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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To email: gaurav.sharma@oilholicssynonymous.com

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

Splendid dossier on a secretive "supermajor"

In 1999, the merger of Exxon and Mobil created what could be described as an oil & gas industry behemoth and, using some financial metrics, perhaps also one of the most profitable among the international “supermajors”. Despite being a global entity, for many people ExxonMobil remains an enigma.

 

Its sheer presence on the world stage has its admirers yet critics have labelled it as a polluter, a climate-change denier, a controversial lobbyist, a bully and more. For Pulitzer Prize winning author Steve Coll, there is more to it than meets the eye when it comes to ExxonMobil and its financial performance which is more durable than others in the Fortune 500 list.

 

Minus generalisations or a linear exercise in big oil bashing, this latest work of Coll's – Private Empire: ExxonMobil and American Power – is a pragmatic book about a global brand which, in the author’s words, became the "most hated"  oil company in America after the Exxon Valdez oil spill off the coast of Alaska in 1989.

 

That incident itself provides the starting point for a detailed narrative of just under 700 pages, split into two parts – The End of Easy Oil and The Risk Cycle – containing 28 chapters. Banking on his journalistic tenacity and detailed research work including over 400 interviews, declassified documents, legal and corporate records and much more, Coll has pencilled his unique description of this “Private Empire” and it does not disappoint.

 

ExxonMobil has its dogmas, fears, idiosyncrasies, pluses and minuses and the author delves into these based on anecdotal as well as observed evidence. From an obsession with safety post Exxon Valdez to the moving of its headquarters to Irving, Texas, from “the merger” to an insistence on R.O.C.E (Return on Capital Employed) – Coll has tackled it all.

 

The author opines that far from being an attention seeking ruthless corporate giant in bed with politicians, as popular conjecture would have you believe, ExxonMobil’s legendary lobbying in Washington DC was cleverly and aggressively targeted for maximum effect. While it shunned overt politicising of its presence and affairs, the company benefitted from new markets and global commerce that US military hegemony protected the world over. After all, when fighting a tight corner, ExxonMobil often called in a favour from power brokers on Capitol Hill.

 

While the whole book is a thoroughly good read, for the Oilholic, reading Coll’s description of ExxonMobil’s grapples with "resource nationalism" in developing markets (as its oil output in developed jurisdictions started declining) and its management (or otherwise) of operations in inhospitable countries, were the two most interesting passages.

 

From Aceh in Indonesia to the Niger Delta, from the Gulf of Guinea to Chad, ExxonMobil found itself in alien territory and conflicts it had not seen before. But it strategized, adopted, called in favours and more often than not emerged with a result in its favour; if not immediately, then over a period of time, writes Coll.

 

Every saga needs a cast of characters and this one is no exception. One individual and his portrayal by the author stand out. That’s Lee ("Iron Ass") Raymond, ExxonMobil’s inimitable boss from 1993 to 2005. With a doctorate in chemical engineering, boasting Dick Cheney among his friends and a history of denying climate change, Raymond was by all accounts a formidable character and Coll’s description of him does not disappoint. One mute criticism the Oilholic has is that its borderline gossip in parts but one supposes the gossip joins the dots in a weighty narrative.

 

In summation, this blogger found the book to be a definitive one on ExxonMobil and by default a glimpse into the wider ‘crude’ world, it’s wheeling and dealing. The Oilholic would be happy to recommend it to anyone interested in the oil business, its history, market dynamics and the geopolitical climate it is inextricably linked with.

 

Those interested in business, finance and economics would also enjoy this book as would the mainstream non-fiction reader in search of a riveting real world account. Finally, it would also be well worth the while of students of financial journalism to read and learn from Coll’s craft.

 

© Gaurav Sharma 2012. Photo: Front Cover – Private Empire: ExxonMobil and American Power © Allen Lane / Penguin Group UK.


Speculators, production & San Diego’s views

It is good to be in the ‘unified’ port of San Diego, California for a few days to get some crude views, especially those of the trading types who have a pad on the city’s Ocean Beach waterfront looking out to the Pacific. While the view from one of their living room windows is a testament to the current serenity of the Pacific Ocean (an example on the left), markets are anything but serene with politicians blaming paper traders for the current volatility.

Instead of shrugging and quipping ‘typical’, most admit candidly that the ratio of paper (or virtual) barrels versus physical barrels will continue to rise. Some can and quite literally do sit on the beach and trade with no intention of queuing at the end of pipeline in Cushing, Oklahoma to collect their crude cargo.

Anecdotal evidence suggests the ratio of paper versus physically traded barrels has risen from 8:1 at the turn of millennium to as high as 33:1 in 2012. Furthermore, one chap reminds the Oilholic not to forget the spread betting public. “They actually don’t even enter the equation but have a flutter on the general direction of crude benchmarks and in some cases – for instance you Brits – all winnings are tax free,” he added.

Nonetheless, on his latest visit to the USA, yours truly sees the supply and demand dynamic stateside undergoing a slow but sure change. In fact old merchant navy hands in San Diego, which is a unified port because the air and sea ports are next to each other, would tell you that American crude import and export dispatch patterns are changing. Simply put, with shale oil (principally in Eagle Ford) and rising conventional production in Texas and North Dakota in the frame and the economy not growing as fast as it should – the US is importing less and less of the crude stuff from overseas.

The IEA projects a fall of 2.6 million barrels per day (bpd) in imports by US refiners and reckons the global oil trading map and direction of oil consignments would be redrawn by 2017. Not only the US, but many nations with new projects coming onstream would find internal use for their product. India’s prospection drive and Saudi Arabia’s relatively new oilfield of Manifa are noteworthy examples.

So a dip in Middle Eastern crude exports by 2017 won’t all be down to an American production rise but a rise in domestic consumption of other producer nations as well. Overall, the IEA reckons 32.9 million bpd will trade between different regions around the globe; a dip of 1.6 million bpd over last year. With some believing that much of this maybe attributed to dipping volumes of light sweet crude demanded by the US; the thought probably adds weight to Eastward forays of oil traders like Vitol, Glencore and Gunvor. Such sentiments are also already having an impact on widening Brent’s premium to the WTI with the latter not necessarily reflecting global market patterns.

Elsewhere, while the Oilholic has been away, it seems BP has been at play. In a statement to the London Stock Exchange on Monday, BP said it had agreed 'heads of terms' to sell its 50% stake in Russian subsidiary TNK-BP to Rosneft for US$28 billion via a mixture of US$17.1 billion cash and shares representing 12.84% (of Rosneft). BP added that it intends to use US$4.8 billion of the cash payment to purchase a further 5.66% of Rosneft from the Russian government.

BP Chairman Carl-Henric Svanberg said, “TNK-BP has been a good investment and we are now laying a new foundation for our work in Russia. Rosneft is set to be a major player in the global oil industry. This material holding in Rosneft will, we believe, give BP solid returns.”

With BP’s oligarch partners at AAR already having signed a MoU with Rosneft, the market is in a state of fervour over the whole of TNK-BP being bought out by the Russian state energy company. Were this to happen, Rosneft would have a massive crude oil production capacity of 3.15 million bpd and pass a sizeable chunk of Russian production from private hands to state control. It would also pile on more debt on an already indebted company. Its net debt is nearing twice its EBITA and a swoop for the stake of both partners in TNK-BP would need some clever financing.

Continuing with the corporate front, the Canadian government has rejected Petronas' US$5.4 billion bid for Progress Energy Resources. The latter said on Sunday that it was "disappointed" with Ottawa’s decision. The company added that it would attempt to find a possible solution for the deal. Industry Minister Christian Paradis said in a statement on Friday that he had sent a letter to Petronas indicating he was "not satisfied that the proposed investment is likely to be of net benefit to Canada."

Meanwhile civil strife is in full swing in Kuwait according to the BBC World Service as police used tear gas and stun grenades to disperse large numbers of people demonstrating against the dissolution of parliament by Emir Sheikh Sabah al-Ahmad al-Sabah whose family have ruled the country for over 200 years.

In June, a Kuwaiti court declared elections for its 50-seat parliament in February, which saw significant gains for the Islamist-led opposition, invalid and reinstated a more pro-government assembly. There has been trouble at the mill ever since. Just a coincidental footnote to the Kuwaiti unrest – the IEA’s projected figure of 2.6 million bpd fall in crude imports of US refiners by 2017, cited above in this blog post, is nearly the current daily output of Kuwait (just to put things into context) ! That’s all from San Diego folks! It’s nearly time to say ‘Aloha’ to Hawaii. But before that the Oilholic leaves you with a view of USS Midway (above right), once an aircraft carrier involved in Vietnam and Gulf War I and currently firmly docked in San Diego harbour as a museum. In its heydays, the USS Midway housed over 4,000 naval personnel and over 130 aircraft.

According to a spokesperson, the USS Midway, which wasn’t nuclear-powered, had a total tank capacity of 2.5 million gallons of diesel to power it and held 1.5 million gallons of jet fuel for the aircraft. It consumed 250,000 gallons of diesel per day, while jet fuel consumption during operations came in at 150,000 gallons per day during flying missions. Now that’s gas guzzling to protect and serve before we had nuclear powered carriers. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Ocean Beach, San Diego. Photo 2: USS Midway, California, USA © Gaurav Sharma 2012.

The world according to ENOC, Jebel Ali & more

If you could think of one participant in the Dubai economy that exemplifies a bit of a detachment from its debt fuelled construction boom turned bust, then the Emirates National Oil Company (ENOC) is certainly it. The Oilholic has always been one for contrasting Dubai’s debt fuelled growth with neighbour Abu Dhabi’s resource driven organic growth. However, ENOC is a somewhat peculiar exception to the recent Dubai norm or some say form.

 

Since becoming a wholly owned Government of Dubai crown company in 1993, ENOC has continued to diversify its non-fuel operations while playing its role as a custodian of whatever little crude oil reserves the Emirate holds. The history of this NOC dates to 1974. Today it is among the most integrated (and youngest) operators in the business, though not necessarily profitable in a cut throat refining and marketing (R&M) world.

 

While it has no operations in neighbouring Abu Dhabi, ENOC has moved well beyond its Dubai hub establishing a foothold in 20 international markets and other neighbouring Emirates over the years. In case, you didn’t know or had never heard of ENOC, this Dubai crown company has a majority 51.9% stake in Dragon Oil Plc; a London-listed promising upstart. Dragon Oil’s principal producing asset is the Cheleken Contract in the eastern section of the Caspian Sea under Turkmenistan’s jurisdiction.

 

Despite trying times for refiners ENOC’s Jebel Ali Refinery, situated 40km southwest of Dubai City, is the crown company’s crown jewel. Planned in 1996 and completed by 1999, the Jebel Ali refinery’s processing capacity currently stands at 120,000 barrels per day (bpd). It processes condensate or light crude to myriad refined products which get exported as well as feed in to ENOC's own domestic supply chain.

 

ENOC says an upgrade of the refinery was carried in 2010 at a cost of US$850 million. The refinery dominates the landscape of the Jebel Ali free trade zone accompanied by a sprawling industrial estate and an international port. The Oilholic is reliably informed that the latter is among the largest and busiest ports in the region playing host to more ships of the US Navy than any other in the world away from American shores.

 

While being able to host aircraft carriers is impressive, what’s more noteworthy from a macroeconomic standpoint is the fact that the Jebel Ali Free Trade Zone as a destination exempts companies relocating there from corporate tax for fifteen years, personal income tax and excise duties. It’s a privilege to have visited Jebel Ali and also by ‘crude’ coincidence witness ENOC sign a joint venture agreement with Saudi Arabia’s Aldrees Petroleum & Transport Services Company (Aldrees) for setting up service stations in different locations across the latter.

 

The equal-staked venture will see service stations in Saudi Arabia feature ENOC’s regional marquee brand products. The first station is expected to open early next year, with the number of sites rising to 40 in due course. Given that ENOC needs to buy petroleum from international markets as Dubai does not produce enough of the crude stuff, the move has much to do with cost mitigation on the home front.

 

ENOC is forced to sell fuel at Dubai petrol pumps well below the price it pays for crude and refining costs. For instance, over 2011 fuel sales losses at ENOC were thought to be in the US$730-750 million range. So here’s a NOC with profitable non-fuel businesses but troubling fuel businesses looking for ‘crude’ redemption elsewhere. That’s all for the moment folks; a final word from Dubai later! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo 1: ENOC Bur Dubai Office, UAE. Photo 2: Jebel Ali Refinery and Industrial Estate, Dubai, UAE © Gaurav Sharma 2012.

Charting the love-hate relationship with big oil

If the oil companies had answers to the energy crisis, and in some cases maybe they do, would you believe them? Given that most of us grow up loathing big oil for a multitude of reasons ranging from environmental to monetary ones while filling up the gas tank, all thoughts put forward by energy companies become suspect.

Or as the author of the book – Why we hate the oil companies? Straight talk from an energy insider – asks, would you accept the fox’s plan for the hen coop? Written by none other than John Hofmeister, the former president of Shell, it examines what’s behind the energy companies' swagger or perceived swagger.

Having made the transition from being a mere consumer of gasoline to the president of a major oil company, Hofmeister attempts to feel the pulse of public sentiment which ranges from indifference to pure hatred of those who produce the crude stuff. Spread over 270 pages split by 14 chapters, this book does its best to offer a reasonably convincing insider’s account of the industry.

Along the way it dwells on how politicians and special interest groups use energy misinformation and disinformation to meet their own odds and ends in a high stakes game. Hofmeister founded the US Citizens for Affordable Energy; an American grassroots campaign aimed changing the way the US looks at energy and energy security.

So this book benefits from his thoughts on solving energy issues, offering targeted solutions on affordable and clean energy, environmental protection and sustained economic competitiveness. The tone is a surprisingly frank one and research is solid. It is also no corporate waffle from an oilman lest sceptics dismiss it as such without reading it.

The Oilholic believes it even throws up some pragmatic solutions which appear sound at least on paper. So while there is little not to like about the book, there is one glaring caveat. It is just way too American in its scope. Yours truly is happy to recommend this book to our friends across the pond in North America; but readers elsewhere while appreciating the narrative, may come to the same conclusion.

© Gaurav Sharma 2012. Photo: Front Cover – Why we hate the oil companies? Straight talk from an energy insider © Palgrave Macmillan

BP fishes, ETP swoops & Chesapeake stumbles

Three corporate stories have caught the Oilholic’s eye over the past fortnight and all are worth talking about for very different reasons. With things improving Stateside and memories of a Russian misadventure fading, oil major BP announced on Tuesday that it had inked two production sharing agreements and aims to begin new deepwater exploration in Atlantic waters off the coast of Trinidad and Tobago. The company is already the Caribbean island nation’s largest oil & gas producer with average production for 2011 coming in the region of 408,000 barrels of oil equivalent per day.

Having been awarded blocks 23(a) and TTDAA14 in the 2010-2011 competitive bid rounds last summer, BP finds itself fishing for crude and gassy stuff in the two blocks which are 2,600 sq km and 1,000 sq km in area respectively. Local sources see the company as a ‘good corporate citizen’ and that ought to be comforting for BP in its march to rebuild trust under Bob Dudley.

While BP’s fishing, Energy Transfer Partners LP (ETP) is smiling having won plaudits around the crude world for its US$5.3 billion acquisition of Sunoco on April 30. A fortnight hence, market commentators are still raving on about the move especially as ETP’s swoop for Sunoco follows on from a clever buyout of Southern Union for US$5.7 billion. These acquisitions make ETP the USA’s second-biggest owner of pipeline assets behind Kinder Morgan whose merger with El Paso is imminent.

Most importantly, the Oilholic believes a swoop for Sunoco diversifies ETP’s pipeline portfolio adding around 9,700 km of oil and refined products pipelines to its existing network of 28,160 km of natural gas and natural gas liquids pipelines. With the move, oil revenues will account for over a quarter of its income. A Moody’s report prior to announcement of the deal suggested that together with Enterprise Production Partners, ONEOK Partners and Williams Partners, ETP was currently in a good place and among those best positioned for organic growth.

Growing production of oil, natural gas and natural gas liquids and higher margins are driving increased earnings and cash flow for midstream companies, especially those with existing gathering and processing or pipeline infrastructure near booming shale plays says the agency. While ETP’s smiling, the situation at Chesapeake Energy is anything but smiles. Under Aubrey McClendon, who co-founded the firm in 1989 in Oklahoma, it grew from strength to strength becoming the USA’s second largest natural gas producer and a company synonymous with the country’s shale gas bonanza. However, in a troubling economic climate with the price of natural gas plummeting to historic lows, Chesapeake has endured terrible headlines many of which were self-triggered.

Two weeks ago activist shareholders forced McClendon’s hand by making him relinquish the post of Chairman which he held along with that of Chief Executive over an arrangement which allows him to buy a 2.5% stake in all new wells drilled by Chesapeake. The arrangement itself will also be negotiated by 2014. The Oilholic finds the way McClendon has been treated to be daft for a number of reasons.

The arrangement has been in place since 1993 when the firm went public so neither the company’s Board nor its shareholders can claim they did not know. Two decades ago Chesapeake drilled around 20 wells per annum on average but by 2011 the average had risen to well above 1500 wells. That McClendon kept putting his money where his mouth is for so long is itself astonishing which is what the attention should focus on rather than on the man himself.

In later years this was largely achieved by borrowing at a personal level to the tune of US$850 million; Reuters reckons the figure is more in the region of US$1.1 billion. However, sections of the US media are currently busy sensationalising the Oklahoma man’s tussles within the company and as if this arrangement has emerged out of the blue.

Furthermore, the macroclimate and falling gas prices are now forcing the energy company’s hand with analysts at Fitch Ratings noting that it faces a funding shortfall of US$10 billion this year. In response, Chesapeake says it plans to sell US$9.0 billion to US$11.5 billion in assets this year. Word from Houston is that the sales of its Permian Basin property in West Texas and Mississippi Lime joint venture are a given by September. Some analysts believe asset sales may cap the figure of US$14 billion; though the view is not unanimous.

While this would help with liquidity issues, a sell-off of those assets currently producing oil & gas would most certainly reduce Chesapeake’s cash flow needed to meet requirements of its existing US$4 billion corporate credit facility secured earlier this week from Goldman Sachs and Jeffries Group. It matures in December 2017, with an interest rate of around 8.5% and can be repaid at any time over 2012 without penalty at par value.

As expected, Chesapeake has suffered a ratings downgrade; Standard & Poor's lowered its credit rating to "BB-" from "BB" citing corporate governance matters and a widening gap between capex and operating cash flow as the primary reasons. There is clear evidence of hedge funds short-selling Chesapeake’s shares.

Industry veteran and founder of BP Capital Partners – T. Boone Pickens – launched a strange albeit very vocal defence of McClendon on CNBC’s US Squawk Box on Wednesday which made yours truly smile. Pickens admitted that he had sold his position on Chesapeake – not because of what is going on but rather that he was very concerned about natural gas prices full stop.

“We got out of natural gas stocks and Chesapeake was one of them. We’re not long on Chesapeake now. Aubrey (McClendon) is a great Oklahoman and Chesapeake is a great company for Oklahoma City generating jobs and investment. Aubrey is a visionary…don’t bet against him…They’ll pull it off. You bet against Aubrey and you’ll scratch your loser’s ass,” said the industry veteran.

You have got to hand it to Pickens! If he's got something to say, there is no minding of the "Ps" and "Qs" – so what if its live television! As a former CNBC employee, the Oilholic wholeheartedly enjoyed Pickens’ soundbite and agrees that Chesapeake should make it out of this mess! However, bad headlines won’t go away anytime soon and its partly their own fault. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Pipeline warning sign, Fairfax, Virginia, USA © O. Louis Mazzatenta/National Geographic. Photo 2: Chesapeake well drilling site © Chesapeake Energy.

‘Crude’ views from across the pond

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

UK PM flags up crude credentials

The Oilholic attended the British lobby group CBI’s annual conference earlier today listening to UK Prime Minister David Cameron flag-up his crude credentials (admittedly among other matters). The PM feels investment in the Oil & Gas sector and British expertise in it could be part of his wider economic rebalancing act.

“In last few weeks alone I have visited an £4.5 billion new investment from BP in the North Sea…And today I hosted Britain and Norway signing a 10-year deal to secure gas supplies and develop together over £1 billion of Norwegian gas fields,” he said.

That deal of course was part of British utility Centrica’s 10-year agreement worth £13 billion to buy natural gas from Norway's Statoil and jointly develop fields.

"Gas plays a central role in powering our economy, and will continue to do so for decades to come. Today's agreement will help to ensure the continued security and competitiveness of gas supplies to Britain, from a trusted and reliable neighbour," the PM concluded.

Admittedly, from a gasoline consumers’ standpoint successive British governments have long lost street cred when it comes to taxing fuel a long while ago; still the present lot fare better in relative terms if the UK ONS is to be relied upon. The British statistics body announced last week that the Government’s Share of petrol pump price dropped to 66p in the pound in 2009/10; from nearly 81p in 2001/02.

The data also show that the poorest 20% of UK households paid almost twice as much of their income in duties on fuel than the richest 20%. In 2009/10, the poorest 20% of households paid 3.5% of their disposable income on duty, compared with only 1.8% for the top 20%. Overall, the average UK household spent 2.3% of its disposable income on duties on fuel.

However, in cash terms, the richest 20% of households paid almost three-times the amount paid by the bottom 20%. In 2009/10 the richest 20% of households spent £1,062 on petrol taxes, compared with £365 for the poorest 20% of households. Overall, the average UK household spent £677 on duties on fuel in 2009/10.

Finally, the UK, US and Canada announced new sanctions against Iran following growing concern over its nuclear programme in wake of the IAEA report. In a statement the US government said that Iran's petrochemical, oil and gas industry (including supply of technical components for Upstream and downstream ops) and its financial sector would be targeted by the sanctions.

Canada will ban all exports for the petrochemical, oil and gas industries without exceptions while the British government would demand that all UK credit and financial institutions had to cease trading with Iran's banks from Monday afternoon. The Oilholic notes that this is first time the UK has cut off a petro-exporting country’s banking sector, in fact any country’s banking sector in this fashion. Its highly doubtful if the move will tame misplaced Iranian belligerence.

© Gaurav Sharma 2011. Photo: British Prime Minister David Cameron speaking at the CBI Conference, November 21^st, 2011 © Gaurav Sharma 2011.

Greece isn’t hitting crude on a standalone basis

Now how many times have we been here in recent times when yet another week begins with market chatter about Eurozone contagion and Greece weighing on the price of Black Gold? Quite frankly it is now getting excruciatingly painful – the chatter that is! The linkage between the abysmal state of affairs in Greece and lower crude prices is neither simple nor linear and a tad overblown from a global standpoint.

Bearish trends are being noted owing to an accumulation of macro factors. Worries about state of the US economy, should lead and actually led the bearish way not Greece. Nonetheless, since Greece’s economic woes have become the poster children of wider problems in the Eurozone for a while now, concerns about its economy never fail to dampen intraday trade on a Monday.

Sucden Financial Research’s Myrto Sokou notes that crude oil prices have started the week on a negative side, as weaker global equity markets and persistent concerns about Greek debt crisis weighed heavily on market sentiment and prompted investors to lock in recent profits. WTI crude oil slid lower 1% toward US$87 per barrel, while Brent oil contract retreated to retest the US$111 per barrel area.

Simply put, European leaders’ decision to delay the Greek tranche payment and EFSF expansion decisions until October, has hit futures trading this side of the Atlantic. Additionally, in the absence of major economic indicators this week, Sokou notes that investors will now be watching for currency movements that could give some direction to the energy market. In any case, investors are being cautious ahead of the two-day US FOMC meeting which concludes on Wednesday.

This week comes on the back of Société Générale’s research published last week which suggested a meaningful slide in oil prices should begin in the next 30-45 days. It is worth rewinding to last Christmas when a stunted recovery was taking hold and people were forecasting oil prices in the circa of US$120 per barrel for 2012. Here’s an example of a JP Morgan research note to clients from December 2010. This not to say that a US$120 price is not achievable – but the last six weeks of ‘over’ listening (or not) to the Greeks’ problems, economic stagnation in the US and even declining consumption forecasts for Asian markets has seen most analysts revise their 2012 forecasts down by almost US$10 per barrel on average.

OPEC Secretary General Abdalla Salem el-Badri certainly thinks there isn’t one economic woe without the other – not just Greece! Speaking at a forum, el-Badri noted that global demand for oil was seen rising at a level which was below expectations. He attributed this to fiscal woes in Europe (sigh!), high unemployment in the US and possible Chinese government action to prevent overheating of their economy.

El-Badri, a Libyan himself, also expressed hope that Libyan production would rise by 500,000 to 600,000 barrels per day (bpd) sometime in the near future. Club all bearish sentiments together, and even the OPEC secretary general is surprised that there has not been an even greater price correction in the crude markets.

Moving away from pricing, two noteworthy corporate stories these past few days have come from the US and Falkland Islands. On September 12, French engineering firm Technip announced its intention to acquire 100% of shares of US-based subsea company Global Industries Ltd. for a total transaction value of US$1.073 billion in cash, including approximately US$136 million of net debt.

The deal is slated for completion over Q1 2012. Elsewhere, British company Rockhopper Exploration, which is searching for crude stuff off the coast of Falkland Islands said on September 15 that it has made further significant finds.

It now expects to start pumping oil by 2016 and would need US$2.1 billion to develop its Sea Lion prospect. Company estimates are for 350 million barrels of recoverable reserves and production peak of 120,000 bpd is expected in 2018. Given the figure, smart money is on Rockhopper either partnering with another company or being taken over by a major. While Rockhopper continues to surprise, that the Argentines are moaning is hardly a surprise.

The Falkland Islands have always be a bone of contention between Argentina and UK who went to war over the Islands in 1982 after the former invaded. UK forces wrested back control of the islands, held by it since 1833, after a week long war that killed 649 Argentine and 255 British service personnel according to UK archives.

The prospect of oil in the region has renewed diplomatic spats with the Argentines complaining to the UN and launching fresh claims of sovereignty. Since, most Falkland islanders want to retain British sovereignty – UK PM David Cameron has declared the issue “non-negotiable”, while Argentina has declared him “arrogant”. It is at present, as the Oilholic noted last year, nothing more than a bit of diplomatic argy-bargy with an oily dimension and is highly likely to stay there.

Finally, concluding on a much lighter note, the London Stock Exchange (LSE), a preferred destination for oilholics, energy majors and miners for their listings, has quite literally become a hive of activity. One is reliably informed via its press office that the LSE has introduced 60,000 bees to their new home in hives situated on the roof of its City HQ at Paternoster Square (see photo on the left).

The introduction of the busy bees is aimed at encouraging growth of the urban bee population in the UK. The initiative is in a partnership with award-winning UK social enterprise - The Golden Company - which works with young people to develop viable businesses that produce, market and sell honey and honey-based natural cosmetics.

Xavier Rolet, CEO of LSE Group describes the move as the perfect example of community and business working together. Ilka Weissbrod, Director of The Golden Company says bees on the roof will be looked after by their ‘Bee Guardians’ together with members of LSE staff and everyone was looking forward to seeing the bees settle in their new home. Sounds like fun!

© Gaurav Sharma 2011. Photo 1: Pump Jacks Perryton, Texas, USA © Joel Sartore / National Geographic. Photo 2: Bees atop the London Stock Exchange © LSE Press Office, September 2011.

Well ‘Why-EA’? Agency wilts as politicians win!

Earlier this afternoon, for only the third time in its history, the IEA asked its members to release an extra 60 million barrels of their oil stockpiles on to the world markets.

The previous two occasions were the first gulf war (1991) and the aftermath of Hurricane Katrina (2005). That it has happened given the political clamour for it is no surprise and whether or not one questions the wisdom behind the decision, it is a significant event.

The impact of the move designed to stem the rise of crude prices was felt immediately. At 17:15GMT ICE Brent forward month futures contract was trading at US$108.45 down 4.99% or US$5.74 in intraday trading while the WTI contract fell 3.64% or US$3.51 to US$91.46.

Nearly half of the 60 million barrels would be released from the US government’s Strategic Petroleum Reserve (SPR). In relative terms, UK’s contribution would be three million barrels – which tells you which nation the IEA was mostly looking to. The agency’s executive director Nobuo Tanaka feels the move will contribute to “well-supplied markets” and ensure a soft landing for the world economy.

This begs the question if the market is “well-supplied” especially with overcapacity at Cushing (Stateside) why now? Why here? For starters, and as the Oilholic blogged earlier, some politicians like Senator Jeff Bingaman – a Democrat from New Mexico and chairman of the US Senate energy committee – have been clamouring for his country’s SPR to be raided to relieve price pressures since April.

OPEC’s shenanigans earlier this month gave them further ammunition amid concerns that the summer or “driving season” rise in US demand would cause prices to rise further still. That is despite the fact that the American market remains well supplied and largely unaffected by 132 million barrels of Libyan light sweet crude oil which the IEA reckons have disappeared from the market (until the end of May since the hostilities began).

Nonetheless, all this mega event does is add to the market fear and confirm that a perceptively short term problem is worsening! Long term hope remains that the Libyan supply gap would be plugged. Releasing portions of the SPRs would not alleviate market concerns and could even be a disincentive for the Saudis to pump more oil – although they made it blatantly obvious after the OPEC meeting deadlock on June 8 that they will up production. Now how they will react is anybody's guess?

Jason Schenker, President and Chief Economist of Prestige Economics, feels that while the decision is price bearish for crude oil in the immediate term, these measures are being implemented with the intent to stave off significantly higher prices in the near and medium term.

In a note to clients, Schenker notes: “The fact that the IEA had to go to these lengths in the second year of an expanding business cycle says something very bullish about crude oil prices in the medium and long term. The global economy is up against a wall in terms of receiving additional oil supplies to meet demand. Additional demand or supply disruption would have a massively bullish impact on prices. After all, releasing emergency inventories is a last resort.”

But must we resort to last resorts, just yet? While Sen. Bingaman would be happy, most in the market are worried. Some moan that Venezuelan and Iranian intransigence in Vienna brought this about. For what it is worth, the market trend was already bearish, Libya or no Libya. Concerns triggered by doubts about the US, EU and Chinese economies were aplenty as well as the end of QE2 liquidity injections coupled with high levels of non-commercial net length in the oil markets.

Some for instance like Phil Flynn, analyst at PFG Best, think the IEA’s move was “the final nail in the coffin for the embattled oil markets.” Let’s see what the agency itself makes of its move 30 days from now when it reassesses the situation.

Those interested in the intricacies of this event would perhaps also like to know how the sale takes place but we only have the US example to go by. Last time it happened – under the Bush administration on September 6, 2005 – of the 30 million barrels made available, only 11 million were actually sold to five bidders by the US energy department. Nine of a total of 14 bidders were rejected, with deliveries commencing in the third week of the month. What the take-up would be in all IEA jurisdictions this time around remains to be seen.

Medium term price sentiments according to the Oilholic’s feedback have not materially altered and so they shouldn’t either. An average of five City forecasts sees Brent at US$113.50 in Q3 2011, US$112.50 in Q4 11 and US$115 in Q1 2012. Finally, most city forecasters, and to cite one, remain “marginally” bullish for 2012 though no one, this blogger including, sees a US$150 price over 2012.

Finally to all of the Oilholic's American readers concerned about the rising price of gas, spare a thought for some of us across the pond. OPEC’s research suggests (click graph above) that much higher taxes in most national jurisdictions in this part of the world means we pay way more than you guys. That is not changing any time soon. Releases of SPRs woould not meaningfully ease price pressures at the pump for us.

© Gaurav Sharma 2011. Photo: Gas Station, Sunnyvale, California, USA © Gaurav Sharma, April 2011. Graphics: Who gets what from a litre of Oil? © OPEC Secretariat, Vienna 2010.

Crude Oil prices & some governments

I have spent the last two weeks quizzing key crude commentators in US and Canada about what price of crude oil they feel would be conducive to business investment, sit well within the profitable extraction dynamic and last but certainly not the least won't harm the global economy.

Beginning with Canada, since there’s no empirical evidence of the Canadian Dollar having suffered from the Dutch disease, for the oil sands to be profitable – most Canadians remarked that a price circa of US$75 per barrel and not exceeding US$105 in the long term would be ideal. On the other hand, in the event of a price dive, especially an unlikely one that takes the price below US$40 per barrel would be a disaster for petro-investment in Canada. A frozen Bow River (pictured above) is ok for Calgarians, but an investment freeze certainly wont be!

The Americans came up with a slightly lower US$70-90 range based on consumption patterns. They acknowledge that should the price spike over the US$150 per barrel mark and stay in the US$120-150 range over the medium term, a realignment of consumption patterns would occur.

This begs the question – what have Middle Eastern governments budgeted for? Research by commentators at National Commercial Bank of Saudi Arabia, the Oilholics’ feedback from regional commentators and local media suggests the cumulative average would be US$65 per barrel. Iran and Iraq are likely to have budgeted at least US$10 above that, more so in the case of the former while Saudi Arabia (and maybe Kuwait) would have budgeted for US$5 (to US$10) below that.

Problem for the Oilholic is getting access to regional governments’ data. Asking various ministries in the Middle East and expecting a straight forward answer, with the notable exception of the UAE, is as unlikely as getting a Venezuelan official to give accurate inflation figures.

Meanwhile, price is not the only thing holding or promoting investment. For instance, the recent political unrest has meant that the Egypt Petroleum Corp. has delayed the Mostorod refinery construction until at least May. The reason is simple – some 20-odd participating banks, who arranged a US$2.6 billion loan facility want the interim government to reaffirm its commitment to the project, according to a lawyer close to the deal. The government, with all due respect, has quite a few reaffirmations to make.

© Gaurav Sharma 2011. Photo: Bow River, Calgary, Alberta, Canada © Gaurav Sharma, April 2011