Clinton in Crudeland, Ghanem’s death & Cressier

US secretary of state Hillary Clinton has been clocking up air miles trying to persuade India and China to import less of the crude stuff from Iran. While diplomatic issues dominated the headlines during her visit, Clinton is understood to have impressed upon the Chinese to lower Iranian imports. However, recent media reports suggest that instead of seeking alternative supplies away from Iran, the economic powerhouse is seeking alternative modes of payment to Tehran away from the US Dollar. First, Reuters cited Mohammed Reza Fayyad, Iran's ambassador to the United Arab Emirates, acknowledging that his country was accepting Yuan payments in kind for oil exports to China. Then the FT reported that China has been providing the Yuan to Iran via Russian banks rather than its own international banks.

Arriving next in India, Clinton had a similar message for New Delhi. She “commended” India for lowering its reliance on Iranian imports urging it to do more. However, as the Oilholic noted on his non-state visit to India earlier this year - Indian policymakers openly admit this is easier said than done. Meanwhile conspiracy theories about the death on April 29 of former Libyan Oil Minister Shokri Ghanem, whose body was found in the River Danube in Vienna, are unlikely to go away with his funeral held four days ago.

In June 2011, his defection from the Gaddafi regime was the epicentre of media gossip – both in the run-up to the 159th OPEC meeting as well as during the event itself where his defection relieved some and riled others. Some doubted his intentions while others doubted that he’d even defected.

All in public domain was that since his defection he had been living in Vienna with his family and working as a consultant. It seemed to be a natural choice since Ghanem’s connection with the city went back a few decades. He had held a number of posts at the old OPEC HQ in Vienna rising to its head of research in 1993 before joining the Gaddafi government first as Prime Minister and then Oil minister which marked his regular return to Vienna until last year.

The Oilholic’s sources in Vienna suggest the Austrian authorities have ruled out foul play. All yours truly knows is that a passer-by saw his body in the river and called the police who found no other documents on him other than business cards of his consultancy. There were no signs of violence on the body and it is thought that he died of natural causes. At the time of his death, he was setting up a business with another OPEC veteran - Algeria's Chakib Khelil and other investors.

However back home, the new government in Tripoli never trusted him despite his defection and was in fact preparing a court case against him for making illegal gains during his time in the Gaddafi regime. Regardless of its circumstances, the void left by his death would be felt in Viennese diplomatic circles and at OPEC HQ where he began his career in earnest.

Going back to 2008, the Oilholic remembers his first interaction with Ghanem from press scrums at a meeting of ministers where journalists jostled to receive his answers in fluent English. His audience in Vienna had grown, more so as his boss Gaddafi had denounced terrorism and come back from the cold to rejoin the international community. Whether Ghanem himself was a saint or a sinner will now never be known.

Away from crude politics, troubled refiner Petroplus’ administrators have found a buyer for its Swiss asset – the Cressier Refinery – in the shape of Varo Holding, a joint venture between trading firm Vitol and AltasInvest. Under the sale agreement, cash strapped Petroplus would transfer Cressier and allied Swiss marketing and logistics assets - Petroplus Tankstorage, Oléoduc du Jura Neuchâtelois and Société Française du Pipeline du Jura to Varo.

Sources suggest Varo hopes to close the deal before the end of June with plans of restarting the 68,000 barrels per day refining facility thereafter. Finally, fresh economic headwinds are bringing about a price correction in the crude markets as recent elections in Greece and France have triggered a Greek Tragedy (Part II) and a Geek Tragedy (a.k.a. Francois Hollande) respectively.

A hung parliament and political stalemate with fears of the terms of the last Greek bailout not being met is impacting market sentiment on the one hand. On the other, newly elected Socialist President of France – Francois Hollande – sees his less than convincing mandate as one of the French public voting against ‘austerity’ and perhaps uncosted grandiose spending plans. On Tuesday, oil trading sessions either side of the pond remained volatile in light of the situation.

Summing up the nerviness in the markets following events of the past few days, Sucden Financial analyst Myrto Sokou notes, “Spain has confirmed that it will provide with additional money for the bank rescue of Bankia, the country's third largest bank in terms of assets. In Greece, the political situation is still uncertain as the country remains without a government after Sunday’s elections…The parties which signed the EU bailout memorandum are now in a minority as Greek voters rejected further austerity plans.”

Concurrently, analysts at Société Générale believe that generally bearish sentiments and still weak fundamentals should continue to combine and prevail and that the entire energy complex seems to be headed for a continued correction downwards. “Oil has performed better than other European energy commodities in 2012, but this seems to have changed during the first week of May. Oil price behaviour will be the key to avoid further slides in European energy prices,” they note.

As if that was not crude enough, an investment note by Citibank just hitting the wires suggests there is now a 75% possibility that Greece would be forced to leave the Eurozone within 12 to 18 months. With no swift Eurozone solution in sight, be prepared to expect further volatility and perceptively bearing trends in the crude markets. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil Rig © Cairn Energy Plc.

Out of its ‘Shell’ & into the ‘Cove’ plus ‘Providence’

Many analysts thought supermajor Royal Dutch Shell which was embroiled in a bidding war for London-listed Cove Energy for better parts of Q1 this year, would emerge out of its conservative shell and trump rival bids from Thailand’s PTTEP and a couple of interested parties from India outright.

In the end the deal was sealed by a conservative, albeit apparently successful, counter offer by Shell for the East Africa focussed E&P company. Having seen its offer for US$1.6 billion back in February trumped by PTTEP, the Anglo-Dutch major returned to the table with a bid of US$1.81 billion which matched rather than bettered the Thai state company’s offer.

On April 24, Cove’s directors accepted and recommended Shell's offer which the Oilholic thinks had much to do with Mozambique as a nation wanting Shell’s expertise as well as its investment. The possibility of a bid battle has now receded; more so as the agreement includes a break fee clause, under which Cove Energy will have to pay Shell US$18 million if it now accepts a rival bid.

An approval from the government of Mozambique is awaited as Shell eyes Cove’s main asset – an 8.5% stake in the Rovuma Offshore Area 1 in the country where Anadarko projects recoverable reserves of 30 tcf of natural gas. Shell as a company continues to be in good nick having recently announced a rise in Q1 profits while rival ExxonMobil saw its profits dip. On an annualised basis, Shell Q1 profits were up 11% at US$7.66 billion while in a strange coincidence Exxon’s profits fell 11% to US$9.45 billion. Both majors said oil prices would be ‘volatile’ in the coming months.

Talking about the luck of the Irish, London and Dublin listed Providence Resources’ quest for Black Gold off the coast of Ireland appears to be on song. The company, which dug Ireland’s first oil prospection well that might be anywhere near profitability, looks good for its 520pence plus share price on the AIM when the Oilholic last checked.

This accolade of Ireland’s first profitable oil well goes to Barryroe prospection field, some 70km off Cork, where a future full-scale extraction to the tune of nearly 4000 barrels per day – which makes a lot of commercial sense – is within relative touching distance. Providence Resources also holds drilling permits in Northern Ireland. Since Irish crude prospection has been riddled with disappointments, Providence deserves a pat on the back and its current share price for its effort.

Finally, the Oilholic is a bit miffed about being told by people that the UK now has the most expensive petrol price in the world, which it clearly does not. Yours truly knows that prices at the pump bite everyone, but we Brits aren’t the worst off.

However, to argue otherwise often results in farcically loud arguments especially with people who think the more inexpert they are, the more valid their opinion is! Thankfully, experts at Staveley Head – a provider of specialist insurance products – have some handy figures to back up the Oilholic which suggest that while UK is almost always on the list of the most expensive countries to buy petrol – it is not the most expensive (yet).

Click on their infographic - the Global Petrol Price Index (above right) - to compare the UK with the others. It would suggest that current price per litre is the highest in Norway, followed by Turkey, Netherlands, Italy and Greece. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Shell Gas Station © Royal Dutch Shell. Infographic: Global Petrol Price Index © Staveley Head.

Oh drat! Brits ask what the ‘Frack’!

The Oilholic arrived back home from Texas last week to the sound of fellow Brits discussing ‘fracks’ and figures in favour of shale gas prospection here. All UK activity ground to a halt last year, when a couple of minor quakes majorly spooked dwellers of Lancashire where a company – Cuadrilla – was test fracking.

Fast forward to April 2012, and a UK government appointed panel of experts including one from the British Geological Survey now says, "There was a very low probability of other earthquakes during future treatments of other wells. We believe that (last year's) events are attributable to the existence of an adjacent geological fault that had not been identified. There might be other comparable faults, (and) we believe it's not possible to categorically reject the possibility of further quakes."

However, it added that while the tremors may be felt in areas where fracking is conducted, they won’t be above magnitude 3 on the Richter scale and were unlikely to cause any significant damage. The panel’s report has now been sent for a six-week consultation period.

The British Department of Energy and Climate Change (DECC) is expected to issue a set of regulations soon and ahead of that a verbal melee has ensued with everyone for or against wanting a say and environmental groups crying foul. However, there was near unanimous approval for a control mechanism which would halt fracking activity as soon as seismic levels rise above 0.5 on the Richter scale. The engineers wanted in too.

Dr. Tim Fox, Head of Energy and Environment at the Institution of Mechanical Engineers, says, “The recommendations that any shale gas operations should be more closely monitored are welcome. UK and European environmental regulations are already some of the most stringent in the world; and these proposed precautions are a good example of how to help mitigate the risk of any damage caused by seismic activity as a result of shale gas activity.”

City energy analysts also gave the panel’s conclusions a cautious thumbs-up as there is a long way to go before a meaningful extraction of the gassy stuff occurs in any case. Jim Pearce, Energy and Process Industries practice partner at global management consultancy A.T. Kearney, says, “Shale developments offer the UK an opportunity to exploit a relatively clean resource and fill the energy gap that is opening up once again as nuclear projects come under threat. If the UK is going to use gas we should look for the best available source, which is arguably shale gas. Moreover, shale developments may also provide the UK’s chemical industry with a much needed boost if ethane and other NGL’s (natural gas liquids) are also found.”

He opines that UK and the rest of Europe are falling rapidly behind on gas supply security and cost. “Our key industries will be coming under increasing threat if we do not react to the new order that shale has created. We have a great opportunity here to take the lessons learned from the US and benefit from them,” Pearce adds.

Oh what the ‘frack’, that’s surely reason enough to tolerate a few quakes providing the security of the water table is preserved and concerns over water pollution are addressed. Yikes, that’s another quaky one! Away from shale, the 30th anniversary of the Falkland Islands war between the UK and Argentina came and went earlier this month marked by remembrance services for the fallen, but accompanied by the usual nonsensical rhetoric from British and Argentine officials, more so from the latter irked by oil prospection off the Islands’ shores which it claims as its own.

Five independent British oil companies are exploring four areas for oil in Falkland Islands’ waters, but only one of these – Rockhopper – claims to have struck meaningful reserves of the crude stuff. It says it could get 350 million barrels in the Sea Lion field to the north of the islands, which it plans to bring onstream by 2016. However, analysts at Edison Investment Research noted in March that a total of 8.3 billion barrels could lie offshore. So expect each anniversary and the run up to it from here on to be accompanied by ‘crude’ rhetoric and much frothing from Buenos Aires.

When it comes to being ‘crude’, the Argentines are in a class of their own. Just ask Repsol! On Wednesday, the country’s Senate approved the controversial decision, announced last week by President Cristina Fernandez de Kirchner, to nationalise Repsol YPF thereby stripping Spanish giant Repsol’s controlling stake in YPF.

Following the bizarre but locally popular announcement last week, while its stock plummeted, rating agencies scrambled to downgrade Repsol YPF’s ratings with Fitch Ratings and Moody’s doing so in tandem. Warnings to Argentina from the Spanish government, EU Trade Commission and last but not the least Repsol itself have since followed.

Repsol wants around US$10 billion for its 57.4% stake in YPF, but Argentina has said it does not recognise that valuation. There also one more thing they don’t possibly recognise - it’s called ‘sound economics’ which often gets trumped by ‘good politics’ in that jurisdiction. A number of analysts’ notes have been doing the rounds since April 17th when Kirchner went down the route towards nationalisation. Most had the same dire forecast for Repsol, but for the Oilholic, one issued by the inimitable Stuart Joyner, head of oil and gas at Investec, stood out.

In it he notes, “The apparent decision to nationalise YPF means we move to a worst case for the value of Repsol's 57.4% stake. The Argentine Tango is the consummate dance of love, but there was little affection for the country's largest foreign investor in Buenos Aires yesterday.”

Well said sir! Meanwhile with near perfect symmetry while the Argentines were being crudely castigated, Time magazine decided to name Brazilian behemoth Petrobras' CEO Maria das Graças Silva Foster one of the most influential people in the world. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Gas pipeline © National Geographic photo stock.

On Oilfield services co’s & a Texan Goodbye

Last two days have been about chatter on oilfield services and drilling companies at a pan global level based on Houstonian feedback, an interesting editorial and an investment note – all of which suggest that things are stable, growth will occur but that 2012-2013 may not be as good as 2011.

The reason is tied-in to the Oilholic’s last few blog posts that natural gas price is low and crude oil price is relatively high. So gains are to be made on one side of the business and the other side – while not necessarily countering all gains – would still stunt growth to a degree according to those in the know. Furthermore, growing competition within the services and drilling industry also means the biggest companies will still grow over the next 12 months, but not by the 10%-or-higher range that would warrant a continued positive outlook according to Moody’s.

“We foresee lower operating margins and slower EBITDA growth in 2012-2013 for the three companies that offer the best barometer of industry conditions – Schlumberger, Halliburton and Baker Hughes,” says Stuart Miller, Vice President & Senior Analyst at the ratings agency.

“We would move our outlook to positive if we projected that sector’s EBITDA would grow by more than 10% (annualised) over the next 12-18 months, while a drop of more than 10% would translate to a negative outlook,” he concludes.

The US rig count is also expected stabilise in 2012-2013. Oil-directed drilling will continue to outperform, but natural gas drilling will remain depressed into the foreseeable future, leading to a slower upward curve according to the agency.

(Click on graph - above right - to enlarge; for the latest Baker Hughes Rig Count click here). Nonetheless, drilling and associated services in unconventional plays continues as an area of strength for the industry.

The technical difficulty of developing unconventional resources will support a robust demand for sophisticated (also read expensive) horizontal well services. Companies such as Superior Energy Services, Key Energy Services and Basic Energy Services all stand to gain from their increasing exposure to unconventional plays, says Moody’s.

This ties-in nicely to an editorial in the latest (Apr 13, 2012) issue of the Houston Business Journal by Deon Daugherty in which she notes that private equity funding is being pumped in to oilfield services firms as 2012 unfolds alongside the usual investment in other traditional E&P components of the business.

Based on feedback from key local players, Daugherty writes that the technology and technical expertise needed to drill complex horizontal wells, hydraulic fracturing and expensive equipment is partly behind Houston private equity funds pouring investments in to oilfield services companies, alongside a high price of black gold driving investment into traditional E&P activity.

Speaking of editorials, there is another interesting and controversial one in The New Yorker (Apr 9, 2012) which makes a comment on ExxonMobil – the world’s largest “non-state-owned” corporation with annual revenues exceeding the GDP of Norway – and its ties with the US Republican Party.

While Democrats love to loathe the Irving, Texas headquartered IOC, columnist Steve Coll, splendidly notes that ExxonMobil CEO Rex Tillerson and President Obama "appear to share at least one understanding about energy policy and the 2012 (presidential) campaign: they are both aware that the partisan and media-amplified war over where to place the blame for rising (US) gasoline prices is largely a phony one."

The Oilholic couldn’t have put it better himself that being an E&P behemoth and that in itself being the area where its core interests are, "ExxonMobil can neither control prices at the pump nor make high profits there."

On a related R&M note, a Bloomberg report suggests that Delta Airlines is possibly in talks with ConocoPhillips about purchasing the Houston-based oil and gas major’s Trainer Refinery in Pennsylvania. Citing anonymous sources, the newswire says Delta would use the fuel from the Trainer refinery and other refineries in exchange for other products made there that it would not use.

While ConocoPhillips has said it would close the Trainer facility if it could not find a buyer by the end of May, its spokesman Rich Johnson told Bloomberg it is "still in the process of seeking a buyer for the refinery” and that the process was confidential. If it goes through, the move would be a remarkable one for a privately listed international airline.

Lastly on a crude pricing note, local media outlets suggest Enterprise Product Partners and Enbridge plan to reverse the flow of the Seaway oil pipeline two weeks ahead of schedule by mid-May pending US regulatory approval, thereby starting a much-needed reduction of excess crude from the US Midwest down and dispatch it to the Gulf Coast.

While the crude fetches a premium in the Gulf Coast, high inventory levels at the Cushing, Oklahoma – the delivery point for WTI oil futures contracts – have impacted WTI pricing relative to Brent. Reports suggest a mid-May (May 17) start date for the pipeline flow reversal will initially carry about 150,000 barrels per day of crude from the Midwest to the Gulf Coast. The news had an immediate impact as the arbitrage between transatlantic Brent and Gulf coast crudes on one hand and WTI on the other contracted sharply.

At 18:15 GMT, Light Louisiana Sweet (LLS) traded at US$19.40 a barrel premium over WTI, down US$1.65 from Friday's, Mars Sour (MRS) traded at US$12.25 a barrel over WTI down US$1.75, Poseidon (PSD) traded at US$11.55 over WTI down US$1.55.

Meanwhile, the ICE Brent futures contract for June traded at US$118.60 down US$2.61. Hitherto Brent crude and Gulf Coast crudes were moving up in tandem for the last 18 months, so this is certainly welcome news for those hoping for a return to more traditional levels stateside between WTI and Gulf Coast crudes.

Sadly, it is now time to bid another goodbye to Houston – a city which the Oilholic loves to visit more than any other. Yours truly leaves you with a view of the Minute Maid Park in downtown Houston. It is home to the local baseball team – the Houston Astros.

The stadium has a capacity of 40,963 spectators according to a spokesperson with an electronically retractable roof which was developed by Vahle, courtesy of which it can be fully air-conditioned when required – a wise decision given the city’s often hot and humid weather!

A local enthusiast tells the Oilholic that the field is unofficially and lightheartedly known as "The Field Formerly Known As Enron" by fans, locals, critics and scribes alike, acquiring the title in wake of the Enron scandal, as the failed energy company had bought naming rights to the stadium in 2000 before its spectacular and fraud-ridden collapse in November 2001.

Thankfully, on June 5, 2002, Houston-based Minute Maid, the fruit-juice subsidiary of Coca Cola Company, acquired the naming rights to the stadium for 28 years. Unlike Enron, it’s a healthier brand says the Oilholic. That’s all from Texas folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Pump Jacks Perryton, Texas, USA © Joel Sartore/National Geographic. Photo 2: Minute Maid Park - home of the Houston Astros, Texas, USA © Gaurav Sharma 2012. Graph: Land & Offshore rig count and forecast © Baker Hughes/Moody's.

Houston, We have a natural gas price problem!

While oil E&P players here in Houston are optimistic, those in the shale and natural gas businesses have a bit of a worry - for the first time since January 2002, a front-month settlement for natural gas has closed below US$2 on the NYMEX overnight.

The execution in question was for a May delivery which settled at US$1.984 per million Btu, down 2.3% or 4.7 cents, and it has caused a stir down here since majority of players, including independents are involved in both sets of prospection activity.

The reason is simple – there’s just too much of the stuff around, especially in a North American context courtesy shale gas plays which have been resulting in an exponential rise in US production. A relatively mild winter stateside and an abundance of supply has already caused natural gas prices to plummet over 50% on an annualised basis.

Can they plummet further over the next two quarters? Possibly. Will they? Probably not; that’s because the trading community will also take stock of the new low. The price is low enough as it is, but is there an appetite for further bearish punts? Regrettably, the Oilholic has not encountered definitive reasons one way or another. In fact, an unscientific straw poll of five Houston based traders had three anticipating a further fall while two said a temporary bottom had been reached.

Without a shadow of doubt though, over the course of the year, companies with a higher proportion of their production equation leaning towards natural gas will be more at profit risk on a basis relative to their peers having a greater exposure to oil production. Expect a scaling back of budgets or a sale of assets in order to manage leverage ratios by such players.

Coupled with all this is an interesting and somewhat related note on US midstream companies put out by Moody’s on April 2, 2012 which notes that booming demand for new oil and natural gas liquids infrastructure trumps weak natural gas prices. The agency reckons that a robust environment for US midstream energy companies will continue through mid-2013 and possibly beyond and forecasts that EBITDA for the midstream sector will grow by more than 20% in 2012.

Growing production of oil, natural gas and natural gas liquids and higher margins are driving increased earnings and cash flow for midstream companies, especially those with existing gathering and processing or pipeline infrastructure near booming shale plays. The agency names Energy Transfer Partners, Enterprise Production Partners, ONEOK Partners and Williams Partners among those best positioned for organic growth.

In addition, Moody's says that low interest rates and the sector's lower commodity price sensitivity have made the midstream sector very attractive to equity investors, while both high-yield and investment grade midstream companies are able to tap the open capital markets for funding to fuel growth.

Moving away from ‘gassy’ issues and onto the price of the crude stuff, WTI maintained its mildly bullish thrust trading over US$103 per barrel at one point in intraday trading on Thursday aided by a weaker US dollar while Brent was seen more or less holding steady at price levels above US$120 per barrel.

That’s all for the moment folks! The Oilholic leaves you with views (above) of the Christopher C. Kraft Mission Control Center building and its mission control room at NASA’s Johnson Space Center which yours truly took time out to visit this afternoon. While crude oil markets have “lift off”, the natural gas markets have a “problem.” Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Downtown Houston, Photo 2: Mission control room and exterior of the Christopher C. Kraft Mission Control Center building at NASA’s Johnson Space Center, Texas, USA © Gaurav Sharma 2012.