Keystone XL revisited, some results & fossil fuels

Despite it having been a mad few days of 'crude' results, the Oilholic feels there is only one place to start this post – the US State Department's recent take on the Keystone XL project.

The Department's review of the project or should you like formalities – its Final Supplemental Environmental Impact Statement – noted that it had "no objections" on any major environmental grounds to the cross-border 1,179 mile-long Alberta to Texas pipeline extension project.

Its take, of course, pertains to 875 miles of proposed pipeline construction across US jurisdictional control which has been the subject of immense controversy with everyone from the American workers' unions [flagging-up job creation] to environmentalists [warning about risk of spillage] weighing in.

So is the end of the saga close with a thumbs-up from the State Department? Sadly, not quite, not yet! A 30-day public comment period has begun and is scheduled to end on March 7. During this time, "members of the public and other interested parties" are encouraged to submit comments on "the national interest determination."

Then the ultimate decision has to be made by the ditherer-in-chief, President Barack Obama, who is yet to make his mind up, pending reviews from "other government agencies" and the public at large.

As expected, the State Department's statement is full of waffle. Hoping not to annoy either those for or against the project, it took no firm stances in the Oilholic's opinion. However, there is one very clear, in fact explicit, conclusion by the department, from this blogger's reading of it – Alberta's oil sands will be developed Keystone XL or not!

In a related development impact assessment, it also noted – perhaps in no small part down to recent incidents and accidents – that using the rail network to transport crude was an even worse option than the pipeline itself, if a carbon footprint was the deciding factor. The so-called "other agencies", most notably the Environmental Protection Agency, now have around 90 days to comment before the State Department finally issues its "final" recommendation to the President.

Then there would be no excuses or reasons for stalling left and we should know either ways by the summer. One thing is for sure, the Americans have formally acknowledged that cancelling the pipeline extension won't stop E&P activity in the oil sands. So if that's what the environmentalists are after, there's some food for thought. One wishes, the State Department read this blog more often. Yours truly could have saved them a lot of time and money in reaching such a blatantly obvious conclusion.

For TransCanada's sake, which first applied for a permit from the US government as far back as 2008, the Oilholic hopes the US$7 billion project does go ahead. Stepping away from pipeline politics, to some 'crude' financial results over the past week, one cannot but feel for BG Group's Chief Executive Chris Finlayson.

In a geopolitically sensitive industry, Finlayson's team could not be apportioned blame when he announced that group earnings would dip by 33% on an annualised basis to around $2.2 billion, owing to unrest in Egypt. In the backdrop of domestic strife, the Egyptian government has not honoured agreements covering BG Group's share of gas from fields in the country, with high levels of gas being diverted to the domestic market.

Unable to fulfil its export obligations, the company had to serve force majeure notices to affected buyers and lenders, in effect releasing all sides from contractual obligations for circumstances beyond their control. Hence, a company deemed to be high-flier in the oil & gas world was - albeit temporarily - made to look like a low-flapper boosted by occasional gusts of gas...er sorry wind!

As Egypt accounts for over 20% of its annual production at present – BG Group's profit warning made its shares take a plastering following the trading update on January 27, dipping 18% at one point. The price is currently in the £10 to £11 range and most analysts are nonplussed. For instance, Liberum Capital cut BG Group to hold from buy, with the target cut from £14.75 to £12.80. Investec analyst Neill Morton cut the group's EPS forecast for 2014 and 2015 by 22% and 16% respectively.

"However, we do not believe that a takeover is likely (or even possible?) for a $60 billion company which is likely to command a substantial takeover premium. The key challenges over the next 18 months are the developments in Brazil and Australia which still run the risk of further issues, in our view (for e.g. the Brazil development is being done by Petrobras)," Morton added.

While BG Group was warning on profits, supermajor Shell wasn't exactly covering itself in glory. Following on from a pretty substantial profits warning, Shell's profits [outstripping the effect of oil price fluctuations came] in at $2.9 billion for the last quarter of 2013, down from $5.6 billion noted over the same period in 2012. The market was already well prepared for a dip in performance from Shell, but much to this blogger's surprise, new chief executive Ben van Beurden said the company's strategy presentation [slated for March 13] would contain no fresh targets on production, capex and asset disposal.

Odd indeed, and if one might humbly add – Shell's asset disposal, especially if similar drives at BP, Chevron and ConocoPhillips are to be used as measuring rods, seems a bit random! The Anglo-Dutch company said it was targeting disposals of $15 billion in the current financial year, and had stopped exploration in Alaska.

Its stake in the Australian Wheatstone project is expected to go, and a 23% stake in the Brazilian Parque das Conchas (BC-10) offshore project already has gone, subject to regulatory approvals. Ratings agency Fitch said such moves were positive, but added: "It remains to be seen whether Shell will take the opportunity that this flexibility affords it to retrench, or be tempted into shareholder friendly actions that could threaten its 'AA' credit rating."

Finally, ExxonMobil – biggest of the publicly traded IOCs by market value – also saw its profits below market expectations after a failure to offset declining production with fresh reserves. For the fourth quarter, it posted a net income of $8.35 billion, or $1.91 per share, compared with $9.95 billion, or $2.20 per share, over the same quarter in 2012. Those picky analysts were hoping for $1.92 to $1.94 per share – some will never be pleased!

Forget the analysts, here's an interesting article on what Warren Buffet sees in ExxonMobil to help draw conclusions on the "quintessential defensive stock." In response to his company's latest financials, chief executive Rex Tillerson promised to move ahead with new exploration projects.

Away from results, oil majors and minors ought to take notice as it seems oil might be overtaken by coal as the dominant primary energy source worldwide by 2017, according to the IEA. Adding further weight to this hypothesis, Worldwatch Institute's recent Vital Signs Online study noted that natural gas increased its share of energy consumption from 23.8% to 23.9% during 2012, coal rose from 29.7% to 29.9%, while oil fell from 33.4% to 33.1%.

Coal, natural gas, and oil, collectively accounted for 87% of global primary energy consumption in 2012. Finally, OPEC's 'long-standing' Secretary General Abdalla Salem El-Badri has said its member nations will be able to handle the extra oil "expected to come from Iran, Iraq and Libya" to head off any oversupply.

We believe you sir, but it'll be kinda hard to keep a trio gagging for an export impetus to toe the line, say us supply-side analysts. Hopefully, oversupply or even the perception of oversupply should bring the price of the crude stuff down a fraction and may be price positive for consumers. Hence, a month into 2014, yours truly stands by his price forecast. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo 1: The White House, Washington DC, USA © Gaurav Sharma, April 2008. Photo 2: Shell tanker truck at Muscat International Airport, Oman © Gaurav Sharma, August 2013.

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’!

To follow The Oilholic on Twitter click here.

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.