BP breathes a sigh; but end of legal woes not nigh!

It has been a crudely British fortnight in terms of Black Gold related news, none more so than BP’s announcement – on March 3 – that it has reached a settlement of US$7.8 billion with the Plaintiffs' Steering Committee (PSC) for civil charges related to the 201 Macondo oil spill in the Gulf of Mexico.

The settlement amount is at the upper end of market conjecture and certainly well above conservative estimates. However, it does not mean that the US government is going to in any way, shape or form, let up on BP – especially in an election year. Everyone knows that, especially BP. However for a second time, the trial case brought against it will have to be delayed as the US Judge in the case – Carl Barbier – noted the settlement would lead to a “realignment of the parties in this litigation and require substantial changes to the current Phase I trial plan, and in order to allow the parties to reassess their respective positions.”

The US government maintains that the US$7.8 billion deal does not address "significant damages" to the environment but PSC-BP agreement is expected to benefit regional 100,000 fishermen, local residents and clean-up workers who suffered following the spill.

BP says it expects the money to come from a US$20 billion compensation fund it had previously set aside and the response of the wider market and ratings agencies to the settlement has been positive. While reaffirming BP’s long term Issuer Default Rating (IDR) at ‘A’, Fitch Ratings notes that BP has adequate financial resources to meet its remaining oil spill related obligations currently estimated by the agency at US$20 billion between 2012 and 2014.

This figure includes the remainder of BP's provisioned costs of US$10.6 billion and approximately US$10 billion of Fitch assumed additional litigation related payments, excluding potential fines for gross negligence. As of end-December 2011, BP had adequate financial resources to meet this obligation with US$14.1 billion of ‘on balance sheet’ cash and US$6.9 billion of undrawn committed stand-by and revolving credit lines. Additionally, the company plans to dispose of assets for about US$18 billion by end-2013 within its US$38 billion asset disposal programme.

Fitch Ratings estimates BP's total Gulf of Mexico spill related payments, net of partner recoveries, will range between US$45 billion and US$50 billion assuming BP was not grossly negligent. BP's cash outflow related to the Gulf of Mexico oil spill amounted to US$26.6 billion by end-2011, net of partner recoveries.

S&P also views the settlement as “somewhat supportive” for its ‘A/A-1/Stable’ ratings on BP and consistent with the agency’s base-case assumptions. “This is because the settlement addresses some material litigation and payment uncertainties, and because we understand that the plaintiffs cannot pursue further punitive damages against BP as a condition of the settlement,” it says.

BP has not admitted liability and still faces other legal claims at State and Federal level. Nonetheless, while the settlement is credit supportive, market commentators in City feel the uncertainty related to the total oil spill liability is not ending any time soon. The Oilholic feels an investigation by US Department of Justice against BP into the oil spill incident encompassing possible violations of US civil or criminal laws could be a potential banana skin as no love has been lost between the two. With several cases still ongoing, a settlement with PSC was a first of many legal hurdles for BP; albeit an important one.

Away from the legal wrangles of “British Petroleum” as US politicians love to call it, Brits themselves had to contend with a record high price of petrol at the pump this week – an average gas station forecourt quote of 137.3 pence per litre on March 5, according to the UK Department of Energy and Climate Change (DECC). The previous record of 137.05p was set on May 9, 2011. However, private research by Experian Catalist says the high is a little “higher” at 137.44p per litre.

And if you thought, the Oilholic’s diesel-powered readership was faring any better, the diesel price is hit a record high of 144.7p per litre, up 0.8p from the previous UK record, which was set the week before! As if that wasn’t enough – the country’s (Markit/CIPS) Purchasing Managers' Index (PMI) for manufacturing slipped to 51.2 in February, down from 52 in January with analysts blaming the high cost oil for manufacturers which rose at the fastest rate in 19 years. It presents another serious quandary for UK Chancellor George Osborne who’s due to table his government’s Union budget on March 21st.

From the price of the refined stuff at British gas station forecourts to the price of a barrel of the crude stuff on the futures market – which saw Brent resisting the US$125 level and WTI resisting the US$106 level for the forward month contract. Myrto Sokou, analyst at Sucden Financial, reckons stronger US economic data brought back risk appetite and improved sentiment this week.

Greece is going to be a main focus for the market with hopes of a positive result on its debt bailout, Sokou adds, but amid renewed rumours whether it would be better for the country to leave the Euro. Cautious optimism is ‘crudely’ warranted indeed.

Elsewhere, the Indian government's attempt divest a 5% stake in one of its NOCs – the Oil and Natural Gas Corporation (ONGC) – via public share offering fell marginally short of expectations last week. Despite tall claims of oversubscription, only 98% of the shares on sale were subscribed. With high hopes of raising something in the region of US$2.5 billion, the government had offered 428 million shares at a price of INR290 per share (approximately US$5.85 and 2% higher than ONGC average share price for February).

However, the Oilholic thinks that even for a company which admittedly has a massive role in a burgeoning domestic market, the price offer was strange at best and overpriced at worst. This probably put off many of the country’s average middle tier investors, especially as many used February’s price as a reference point. Who can blame them and perhaps the Indian government is wiser for the experience too. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Aerial of the Helix Q4000 taken shortly before "Static Kill" procedure began at Macondo (MC 252) site in Gulf of Mexico, August 3, 2010 © BP Plc.

An apt legal book for a complex LNG business!

The LNG business has evolved more over the last ten years than it ever did over the preceding five decades. From a point in time in history when energy majors considered finding gas a disappointment during exploration and production drives to the present multijurisdictional nature of the LNG business; the transformation has been truly unique. All the while, challenges posed by the low price of natural gas, gas-oil price differential, overcapacity in some markets and the perceived US shale gas bonanza lurk in the backdrop. Inevitably, disputes arise and many end up in court.

Currently, in its second edition, the book Liquefied Natural Gas: The Law and Business of LNG, a compendium of thoughts from authors with a legal background, attempts to address the information appetite for legal, regulatory, political and practical elements of the LNG chain. This edition of just fewer than 300 pages split by fourteen chapters – each of which has been authored by a legal industry expert – is a handy reference guide.

Structuring and financing of LNG projects, LNG trading, sale and purchase agreements, shipping, FLNG, import terminals have all been examined and in some detail. Two brilliant chapters specifically dwell on the natural gas price reopeners vis-à-vis English law and Shale gas. Content of this book should sit happily on any legal expert’s bookshelf, especially those involved in the due diligence for LNG projects and allied infrastructure including import and export terminals.

It would be unfair to pick a few favourites as the whole volume is a thoroughly good read, but if asked which ones the Oilholic particularly liked, then they would be Matthew Griffiths’ chapter on Floating LNG, David Gardner’s on LNG Shipping and Paul Griffin’s introduction to the whole volume. The latter beautifully sums up the evolving nature of the LNG business (and indeed the publisher’s commercial reason for bringing out a second edition).

As a regional business has slowly evolved or quickly morphed – depending on your point of view – into a truly global one, it is also perceived as a minefield for disputes, more so in an era of resource nationalism. In such a setting, this book more than fulfils its pragmatic purpose for legal professionals whether you are a private practitioner or one attached to a commercial establishment ranging from utilities to banking.

As with a specialist title of this nature, you will need a mid to high level of industry knowledge to fully appreciate the book, should you have a non-legal remit within the energy business. While envisaged as a written work aimed at legal professionals and industry experts, it is the Oilholic's considered viewpoint that it would be well worth the while of law and energy business students and academics to glance at this title too.

© Gaurav Sharma 2012. Photo: Front Cover (Second Edition) – Liquefied Natural Gas: The Law and Business of LNG © Globe Law and Business.

India’s Iran connection & the crudely high price

Don’t say the Oilholic did not tell you so after his Indian adventure – that India will find it very hard to match Europeans on censuring Iran in ‘crude’ terms! An interesting newswire copy from the Indo-Asian News Service (IANS) as cited by broadcaster NDTV notes that in fact, India is set to step up its energy and business ties with Tehran.

The news emerges in wake of an attack earlier this month on an Israeli diplomat carried out barely yards from the Indian Prime Minister’s residence in Delhi, for which Isreal is blaming Iran. It shows you how ‘crude’ the Delhi-Tehran ties are. The blogosphere is rife with news that it is becoming increasingly difficult for Indian oil companies to pay their Iranian counterparts in wake of international sanctions which hamper processing of international payments and place limits on what the central bank - Reserve Bank of India (RBI) - can or cannot do. Well placed sources suggest that various options from routing payments via Turkey and in suitcases are being trialled.

Pragmatically speaking, few can blame India for not curtailing ties with a country which supplies 10% of its crude imports. The Iranian situation coupled with the geopolitical influence of other events in Nigeria and Sudan alongside a Greek rescue and the Chinese Central bank’s cut of the required reserve ratio of its domestic banks (on Saturday to ease borrowing) have all come together to introduce bullish trends.

The crude price is currently at an 8-month high; when last checked @13:45GMT on Feb 23rd – the ICE Brent forward month futures contract was at US$124.33 per barrel and WTI was at US$106.33 per barrel. Three City analysts told the Oilholic this morning that the strong upside rally in the oil market is likely to continue for some time yet. Additionally, in a note to clients JP Morgan Chase raised its 2012 price forecast for Brent crude by US$6 to US$118 a barrel and its 2013 forecast by US$4 to US$125 a barrel.

Meanwhile, former UK Chancellor of the Exchequer Lord Lamont – who is now the Chairman of the British-Iranian Chamber of Commerce – recently told BBC Radio 4 that imposing economic sanctions on Iran will not work.

"I can only say we are banging our heads against a wall with this approach...Iran will not buckle under these sanctions. The effect of sanctions is to hit the private sector in Iran, drive companies bankrupt and drive them into the arms of the government, or into the hands of the Revolutionary Guards and into alliances with people in the government smuggling the goods they desperately need," he said.

"I'm not sure this will have the right effect. Could this produce regime change? It's possible but in my view it's just as likely that it will bolster the strength of the regime," Lord Lamont concluded. According to the BBC, data compiled by companies exporting to Iran show that direct trade dropped from just under £500 million in 2008 - to an estimated £170 million in 2011. Blimey – didn’t know we had that much bilateral trade in the first place!

Moving away from what a former UK Chancellor said, an Indian wire reported and the Oilholic ranted about, it is time to discuss some interesting bits of reading material. This humble blog’s rapidly rising North American fan base (to put it modestly) would be keen to know that Reuters’ very own resident Oilholic – Tom Bergin’s splendid book on BP’s Macondo fiasco and its corporate culture – Spills and Spin: The Inside Story of BP – saw its US edition launched earlier this week.

Here’s the review, and if you lot in the US haven’t been cheeky and ordered a UK copy from an internet retailer, the Oilholic would recommend that you visit you a friendly neighbourhood bookstore (or library) where you are likely to find a local edition. From Bergin’s book which raises serious questions on corporate ethics to a Pastor who raises a rather pious question for us all really - Where would Jesus Frack?

According to the Pittsburgh Tribune Review, a pastor told environmentalists last month that there is a scriptural basis for opposing Marcellus Shale drilling in the US. The Rev. Leah Schade, pastor of the United in Christ Church in Union County, Pennsylvania, USA, wore a hand-sewn white patch that said, "WWJF - Where Would Jesus Frack?" and dropped to her knees to demonstrate the power of prayer.

Asked later to answer the question on her blouse, Schade said, "I don't believe Jesus would be fracking anywhere." She cited Genesis 2;15: "God put human beings into the Garden to till it and keep it, not drill and poison it." Amen!

Continuing with interesting things to read, finally here is a comparison drawn by BBC journalist Vanessa Barford on what are the competing claims of UK and Argentina over the Falkland Islands – an old diplomatic spat which has recently acquired a crude dimension. Last but not the least, here is a video of yours truly on an OPEC broadcast discussing project investment by the cartel at its 160th meeting of ministers in December. That’s all for the moment folks! Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo I: Veneco Oil Platform © Rich Reid - National Geographic. Photo II: Front Cover (US Edition) – Spills and Spin © Random House Publishers.

Mr. Gabrielli, an IEA revision & the Kuwaiti situation

This Monday, the crude world bid farewell to Petrobras’ inimitable CEO José Sergio Gabrielli de Azevedo who stepped down from his position having been at the Brazilian major's helm since July 2005. Over his tenure, Petrobras took great strides towards ultradeepwater offshore exploration and made several overseas forays. Rumours had been lurking around since January that Gabrielli was in the twilight of his career at Petrobras following differences with Brazilian President Dilma Rouseff – but both the government and the company strenuously denied it.

The reins of Petrobras have now passed on to Maria das Graças Silva Foster (pictured left) a corporate veteran who has worked at Petrobras for 31 years. In addition to occupying various executive level positions in the company, Foster has been CEO of Petroquisa - Petrobras Química, and CEO and CFO of Petrobras Distribuidora. In her career, she was also Secretary of Oil, Natural Gas and Renewable Fuels at the Brazilian Ministry of Mines and Energy from January 2003 to September 2005.

Earlier, Petrobras approved the contract for 21 offline rigs with Sete Brasil, at an average daily rate of US$530,000 and the contract for 5 dual activity rigs with Ocean Rig, at the average day rate of US$548,000, both for a 15-year term. All units, which have local content requirements ranging from 55% to 65%, are to be delivered within 48 to 90 months, according to the schedules established in the contracts.

The project includes the construction of new shipyards in the country and the use of existing infrastructure. Petrobras expects to reduce the average daily rates to US$500,000 for the Sete Brasil contract and to US$535,000 for the Ocean Rig contract. These amounts may suffer further reductions if the parties detect and agree to mechanisms that reduce operating costs.

With these contracts, the plan to contract 28 drilling rigs to be built in Brazil to meet the demands of the long-term drilling program, primarily for use in pre-salt wells has been completed. Based on the conditions submitted by the companies and on the current demand for the development of future projects, Petrobras, in its own words, "chose to take advantage of the negotiated conditions and contract five additional which were not originally planned."

All this is fine and dandy, but since the timelines of construction and delivery are so lengthy, a hike in construction costs is likely – more so because some yards where the rigs are expected to be built, haven’t yet been built themselves. But the Oilholics loathes being too sceptical about what is a reasonably positive agreement.

Meanwhile, the IEA has cut its oil demand forecast again! In an announcement last week, the agency said a weak global economy had prompted its sixth successive monthly revision to forecasts by 250,000 barrels per day (bpd) to 800,000 barrels for 2012. Before the IEA, the US EIA actually made an upward revision of 50,000 barrels to 1.32 million bpd while OPEC cut its forecast by 120,000 bpd to 940,000. All three forecasters are looking towards non-OECD jurisdictions for demand growth.

Elsewhere, the Oilholic would like to highlight two very interesting corporate client notes. In one issued on February 7th, Fitch Ratings observed that following the recent parliamentary elections in Kuwait, marked frictions between an elected Parliament and the appointed government will continue to weigh on the reform agenda and hamper political effectiveness.

The agency feels that difficulties in reaching agreement at the political level will continue to affect economic reforms, including the implementation of a four-year development plan (worth 80% of GDP over 2010-11 and 2013-14), which aims at boosting the country's infrastructure and diversifying the economy away from oil.

Nonetheless, Fitch rates Kuwait as 'AA' with a Stable Outlook. As relatively high oil prices are being forecast, Fitch’s own being at US$100/barrel for 2012, Kuwait’s earnings should continue to ensure double digit current account and fiscal surpluses which lend support to the rating.

Moving on to the second note, on the expected impact of US' QE3 on the commodity market circulated on February 10th, Société Générale analysts Michael Haigh and Jesper Dannesboe opine that an increase of expected inflation during QE3 Stateside coupled with the impact of the EU embargo on Iran could result in the DJ-UBS commodity index rising 20% and Brent prices rising to US$130/barrel.

“Sep12 Brent call spread with strikes at US$117 (long) and US$130 (short). The current net up-front cost: about US$4.6/barrel. This results in a maximum net profit of US$8.4/barrel. If one also sells a Sep12 US$100/barrel put, the overall structure would have zero upfront cost and the maximum net profit would be US$13.7/barrel. We consider a price drop below US$100 to be very unlikely,” they wrote and the Oilholic quotes. That’s all for the moment folks! Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Petrobras CEO Maria das Graças Silva Foster © Petrobras Press Office.

Corporate crude chatter: Xstrata, Glencore & more

There appears to be only one story in town these past few days - the valuation and implication of a Glencore and Xstrata merger. According to communiqués issued yesterday poured over the Oilholic and his peers, the Switzerland based commodities trader and the mining major aim to create a merged natural resources, mining and trading company with a combined equity market value of US$90 billion.

Xstrata’s operating businesses and Glencore’s marketing functions will continue to operate under their existing brands. It is proposed that the combined entity will be called Glencore Xstrata International plc, listed on the London and Hong Kong Stock Exchanges, with its headquarters in Switzerland and will continue as a company incorporated in Jersey. The deal was labelled by the two firms as a "merger of equals" but the Oilholic suspects Glencore would carry the upper hand.

While the new corporate entity will be the world's biggest exporter of coal for power plants and the largest producer of zinc, the ever secretive Glencore’s involvement gives the merger a ‘crude’ dimension. The latter’s Chief Executive Ivan Glasenberg has made a fortune for his company selling crude oil and oil products alongside other commodities. Controversy and Glencore go hand in hand as its Wikipedia page records.

Where from here remains to be seen as ratings agency Moody's has placed all the ratings of Glencore and Xstrata, as well as those of their guaranteed subsidiaries, on review for possible upgrade following the announced all-share merger. The initiation of this review reflects Moody's favourable assessment of the planned merger in terms of diversification and synergies, as well as the uncertainties surrounding the final details and execution of the proposed transaction.

Moving away from the Glencore-Xstrata story but sticking with Moody's, the agency also commented on the completion of Sunoco Inc.'s strategic review. It notes that the American petroleum company is better positioned to focus on midstream logistics and retail product marketing as its core operations, with greater clarity around its plans to re-deploy a sizeable portion of its cash liquidity.

Sunoco announced a number of steps last week to allow it to focus on its large investment in Sunoco Logistics Partners LP and on retail marketing as the drivers of its future growth and returns. It began shuttering the Marcus Hook refinery in December and is likely to do the same with its Philadelphia refinery by July 2012 unless it can conclude a suitable sale. These exposures and the limited sales prospects for the refineries have resulted in an additional pre-tax charge of US$612 million in Q4 2011, including non-cash book charges and provisions for severance and other cash expenses.

Continuing with corporate news, Petrobras announced another discovery of a new oil and natural gas accumulation – this time in the Solimões Basin (Block SOL-T-171), in the State of Amazonas. The discovery took place during drilling of Igarap é Chibata Leste well located in Coari, 25 km from the Urucu Oil Province. The well was drilled to a final depth of 3,295 meters and tests have indicated a production capacity of 1,400 barrels per day of good quality oil (41º API) and 45,000 m3 of natural gas. Obviously, Petrobras holds 100% of the exploration and production rights in the Concession.

The Brazilian major also closed the issuance of global notes in the international capital markets worth US$7 billion on Monday. The transaction was executed in one day, with a demand of approximately US$25 billion as a result of more than 1,600 orders coming from more than 700 investors. The final allocation was more concentrated in the United States (58.4%), Europe (28.1%) and Asia, mostly dedicated to the high grade market. The oversubscription is symptomatic of the huge interest in Brazilian offshore.

Finally, BP raised its dividend payout after quarterly earnings rose on rising crude prices. Replacement cost profit for the three months to December-end 2011 was US$7.6 billion up on US$4.6 billion for the corresponding period in 2010. For FY 2011, BP's profit was US$23.9 billion versus a US$4.9 billion loss in 2010. This meant allowing for a 14% rise in the dividend to 8c (5p) per share, a first increase since the 2010 Gulf of Mexico spill.

Away from corporate matters, the UK government launched its 27th offshore oil and gas licensing round last Wednesday making 2,800 blocks available to prospectors. The last British licensing round set an all-time high at 190 awards with high crude prices enticing exploration companies big and small. Lets see how it all shapes up this time around especially as the British government maintains that some 20 billion barrels of the crude stuff is still to be extracted. The Oilholic cannot possibly dispute the figure with authority, but what one can note with some conviction is that all the easy (to extract) oil has already been found. Extracting the remaining 20 billion would be neither easy nor cheap, especially in a tough macroclimate.

Meanwhile, as tensions mount over Iran, Saudi Arabia’s crown prince has said the Kingdom would not let the price of crude oil stay above US$100 using the WTI as a benchmark. Concurrently, and in order to allay Asian fears about crude oil supplies, the UAE government says it is looking to export more to Asia should there be a need to mitigate the supply gap caused by a ban on Iranian oil by Asian importers. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Offshore oil rig in North Sea © Cairn Energy Plc.