Algeria’s ‘dark cloud’, PDVSA’s ratings & more

The terrorist strike on Algeria’s In Amenas gas field last week and the bloodbath that followed as the country’s forces attempted to retake the facility has dominated the news headlines. The siege ended on Saturday with at least 40 hostages and 32 terrorists dead, according to newswires. The number is likely to alter as further details emerge. The hostage takers also mined the whole facility and a clear-up is presently underway. The field is operated as a joint venture between Algeria's Sonatrach, Statoil and BP. While an estimated 50,000 barrels per day (bpd) of condensate was lost as production stopped, the damage to Algeria’s oil & gas industry could be a lot worse as foreign oil workers were deliberately targeted.

 

In its assessment of the impact of the terror strike, the IEA said the kidnapping and murder of foreign oil workers at the gas field had cast a ‘dark cloud’ over the outlook for the country's energy sector. The agency said that 'political risk writ large' dominates much of the energy market, 'and not just in Syria, Iran, Iraq, Libya or Venezuela' with Algeria returning to their ranks. Some say it never left in the first place.

 

Reflecting this sentiment, BP said hundred of overseas workers from IOCs had left Algeria and many more were likely to join them. Three of the company’s own workers at the In Amenas facility are unaccounted for.

 

Continuing with the MENA region, news emerged that Saudi Arabia’s output fell 290,000 bpd in December to 9.36 million bpd. Subsequently, OPEC’s output in December also fell to its lowest level in a year at 30.65 million bpd. This coupled, with projections of rising Chinese demand, prompted the IEA to raise its global oil demand forecast for 2013 describing it as a 'sobering, 'morning after' view.'

 

The forecast is now 240,000 bpd more than the IEA estimate published in December, up to 90.8 million bpd; up 1% over 2012. "All of a sudden, the market looks tighter than we thought…OECD inventories are getting tighter - a clean break from the protracted and often counter-seasonal builds that had been a hallmark of 2012," IEA said.

 

However, the agency stressed there was no need for rushed interpretations. "The dip in Saudi supply, for one, seems less driven by price considerations than by the weather. A dip in air conditioning demand - as well as reduced demand from refineries undergoing seasonal maintenance - likely goes a long way towards explaining reduced output. Nothing for the global market to worry about," the IEA said.

 

"The bull market of 2003‐2008 was all about demand growth and perceived supply constraints. The bear market that followed was all about financial meltdown. Today's market, as the latest data underscore, has a lot to do with political risk writ large. Furthermore, changes in tax and trade policies, in China and in Russia, can, at the stroke of a pen, shakeup crude and products markets and redraw the oil trade map," the agency concluded.

 

Simply put, it’s too early for speculators to get excited about a possible bull rally in the first quarter of 2013, something which yours truly doubts as well. However, across the pond, the WTI forward month futures contract cut its Brent discount to less than US$15 at one point last week, the lowest since July. As the glut at Cushing, Oklahoma subsides following the capacity expansion of the Seaway pipeline, the WTI-Brent discount would be an interesting sideshow this year. 

 

The IEA added that non-OPEC production was projected to rise by 980,000 bpd to 54.3 million bpd, the highest growth rate since 2010. Concurrently, BP said that US shale oil production is expected to grow around 5 million bpd by 2030. This, according to the oil major, is likely to be offset by reductions in supply from OPEC, which has been pumping at historical highs led by the Saudis in recent years.

 

BP's chief economist Christof Ruehl said, "This will generate spare capacity of around 6 million bpd, and there's a fault line if there is higher shale production then the consequences would be even stronger." But the shale revolution will remain largely a "North American phenomenon," he added.

 

"No other country outside the US and Canada has yet succeeded in combining these factors to support production growth. While we expect other regions will adapt over time to develop their resources, by 2030 we expect North America still to dominate production of these resources," Ruehl said.

 

Along the same theme, CNN reported that California is sitting on a massive amount of shale oil and could become the next oil boom state. That’s only if the industry can get the stuff out of the ground without upsetting the state's powerful environmental lobby. Yeah, good luck with that!

Returning to Saudi Arabia, Fitch Ratings said earlier this month that an expansionary 2013 budget based on a conservative oil price will support another year of healthy economic growth for the country and a further strengthening of the sovereign's net creditor position. However, overall growth will slow “due to a decline in oil production that was already evident in recent months.”

 

In the full year to December-end 2013, the Saudi budget, unveiled on December 29, projected record spending of US$219 billion (34% of GDP), up by almost 20% on the 2012 budget. Budgeted capital spending is 28% higher than in 2012, though the government has struggled to achieve its capital spending targets in recent years.

 

While an 18% rise in Saudi revenues is projected in the budget, they are based on unstated oil price and production assumptions, with the former well below prevailing market prices. Fitch anticipates Saudi production and prices will be lower in 2013 than 2012.

"With no new revenue-raising measures announced and little scope for higher oil revenues, the revenue projection appears less cautious than usual. However, actual revenues generally substantially exceed budget revenues (by an average of 82% over the past five years) and should do so again in 2013," the agency said.

 

Meanwhile, political uncertainty continues in Venezuela with no clarity about the health of President Hugo Chavez. It has done Petróleos de Venezuela's (PDVSA), the country’s national oil company, no favours. On January 16, ratings agency Moody’s changed PDVSA's rating outlook to negative.

It followed the change in outlook for the Venezuelan government's local and foreign currency bond ratings to negative. "The sovereign rating action reflects increasing uncertainty over President Chavez's political succession, and the impact of a possibly tumultuous transition on civil order, the economy, and an already deteriorating government fiscal position," Moody’s said.

 

On PDVSA, the agency added that as a government-related issuer, the company's ratings reflect a high level of imputed government support and default correlation between the two entities. Hence, a downgrade of the government's local and foreign currency ratings would be likely to result in a downgrade of PDVSA's ratings as well.

 

Away from a Venezuela, two developments in the North Sea – a positive and a negative apiece – are worth taking about. Starting with the positive news first, global advisory firm Deloitte found that 65 exploration and appraisal wells were drilled on the UK Continental Shelf (UKCS), compared with 49 in 2011.

 

The activity, according to Deloitte, was boosted by a broader range of tax allowances and a sustained high oil price. The news came as Dana Petroleum said production had commenced at the Cormorant East field which would produce about 5,500 bpd initially. Production will be processed at the Taqa-operated North Cormorant platform, before being sent to BP's Sullom Voe terminal (pictured above) for sale.

 

Taqa, an Abu Dhabi government-owned energy company, has a majority 60% stake in the field. Alongside Dana Petroleum (20%), its other partners include Antrim Resources (8.4%), First Oil Expro (7.6%) and Granby Enterprises (4%).

 

While Taqa was still absorbing the positives, its Cormorant Alpha platform, about 160 km from the Shetland Islands, reported a leak leading to a production shut-down at 20 other interconnected North Sea oilfields.

 

Cormorant Alpha platform handles an output of about 90,000 bpd of crude which is transported through the Brent pipeline to Sullom Voe for dispatch. Of this only 10,000 bpd is its own output. Thankfully there was no loss of life and Taqa said the minor leak had been contained. It is currently in the process of restoring 80,000 bpd worth of crude back to the Brent pipeline system along with sorting its own output.

 

Finally, as the Oilholic blogged back in October on a visit to Hawaii, Tesoro is to close its Kapolei, O'ahu refinery in the island state in April as a buyer has failed to turn-up (so far). In the interim, it will be converting the facility to a distribution and storage terminal in the hope that a buyer turn up. The Oilholic hopes so too, but in this climate it will prove tricky. Tesoro will continue to fulfil existing supply commitments.

 

That’s all for the moment folks except to inform you that after resisting it for years, yours truly has finally succumbed and opened a Twitter account! Keep reading, keep it ‘crude’!

 

To follow The Oilholic on Twitter click here.

 

© Gaurav Sharma 2013. Photo: Sullom Voe Terminal, BP © BP Plc.

On finite resources and China’s urges

We constantly debate about the world’s finite and fast depleting natural resources; that everything from fossil fuel to farmable acreage is in short supply. Some often take the line that the quest for mineral wealth would be a fight to the death. Others, like academic Dambisa Moyo take a more pragmatic line on resource scarcity and rationally analyse what is at stake as she has done in her latest book Winner Take All: China’s race for resources and what it means for us.

That the Chinese are in town for more than just a slice of the natural resources cake is well documented. Yet, instead of crying ‘wolf’, Moyo sequentially dissects and offers highly readable conjecture on how China is leading the global race for natural resources be it via their national oil companies, mergers, asset acquisitions, lobbying or political leverage on an international scale.

While cleverly watching out for their interests, the author explains, in this book of just over 250 pages split by two parts containing 10 chapters, that the Chinese are neck-deep in a global resources rush but not necessarily the causative agents of perceived resource scarcity.

However, that they are the dominant players in a high stakes hunt for commodities from Africa to Latin America is unmistakable. For good measure and as to be expected of a book of this nature, the author has examined a variety of tangents hurled around in a resource security debate. The Dutch disease, geopolitics, risk premium in commodities prices, resource curse hypothesis have all been visited versus the Chinese quest by Moyo.

The Oilholic found her arguments on the subject to be neither alarmist nor populist. Rather, she has done something commendable which is examine how we got to this point in the resources debate, the operations of commodity markets and the geopolitical shifts we have seen rather than sensationalise the subject matter. China, the author opines may be leading the race for resources, but is by no means the only hungry horse in town.

Overall, it is a very decent book and well worth reading given its relevance and currency in today’s world. The Oilholic would be happy recommend it to commodities traders, those interested in international affairs, geopolitics, financial news and resource economics. Finally, those who have made a career out of future projections would find it very well worth their while to absorb it from cover to cover.

To follow The Oilholic on Twitter click here. 

© Gaurav Sharma 2013. Photo: Front cover - Winner Take All © Allen Lane / Penguin Group UK.

The oil market in 2013: thoughts & riddles aplenty

Over a fortnight into 2013 and a mere day away from the Brent forward month futures contract for February expiring, the price is above a Nelson at US$111.88 per barrel. That’s after having gone to and fro between US$110 and US$112 intra-day.

As far as the early January market sentiment goes, ICE Future Europe said hedge funds and other money managers raised bullish positions on Brent crude by 10,925 contracts for the week ended January 8; the highest in nine months. Net long positions in futures and options combined, outnumbered short positions by 150,036 lots in the week ended January 8, the highest level since March 27 and the fourth consecutive weekly advance.

On the other hand, bearish positions by producers, merchants, processors and users of Brent outnumbered bullish positions by 175,478, down from 151,548 last week. It’s the biggest net-short position among this category of market participants since August 14. So where are we now and where will we be on December 31, 2013?

Despite many market suggestions to the contrary, Barclays continues to maintain a 2013 Brent forecast of US$125. The readers of this blog asked the Oilholic why and well the Oilholic asked Barclays why. To quote the chap yours truly spoke to, the reason for this is that Barclays’ analysts still see the Middle East as “most likely” geopolitical catalyst.

“While there are other likely areas of interest for the oil market in 2013, in our view the main nexus for the transmission into oil prices is likely to be the Middle East, with the spiralling situations in Syria and Iraq layered in on top of the core issue of Iran’s external relations,” a Barclays report adds.

Macroeconomic discontinuities will continue to persist, but Barclays’ analysts reckon that the catalyst they refer to will arrive at some point in 2013. Nailing their colours to mast, well above a Nelson, their analysts conclude: “We are therefore maintaining our 2013 Brent forecast of US$125 per barrel, just as we have for the past 21 months since that forecast was initiated in March 2011.”

Agreed, the Middle East will always give food for thought to the observers of geopolitical risk (or instability) premium. Though it is not as exact a science as analysts make it out to be. However, what if the Chinese economy tanks? To what extent will it act as a bearish counterweight? And what are the chances of such an event?

For starters, the Oilholic thinks the chances are 'slim-ish', but if you’d like to put a percentage figure to the element of chance then Michael Haigh, head of commodities research at Société Générale, thinks there is a 20% probability of a Chinese hard-landing in 2013. This then begs the question – are the crude bulls buggered if China tanks, risk premium or no risk premium?

Well China currently consumes around 40% of base metals, 23% major agricultural crops and 20% of ‘non-renewable’ energy resources. So in the event of a Chinese hard-landing, not only will the crude bulls be buggered, they’ll also lose their mojo as investor confidence will be battered.

Haigh thinks in the event of Chinese slowdown, the Brent price could plummet to US$75. “A 30% drop in oil prices (which equates to approximately US$30 given the current value of Brent) would ultimately boost GDP growth and thus pull oil prices higher. OPEC countries would cut production if prices fall as a result of a China shock. So we expect Brent’s decline to be limited to US$75 as a result,” he adds.

Remember India, another major consumer, is not exactly in a happy place either. However, it is prudent to point out the current market projections suggest that barring an economic upheaval, both Indian and Chinese consumption is expected to rise in 2013. Concurrently, the American separation from international crude markets will continue, with US crude oil production tipped to rise by the largest amount on record this year, according to the EIA.

The independent statistical arm of the US Department of Energy, estimates that the country’s crude oil production would grow by 900,000 barrels per day (bpd) in 2013 to 7.3 million bpd. While the rate of increase is seen slowing slightly in 2014 to 600,000 bpd, the total jump in US oil production to 7.9 million bpd would be up 23% from the 6.4 million bpd pumped domestically in 2012.

The latest forecast from the EIA is the first to include 2014 hailing shale! If the agency’s projections prove to be accurate, US crude oil production would have jumped at a mind-boggling rate of 40% between 2011 and 2014.

The EIA notes that rising output in North Dakota's Bakken formation and Texas's Eagle Ford fields has made US producers sharper and more productive. "The learning curve in the Bakken and Eagle Ford fields, which is where the biggest part of this increase is coming from, has been pretty steep," a spokesperson said.

So it sees the WTI averaging US$89 in 2013 and US$91 a barrel in 2014. Curiously enough, in line with other market forecasts, bar that of Barclays, the EIA, which recently adopted Brent as its new international benchmark, sees it fall marginally to around US$105 in 2013 and falling further to US$99 a barrel in 2014.

On a related note, Fitch Ratings sees supply and demand pressures supportive of Brent prices above US$100 in 2013. “While European demand will be weak, this will be more than offset by emerging market growth. On the supply side, the balance of risk is towards negative, rather than positive shocks, with the possibility of military intervention in Iran still the most obvious potential disruptor,” it said in a recent report.

However, the ratings agency thinks there is enough spare capacity in the world to deal with the loss of Iran's roughly 2.8 million bpd of output. Although this would leave little spare capacity in the system were there to be another supply disruption. Let’s see how it all pans out; the Oilholic sees a US$105 to US$115 circa for Brent over 2013.

Meanwhile, the spread between Brent and WTI has narrowed to a 4-month low after the restart of the Seaway pipeline last week, which has been shut since January 2 in order to complete a major expansion. The expanded pipeline will not only reduce the bottleneck at Cushing, Oklahoma but reduce imports of waterborne crude as well. According to Bloomberg, the crude flow to the Gulf of Mexico, from Cushing, the delivery point for the NYMEX oil futures contract, rose to 400,000 bpd last Friday from 150,000 bpd at the time of the temporary closure.

On a closing note, and going back to Fitch Ratings, the agency believes that cheap US shale gas is not a material threat to the Europe, Middle East and Africa’s (EMEA) oil and gas sector in 2013. It noted that a lack of US export infrastructure, a political desire for the US to be self-sufficient in gas, and the prevalence of long term oil-based gas supply contracts in Europe all suggest at worst modest downward pressure on European gas prices in the short to medium term.

Fitch’s overall expectation for oil and gas revenues in EMEA in 2013 is one of very modest growth, supported by continued, if weakened, global GDP expansion and potential supply shocks. The ratings agency anticipates that top line EMEA oil and gas revenue growth in 2013 will be in the low single digits. There remains a material – roughly 30% to 40% – chance that revenue will fall for the major EMEA oil producers, but if so this fall is unlikely to be precipitous according to a Fitch spokesperson.

That’s all for the moment folks! One doubts if oil traders are as superstitious about a Nelson or the number 111 as English cricketers and Hindu priests are, so here’s to Crude Year 2013. Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

© Gaurav Sharma 2013. Photo: Holly Rig, Santa Barbara, California, USA © James Forte / National Geographic.

Final ‘crude’ points of 2012

As 2012 draws to a close, a few developments over the last fortnight are worth mulling over, ahead of uncorking the champagne to usher in the New Year. But first, a word on pricing - the final ICE Brent February futures contract price cut-off noted by the Oilholic came in at US$110.96 per barrel with US budget talks in the background.

 

Over the last two weeks, and as expected, the cash market trade was rather uneventful with a number of large players starting the countdown to the closure of their books for the year. However, the ICE’s weekly Commitment of Traders report published on Christmas Eve made for interesting reading.

 

It suggested that money managers raised their net long positions in Brent crude futures (and options) by 11.2% in the week that ended on December 18; a trend that has continued since November-end. Including hedge funds, money managers held a net long position of 106,138 contracts, versus 95,447 contracts the previous week.

 

Away from Brent positions, after due consideration the UK government finally announced that exploration for shale gas will resume albeit with strict safety controls. Overall, it was the right decision for British consumers and the economy. It was announced that there would be a single administrative authority to regulate and oversee shale gas and hydraulic fracking. A tax break may also apply for shale gas producers; further details are due in the New Year.

 

Close on the heels of UK Chancellor George Osborne’s autumn statement and the shale announcement, came a move by Statoil to take a 21-year old oil discovery in the British sector of the North Sea off its shelf.

 

On December 21, the Norwegian company approved a US$7 billion plan to develop its Mariner project, the biggest British offshore development in over a decade. According to Statoil, it could produce around 250 million barrels of oil or more over a 30-year period and could be brought onstream as early as 2017 with a peak output of 55,000 barrels per day.

 

Mariner, which is situated 150 km southeast of the Shetland Islands, was discovered in 1981. The Oilholic thinks Statoil’s move is very much down to the economics of a Brent oil price in excess of US$100 per barrel. Simply put, now would be a good time to develop this field in inhospitable climes and make it economically viable.

 

Being the 65.11% majority stakeholder in Mariner, Statoil would be joined by minority stakeholders JX Nippon E&P (28.89%) and Cairn Energy (via a subsidiary with a 6% stake).

 

Elsewhere, Moody's changed the outlook for Petrobras’ A3 global foreign currency and local currency debt to negative from stable. It said the negative outlook reflects the company's rising debt levels and uncertainty over the timing and delivery of production and cash flow growth in the face of a massive capital budget, rising costs and downstream profit pressures.

 

“We also see increasing linkage between Petrobras and the sovereign, with the government playing a larger role in the offshore development, the company's strategic direction, and policies such as local content requirements that will affect its future development plans,” said Thomas S. Coleman, senior vice president, Corporate Finance Group at Moody’s.

 

That’s all for 2012 folks! A round-up of crude year 2012 to follow early in the New Year; in the interim here’s wishing you all a very Happy New Year. Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo: Vintage Shell pump, San Francisco, USA © Gaurav Sharma.

Splendid dossier on a secretive "supermajor"

In 1999, the merger of Exxon and Mobil created what could be described as an oil & gas industry behemoth and, using some financial metrics, perhaps also one of the most profitable among the international “supermajors”. Despite being a global entity, for many people ExxonMobil remains an enigma.

 

Its sheer presence on the world stage has its admirers yet critics have labelled it as a polluter, a climate-change denier, a controversial lobbyist, a bully and more. For Pulitzer Prize winning author Steve Coll, there is more to it than meets the eye when it comes to ExxonMobil and its financial performance which is more durable than others in the Fortune 500 list.

 

Minus generalisations or a linear exercise in big oil bashing, this latest work of Coll's – Private Empire: ExxonMobil and American Power – is a pragmatic book about a global brand which, in the author’s words, became the "most hated"  oil company in America after the Exxon Valdez oil spill off the coast of Alaska in 1989.

 

That incident itself provides the starting point for a detailed narrative of just under 700 pages, split into two parts – The End of Easy Oil and The Risk Cycle – containing 28 chapters. Banking on his journalistic tenacity and detailed research work including over 400 interviews, declassified documents, legal and corporate records and much more, Coll has pencilled his unique description of this “Private Empire” and it does not disappoint.

 

ExxonMobil has its dogmas, fears, idiosyncrasies, pluses and minuses and the author delves into these based on anecdotal as well as observed evidence. From an obsession with safety post Exxon Valdez to the moving of its headquarters to Irving, Texas, from “the merger” to an insistence on R.O.C.E (Return on Capital Employed) – Coll has tackled it all.

 

The author opines that far from being an attention seeking ruthless corporate giant in bed with politicians, as popular conjecture would have you believe, ExxonMobil’s legendary lobbying in Washington DC was cleverly and aggressively targeted for maximum effect. While it shunned overt politicising of its presence and affairs, the company benefitted from new markets and global commerce that US military hegemony protected the world over. After all, when fighting a tight corner, ExxonMobil often called in a favour from power brokers on Capitol Hill.

 

While the whole book is a thoroughly good read, for the Oilholic, reading Coll’s description of ExxonMobil’s grapples with "resource nationalism" in developing markets (as its oil output in developed jurisdictions started declining) and its management (or otherwise) of operations in inhospitable countries, were the two most interesting passages.

 

From Aceh in Indonesia to the Niger Delta, from the Gulf of Guinea to Chad, ExxonMobil found itself in alien territory and conflicts it had not seen before. But it strategized, adopted, called in favours and more often than not emerged with a result in its favour; if not immediately, then over a period of time, writes Coll.

 

Every saga needs a cast of characters and this one is no exception. One individual and his portrayal by the author stand out. That’s Lee ("Iron Ass") Raymond, ExxonMobil’s inimitable boss from 1993 to 2005. With a doctorate in chemical engineering, boasting Dick Cheney among his friends and a history of denying climate change, Raymond was by all accounts a formidable character and Coll’s description of him does not disappoint. One mute criticism the Oilholic has is that its borderline gossip in parts but one supposes the gossip joins the dots in a weighty narrative.

 

In summation, this blogger found the book to be a definitive one on ExxonMobil and by default a glimpse into the wider ‘crude’ world, it’s wheeling and dealing. The Oilholic would be happy to recommend it to anyone interested in the oil business, its history, market dynamics and the geopolitical climate it is inextricably linked with.

 

Those interested in business, finance and economics would also enjoy this book as would the mainstream non-fiction reader in search of a riveting real world account. Finally, it would also be well worth the while of students of financial journalism to read and learn from Coll’s craft.

 

© Gaurav Sharma 2012. Photo: Front Cover – Private Empire: ExxonMobil and American Power © Allen Lane / Penguin Group UK.