GS Caltex's rare buy & tankers in English Bay

It is great to be back in Vancouver, Canada for Christmas. Of course, no trip some 4,700 miles westward goes without the Oilholic taking his customary walk from the City’s Waterfront facing Vancouver Harbour to Beach Avenue facing English Bay, and watching both waterways interspersed with oil tankers of all description heading in and out of the Burrard Inlet to Port Moody. 

Business is ticking along even in trying times, if this blogger's unscientific assessment of traffic volume is anything to go by. At the moment, the Western Canadian Select (WCS) is seeing its weakest price since the first quarter of 2014, and hit sub $30 per barrel levels at one point this month with regional inventories at a record high. 

Kinda feels like the marginal oil price recovery of 2017 didn’t really hit these shores customarily used to trading their benchmark at a steep discount to the WTI (roughly $5-7 per barrel in the old days, typically $12-15 and currently well above $20). But such a pricing level brings in fresh interest too, and of course arbitrage opportunities depending on what’s afoot elsewhere. 

According to a Reuters report, South Korean refiner GS Caltex recently picked up a rare cargo of heavy Canadian crude from Vancouver.

It seems 300,000 barrels of Cold Lake heavy sour crude were loaded onto the Panamax Selecao on 13 December. The consignment may not be the last; the Cold Lake heavy sour is quite close to pricier Middle Eastern heavy crudes. 

Sources here also suggest other Asian refiners might want to go down GS Caltex’s path, including its domestic rival Hyundai Oilbank. If that were to materialise, as opposed to what is quite frankly a small trial consignment taken by GS Caltex, the crude world could see meaningful cargo dispatches from Canada to South Korea for the first time since 1995, and well more tankers on the English Bay horizon. 

Away from here, the latest rig counts from Baker-Hughes point to a decline in the number of Canadian rigs by 28 to 210, while the US rig count was broadly unchanged at 931, up one on the week before. Finally, here's the Oilholic's latest Forbes post on the 'OPEC put' versus direction of the oil market in 2018.

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

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© Gaurav Sharma 2017. Photo: Oil tankers at sunset on Vancouver's English Bay, British Columbia, Canada © Gaurav Sharma 2017. 

Chasing tankers in Beautiful British Columbia

The Oilholic has crossed the international dateline and has gone from being 6000 miles east of London in Tokyo, Japan to being 4700 miles west in "Beautiful British Columbia, Canada" as vehicle registration plates in Vancouver remind you with customary aplomb.

It’s a bit cloudy and tad soggy here, a marked contrast to sunny Tokyo. In between meeting family, friends and contacts, yours truly has also penned two Forbes columns – one on the direction of the South Korean economy and a second one on the oil price bottoming out.

This blogger would say it is all well and good that both global benchmarks – Brent and WTI – are lurking at or just below the $40 per barrel level, and some, including the International Energy Agency, are opining that prices may well have bottomed out. While accepting those sentiments is not difficult, China’s anticipated flat demand could spell trouble over the medium term, as one explained in the latter Forbes post. 

Shipping traffic out of this Canadian province where yours truly is at the moment, typifies the oil and gas world’s dependency on emerging markets in general and Far Eastern economies in particular, led by – who else – but China.

Wherever you admire BC’s amazing shoreline and Vancouver’s beautiful waterfronts – atop Grouse Mountain (above left), Concord Pacific Place in Downtown Vancouver (right), City Harbour inlet (below left), Port Moody or on the other side of the Burrard Inlet from English Bay beach (one's favourite spot) – you cannot miss umpteen oil and gas tankers either waiting to dock or waiting to leave with their crude cargo from the area.

Over the last 12 years on each visit to the area, the Oilholic has only seen the volume of traffic rise exponentially. Unsurprisingly, it causes much consternation among the very strong regional environmentalist groups. Their worst fears were heightened again by the spillage of bunker fuel in April 2015 off West Vancouver’s Sandy Cove.

Prior to that, there have been other incidents, though the most serious one dates back to July 2007 when an excavator working on a sewage line pierced a oil pipeline releasing more than 250,000 litres of crude oil. Nearly 70,000 litres flowed into the Burrard Inlet, with the resulting clear-up costing the province $20 million.

Yet loading and outflow of oil (and gas) from British Columbia, a province which has very little of its own and serves mainly as a transit point, to the Far East is only going to increase not decrease. In the last election, Canada’s new carbon footprint conscious Prime Minister Justin Trudeau’s Liberals bagged 17 of 42 seats in the province; their best result since 1968.

Some, to quote a retired civil servant and old contact, can be described as “tree huggers”, which is not necessarily a bad thing and there are plenty of trees to hug in BC. Tree huggers or not, Trudeau promptly appointed three of his MPs from BC to his cabinet. 

But with the Canadian economy going through a lacklustre patch, oil markets grappling with oversupply and China expected to buy less, the stakes are going to get higher even if the Western Canadian Select – which trades at a discount (currently above US$14) to the West Texas Intermediate – goes lower. Quite frankly, there is very little the carbon conscious PM can do here.

Furthermore, if anecdotal evidence is to be believed, BC Premier Christy Clark and her provincial Liberals were actually banking on an oil and gas boom in time for a 2017 regional election, eyeing both jobs and revenue.

Instead they, along with much of the oil and gas world, now have a complicated and prolonged bust on their hands, with the general direction of Canadian oil dispatches more than likely to be Eastwards, even if the US remains Canada’s largest trading partner for oil and much else. Just ask neighbouring Alberta; the politics (and economics) of it all is likely to get much more complicated! 

However, given lower demand from both Japan and China, it is quite likely that you might spot marginally fewer tankers in British Columbian waters. The Oilholic does stress on the word ‘marginally’ though, and that won't satisfy the tree huggers. That’s all for the moment from Vancouver folks! Next stop San Francisco, California, USA via short stopover in Phoenix, Arizona. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo I: View of Vancouver from Grouse Mountain, North Vancouver, Photo II: Concord Pacific Place, Downtown Vancouver, Photo III: City Harbour inlet, Vancouver, British Columbia, Canada © Gaurav Sharma, March 2016.

Viewing US oil output through Drillinginfo’s lens

Perceptions about massive a decline in US oil production currently being put forward with such fervour and the ground reality of an actual one taking place are miles apart; or should we say barrels apart. 

Assuming that a decline in production stateside would start eroding the oil supply glut thereby lending slow but sure support to the oil price is fine. But declarations on the airwaves by some commentators that a North American decline is already here, imminent or not that far off, sound too simplistic at best and daft at worst.

The Oilholic agrees that Baker Hughes rig count, which this blog and countless global commentators rely upon as a harbinger of activity in the sector, has shown a continual decline in operational rigs over recent weeks and months. However, that does not paint a complete picture.

Empirical and anecdotal data from Canada demonstrates that Western Canadians are aiming to do more with less. According to research conducted by the Canadian Association of Petroleum Producers (CAPP), fewer wells would be dug this year but production will actually rise on an annualised basis over 2015. That’s despite the fact that the Western Canadian Select fell to US$31 per barrel at one point.

There’s a similar story to be told in the US of A, and digital disruptors at Drillinginfo are doing a mighty fine job of narrating it. The Austin, Texas headquartered energy data analytics and SaaS-based decision support technology provider opines that much of the current conversation obsessively intertwines the oil price dip with a decline in activity, bypassing efficiencies of scale and operations achieved by US shale explorers.

“Our conjecture is that an evident investment decline does not imply that production is nose-diving in tandem. Quite the contrary, our research suggests exploration and production firms are 25% more efficient than they were three years ago,” says Tom Morgan, Analyst and Corporate Counsel at Drillinginfo.

It’s not that Drillinginfo is not recording dip in rig counts and new drilling projects coming onstream via its own DI Index. Towards the end of February, its US rig count stood at 1433, while new US oil production dipped 9% on the month before to 525 million barrels per day (bpd). However, if what’s quoted here sounds better than what you’ve heard elsewhere then it most probably is for one simple reason.

“What we put forward is in real-time. Two years ago, we started handing out GPS trackers to operators to latch on to their rigs. It was not easy convincing an old fashioned industry to immediately warm up to what we were attempting to do. It was a long drawn out process but we converted many people around to our viewpoint.

“At present, over 80% of rigs in continental US are reported on daily via Drillinginfo installed GPS units. In return, the participants get free access to our collated data. At this moment in time, not only can I point out each of these rigs via a heat signature (see image from January above left, click to enlarge), but also pinpoint the coordinates for you to locate one, drive there and verify yourself. I’d say our data is 99% accurate based on back testing and reconciling trends with our archives,” Morgan adds.

Drillinginfo also examines the actual spud of a well that's been drilled but not yet completed, as well as permit applications. “The thought process in case of the latter is that if you have applied for a permit to drill, then you are more than likely [if not a 100%] sure of going ahead with it.”

Drillinginfo saw a 24% decline in US permit application between January and February. This shows that investment is slowing down, yet at the same time operational wells are generally on song. With the end of first quarter of this year in sight, the US is still the world’s leading producer in barrels of oil equivalent terms.

Oil production continues to rise, albeit not in incremental volumes noted over the first and second quarters of last year prior to the slump. US producers, or shall we say those producers who can, are strategically lowering operations in less bankable or logistically less connected shale plays, while perking up production elsewhere.

For instance, while the collated production level at Bakken shale plays in North Dakota is declining, production at Eagle Ford shale in Texas has risen to 159,000 bpd; a good 26,000 bpd above levels seen towards the end of last year.  In terms of the type of wells, Drillinginfo sees older vertical wells bear the brunt of the slump, while production at onstream horizontal wells is either holding firm or actually rising a notch or two.

“No one is pretending that market volatility and the oil price slump isn’t worrying. What we are encountering is that shale players are trying to achieve profitability at a price level we could not imagine ten, five or even three years ago because technology has advanced and efficiencies have improved like never before,” Morgan adds.

While pretty reliable, feed-through of information via the Baker Hughes rig count is not real-time but looking backwards based on a telephone and electronic submission format. By that argument, the Oilholic finds what Drillinginfo has to say to be an eye-opener in the current climate, particularly in an American context. 

However, company man Morgan, who has known Drillinginfo's co-founder and CEO Allen Gilmer since both their freshmen years at Rice University back in the 1980s, has a more polished description.

“Today we talk of heat map of rigs, real-time data, rig movement monitoring, type and location of rigs going offline, and much more. I’d say we’re bringing agility via a digital medium to participants in a very traditional business.”

That agility and sense of perspective is something the industry does indeed crave, especially in the current climate. The Oilholic would say what Genscape is bringing to storage monitoring; Drillinginfo is bringing to upstream data analytics. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Graphic: Map of new US wells drilled in January 2015, and those drilled within the last six months © Drillinginfo, 2015

Oil markets & producers on a tricky skating rink

So we had a crude oil price plunge early January, followed by a spike that promptly "un-spiked", only to rise from the ashes and subsequently go down the path of decline again. Expect further slippage, more so as the last week of profit taking takes place before the March futures contracts close, which in ICE Brent’s case would be February 13.

Amid the ups and downs of the last six weeks, headline writers were left tearing their hair on a daily basis switching from "Brent extends rally" to "Oil slides despite OPEC talk of a floor" to "Falling Premiums" to "Crude oil getting hammered" and back to "Oil jumps". All the while commentators queued up with some predicting a return to a US$100 per barrel Brent price "soon", alongside those sounding warnings about a drop to $10.

The actual market reality is both here and nowhere, as we enter a period of constant slides and spikes between $40 and $60. There are those who say the current oil price level cannot be sustained and supply-side analysts, including the Oilholic, who say the current oil production levels cannot be sustained. Both parties are correct – a price spike and a supply correction will happen in tandem, but not overnight.

It will take at least until the summer for sentiments about lower production levels to feed through, if not longer. More so, as many are gearing up to produce more with less, for example in Western Canada where fewer wells would be dug this year, but the production tally would be higher than the previous year. Taking a macro viewpoint, all the chatter of bull runs, bear attacks and subsequent rallies is just that – chatter. Market fundamentals have not materially altered.

Despite the latest Baker Hughes data showing fewer operational rigs compared to this point last year, the glut persists and there is some way to go before it alters. Roughly around 5% of current global oil production is taking place at a loss. Yet producers are biting the bullet wary of losing market share. It'll take a lot longer than a few weeks of negative rig data in the new year, before someone eventually blinks and makes a substantial impact on production levels. The Oilholic reckons it will be around June.

Until then, expect the market to continue skating in the $40 to $60 rink. In fact, there is some justification in OPEC Secretary General Abdalla Salem El-Badri’s claim that oil prices have bottomed out. While we could have a momentary dip below $40, something which the Western Canadian Select has already faced. However, by and large benchmark prices have indeed found resistance above $40. 

Having said so, the careful thing to do between now and (at least) June would be to not get carried away by useless chatter. When Brent shed 11.44% in the first five trading days of January, only to more than recover the lost ground by the end of the month (see chart on the right, click to enlarge), some called it a mini-bull run.

Percentages are always relative and often misleading in the volatile times we see at the moment, as one noted in a recent Tip TV broadcast. So mini-bull run claims were laughable. As for the eventual supply correction, capex reduction is already afoot. BP, Shell, BG Group and several other large and small companies have announced spending cuts. A recent Genscape study of 95 US exploration and production (E&P) companies noted a cumulative capex decline of 27%, from $44.5 billion last year to a projected $32.5 billion this year.

Meanwhile, Igor Sechin, the boss of Russia’s Rosneft has denied the country would be the first to blink and lower production in a high stakes game. Quite the contrary, Sechin compared the US shale boom to the dotcom bubble and rambled about the American position not being backed up by crude reserves.

He also accused OPEC along familiar lines of conspiring with Western nations, especially the US, to hurt Russia. Moving away from silly conspiracy theories, Sechin does have a point – the impact of a lower oil price on shale is hard to predict and is currently being put to test. We’ll know more over the next two to three quarters.

However, comparing the shale bonanza to the dotcom bubble suggests wilful ignorance of a few basic facts. Unlike the dotcom bubble, where a plethora of so-called technology firms put forward their highly leveraged, unproven, profit lacking ventures pitched to investors by Wall Street as the next big thing, independent shale oil upstarts have a ready, proven product to sell in barrels.

Of course, operational constraints and high levels of leveraging remain burdensome in a bearish oil market. While that might cause difficulties for fringe shale players, established ones will carry on regardless and find ways to mitigate exposure to volatility.

In case of the dotcom bubble, where some had nothing of proven tangible value to sell, independents tipped over like dominos when the bubble burst, apart from those who had a plan. For instance, the likes of Amazon or eBay have survived and thrived to see their stock price recover well above the dotcom boom levels.

Finally, in case of US shale players, ingenuity of the wildcatters catapulted them to where they are with a readily marketable product to sell. There is anecdotal evidence of that same ingenuity kicking in tandem with extraction process advancements thereby making E&P activity viable even at a $40 Brent price for many if not all.

So it's not quite like Pets.com if you know what the Oilholic means. Sechin’s point might be valid but its elucidation is daft. Furthermore, US shale players might have troubling days ahead, but trouble is something the Russian oil producers can see quite clearly on their horizon too. Additionally, shale plays have technological cooperation aimed at lowering costs on their side. Sanctions mean sharing of international technology to sustain or boost production as well as lower costs is off limits for the moment for Russia.

On a closing note, its being hotly disputed these days whether and by how much lower oil prices boost global economic activity, as one noted in a recent World Finance journal video broadcast. Entering the debate this week, Moody’s said lower oil prices might well give the US economy a boost in the next two years, but will fail to lift global growth significantly as headwinds from the Eurozone, China, Brazil and Japan would dent economic activity.

Despite lower oil prices, the agency has maintained its GDP growth forecast for the G20 countries at just under 3% in both 2015 and 2016, broadly unchanged from 2014. Moody's outlook is based on the assumption that Brent will average $55 in 2015, rising to $65 on average in 2016. 

It assumes that oil prices will stay near current levels in 2015 because demand and supply conditions are "unlikely to change markedly" in the near future, as The Oilholic has been banging on many a blog post including this one. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Danger of slipping sign. Graph: Oil Benchmark Prices, January 2015 © Gaurav Sharma

The $40-50 range, CAPP on Capex & Afren's woes

The first month of oil trading in 2015 is coming to a much calmer end compared to how it began. The year did begin with a bang with Brent shedding over 11% in the first week of full trading alone. Since then, the only momentary drama took place when both Brent and WTI levelled at US$48.05 per barrel at one point on January 16. Overall, both benchmarks have largely stayed in the $44 to $49 range with an average Brent premium of $3+ for better parts of January.

There is a growing realisation in City circles that short sellers may have gotten ahead of themselves a bit just as those going long did last summer. Agreed, oil is not down to sub-$40 levels seen during the global financial crisis. However, if the price level seen then is adjusted for the strength of the dollar now, then the levels being seen at the moment are actually below those seen six years ago.

The big question right now is not where the oil price is, but rather that should we get used to the $40 to $50 range? The answer is yes for now because between them the US, Russia and Saudi Arabia are pumping well over 30 million barrels per day (bpd) and everyone from troubled Libya to calm Canada is prodding along despite the pain of lower oil prices as producing nations.

The latter actually provides a case in point, for earlier in January the Western Canadian Select did actually fall below $40 and is just about managing to stay above $31. However, the Oilholic has negligible anecdotal evidence of production being lowered in meaningful volumes.

For what it’s worth, it seems the Canadians are mastering the art of spending less yet producing more relative to last year, according to the Canadian Association of Petroleum Producers (CAPP). The lobby group said last week that production in Western Canada, bulk of which is accounted for by Alberta, would grow by 150,000 bpd to reach 3.6 million bpd in 2015. 

That’s despite the cumulative capex tally of major oil and gas companies seeing an expected decline of 33% on an annualised basis. The headline production figure is actually a downward revision from CAPP’s forecast of 3.7 million bpd, with an earlier expectation of 9,555 wells being drilled also lowered by 30% to 7,350 wells. Yet, the overall production projection is comfortably above 2014 levels and the revision is nowhere near enough (yet) to have a meaningful impact on Canada’s contribution to the total global supply pool. 

Coupled with the said global supply glut, Chinese demand has shown no signs of a pick-up. Unless either the supply side alters fundamentally or the demand side perks up, the Oilholic thinks the current price range for Brent and WTI is about right on the money. 

But change it will, as the current levels of production simply cannot be sustained. Someone has to blink, as yours truly said on Tip TV – it’s likely to be the Russians and US independent upstarts. The new Saudi head of state - King Salman is unlikely to change the course set out by his late predecessor King Abdullah. In fact, among the new King’s first acts was to retain the inimitable Ali Al-Naimi as oil minister. 

Greece too is a non-event from an oil market standpoint in a direct sense. The country does not register meaningfully on the list of either major oil importers or exporters. However, its economic malaise and political upheavals might have an indirect bearing via troubles in the Eurozone. The Oilholic sees $1= €1 around the corner as the dollar strengthens against a basket of currencies. A stronger dollar, of course, will reflect in the price of both benchmarks.

In other news, troubles at London-listed Afren continue and the Oilholic has knocked his target price of 120p for the company down to 20p. First, there was bolt out of the blue last August that the company was investigating “receipt of unauthorised payments potentially for the benefit of the CEO and COO.” 

Following that red flag, just recently Afren revised production estimates at its Barda Rash oilfield in the Kurdistan region of Iraq by 190 million barrels of oil equivalent. The movement in reserves was down to the 2014 reprocessing of 3D seismic shot in 2012 and processed in 2013, as well as results from its drilling campaign, Afren said. 

It is presently thinking about utilising a 30-day grace period under its 2016 bonds with respect to $15 million of interest due on 1 February. That’s after the company confirmed a deferral of a $50 million amortisation payment due at the end of January 2015 was being sought. Yesterday, Fitch Ratings downgraded Afren's Long-term Issuer Default Rating (IDR), as well as its senior secured ratings, to 'C' from 'B-'. It reflects the agency’s view that default was imminent.

Meanwhile, S&P has downgraded Russia’s sovereign rating to junk status. The agency now rates Russia down a notch at BB+. “Russia’s monetary-policy flexibility has become more limited and its economic growth prospects have weakened. We also see a heightened risk that external and fiscal buffers will deteriorate due to rising external pressures and increased government support to the economy,” S&P noted.

Away from ratings agencies notes, here is the Oilholic’s take on what the oil price drop means for airlines and passengers in one’s latest Forbes piece. Plus, here’s another Forbes post touching on the North Sea’s response to a possible oil price drop to $40, incorporating BP’s pessimistic view that oil price is likely to lurk around $50 for the next three years.

For the record, this blogger does not think oil prices will average around $50 for the next three years. One suspects that neither does BP; rather it has more to do with prudent forward planning. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Oil pipeline with Alaska's Brooks Range in the background, USA © Michael S. Quinton / National Geographic

The tale of Alberta's first commercial oilfield

A quaint town called Turner Valley in Alberta, Canada may not mean much to the current crop of oil and gas industry observers. However, it has a special place in British history as well as that of the industry itself. Back in 1914, the town acquired the status of Western Canada's oil hub and had the country's first commercial oilfield which, for a while, was the largest oil and gas production base in the entire British Empire as it stood then.

 

Hell’s Half Acre by David Finch is a meticulously researched and entertaining tale of the townsfolk of Turner Valley, and those who came from further afield to make it all happen back in the day. The author, who has been researching the social history of Western Canada’s oil and gas industry since the 1980s and has no fewer than 15 books about the region to his name, recounts where it all began in earnest for the province.

 

The drilling rigs, processing plants and pipelines are all there, and so are anecdotes of the wildcatters and workers who put it all in place, who made it happen and who lived to tell their tales. In order to make for a lively narration, Finch has gelled archived material and the dozens of interviews he conducted extremely well. But this pragmatic book of just over 200 pages, not only narrates a tale of commercial success, but also what costs were paid by Turner Valley in its (and by default) Canada's historic quest for black gold; an effort, which as fate would have it, was sandwiched between the two World Wars.

 

Hell's Half Acre is a very real place in a coulee just outside of Turner Valley, writes Finch. For two decades, companies piped excess natural gas to the lip of this gorge and burned it – in order to produce valuable gasoline they had to also produce the natural gas for which there were limited markets at the time. In fact, the glowing sky could be seen as far south west as Calgary, the author tells us.

 

Canada's national treasure also became a military target for while. At its height, and before peaking in 1942, the Turner Valley provided 10 million barrels per day towards the Allied War Effort. As you would expect, what was then (and still is) a cyclical industry saw its own booms and busts. The companies and their cast of characters from Turner Valley have also been delved into, and in some detail, by Finch.

 

The Oilholic first came across this book on a visit to Calgary and a chance visit to DeMille Bookstore at the recommendation of a local legal expert. For that, this blogger is truly grateful to all parties concerned, and above all to the author for enriching one's knowledge about this fascinating place. Hence, this review was long overdue!

 

Today Turner Valley, a harbinger of the success of Canada's oil and gas industry, is known for tourism, leisure and for being the hometown of Laureen Harper, the frank and vivacious wife of Prime Minister Stephen Harper. So Finch's colourful book could serve as a timely reminder of the importance of a bygone era as Turner Valley begins the countdown to its centennial celebrations of the 1914 discovery of oil.

 

The Oilholic is happy to recommend this book to all those interested in the history of the oil and gas business, origins of the Canadian energy industry, Alberta's place in the global geopolitical oil and gas equation and last, but not the least, anyone seeking a riveting book about the Great Alberta Oil Patch.

 

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© Gaurav Sharma 2013. Photo: Front Cover – Hell’s Half Acre © Heritage House Publishing

North Sea & the 'crude' mood in Aberdeen

The Oilholic spent the wee hours of this morning counting the number of North Sea operational support ships docked in Aberdeen Harbour. Interestingly enough, of the nine in the harbour, six were on the Norwegian ships register.

Whether you examine offshore oil & gas activity in the Norwegian sector of the North Sea or the British sector, there is a sense here that the industry is enjoying something of a mini revival if not a full blown renaissance. As production peaked in the late 1990s, empirical evidence that oil majors had begun looking elsewhere for better yields started emerging. Some even openly claimed they’d given up.

Over a decade later, with new extraction techniques and enhanced hydrocarbon recovery mechanisms in vogue – a different set of players have arrived in town from Abu Dhabi National Energy Company (TAQA) to Austria's OMV, from Canada's Talisman Energy to China's Sinopec. Oil recovery from mature fields is now the talk of the town.

Even the old hands at BP, Shell and Statoil – who have divested portions of their North Sea holdings – seem to be optimistic. The reason can be found in the three figure price of Brent! Most commentators the Oilholic has spoken to here, including energy economists, taxation experts, financiers and one roughneck [with 27 years of experience under his belt] are firmly of the view that a US$100 per barrel price or above supports the current level of investment in mature fields.

One contact remarks that the ongoing prospection and work on mature fields can even take an oil price dip to around $90-level. "However, anything below that would make a few project directors nervous. Nonetheless, the connect with between Brent price fluctuation and long term planning is not as linear as is the case between investment in Canadian oil sands projects and the Western Canadian Select (WSC) price."      

To put some context, the WSC was trading at a $30 per barrel discount to the WTI last time yours truly checked. Concurrently, Brent's premium to the WTI, though well below historic highs, is just shy of $10 per barrel. Another contact, who retains faith in the revival of the North Sea hypothesis, says it also bottles down to the UK's growing demand for natural gas.

"It's what'll keep West of Shetland prospection hot. Furthermore, and despite concern about capacity constraints, sound infrastructural support is there in the shape of the West of Shetland Pipeline (WOSP) which transports natural gas from three offshore fields in the area to Sullom Voe Terminal [operated by BP]."

While further hydrocarbon discoveries have been made atop what's already onstream, they are not yet in the process of being developed. That's partially down to prohibitive costs and partially down to concerns about WOSP's capacity. However, that's not dampening the enthusiasm in Aberdeen.

Five years ago, many predicted a rig and infrastructure decommissioning bonanza to be a revenue generator and become a thriving industry itself. "But enhanced oil recovery schemes keep pushing this 'bonanza' back for another day. This in itself bears testimony to what's afoot here," says one contact.

UK Chancellor George Osborne also appears to be listening. In his budget speech on March 20, he said that the government would enter into contracts with companies in the sector to provide "certainty" over tax relief measures. That has certainly cheered industry players in Aberdeen as well the lobby group Oil & Gas UK.

"The move by the Chancellor gives companies the certainty they need over the tax treatment of decommissioning. At no cost to the government, it will speed up asset sales and free up capital for companies to use for investment, extending the productive life of the UK Continental Shelf," a spokesperson says, echoing what many here have opined.

Osborne's budget speech also had one 'non-crude' bit of good news for the region. The Chancellor revealed that one of the two bidders for the UK government's £1 billion support programme for Carbon Capture and Storage (CC&S) is the Peterhead Project here in Aberdeenshire. Overall, the industry sounds optimistic, just don't mention the 'R-word'. Scotland is due to hold a referendum on September 18, 2014 on whether it wants to be independent or remain part of the United Kingdom.

Hardly any contact in a position of authority wants to express his/her opinion on record with the description of political 'hot potato' attributed to the referendum issue by many. The response perhaps is understandable. It's an issue that is dividing colleagues and workforces throughout the length and breadth of Scotland.

General consensus among commentators seems to be that the industry would be better off in a 'United' Kingdom. However, even it were to become a 'Disunited' Kingdom come September 2014, industry veterans believe the global nature of the oil & gas business and the craving for hydrocarbons would imply that the sector itself need not be spooked too much about the result. National opinion polls suggest that most Scots currently prefer a United Kingdom, but also that a huge swathe of the population is as yet undecided and could be swayed either way.

In a bid to conduct an unscientific yet spirited opinion poll of unknown people since known ones were unwilling, the Oilholic quizzed three taxi drivers around town and four bus drivers at Union Square. Result – two were in the 'Yes to independence' camp, four were in the 'No' camp and one said he'd just about had enough of the 'ruddy question' being everywhere from newspapers to radio talk shows, to a stranger like yours truly asking him and that he couldn't give a damn!

Moving away from the politics and the projects to the crude oil price itself, where black gold has had quite a fortnight in the wake of a US political stalemate with regard to the country's debt ceiling. Nervousness about the shenanigans on Capitol Hill and the highest level of US crude oil inventories in a while have pushed WTI’s discount to Brent to its widest in nearly three months by this blogger's estimate.

Should the unthinkable happen and the political stalemate over the US debt ceiling not get resolved, it is the Oilholic's considered viewpoint that Brent is likely to receive much more support at $100-level than the WTI, should bearish trends grip the global commodities market. This blogger has maintained for a while that the WTI price still includes undue froth in any case, thereby making it much more vulnerable to bearish sentiment. 

Just one final footnote, before calling it a day and sampling something brewed in Scotland – according to a recent note put out by the Worldwatch Institute, the global commodity 'supercycle' slowed down in 2012. In its latest Vital Signs Online trends report, the institute noted that global commodity prices dropped by 6% in 2012, a marked change from the dizzying growth during the commodities supercycle of 2002-12, when prices surged an average of 9.5% per annum, or 150% over the stated 10-year period.

Worldwatch Institute says that during the supercycle, the financial sector took advantage of the changing landscape, and the commodities market went from being "little more than a banking service as an input to trading" to a full-fledged asset class; an event that some would choose to describe as "assetization of commodities" and that most certainly includes black gold. Supercycle or not, there is no disguising the fact that large investment banks participate in both financial as well as commercial aspects of commodities trading (and will continue to do so).

Worldwatch Institute notes that at the turn of the century, total commodity assets under management came to just over $10 billion. By 2008 that number had increased to $160 billion, although $57 billion of that left the market that year during the global financial crisis. The decline was short-lived, however, and by the end of the third quarter in 2012, the total commodity assets under management had reached a staggering $439 billion.

Oil averaged $105 per barrel last year and a slowdown in overall commodity price growth was indeed notable, but Worldwatch Institute says it is still not clear if the so-called supercycle is completely over. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo 1: North Sea support ships in Aberdeen Harbour. Photo 2: City Plaque near ferry terminal, Aberdeen, Scotland © Gaurav Sharma, October 2013.

Non-OPEC supply, volatility & other matters

One of the big beasts of the non-OPEC supply jungle – Russia – held its latest high level meeting with OPEC earlier this week. Along with the customary niceties came the expected soundbites when Alexander Novak, Minister of Energy of the Russian Federation and Abdalla Salem El-Badri, OPEC Secretary General, met in Vienna on Tuesday.

 

Both men accompanied by “high-level” delegations exchanged views on the current oil market situation and “underscored the importance of stable and predictable markets for the long term health of the industry and investments, and above all, the wellbeing of the global economy.”

 

OPEC is also eyeing Russia’s Presidency of the G-20 in 2013 where the cartel has only one representative on the table in the shape of Saudi Arabia, which quite frankly represents itself rather than the block. However, non-OPEC suppliers are aplenty – Canada, Brazil, Mexico and USA to name the major ones alongside the Russians. The Brits and Aussies have a fair few hydrocarbons to share too.

 

Perhaps in light of that, OPEC and Russia have proposed to broaden their cooperation and discuss the possible establishment of a joint working group focused on information exchange and analysis of the petroleum industry. The two parties will next meet in the second quarter of 2013 by which time, unless there is a geopolitical flare-up or a massive turnaround in the global economy, most believe healthy non-OPEC supply growth would have actually been offset by OPEC cuts.

 

So the Oilholic thinks there’s quite possibly more to the meeting on September 25 than meets the eye…er…press communiqué. Besides, whom are we kidding regarding non-OPEC participants? Market conjecture is that non-OPEC supply growth itself is likely to be moderate at best given the wider macroeconomic climate.

 

Mike Wittner, global head of oil research at Société Générale, notes that non-OPEC supply growth is led by rapid gains in North America: tight oil from shale in the US and oil sands and bitumen in Canada. North American supply is forecast to grow by 1.04 million barrels per day (bpd) in 2012 and 0.75 million bpd in 2013. The reason for the overall higher level of non-OPEC growth next year, compared to 2012, is that this year’s contraction in Syria, Yemen, and South Sudan has  already taken place and will not be repeated.

 

“We are projecting output in Syria and Yemen flat through 2013, with disruptions continuing; we are forecasting only small increases in South Sudan beginning well into next year, as the recent pipeline agreement with Sudan appears quite tenuous at this point. With non-OPEC supply growth roughly the same as global demand growth next year, OPEC will have to cut crude production to balance the market,” he added.

 

With more than anecdotal evidence of the Saudis already trimming production, Société Générale reckons total non-OPEC supply plus OPEC NGLs production may increase by 0.93 million bpd in 2013, compared to 0.75 million bpd in 2012. Compared to their previous forecast, non-OPEC supply plus OPEC NGLs growth has been revised up by 50,000 bpd in 2012 and down by 60,000 bpd in 2013. That’s moderate alright!

 

The key point, according to Wittner, is that the Saudis did not replace the last increment of Iranian flow reductions, where output fell by 300 kb/d from May to July, due to EU and US sanctions. “The intentional lack of Saudi replacement volumes was – in effect – a Saudi cut; or, if one prefers, it was the Saudis allowing Iran to unintentionally and unwillingly help out the rest of OPEC by cutting production and exports,” he concluded.

 

Let’s see what emerges in Vienna at the December meeting of ministers, but OPEC crude production is unlikely to average above 31.5 million bpd in the third quarter of 2012 and is likely to be cut further as market fundamentals remain decidedly bearish. In fact, were it not for the geopolitical premium provided by Iran’s shenanigans and talk of a Chinese stimulus, the heavy losses on Wednesday would have been heavier still and Brent would not have finished the day remaining above the US$110 per barrel mark.

 

On a related note, at one point Brent's premium to WTI increased to US$20.06 per barrel based on November settlements; the first move above the US$20-mark since August 16. As a footnote on the subject of premiums, Bloomberg reports that Bakken crude weakened to the smallest premium over WTI oil in three weeks as Enbridge apportioned deliveries on pipelines in the region in Tuesday’s trading.

 

The Western Canadian Select, Canada’s most common benchmark, also usually sells at a discount to the WTI. But rather than the “double-discount” (factoring in WTI’s discount to Brent) being something to worry about, National Post columnist Jameson Berkow writes how it can be turned into an advantage!

 

But back to Europe where Myrto Sokou, analyst at Sucden Financial Research, feels that very volatile and nervous trading sessions are set to continue as Eurozone‘s concerns weigh on market sentiment. “The rebound on Thursday morning followed growing discussions of a further stimulus package from China that improved market sentiment and increased risk appetite,” she said.

 

However, Sokou sees the market remaining focussed on Spain as news of its first draft budget for 2013 is factored in. “It is quite a crucial time for the markets, especially following the recent refusal from Germany, Holland and Finland to allow ESM funds to cover legacy assets, so that leaves the Spanish Government to fund their Banks,” she added.

 

On the corporate front, Canadians find themselves grappling with the Nexen question as public sentiment is turning against CNOOC’s offer for the company just as its shareholders approved the deal. Many Members of Parliament have also voiced their concerns against a deal with the Chinese NOC. For its part, if a Dow Jones report is to be believed, CNOOC is raising US$6 billion via a one-year term loan to help fund the possible purchase of Nexen. The Harper administration is yet to give its regulatory approval.

 

Meanwhile, the Indian Government has confirmed that one of its NOCs – ONGC Videsh – has made a bid to acquire stakes in Canadian oil sands assets owned by ConocoPhillips with a total projected market valuation of US$5 billion. ConocoPhillips aims to sell about 50% of its stake in emerging oil sands assets, according to news reports in Canada. Looks like one non-OPEC destination just won’t stop grabbing the headlines!

 

Moving away from Canada, Thailand’s state oil company PTTEP has finalised arrangements for its US$3.1 billion share offer for Mozambique’s Cove Energy. Earlier this year, PTTEP won a protracted takeover battle for Cove over Shell. Concluding on a lighter note, the Oilholic has learned that the Scottish distillery of Tullibardine is to become the first whisky distillery in the world to have its by-products converted into advanced biofuel, capable of powering vehicles fuelled by petrol or diesel.

 

The independent malt whisky producer in Blackford, Perthshire has signed a memorandum of understanding with Celtic Renewables Ltd, an Edinburgh-based company which has developed the technology to produce biobutanol from the by-products of whisky production. Now that’s worth drinking to, but it’s all for the moment folks! Keep reading, keep it ‘crude’!

 

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