‘Oh Frack’ for OPEC, ‘Yeah Frack’ for IEA?

In a space of a fortnight this month, both the IEA and OPEC raised “fracks” and figures. Not only that, a newly elected President Barack Obama declared his intentions to rid the USA of “foreign oil” and the media was awash with stories about American energy security permutations in wake of the shale bonanza. Alas, the whole lot forgot to raise one important point; more on that later.

 

Starting with OPEC, its year-end calendar publication – The World Oil Outlook – saw the oil exporters’ bloc acknowledge for the first time on November 8 that fracking and shale oil & gas prospection on a global scale would significantly alter the energy landscape as we know it. OPEC also cut its medium and long term global oil demand estimates and assumed an average crude oil price of US$100 per barrel over the medium term.

 

“Given recent significant increases in North American shale oil and shale gas production, it is now clear that these resources might play an increasingly important role in non-OPEC medium and long term supply prospects,” its report said.

 

The report added that shale oil will contribute 2 million barrels per day (bpd) towards global oil supply by 2020 and 3 million bpd by 2035. If this materialises, then the projected rate of incremental supply is over the daily output of some OPEC members and compares to the ‘official’ daily output (i.e. minus the illegal siphoning / theft) of Nigeria.

 

OPEC’s first acknowledgement of the impact of shale came attached with a caveat that over the medium term, shale oil would continue to come from North America only with other regions making “modest” contributions over the longer term at best. For the record, the Oilholic agrees with the sentiment and has held this belief for a while now based on detailed investigations in a journalistic capacity (about financing shale projects).

 

OPEC admitted that the global economy, especially the US economy, is expected to be less reliant on its members, who at present pump over a third of the world's oil and have around 80% of planet’s conventional crude reserves. Pay particular attention to the ‘conventional’ bit, yours truly will come back to it.

 

According to the exporters’ bloc, global demand would reach 92.9 million bpd by 2016, down over 1 million from its 2011 report. By 2035, it expects consumption to rise to 107.3 million bpd, over 2 million less than previous estimates. To put things into perspective, global demand in 2011 was 87.8 million bpd.

 

Partly, but not only, down to shale oil, non-OPEC output is expected to rise to 56.6 million bpd by 2016, up 4.2 million bpd from 2011, the report added. So OPEC expects demand for its crude to average 29.70 million bpd in 2016; much less than its current output (ex-Iraq).

 

"This downward revision, together with updated estimates of OPEC production capacity over the medium term, implies that OPEC crude oil spare capacity is expected to rise beyond 5 million bpd as early as 2013-14," OPEC said.

 

"Long term oil demand prospects have not only been affected by the medium term downward revisions, but by higher oil prices too…oil demand growth has a notable downside risk, especially in the first half of 2013. Much of this risk is attributed to not only the OECD, but also China and India," it added.

 

So on top of a medium term crude oil price assumption of US$100 per barrel (by its internal measure and OPEC basket of crudes, which usually follows Brent not WTI), the bloc forecasts the price to rise with inflation to US$120 by 2025 and US$155 by 2035.

 

Barely a week later, IEA Chief Economist Fatih Birol – who at this point in 2009 was discussing 'peak oil' – created ripples when he told a news conference in London that in his opinion the USA would overtake Russia as the biggest gas producer by a significant margin by 2015. Not only that, he told scribes here that by 2017, the USA would become the world's largest oil producer ahead of the Saudis and Russians. 

 

Realising the stirrings in the room, Birol added that he realised how “optimistic” the IEA forecasts were sounding given that the shale oil boom was a new phenomenon in relative terms.

 

"Light, tight oil resources are poorly known....If no new resources are discovered after 2020 and plus, if the prices are not as high as today, then we may see Saudi Arabia coming back and being the first producer again," he cautioned.

 

Earlier in the day, the IEA forecasted that US oil production would rise to 10 million bpd by 2015 and 11.1 million bpd in 2020 before slipping to 9.2 million bpd by 2035. It forecasted Saudi Arabia’s oil output to be 10.9 million bpd by 2015, 10.6 million bpd in 2020 but would rise to 12.3 million bpd by 2035.

 

That would see the world relying increasingly on OPEC after 2020 as, in addition to increases from Saudi Arabia, Iraq will account for 45% the growth in global oil production to 2035 and become the second-largest exporter, overtaking Russia.

 

The report also assumes a huge expansion in the Chinese economy, which the IEA said would overtake the USA in purchasing power parity soon after 2015 (and by 2020 using market exchange rates). It added that the share of coal in primary energy demand will fall only slightly by 2035. Fossil fuels in general will remain dominant in the global energy mix, supported by subsidies that, in 2011, rose by 30% to US$523 billion, due mainly to increases in the Middle East and North Africa.

 

Fresh from his re-election, President Obama promised to “rid America of foreign oil” in his victory speech prior to both the IEA and OPEC reports. An acknowledgement of the US shale bonanza by OPEC and a subsequent endorsement by IEA sent ‘crude’ cheers in US circles.

 

The US media, as expected, went into overdrive. One story – by ABC news – stood out in particular claiming to have stumbled on a shale oil find with more potential than all of OPEC. Not to mention, the environmentalists also took to the airwaves letting the great American public know about the dangers of fracking and how they shouldn’t lose sight of the environmental impact.

 

Rhetoric is fine, stats are fine and so are verbal jousts. However, one important question has bypassed several key commentators (bar some environmentalists). That being, just how many barrels are being used, to extract one fresh barrel? You bring that into the equation and unconventional prospection – including US and Canadian shale, Canadian oil sands and Brazil’s ultradeepwater exploration – all seem like expensive prepositions.

 

What’s more OPEC’s grip on conventional oil production, which is inherently cheaper than unconventional and is expected to remain so for sometime, suddenly sounds worthy of concern again.

 

Nonetheless “profound” changes are underway as both OPEC and IEA have acknowledged and those changes are very positive for US energy mix. Maybe, as The Economist noted in an editorial for its latest issue: “The biggest bonanza from all this new (US) energy would be if users paid the real cost of consuming oil and gas.”

 

What? Tax gasoline users more in the US of A? Keep dreaming sir! That’s all for the moment folks! Keep reading, keep it crude!

 

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

BP’s settlement expensive but sound

As BP received the biggest criminal fine in US history to the tune of US$4.5 billion related to the 2010 Gulf of Mexico oil spill, the Oilholic quizzed City analysts over what they made of it. Overriding sentiment of market commentators was that while a move to settle criminal charges in this way was expensive for BP, it was also a sound one for the oil giant.

 

Beginning with what we know, according to the US Department of Justice (DoJ), BP has agreed to plead guilty to eleven felony counts of misconduct or neglect of ships officers relating to the loss of 11 lives, one misdemeanour count under the Clean Water Act, one misdemeanour count under the Migratory Bird Treaty Act and one felony count of obstruction of Congress.

 

Two BP workers - Robert Kaluza and Donald Vidrine - have been indicted on manslaughter charges and an ex-manager David Rainey charged with misleading Congress according to the Associated Press. The resolution is subject to US federal court approval. The DoJ will oversee BP handover US$4 billion, including a US$1.26 billion fine as well as payments to wildlife and science organisations.

 

BP will also pay US$525 million to the US SEC spread over three years. The figure caps the previous highest criminal fine imposed on pharmaceutical firm Pfizer of US$1.2 billion. City analysts believe BP needed this settlement so that it can now focus on defending itself against pending civil cases.

 

“It was an expensive, but necessary closure that BP needed on one legal fronts of several,” said one analyst. The 2010 Deepwater Horizon disaster killed 11 workers and released millions of barrels of crude into the Gulf of Mexico which took 87 days to plug.

 

The company is expected to make a final payment of US$860 million into the US$20 billion Gulf of Mexico compensation fund by the end of the year. BP’s internal investigation about the incident had noted that, “multiple companies, work teams and circumstances were involved over time.”

 

These companies included Transocean, Halliburton, Anadarko, Moex and Weatherford. BP has settled all claims with Anadarko and Moex, its co-owners of the oil well and contractor Weatherford. It received US$5.1 billion in cash settlements from the three firms which was put into the Gulf compensation fund.

 

BP has also reached a US$7.8 billion settlement with the Plaintiffs' Steering Committee, a group of lawyers representing victims of the spill. However, the company is yet to reach a settlement with Transocean, the owner of the Deepwater Horizon rig and engineering firm Halliburton. A civil trial that will determine negligence is due to begin in New Orleans in February 2013.

 

Jeffrey Woodruff, Senior Director at Fitch Ratings, felt that the settlement was a positive move but key areas of uncertainty remained. “Although the settlement removes another aspect of legal uncertainty, it does not address Clean Water Act claims, whose size cannot yet be determined. It is therefore too early for us to consider taking a rating action,” he added.

 

Fitch said in July, when revising the company's Outlook to Positive, that BP should be able to cover its remaining legal costs without impairing its financial profile, and that a comprehensive settlement of remaining liabilities for US$15 billion or less would support an upgrade.

 

Recent asset sales have also strengthened BP's credit profile. Last month, BP posted a third quarter underlying replacement cost profit, adjusted for non-operating items and fair value accounting effects, of US$5.2 billion. The figure is down from US$5.27 billion recorded in the corresponding quarter last year but up on this year's second quarter profit of US$3.7 billion.

 

“The company has realised US$35 billion of its US$38 billion targeted asset disposal programme at end the end of the third quarter of 2012. Proceeds from the sale of its 50% stake in TNK-BP in Russia will further improve its liquidity, supporting our view that the company can meet legal costs without impairing its profile,” Woodruff concluded.

 

Meanwhile, Moody’s noted that the credit rating and outlook for Transocean (currently Baa3 negative), which is yet to settle with BP, was unaffected by the recent development.

 

Stuart Miller, Moody's Senior Credit Officer, said, "The big elephant in the room for Transocean is its potential exposure to Clean Water Act fines and penalties as owner of the Deepwater Horizon rig. The recent agreement between BP and DoJ did not address the claims under the Act."

 

However, he felt that Transocean will ultimately settle with the DoJ, and there was a good chance that the amount may be manageable given the company’s current provision level and cash balances.

 

“But if gross negligence is proven, a very high legal standard, the settlement amount could result in payments by Transocean in excess of its current provision amount,” Miller concluded.

Plenty more to unfold in this saga but that’s all for the moment folks. Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Gulf of Mexico spill containment area © BP Plc.

A brilliant catalogue of ‘crude’ expressions

As paper barrels increasingly get the upper hand in an intertwined global network of crude oil and distillates trading, whether it is the virtual crude you are after or the physical stuff – getting a hang of the market jargon is crucial.

 

Perhaps you are familiar with terms such as contango, backwardation or crack spreads – as many readers of this blog would be. But can you confidently define what a PIONA test is? Or for that matter what’s a No. 6 Fueloil? Or maybe what demulsibility implies to in a crude context or what are charter parties?

 

If you are stumped or curious or unsure or perhaps all three, then – The Oil Traders’ Word(s) – a brilliant compendium of ‘crude’ knowledge containing oil traders’ expressions, trading floor jargon, measurements, metrics and terms put together by Statoil executive Stefan Van Woenzel is just the tonic!

 

In a painstaking endeavour, Van Woenzel has penned the A to Z of oil trading jargon banking on his decades of experience as a trader. In order to put the veracity of his research work to test, the Oilholic subjected The Oil Traders’ Word(s) to a simple test. To begin with yours truly tallied common oil trading expressions to check the author’s description of them, then on to terms that only readers with a mid to high level of investment knowledge would be familiar with and finally to random jump searches by alphabet.

 

The Oilholic is delighted to say that Van Woenzel’s ‘glossary-plus’ emerges with full marks and more on all counts. Expressions, words and jargon aside, metric to imperial measures and explanatory notes make this work of just under 550 pages one of the most purposeful reference books of the oil sector. With close to 2,000 definitions, one would struggle to find a better or even a comparable product to the author’s arduous effort.

This book is not limited to a role of a ‘crude’ dictionary or an industry communications guide. Going beyond that, Van Woenzel has shared his two decades-plus worth of industry wisdom with readers in a separate chapter. Overall, it was a joy to read the book and put the glossary to a very enjoyable test. A multibillion dollar industry must appreciate the value of the author’s commendable research.

 

For his humble part, the Oilholic would be happy to recommend it to fellow ‘crude’ individuals, oil & gas executives, oil traders, energy project financiers, shipping personnel, banking sector professionals, energy journalists and academics. Students of economics, business and energy studies might also find it worth their while to have it handy. If you needed a one-stop oil industry jargon guide, then this book really is the ‘real deal’.

 

© Gaurav Sharma 2012. Photo: Front Cover – The Oil Traders' Word(s) © AuthorHouse.

For US President, the Oilholic endorses 'neither'!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hawaii’s crude reality: Being a petrohead costs!

In a break from the ‘crude’ norm for visits to the USA, the Oilholic packed his bags from California and headed deep out to the Pacific and say ‘Aloha’ to newest and 50th United State of Hawaii. It’s good to be here in the Kona district of the Big Island and realise that Tokyo is a lot closer than London.

It is interesting to note that Hawaii is the only US state still retaining the Union Jack in its flag and insignia. The whole flag itself is a deliberate hybrid symbol of British and American historic ties to Hawaii and traces its origins to Captain John Vancouver – the British Naval officer after whom the US and Canadian cities of Vancouver and Alaska’s Mount Vancouver are named.

What’s not good being here is realising that a 1.3 million plus residents of these northernmost isles in Polynesia pay the most for their energy and electricity needs from amongst their fellow citizens in the US. It is easy to see why, as part dictated by location constraints Hawaii presently generates over 75% of its electricity by burning Petroleum.

Giving the geography and physical challenges, most of the crude oil is shipped either from Alaska and California or overseas. Furthermore, the Islands have no pipelines as building these is not possible owing to volcanic and seismic activity. Here’s a view of one active crater – the Halema’uma’u in Kilauea Caldera (see above right). You can actually smell the sulphur dioxide while there as the Oilholic was earlier today. In fact the entire archipelago was created courtesy of volcanic eruptions millions of years ago. The Big Island’s landmass of five plates is created out of Mauna Kea (dormant) and Mauna Loa (partly active) and the island is technically growing at moment as Kilaueu still spews lava which cools and forms land.

So both crude and distillates have to be moved by oil tankers between the islands or tanker lorries on an intra-island basis. The latter  creates regional pricing disparities. For instance in Hilo, the commercial heart of the Big Island and where the tanker docking stations are, gasoline is cheaper than Kona by almost 40-50 cents per gallon. The latter receives its distillates by road once tankers have docked at Hilo.

The state has two refineries both at Kapolei on the island of O‘ahu 20 miles west of capital Honolulu – one apiece owned by Tesoro and Chevron. The bigger of the two has a 93,700 barrels per day (bpd) and is owned by Tesoro; the recent buyer of BP’s Carson facility. However in January Tesoro put its Hawaiian asset up for sale.

Tesoro, which bought the refinery for US$275 million from BHP Petroleum Americas in 1998, said it no longer fitted with its strategic focus on the US Midcontinent and West Cost. The company expects the sale to be completed by the end of the year. Its Hawaiian retail operations, which include 32 gas stations, will also be part of the deal. Chevron operates Kapolei’s other refinery with a 54,000 bpd capacity. Between the two, there is enough capacity to meet Hawaii’s guzzling needs and the pressures imposed by US forces operations in the area.

In this serene paradise with volcanic activity and ample tidal movement, power generation from tidal and geothermal is not inconceivable and facilities do exist. In fact, for the remaining 25% of its energy mix, the state is one of eight US states with geothermal power generation and ranks third among them. Additionally, solar photovoltaic (PV) capacity increased by 150% in 2011, making Hawaii the 11th biggest US state for PV capacity. However, it is not nearly enough.

One simple solution that is being attempted is natural gas – something which local officials confirmed to the Oilholic. The EIA has also noted Hawaii’s moves in this direction. Oddly enough, while Hawaii hardly uses much natural gas, it is one of a handful of US states which actually produces synthetic natural gas. Switching from petroleum-based power generation to natural gas for much of Hawaii’s power generation could lower the state’s power bills considerably as the massive disconnect between US natural gas and crude oil prices looks set to continue.

Strong ‘gassy’ moves are afoot and anecdotal evidence here suggests feelers are being sent out to Canada, among others. In August, Hawaii Gas applied for a permit with the Federal Government to ship LNG to Hawaii from the West Coast. While the deliveries will commence later this year, arriving volumes of LNG would be small in the first phase of the project, according to Hawaii Gas. At least it is a start and the State House Bill 1464 now requires public utilities to provide 25% of net electricity sales from renewable sources by December 31, 2020 and 40% of net electricity sales from renewables by December 31, 2030.

That’s all for the moment folks as the Oilholic needs to explore the Big Island further via the old fashioned way which requires no crude or distillates – its the trusty old bicycle! Going back to history, it was Captain James Cook and not Vancouver who located these isles for the Western World in 1778. Regrettably, he got cooked following fracas with the locals in 1779 and peace was not made between Brits and locals until Vancouver returned years later.

Moving away from history, yours truly leaves you with a peaceful view of Punaluʻu or the Black Sand beach (see above left)! It is what nature magnificently created when fast flowing molten lava rapidly cooled and reached the Pacific Ocean. According to a US Park Ranger, the beach’s black sand is made of basalt with a high carbon content. It is a sight to behold and the Oilholic is truly beholden! On a visit there, you have a 99.99% chance of spotting the endangered Hawksbill and Green turtles lounging on the black sand. For once, yours truly is glad there are no bloody pipelines in the area blotting the landscape. More from Hawaii later - keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Halema’uma’u, Kilauea Caldera. Photo 2: Punaluʻu - the Black Sand beach, Hawaii, USA © Gaurav Sharma 2012.