners are up and the speeches are reaching a last minute fervour as Romney and Obama begin the concluding phases of their face-off ahead of the November 6, 2012 US Presidential election day.

As decision day draws nearer, the Oilholic endorses neither as both leading candidates have displayed a near lack of vision required to steer US energy policy in light of recent developments. The USA, despite its oil imports dynamic, believe it or not is the world’s third largest producer of crude oil by volume and among the market leaders in the distillates business.

With the next generation of independent wildcatters’ knack for finding value and economies of scale for small volumes (mostly in Texas and North Dakota), shale oil and an overall rise in countrywide oil output, things can only get better with the right man in charge at the White House. Additionally, the shale gas bonanza bears testimony to just about everything from American ingenuity and the benefits of an impressive pipeline (to market) network to a favourable legislative framework.

Yet both Obama and Romney sound unconvincing on respective plans for the energy industry despite their country’s domestic good fortune in recent years. The President’s policy has been a near failure while his opponent’s plans are insipid at best. Starting with the President first, since the Oilholic is in his birthplace of Hawaii and having arrived from California which hasn’t voted Republican in recent decades, bar the exception of Ronald Regan’s bid for the White House.

On the plus side, the Obama administration has opened up new US regions to oil and gas prospection though red tape persists. It has made noteworthy moves as a proponent of energy efficiency and energy economy drives for motorists and businesses alike. But on this briefest of note, the positivity ends. The BP Deepwater Horizon spill was as much about the failure of the company involved, as it was about the initial fuzzy response of the Obama administration followed by political points scoring as public anger grew when the spill wasn’t plugged for months.

Then of course there is the Solyndra boondoggle and supposed plans for “clean coal” where the less said the better, unless you are an opponent of the President. Shenanigans of the US Congress put paid to any plans he may have had for curbing greenhouse gas emissions. Then of course there are politically fishy manoeuvres ranging from not offering proactive support to shale prospection and delaying the Keystone XL pipeline project from Canada until after the election and to reach (and then again subsequently threaten to reach) US strategic petroleum reserves as petrol prices rose at US pumps.

Yet for all of his incompetence, the American energy industry is not in an unhappy place thanks largely to the Bush administration’s recognition of the domestic reserve potential and Dick Cheney’s super-aggressive push on shale. What is disappointing is that it could have been much better under Obama but wasn’t. Remember all those “Yes we can” posters of his from the 2008 campaign. The Oilholic was hard pressed not to find at least one Obama banner once every four or five streets in major Californian metropolitan areas on a visit back then (using Los Angeles, San Diego, San Francisco, San Jose, Sunnyvale and Sacramento as a basis).

Last week in San Diego yours truly found none and this week in Hawaii has been the same. For the US energy business, the absence of “Yes we can” banners conveys the same metaphorical message of being let down perhaps as the rest of the country. Things are tagging along in the energy business despite of Obama not because of anything in particular that he has done. Of course, he did make a tall claim of a cut in US oil imports from the Middle East which is true. However, the Oilholic agrees with T. Boone Pickens on this one – yes the US production rise has contributed to reduced importation of crude oil but so has the dip in economic performance which cuts energy usage and makes the citizenry energy frugal. What has Obama done?

Well so much so for the President, but what about his challenger? Sigh...The Right Honourable Mitt Romney’s policy is to make (and switch) a policy on the go accompanied by jumbled statements. Or, in something that would make the fictitious British civil servant Sir Humphrey Appleby from BBC’s political satire Yes Minister proud – the Romney campaign’s policy is not to have a policy unless asked about a particular facet of the energy business.

So what do we know so far? Romney stands for less regulation, a more lenient approach to environmental regulations and will cut addiction to subsidies. But political waffle aside, all we have had is him blast Obama over the Solyndra affair, call for a repeal of Clean Air Act without outlining his ‘clean’ alternative and a proposal to allow wind power subsidies to lapse (again without spelling out the Romney plan for Wind Power).

He flags up the shale boom without being mindful that it too needed incentives to begin with before market forces kicked-in. Admittedly, the wind energy sector works to a different dynamic and is indeed subsidy addicted. But a quip to cut subsidies without a cohesive back-up plan reeks of political opportunism. The only way Romney scores better than Obama on energy policy is that he is not Obama and who knows if that might be reason enough to vote for good ol’ Mitt.

Both men have the fuzziest of plans with erratic changes in stance suited to the political climate in an election year. This brings us back to the Humuhumunukunukuāpuaʻa which is the Hawaiian state fish from the tropical reef triggerfish family. The local name simply means "the fish that grunts like a pig" for the sound it makes when caught. It is also prone to sudden erratic changes in position and swimming patterns while negotiating the Hawaiian coral reefs according to a local marine biologist. Kinda like the two main US Presidential candidates isn’t it?

That’s all from Hawaii folks as the Oilholic prepares for the long journey home. It has been a memorable week in another memorable part of America. Alas, all good things must come to an end. Yours truly leaves you with a photo of Hawaiian residents of the Punaluʻu Black Sand beach – the Hawksbill and Green sea turtles (above right) and moi at Old Kona State Airport recreation beach and park.

You can cycle down 30 miles along the Kona coastline and stop every 15 mins to ask “Is that a view? Or is that a view?” and you’ll conclude that that’s a view! The people are lovely, the food is great, the place oozes natural history and tales of human history. Since this blogger also drove 260 miles circling the entire Big Island via its main highway with the help of veteran local tour guide John Mack, one can confirm that different parts of this Hawaiian isle get 11 of the 13 climate ranges known to mankind.

It is a privilege to have spent a week here, where for a change blogging on oil did not reign supreme. Next stop Los Angeles International followed by London Heathrow – a day long up in the air affair! Keep reading; keep reading it ‘crude’ – but its goodbye to the ‘Aloha’ state!

© Gaurav Sharma 2012. Photo 1: White Sands Beach Park, Kona. Photo 2: Oilholic at the Old Kona State Airport recreation beach park, Kona Kailua. Photo 3: Punaluʻu Black Sand beach, Hawaii, USA © Gaurav Sharma 2012.

Market chatter, luck of the Irish & East Timor

Rather than a daily assessment, the Oilholic often looks at how the forward month price of leading crude oil benchmarks fluctuates on a weekly basis. Such an exercise regularly provides interesting tangents for a discussion at the beginning of the week. Last Monday all three benchmarks – Brent, WTI and OPEC’s basket of crude – were in the red in week over week terms. This Monday, all three are in the green rising roughly between 2% and 3%. There is a clear reason for the upside momentum with Brent holding firm above US$114 per barrel and the WTI above US$90.

 

Better than expected Chinese economic data is largely behind the current market sentiment (see graphic above, click to enlarge). But as yours truly fast loses count of how many ‘critical’ EU summits we have recently had, another one is due towards the end of the week. So market caution will prevail either side of the pond. For Sucden Financial analyst Myrto Sokou, the two-day summit (this Thursday and Friday) and the regional Spanish elections (Galicia and Basque) will be the main focus for the week.

 

“We are not expecting any decision yet on Spain’s issues, with Reuters again suggesting that bundling multiple bailouts in one package is preferable, especially for Bundestag approval. Again the usual flow of Greek rumours, with some suggesting that the country needs two more years to implement reforms,” she added.

 

US EIA data released last Friday noted that American crude oil stocks built by 1.7 million barrels driven by a 193,000 barrels per day (bpd) increase in supply. This came from an import rise of 115,000 bpd and a domestic output rise of 78,000 bpd (to 6.598 million bpd). Concurrently, US refinery runs declined by 97,000 bpd, in line with the maintenance season and Cushing, Oklahoma stocks slightly gained by 0.3 million barrels (and are still comfortably above five year highs).

 

Société Générale analyst Mike Wittner felt the report indicated a typical pattern for a refinery maintenance season. “We see a very bullish backdrop for products and a bearish trend for crude…However, all products' fundamentals were very weak - both supply and demand. Recent positive US macroeconomic data might improve demand and add an upward pressure on prices,” he concluded.

 

Moving away from the price of the crude stuff, confirmation finally came that the Irish are about to hit black gold in meaningful quantities after many false dawns. This may largely be attributed to Providence Resources, a Dublin and London AiM dual-listed company, which first caught the Oilholic’s eye back in May.

 

The company’s chief executive Tony O’Reilly confirmed last week that its Barryroe site, 30 miles off the Cork coast, could potentially yield 280 million barrels of oil. He told the BBC that with Brent crude above US$100 per barrel at moment, the prospection offered a “lot of value” and would mark the beginning of the Irish oil industry.

 

While rules related to licensing, taxation and local job facilitation would still need to be worked on, what is transpiring at Providence is by all accounts a pivotal moment. "We hope there is a renaissance of interest by international companies who need to come to Ireland and help us to exploit our natural resources. We cannot do it alone," O’Reilly added.

 

ExxonMobil has already obliged by opting to explore a Providence site at Drumquin. Many others would surely follow given number of exploration licences the company currently holds according to its 2011 Annual report (see map of Providence Resources' licences above right, click to enlarge). Crossing over to the other side of the planet, East Timor or Timor Leste has created its domestic Institute of Petroleum and Geology (IPG) by means of its Decree-Law 33/2012 of July 18, 2012.

 

The new institute will be entrusted with archiving, producing, managing, storing and disseminating geological data, including that related to onshore and offshore oil, gas and mineral resources. Miranda Law Firm, which operates in the once strife ravaged jurisdiction, said the data collected and managed by IPG will provide the basis and impetus for domestic prospecting, exploration and production.

 

The problem is not so much of data collection hindering offshore prospection but one of defining East Timor’s maritime boundaries. It only became an independent state in May 2002. The new nation did not accept the Timor Gap Treaty of 1989, which divided the country’s resources between Australia and Indonesia. It was signed over a decade after Indonesia invaded East Timor in 1976 which had formerly been a Portuguese colonial outpost.

 

A new agreement – the Timor Sea Treaty of 2002 – then proposed a Joint Petroleum Development Area (JPDA) with a 90:10 oil & gas revenue share of new finds between East Timor and Australia. Then perhaps much to the chagrin of locals, Greater Sunrise Gas field – considered one of the most promising finds in the region – saw only a fifth of its nautical area within JPDA confines. As a consequence, only 18% of generated revenue currently falls in East Timor's lap according to sources in the Australian media. All the Oilholic can say is that if you need a crude talking point – talk East Timor.

 

Moving on from one post-conflict area to another supposedly post-conflict region – the Niger Delta – where Shell rejected the liability claims by four Nigerian farmers. At a civil court in The Hague, they have accused the Anglo-Dutch oil major of ruining their livelihood and causing damage to their land on account of oil spills. Shell for its part blamed sabotage and criminal theft by locals for the damage.

 

In a statement it said, "The real tragedy of the Niger Delta is the widespread and continual criminal activity, including sabotage, theft and illegal refining, that causes the vast majority of oil spills. It is this criminality which all organisations with an interest in Nigeria's future should focus their efforts on highlighting and addressing."

 

Opinion might well be divided, but this is the first instance of a half-Dutch multinational being taken to a civil court for an alleged offence caused outside the Netherlands. The only local connection is the Dutch arm of environmental group Friends of the Earth which is backing the four Nigerian farmers. While this landmark case is far from reaching its conclusion, if it has piqued your interest then Michael Peel’s brilliant book A Swamp Full of Dollars could give you all the background to the spills, the violence, the destruction and the crude world of Nigerian oil.

 

Finally, from the serious to the farcical – an episode was brought to the Oilholic’s attention by a colleague at industry scouting data and technical information provider Drillinginfo.  It seems Hollywood megastar Matt Damon’s latest foray – The Promised Land – widely touted as an anti-fracking response to US shale exploration is part bankrolled or rather will be brought to our screens “in association with” Image Media Abu Dhabi, a subsidiary of Abu Dhabi Media, according to the preview’s list of credits.

 

The media company is wholly owned by the government of UAE; an OPEC member country and one from which the US is hoping to cut its crude imports from based on the prospects of domestic shale exploration! It is best to leave it to you folks to draw your own conclusions, but that’s all for the moment! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Graphic 1: Forward month crude oil price © Sucden Financial, October 2012. Graphic 2: Providence Resources’ existing licences © Providence Resources Plc, December 2011

On another BP sale, another Chavez term & more

A not so surprising news flash arrived this week that BP has finally announced the sale of its Texas City refinery and allied assets to Marathon Petroleum for US$2.5 billion. A spokesperson revealed that the deal included US$600 million in cash, US$1.2 billion for distillate inventories and another US$700 million depending on future production and refining margins.

 

Following the Carson oil refinery sale in California, the latest deal ratchets BP’s asset divestment programme up to US$35 billion with a target of US$38 billion within reach. It is time for the Oilholic to sound like a broken record and state yet again that – Macondo or no Macondo – the oil major would have still divested some of its refining and marketing assets regardless.

 

However, for fans of the integrated model – of which there are quite a few including ratings agencies who generally rate integrated players above R&M only companies – the head of BP's global R&M business Iain Conn said, "Together with the sale of our Carson, California refinery, announced in August, the Texas City divestment will allow us to focus BP's US fuel investments on our three northern refineries."

 

Things have also picked-up pace on the TNK-BP front. On Tuesday, Reuters reported that BP’s Russian partners in the venture Alfa Access Renova (AAR) would rather sell their stake than end-up in a ‘devalued’ partnership with Kremlin-backed rival Rosneft. On Wednesday, the Russian press cited sources claiming a sale of BP’s stake to Rosneft has the full backing of none other than Russian President Vladimir Putin himself. Now that is crucial.

On a visit to Moscow and Novosibirsk back in 2004, the Oilholic made a quick realisation based on interaction with those in the know locally – that when it comes to natural resources assets the Kremlin likes to be in control. So if BP and the Russian government have reached some sort of an understanding behind the scene, AAR would be best advised not to scream too loudly.

 

Another hypothesis gaining traction, in wake of AAR’s intention to sell, is that instead of being the seller of its stake in TNK-BP, the British oil major could now turn buyer. BP could then re-attempt a fresh partnership with Rosneft; something which it attempted last year only for it to be scuppered by AAR.

 

There can be any amount of speculation or any number of theories but here again a nod from the Kremlin is crucial. Away from ‘British Petroleum’ (as Sarah Palin and President Obama lovingly refer to it in times of political need) to the British Government which reiterated its support for shale exploration earlier this week.

 

On Monday, Minister Edward Davey of UK's Department of Energy and Climate Change (DECC) expressed hopes of lifting a suspension on new shale gas exploration. It was imposed in 2011 following environmental concerns about fracking and a series of minor earthquakes in Lancashire triggered by trial fracking which spooked the nation. In near sync with Davey, Chancellor of the Exchequer George Osborne told the Conservative Party conference in Birmingham that he was considering a 'generous new tax regime' to encourage investment in shale gas.

 

In case you haven’t heard by now, Hugo Chavez is back as president of Venezuela for another six year stint. This means it will be another rendezvous in Vienna for the Oilholic at the OPEC meeting of ministers in December with Rafael Ramirez, the crude Chavista likely to be hawkish Venezuela’s man at the table. Opposition leader Henrique Capriles believed in change, but sadly for the Venezuelan economy grappling with mismanagement of its ‘crude’ resources and 20% inflation, he fell short.

 

On January 10, 2012 when Chavez will be inaugurated for another term as Venezuela's president, he will be acutely aware that oil accounts for 50% of his government’s revenue and increasingly one dimensional economy. Bloomberg puts Chinese lending to Venezuela between 2006 and 2011 at US$42.5 billion. In a staggering bout of frankness, Ramirez admitted in September that of the 640,000 barrels per day (bpd) that Venezuela exported to China, 200,000 bpd went towards servicing government debt to Beijing.

 

The country's oil production is hardly rising. Just as Chavez’s health took a toll from cancer, national oil company PDVSA has not been in good health either. Its cancer is mismanagement and underinvestment. Most would point to an explosion in August when 42 people perished at the Amuay refinery – Venezuela’s largest distillate processing facility as an example. However, PDVSA has rarely been in good health since 2003 when it fired 40% of its workforce in the aftermath of a general strike aimed at forcing Chavez from power.

 

Staying with Latin America, the US Supreme Court has said it will not block a February 2011 judgement from an Ecuadorean court that Chevron must pay US$19 billion in damages for allegedly polluting the Amazonian landscape of the Lago Agrio region. The court’s announcement is the latest salvo in a decade-long legal tussle between Texaco, acquired by Chevron in 2001, and the people of the Lago Agrio.

 

The Ecuadorians and Daryl Hannah (who is not Ecuadorian) wont rejoice as Chevron it is not quite done yet. Far from it, the oil major has always branded the Ecuadorian court’s judgement as fraudulent and not enforceable under New York law. It has also challenged it under an international trade agreement between the US and Ecuador.

 

The latter case will be heard next month – so expect some more ‘crude’ exchanges and perhaps some stunts from Ms. Hannah. That’s unless she is under arrest for protesting about Keystone XL! That’s all for the moment folks! Keep reading, keep it ‘crude’ or Elle Driver might come after you!

 

© Gaurav Sharma 2012. Photo: East Plant of the Texas City Refinery, Texas, USA © BP Plc