Crude prices: Syrian conundrum & bearish trends

As the immediate threat of a US-led campaign against Syria recedes, some semblance of decidedly bearish calm has returned to the oil markets. The last two weeks have seen steady declines in benchmark prices as the Assad regime agreed to a Russian-led initiative aimed at opening up the Syrian chemical weapons arsenal to international inspection. Jury is still out on whether it will work, but that’s enough to keep the oil market bulls in check.

 

Supply-side analysts also took comfort from the improving situation in terms of Libyan production. However, an appreciable caveat needs to be taken into account here. Libya’s oil production has recovered, but only to about 40% of its pre-war rate of 1.6 million barrels per day (bpd), and is currently averaging no more than 620,000 bpd, according to the government.

 

A further lull in violence in Egypt has helped calm markets as well. Much of the market fear in this context, as the Oilholic noted from Oman a few weeks ago, was invariably linked to the potential for disruption to tanker traffic through the Suez Canal which sees 800,000 barrels of crude and 1.5 million barrels of petroleum distillate products pass each day through its narrow confines.

 

Furthermore, it wasn’t just the traffic between the Red Sea and the Mediterranean Sea via the canal that was, and to a certain extent still is, an area of concern. Disturbances could also impact the Suez-Mediterranean pipeline which ferries through another 1.7 million bpd. Syria, Libya and Egypt aside, Iran is sending conciliatory notes to the US for the first time in years in its nuclear stand-off with the West.

 

Factoring in all of this, the risk premium has retreated. Hence, we are seeing are near six-week lows as far as the Brent forward month futures contract for November goes. There is room for further correction even though winter is around the corner. On a related note, the WTI’s discount to Brent is currently averaging around US$5 per barrel and it still isn’t, and perhaps never will be, sufficiently disconnected from the global geopolitical equation.

 

Shame really, for in what could be construed further price positive news for American consumers, the US domestic crude production rose 1.1% to 7.83 million bpd for the week that ended September 13. That’s the highest since 1989 according to EIA. At least for what it’s worth, this is causing the premium of the Louisiana Light Sweet (LLS) to the WTI to fall; currently near its lowest level since March 2010 (at about $1.15 per barrel).

 

Moving away from pricing matters, the Oilholic recently had the chance to browse through a Fitch Ratings report published last month which seemed to indicate that increasing state control of Russian oil production will make it harder for private companies to compete with State-controlled Rosneft. Many commentators already suspect that.

 

Rosneft's acquisition of TNK-BP earlier this year has given the company a dominant 37% share of total Russian crude production. It implies that the state now controls almost half of the country's crude output and 45% of domestic oil refining.

 

Fitch analyst Dmitri Marinchenko feels rising state control is positive for Rosneft's credit profile but moderately negative for independent oil producers. “The latter will find it harder to compete for new E&P licences, state bank funding and other support,” he adds.

 

In fact, the favouring of state companies for new licences is already evident on the Arctic shelf, where non-state companies are excluded by law. However, most Russian private oil producers have a rather high reserve life, and Marinchenko expects them to remain strong operationally and financially even if their activities are limited to onshore conventional fields.

 

“We also expect domestic competition in the natural gas sector to increase as Novatek and Rosneft take on Gazprom in the market to supply large customers such as utilities and industrial users. These emerging gas suppliers are able to supply gas at lower prices than the fully regulated Gazprom. But this intensified competition should not be a significant blow to Gazprom as it generates most of its profit from exports to Europe, where it has a monopoly.”

 

There is a possibility that this monopoly could be partly lifted due to political pressure from Rosneft and Novatek. But even if this happens, Marinchenko thinks it is highly likely that Gazprom would retain the monopoly on pipeline exports – which would continue to support its credit rating.

 

Continuing with the region, Fitch also said in another report that the production of the first batch of the crude stuff from the Kashagan project earlier this month is positive for Kazakhstan and KazMunayGas. The latter has a 16.8% stake in the project.

 

Eni, a lead member of North Caspian Operating Company, which is developing Kashagan, has said that in the initial 2013-14 phase, output will grow to 180,000 bpd, compared with current output from Kazakh oilfields of 1.6 million bpd. Kashagan has estimated reserves of 35 billion barrels, of which 11 billion barrels are considered as recoverable.

 

The onset of production is one reason Fitch expects Kazakhstan's economic growth rate to recover after a slight slowdown in 2012. Meanwhile, KazMunayGas expects the Kashagan field to make a material contribution to its EBITDA and cash flow from next year, the agency adds.

 

Increased oil exports from Kashagan will also support Kazakhstan's current account surplus, which had been stagnating thanks to lower oil prices. However, Fitch reckons foreign direct investment may decline as the first round of capital investment into the field slows.

 

What's more, China National Petroleum Company became a shareholder in Kashagan with an 8.3% stake earlier this month. Now this should certainly help Kazakhstan increase its oil supplies to China, which are currently constrained by pipeline capacity. Watch this space! 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: Oil production site, Russia © Lukoil

On Bukha’s oil & the beauty of Khasab

The Oilholic finds himself roughly 27 km west of Khasab, here in Oman in the wilayat (district) of Bukha on the Musandam peninsula. This area has its own 'crude' place in the history of Omani oil & gas production.

Not far off its coastline is what the government has designated as offshore exploration Block 8 – a unique prospection zone in a country whose main production hubs are largely onshore.

What's more, according to a roughneck based here, both are 'beautiful' fields. Split into Bukha and West Bukha, in 1994 Block 8 apparently yielded gas condensate that was so high in quality (64°API), according to a Petroleum Directorate of Oman (PDO) spokesperson, that you can pretty much use it to run a car without refining (a sample is pictured above left)! No exaggeration, if you get the 'purity' standpoint.

Norway’s DNO International, under a remit from Muscat, is a major player here with two production fields. Its data indicates that production from West Bukha 2 and 3 fields currently averages 8,000 oil barrels per day as well as 27 million cubic feet of dry gas. All of this is sent via a 34 km pipeline for onshore processing at a plant located in Ras Al Khaimah, UAE. Furthermore, two additional wells – West Bukha 4 and 5 are in the pipeline, no pun intended.

Exciting times indeed for the Musandam Governorate (split from the rest of Oman by the UAE), which has of late started enjoying the prosperity seen in the rest of the country. Recent prosperity aside, this peninsula oozes history from ancient to modern when it comes to global trade. Market analysts should find it quite gripping – at least yours truly did!

Musandam juts out into the Strait of Hormuz, with the Persian Gulf on one side and the Sea of Oman on the other. Turn the clock or sundial back 5,000 years and you would have seen ships from ancient Oman (then known as Magan) sail between Mesopotamia and India. Magan’s traders knew about (and traded with) India well before the British, French and Portuguese traders ‘discovered’ the country. A museum exhibit offers a model of the vessels and charts the route (above right).

Local historians even suggest that interaction via sea routes took place with the Indus Valley Civilization on one side and modern day Egypt on the other. Fast forward to 2013, and you can easily spot oil tankers from any high vantage point – of which the peninsula provides several. Views of the Strait of Hormuz include tankers carrying their crude cargo out to the world as it is a crossing point for 90% of the Gulf's oil due to be shipped overseas (see below left).

As if by divine convenience – the most navigable bit lies in Omani territorial waters. To say that Musandam bears silent testimony to the history of global trade routes would be an understatement – it has actually shaped them. Roman Empire’s logs from the 2nd century mention the Cape of Musandam, as do Marco Polo’s from the 13th century.

The Portuguese occupied Musandam between 1515 and 1622 and the imposing Khasab Castle (see below) was built during the occupation. For just over four centuries, it has overlooked regional territorial waters and formed the focal point of the modern city of Khasab. After the defeat and expulsion of the Portuguese in the 17th century, the locals modified the castle to suit their defensive needs. Today, it is a modern day museum featuring several exhibits depicting the way of life in this enchanting part of Oman (see below right).

Targeted reinvestment of regional oil wealth by the administration of Sultan Qaboos bin Said Al Said has improved links between Khasab and the rest of Oman via air and sea. A local ferry service links Khasab to Muscat, as does a daily Oman Air flight. Sand, sun and sea on one side and mountains on the other, leave everything from hiking to snorkelling as a leisure option. And should you wish to spot dolphins, get a local tour guide to take you out to the sea!

There are a few local hotels, but the Golden Tulip Resort (now Atana), Khasab is the most impressive one in the area with great views of the waterfront from a poolside balcony and most of its rooms. It is also only a few minutes away from the Bassa Beach. There is a huge supermarket right next to Khasab Castle, with the sea-port terminal for a ferry to Muscat and Khasab airport for a flight close by! Right, that’s that for travel tips and observations. (Click below left for the sights minus the sound)

One tiny and somewhat darkly funny footnote though! A different kind of trade is also flourishing here which speaks volumes about the prosperity in Oman and the lack of it in sanction-squeezed Iran, whose coastline is barely 45 km across the Strait.

Using a decent pair of binoculars, the Oilholic spent a good few hours this evening noting how Iranian smugglers dock off the Port of Khasab (see below right for an aerial view) and conduct a 'cash and carry' trade. First off, differentiating a decidedly tacky Iranian boat from an Omani Dhow or a local motorboat is quite easy. The smugglers' communication method is rather rudimentary including a signalling system involving a combination of torchlights and car headlights. As for the cargo, do not be alarmed – it includes things as non-sinister as western branded biscuits, stimulants such as tea, coffee and cigarettes and of course dodgy satellite TV recorders.

By playing the dumb tourist card, the Oilholic got a local boatman to reveal that the trade route used here is a 50 minute motor-boat ride between Khasab and Qeshm Island, Iran and then on to the Iranian mainland. Most of the activity takes place from sunset onwards. But this desperate activity, which is lucrative for some, is also mighty dangerous.

Cross-crossing one of the busiest shipping lanes in the dark with no lights to avoid detection is fraught with danger. Storms often claim lives, as do unreported collisions with tankers and containers ships. Yet, driven by the desire to make a quick buck out of the cravings of a sanction squeezed Iran, the smugglers keep coming. Warehouses hoard until the price of a particular commodity is high enough in Iran and lo and behold a buyer usually arrives in the dark of the night.

Surprisingly, some of the smugglers or "shooties" (as they would be called were you to translate literally from Farsi), happen to be women! The Oilholic can personally vouch for it with a fair bit of disbelief! One is all for gender equality - but this is something else. Don't know about the Iranian side, but not many on the Omani side seem to mind the shooties plying their trade. If caught offshore by the Omani authorities the pretext of "fishing" usually gets the shooties away!

The traders of Musandam have been a very resourceful lot for centuries. In the 21st century, legal or not, sanctions have driven Iranians to a different, dangerous kind of resourcefulness. While illegal, it certainly is tenacious. Speaking of a more formal dialogue between Iran and Oman, Sultan Qaboos has become among the first world leaders to interact with Iran’s new president – Dr Hassan Rouhani. The Sultan, who is often seen as a bridge between the West and the Islamic Republic, oversaw the signing of a memorandum of understanding between Tehran and Muscat, which would see the latter export natural gas to Oman in a 25-year deal with a US$60 billion valuation.

While further details are yet to be formally announced, the transportation of natural gas would involve pulling a pipeline from Iran to Oman under the Sea of Oman, east of the Strait of Hormuz. Local media reports suggest that the deal would be the largest (by valuation) between the two nations. Sadly that’s all from Khasab folks as the Oilholic packs his bags for a short overnight stay in Muscat before the flight home to London. More from Oman later, in the meantime keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo 1: Bukha oil on display in Khasab, Oman. Photo 2: Model of Mesopotamian ships. Photo 3: Oil tankers in the Strait of Hormuz. Photo 4: Khasab Castle. Photo 5: Collage of sights in Khasab. Photo 6: Port of Khasab as seen from Oman Air flight 917 © Gaurav Sharma, August 2013.

The Keystone XL saga: Views of Toronto analysts

The Oilholic arrived in Toronto, ON for the briefest of visits to find the energy community here in bullish mood about the Keystone XL pipeline project getting a nod of approval from the Obama administration this summer.

Out of a snap, unscientific, random poll of seven energy analysts in downtown Toronto, none of the commentators thought the project’s second application for approval would be turned down this summer by the US Government. Only one analyst thought the second application would face severe delays yet again. On the subject of what next if the unthinkable happens and the US yet again denies approval, most thought Canada can find plenty of takers for Alberta’s most precious resource.

Simply put, if the US does not want oil derived from a bituminous source, there are many takers – as is evident from the interest in the oil sands from burgeoning Asian importers. Make no mistake, the oil sands would be developed, most said. Additionally, there were some predictable quips as well from our friends in Toronto along the lines of “Obama doesn’t have a re-election to fight, so he’ll approve”, “who would the US deal with Canadians or Venezuelans?” or “it could be a shot in the arm for US refinery upgrade projects”.

All of these quips ring true in parts. Furthermore, a recent poll, conducted across the border by the non-partisan Pew Research Center, suggests two-thirds of Americans (66%) favour building the pipeline, which would transport oil from Alberta via the Midwest to Texan refineries. For purposes of its research, Pew polled 1501 adult US citizens between March 13 and 17. The survey result is a pretty convincing one, polled by a very respectable source.

Away from Pew’s findings was a totally unrelated editorial calling for the project’s approval in none other than the Chicago Tribune. The Oilholic is not from Illinois but is quietly confident that President Obama, who was once a senator from the state, does read his local broadsheet. On March 29, printed on page 22, he would have found the lead editorial declaring: “Enough dawdling. Obama should approve the Keystone pipeline.”

Further down the editorial, the paper wrote: “The President is expected to make a decision by this summer. He rejected a Keystone plan a year ago, in the midst of his re-election campaign. This was applauded by some environmental groups and angered the Canadian government. But the most significant impact was this: It kept Americans from getting good-paying jobs.”

Powerful stuff one would say! Canada, you have the support of the President’s (once) local newspaper! Furthermore, most Chicago-based analysts the Oilholic spoke to last week seemed to be clamouring for an approval. Phil Flynn, senior analyst at Price Future Group, said it had been a sad political story symptomatic of dysfunctional US politics and government.

“Here we have a bizarre situation that a pipeline is geopolitically right, but politically...a mess! Democrats had a pop at President George W. Bush tying him with “big oil”; Obama is getting the other end of the stick with people labelling him “big green.” Had he approved the Keystone XL project before it had become a “major issue” in this social media age – well it would not have become an issue at all; just one of the many North American pipelines plain and simple!”

“I see it as a classic case of a bungled energy policy. The Obama administration grossly underestimated the both the importance of Canadian oil sands and American shale and worse still that we could be energy independent. This side of the border, the shale gas revolution happened not because of Washington, but rather despite of Washington,” he said.

Most in the trading community this blogger met in Toronto and Chicago feel an important reason why Keystone XL is going to be approved this time around is because the US labour unions want it badly. Now, hardly any Democrat would flag this up as a reason for approving the project in the summer. Saddest part of it all – for both Canada and the US – is that the Keystone XL project is such a small part of the ongoing energy story of both countries.

Flynn reckons it is all about finding a way to approve it and save face in the summer! “Canadian crude from the oil sands is coming to the market anyway. So the Democrats on Capitol Hill will say America may as well go for it anyway! Mark my word, that’ll be the argument used to peddle the approval,” he concluded.

Moving away from Keystone XL, but sticking with pipelines, ratings agency Moody’s has given thumbs-up to Enbridge’s capital expenditure programme. In a note to clients this morning, Moody's affirmed Enbridge's Baa1 senior unsecured, Baa1 long term issuer, (P)Baa2 subordinate shelf and Baa3 preferred stock ratings.

“The company has taken timely advantage of opportunities that have developed in the North American liquids market over the last few years as a result of regulatory delays in getting new pipelines approved and a persistent liquids pricing differential attributed to tight takeaway capacity, bottlenecks and an inability for shippers to access tidewater and global markets,” the agency said.

According to Moody’s, Enbridge's announced projects are lower risk because they are generally on existing rights of way as either expansions or reversals. “Once this large programme is completed, Enbridge's business risk should be lower due to even greater liquids network diversity,” it added.

Just one more footnote before a farewell to Toronto, the local networks and newspapers are awash with news that Canada's Information Commission is poised investigate claims the Federal government is "muzzling" its scientists.

According to The Globe and Mail, the Commission is investigating seven government departments. These include Environment, Fisheries and Oceans, Natural Resources, National Defence, the Treasury Board Secretariat, National Research Council of Canada and the Canadian Food Inspection Agency.

A spokesperson said the investigation is in response to a complaint filed by the University of Victoria, BC and the campaign group Democracy Watch. Assistant Information Commissioner Emily McCarthy’s office would be leading the probe. Intriguing story indeed and one to watch out for!

It is almost time to head back home, but before heading up in the air towards London Heathrow, the Oilholic leaves you with a view of a natural wonder which helps Ontario Power and Power Authority of New York harness copious amounts of hydroelectricity – the Niagara Falls.

With even Americans saying the view is better from the Canadian side, the Oilholic simply had to pop over and admire it. So it turned out to be quite a view. Photographed here is the Horseshoe Falls – on the side yours truly has snapped from is Canada and on the other is the USA. Sandwiched between is the Niagara River which drains Lake Erie in to Lake Ontario.

The first known effort to harness these waters for power generation was made by one Daniel Joncaire who built a small canal above the falls to power his sawmill in 1759, according to a local park official. Today, if the US (Robert Moses Niagara Power Plant and the Lewiston Pump Generating Plant) and Canadian (Sir Adam Beck I and II) power generation facilities are pooled, the total power production would be 4.4 gigawatts! That’s all from Toronto 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: Toronto’s Skyline and Lake Ontario, Canada. Photo 2: The Niagara Falls, Ontario, Canada © Gaurav Sharma.