‘Frackers’ & US coffers plus other crude matters

US Interior Secretary Sally Jewell should be a happy bunny this week say contacts in Houston town. In fact since morning, no fewer than nine have pointed this out to The Oilholic.

That is because Jewell's Interior Department has collected and disbursed over US$14.2 billion this week courtesy of a record royalties and fees windfall from oil & gas drilling on public land and US territorial waters for the fiscal year ending September 30. The figure is the second-highest collection on file and represents an annualised increase of $2 billion over the last fiscal year.

Fracking and horizontal drilling coupled with increasing interest in offshore E&P are being seen as the drivers. There is one caveat though, the figure does include proceeds of a bonus licensing bid in the Gulf of Mexico that took place in 2012, but was put on ledgers for 2013. In a statement, Jewell said, "The figure reflects significant energy production from public resources in the United States and serves as critical revenue stream for federal and state governments and tribal communities."

While the Interior Secretary stopped short of blessing the frackers, they are chuffed to bits and there is a fair bit of table thumping here. Let's also not forget that despite the frenetic pace of E&P activity in North Dakota, the state of Texas remains the country's largest producer of the crude stuff. That position is likely to be retained on account of fracking, enhanced oil recovery techniques being deployed, horizontal drilling and many established extraction sites that are chugging along nicely.

There is one positive domino effect which is largely going under the radar – Houston is leading the global race in the manufacture and shipping of oil & gas equipment manufacturing from blowout preventers to wellheads. Some of equipment can be loaded conventionally, but the rest – i.e. break bulk (heavy equipment which cannot be shipped in conventional containers) loading is also creating additional revenue streams in the state.

According to the Port of Houston, the facility handles nearly 70% of the US' entire break bulk cargo. Some here say jobs have more than doubled since 2005; Texas (along with North Dakota) also has the lowest unemployment rates in the country to brag about. Recent research conducted by McKinsey and IHS Global Insight came out bullish on the industry's long term potential for job creation – with both forecasting the creation of 1.7 million and 3.9 million jobs by 2020 and 2025 respectively.

Now that tells you something, especially as the US is poised to overtake Russia and Saudi Arabia and become the world's largest producer in barrels of oil equivalent terms. Strangely enough though, some of the majors such as Shell and BHP Billiton have apparently not got it right. The former has cut its shale production projections while the latter has put up half of its oil & gas land holdings right here in Texas as well as New Mexico for sale.

ExxonMobil's exit from shale exploration in Poland has also slightly dented the hypothesis of America exporting its nous on shale overseas. Some geologists have long warned that no one size fits all shale beds! Nonetheless, its early days yet on the knowledge export front at least.

Going beyond Texan borders, the positive impact of major upstream project start-ups on cash generation in the global integrated oil & gas industry in 2014-15, as well as continuing robust crude price conditions, have resulted in a change of outlook for the sector by Moody's to 'positive' from 'stable'. Up until this month, the ratings agency's outlook had been stable since September 2011.

Francois Lauras, senior credit officer in Moody's corporate finance group, said, "With crude prices set to remain robust, we expect that the start-up and ramp-up of major upstream projects over the next 12-18 months will benefit companies' production profiles and operating cash flow generation, and lead the industry's EBITDA to grow in the mid-to-high single digits year-on-year in 2014, albeit with more of the improvement showing in the latter part of the year."

"Downstream operations will remain under pressure, but EBITDA from refining and marketing operations will stabilise near their 2013 levels," he adds. Furthermore, Lauras feels that the global integrated oil and gas sector's capital investment in 2014 will remain close to its record levels of 2013.

The completion of the major upstream projects currently under construction will hold the key to the sector's return to positive free cash flow in the medium term. Integrated oil & gas companies will also continue to manage their asset portfolios actively and will execute further asset sales, supporting their financial profiles, Moody's concluded.

Finally, the Oilholic leaves you with glimpses of The Woodlands (see above, click to enlarge), a suburb of Houston, dedicated by none other than the late George Mitchell, a man credited for pioneering fracking.

Founded in 1974 as a largely residential area, today it houses commercial operations of many companies including those of a crude variety such as Anadarko, Baker Hughes and one GeoSouthern energy, a Blackstone Group backed company. It was one of the first to take a punt on the Eagle Ford shale prospection area and has just sold shale acreage to Devon Energy.

That's all for the moment from Houston folks! Keep reading, keep it 'crude'!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com 

© Gaurav Sharma 2013. Photo 1: Pump Jacks, Perryton © Joel Sartore / National Geographic. Photo 2: Collage of The Woodlands, Texas, USA © Gaurav Sharma, November 2013.

Greening up the USA’s oil capital

The Oilholic finds himself in Houston, Texas once again, feeling the pulse of the oil & gas market and catching-up with contacts old and new. But on this latest visit, yours truly has also picked up a new whiff of green! It seems the US oil capital's efforts to lower its carbon emissions and flag up its green credentials are bearing fruit in more ways than one.

Some of the ongoing efforts are not immediately apparent to outsiders. For instance, energy efficiency codes for the city's many skyscrapers have been completely redrawn and revised upwards as the Oilholic realised after stepping inside a few and have it confirmed by contacts.

More importantly, despite the new codes being non-mandatory for commerical establishments, most – including some of the largest oil companies in the world with offices here – have adopted them up and down Main Street and beyond with much gusto.

Here is something even more surprising, and one had to double-check with the City's Directorate of Sustainability and a contact at the EIA – the Houston Metropolitan Area is indeed the USA's largest municipal purchaser of renewable energy. Furthermore, over a third of it is sourced locally from Texan wind farms whose state-wide number alone exceeds many European countries taken as a whole.

Moving on to efforts that are clearly apparent, the Oilholic noted a few this afternoon having criss-crossed Downtown Houston on foot going left on Dallas Street from Main Street, turning on to Bagby Street and then right back up on Prairie Street in the other direction. For starters, a bike sharing programme has been underway since May 2012. While still in its infancy, Houston's answer to London's Boris bikes is commendable.

Under so-called the Houston B Cycle initiative, riders can provide their details online, purchase and get on-ground bike shares in Downtown, Midtown and the Museum District. Even some of the docking stations are solar powered (see photo right). Away from the programme, the City of Houston offers over 300 miles interconnected bikeway network spanning across 500 square miles and most public transport vehicles are 'bike storage' friendly.

Moving on from two wheels to four, more than half of the 10 or so official city vehicles spotted by this blogger were – hear this – either electric or hybrid. Courtesy a partnership between the Downtown District, BG Group and Houston First Corporation, you can also see GreenLink buses zipping by (see below left). Around seven of these circle the Downtown area, running on CNG and you can ride on them for free!

Houston Metro's light rail line, started in 2004, is fast expanding and adding three new lines. A farmers' market comes into town every week to sell locally sourced produce. And finally, a chance encounter with a Centerpoint Energy engineer at a downtown bar, led to another discovery that 75% of the traffic lights in Houston use LED bulbs!  

The city's criss-crossing freeways, erratically scattered green spaces and rush hour traffic often disguise the effort it has made to go green over the last 10 years.

The fact that it is the USA's fourth largest city and its fifth largest metropolitan area (atop being Texas' largest) with some 6 million-plus inhabitants, makes the progress made even more noteworthy. In 1999, Houston was the city with the dirtiest air quality in the country; today it is outside the worst ten, according to the American Lung Association.

One mute point though, which makes a lot of this blog's Texan friends chuckle – it seems eight of the worst ten cities in terms air quality are from 'green' California. One apiece from Indiana and Pennsylvania make-up the rest! What the Oilholic has catalogued above has been achieved in a short space of a decade. So here's to the next ten say locals. That's all for the moment from Houston folks! More soon, keep reading, keep it 'crude'!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo1:  Skyline of Downtown. Photo 2: Houston B Cycle docking station at Bayou Place. Photo 3: GreenLink buses collage, Houston, Texas, USA © Gaurav Sharma, November 2013.

The Kurdish question & a ‘Dudley’ sin?

The autonomous region of Kurdistan within Iraq's borders is drawing 'crude' headlines yet again. It's that old row about who controls what and gives rights for E&P activity in the region – the Federal administration in Baghdad or the provincial administration in Erbil?

 

The historical context is provided by Gulf War I, when allied forces imposed a no-fly zone, and the Kurds subsequently pushed Saddam Hussein's forces back outside the provincial border. That was 1991, this is 2013 – a lot has changed for Iraq, but one thing hasn't – Iraqi Kurdistan is as autonomous today, as it was back then.

 

In fact, it is more prosperous and an oasis of calm compared to the rest of the Federal state. One simple measure is that the rest of Iraq ravaged by sectarian conflict and Gulf War II still only provides its citizens with about an average of 6 to 7 hours of electricity per day. The average resident of Erbil gets 22 hours and sees infrastructural spending all around, driven by targeted revenue from oil and gas licensing and exports.

Since 2006, the Kurdistan Regional Government (KRG) has been granting rights for exploration within its borders to firms from Norway to the US, with much gusto and on better terms, many say, than the Federal administration in Baghdad. The Iraqi government in turn says KRG has no right to do so.

 

Mutual consternation came to a head in January when BP and Baghdad reached an agreement to revitalise the northern Kirkuk oilfield. Since jurisdictional mandate over the oilfield and the city is hotly contested by both sides, KRG declared the deal to be illegal on grounds that it was not consulted.

 

Firing a return salvo, Iraqi Oil Minister Abdul Kareem al-Luaibi called the production and export of oil from Kurdistan to be an act of "smuggling" and threatened to cut the region's [17%] spending allocation from the federal budget as well as take legal action against Western firms digging up Kurdistan, beginning with London-listed Genel Energy (the first such firm to export from the region).

Neither Genel Energy nor the administration paid heed to that threat. Baghdad and BP did likewise with KRG's moans over Kirkuk. Then the US State Department issued an advisory to all American oil firms operating in Kurdistan that they could be liable for legal damages from Baghdad. Doubtless, the rather handsomely rewarded legal eagles at their end advised them not to worry too much.

An "as-you-were" lull lasted for roughly 10 months, when last week in an extraordinary development, Bob Dudley, CEO of BP, joined al-Luaibi and officials from the Iraqi state-run North Oil Company to pay a controversial visit to the Kirkuk oilfield in a show of support. Why Dudley took the decision to go himself instead of sending a deputy is puzzling and paradoxically a bit obvious as well.

 

In making an appearance himself, Dudley wanted to show how important the Kirkuk deal is. Yet a deputy of his would have drawn a similar two-fingered gesture from KRG, as his visit did. Playing it cool, a source at BP said its only intention is to revive production at Kirkuk, an oilfield which at the turn of millennium saw an output of 900,000 barrels per day (bpd), but can barely manage less than a third of it today.

 

BP has the technical know-how to improve the field's output, but how it will extricate itself from the quagmire of the area's politics is anybody's guess. An Abu Dhabi based source says both sides are entrenched at Kirkuk. BP will have access to the Federally-administered side of the Kirkuk field, namely the Baba and Avana geological formations. But one formation – Khurmala – is inside the Kurdish provincial borders and being is developed by the KAR group.

 

Furthermore, there is another twist in the linear fight between Baghdad and Erbil – Kirkuk's governor Najimeldin Kareem, a man of Kurdish origin, has backed the Federal deal with BP. Dudley left the oilfield without saying anything concrete on record, leaving it to the Iraqis to do most of the talking.

 

The Iraqi Oil Ministry chose to describe Kareem's backing "as securing the complete support from the local government of Kirkuk" in order to commence developing Kirkuk. Hmm…but whose Kirkuk is it anyway? The primary beneficiary of Kurdish oil exports is Turkey; the closest market where the aforementioned Genel Energy delivers most of its output to.

 

Where the tussle will lead to is unpredictable – but it hasn't deterred either BP from signing up a deal with Baghdad or the likes of ExxonMobil, Chevron and Total with Erbil. This brings us back to why Dudley went himself – well, when his peers such as Rex Tillerson, ExxonMobil's boss, have showed-up in Erbil, there was perhaps little choice left. If the regional politics goes out of control, the bosses of oil firms would have only themselves to blame for getting so close to the Iraqi wrangles most say they are least interested in.

 

At the centre of it all is the thirst for black gold. KRG is providing generous production sharing and contract conditions within its autonomous borders, while Baghdad has quite possibly given equally generous terms to BP for Kirkuk. The oil major has already announced a US$100 million investment in the oilfield.

 

Giving KRG the last word in the verbal melee – in September 2012, even before the recent salvos had been fired in earnest and the CEOs had come calling, Ashti Hawrami, Minister for Natural Resources of KRG, said something rather blunt on BBC’s Hard Talk programme which explains it all: "To put it politely, if I have million barrels of oil to produce in two years time, the market needs it, Iraq needs it and at the end of the day we are going to win that battle."

 

There are 50 plus firms already helping him achieve that objective. With geological surveys projecting that Kurdistan potentially has 45 billion barrels of the crude stuff, many of these firms are working with the KRG contrary to advice given by their own governments.

 

And as if to rub it in further into his Federal counterpart, Hawrami quipped, "Kurdistan's investment and spending plans are more structured…Why is Baghdad buying F-16s when Iraqis have little more than 4 hours of electricity per day on average [much worse than the inhabitants of Iraqi Kurdistan]." OUCH!

 

Moving away from Iraqi politics, Brent's $106 per barrel floor has not only been breached, but was smashed big time last week. As noted, hedge funds are indeed feeling the pinch, for instance high-flier Andy Hall's $4 billion baby – Astenbeck Capital Management.

 

According to Reuters, Astenbeck is down 5% as of Oct-end, largely due to the slump in Brent prices. Even though Hall's team have diversified into palladium, platinum and soft commodities, it'd be remarkable if the fund is able to avoid its first annual loss in six years. However, one shouldn't be too hard on Astenbeck as the average energy fund on Chicago's Hedge Fund Research Index, is down 4.45%. That's all for the moment folks! Keep reading, keep it 'crude'!

 

To follow The Oilholic on Twitter click here.

 

To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo: Exploration site in Kurdistan © Genel Energy plc

Crude reality: Time to short as bulls go lethargic?

Most of the Oilholic's contacts in City trading circles had been maintaining in recent months that a US$106 per barrel price would be the psychological floor to the year-end, barring bearish trends induced by a wider and unforeseen macroeconomic tsunami.

To be quite honest, the global economy is probably where it has been for a while – in a bit of a lull. So even though things are neither materially better nor all that worse, the level was still breached this Monday morning. Methinks there is going to be further selling and yet more shorting either side of the Atlantic.

Our old friends the hedge funds – held responsible by many for the assetization of black gold – certainly seem to think so. That's if you believe data published by ICE Futures Europe. It indicates speculative bets that the Brent price will rise (in futures and options combined), outnumbered short positions by 119,451 lots in the week ended October 29.

The London-based exchange says that's a reduction of 21% (or 30,710 contracts) from the previous week and the biggest drop since the week ended June 25. Concurrently, bearish positions on Brent outnumbered bullish wagers by 321,470; a 3.2% decrease in net-short positions from October 22. So there you have it!

On a related note, albeit for different reasons, the WTI also closed at its lowest since June 26. In fact the forward month futures contract for December shed as much as 55 cents to $94.06 at one point in intraday trading on Monday.

The Oilholic believes the prices aren’t plummeting; rather they are hitting a much more realistic level. Such a sentiment was echoed by two new supply-side contacts this blogger had the pleasure of running into at the UK business lobby group CBI's 2013 annual conference.

As 2014 is nearly upon us, Steven Wood, managing director (corporate finance) at Moody's, says oil prices should stay robust through next year. His and Moody's quantification of robustness for Brent, factoring in Chinese demand and tensions in the Middle East, stands at around $95 per barrel, and West Texas Intermediate "for slightly less, in the next one to two years."

"And with the worst behind the US natural gas industry, prices for benchmark Henry Hub will average about $3.75 per thousand cubic feet next year," he adds.

Additionally, the good folks at Moody's reckon the E&P sector's fortunes will continue to rise over the next year, with big capital spending budgets keeping fundamentals strong (also for the oilfield service and drilling sector).

One minor footnote though, even if it is still some way off – what if international sanctions on Iran get eased should relations between the Islamic Republic and the West improve? We could then see the Iran add over 750,000 barrels per day to the global oil output pool. Undoubtedly, this would be bearish for oil markets, especially so for Brent. The recent dialogue between both sides has made contemplating the possibility possible!

Away from price-related issues, if you needed any further proof of renewed vigour in North Sea E&P activity, then Norway's Statoil has announced it will go ahead with a decision to build a new platform at its Snorre field to extract another 300 million barrels of the crude stuff at an expense of £4.2 billion. This would, according to the Norwegian media, extend the project's lifetime to 2040.

Statoil will take a final decision on engineering aspects in the first quarter of 2015 with the platform scheduled to come onstream in the fourth quarter of 2021. The Norwegian firm owns 33.3% of the exploration project licence. Other shareholders include Petoro (30%), ExxonMobil (17.4%), Idemitsu Petroleum (9.6%), RWE (8.6%) and Core Energy (1.1%). That’s all for the moment folks! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com

 

© Gaurav Sharma 2013. Photo: North Sea oil rig © Cairn Energy plc

An ‘Atlas’ of e-learning for a contact sport

The Oilholic has had the pleasure of visiting quite a few E&P facilities over the years from offshore rigs to onshore gas fields. Going back roughly a decade, it wasn't uncommon [and still isn't] to see roughnecks in hard hats being given instructions ranging from operational to health and safety by a superior.

The mode of communication usually involved barking verbal instructions in highly colourful language with bulky printed training manuals on-hand containing everything from evacuation routes to rules and regulations. All of this has changed and rather dramatically, if one may add. What started as a slow, but sure, transformation at the turn of the millennium came in the form of former roughnecks and rig engineers imparting their wisdom for the benefit of budding on-site professionals via training courses using the electronic medium.

 

By 2006-07, e-learning provided by specialist providers had gained considerable traction in what is largely a contact sport. Among the stalwarts, in this relatively young but highly competitive market, is a part private equity-owned, part employee-owned educator headquartered in Aberdeen, Scotland called Atlas.

 

The firm came on the Oilholic's radar back in 2011 at the 20th World Petroleum Congress in Doha.  A further look into Atlas, at the suggestion of a banking sector contact, revealed a client portfolio of some of the biggest names in the business for a company which is less than 20 years old. IOCs aside, strikingly enough, this blogger found that a number of NOCs had also availed Atlas' service to give their workforces – as the educator's motto states – the "knowledge to perform."

 

For the sake of a crude analogy, the Oilholic quipped to Kevin Short, Director of Sales at Atlas, if they'd in fact become the Rosetta Stone of the oil & gas business. "I don’t think it is that simple, although our e-learning courses and industry solutions are indeed multi-linguistic," he laughs.

 

For Short, it's more about creating, marketing and selling virtual learning solutions aimed at "improving efficiencies while minimising operational and legislative risk". This could range from e-training courses for employees moving dangerous goods by air to a simple training solution for evacuating an E&P facility.

 

"There are industry standard courses available from our library; but more often than not, you'll find clients ordering bespoke solutions or an altered version of an existing training solution to suit their specific needs," Short explains.

 

There is no mystique about what Atlas provides and the company continues to record double-digit growth on an annualised basis, much to the delight of its PE owners [HG Capital] one assumes. Peer-to-peer contact and reviews have certainly been of immense help in achieving this – both in terms of retaining clients and bagging new ones. Over the years, Atlas has expanded to Dubai, Kuala Lumpur and Houston.

 

Understandably, the firm keeps abreast of new emerging techniques in the E&P sector, unconventional prospection activity and allied health and safety issues to come-up with e-learning options for clients.

 

However, the Oilholic put one caveat to Short – pros from Aberdeen who have gained expertise for better parts of four decades, especially on the health and safety front in wake of the Piper Alpha tragedy (1988), are also on the educating circuit from Dubai to Calgary and in great demand. So is Atlas toughing it out with them too?

 

"In a sense, perhaps yes. But in terms of the broader picture no! That's because we also work with some of these professionals a lot of the time and hire them as what we call 'Subject Matter Experts' to work on fresh concepts for courses and bespoke solutions for clients. What's good for them is good for Atlas and by default good for the commissioning client."

 

When it comes to fishing these guys out – networking, events, headhunting those with industry reputation and project-based demand all play a part. Such expertise has helped the company put together its patented Atlas Knowledge Centre – a 3,000 page grab of all of the company's core content. Akin to a virtual oil & gas knowledge encyclopaedia, it is made available to subscribers serving as a "refresher" or instant help-guide to learners.

 

But what about converting new clients around the e-learning viewpoint? Short says competency is key here. "We can help companies by ensuring that their recruits not only just sit the course but based on the information that's been given to them, they become competent to handle the tasks at hand. It is not just about providing reading and reference material but rather ensuring that the candidate is learning."

 

Atlas also has an advisory board to help it test run pilot courses and provide constant feedback. Last time the Oilholic checked, there were around 53 companies on board for such an exercise. Finally, the company is also rather careful in being shall we say 'electronic platform neutral'.

 

"If a client wants an e-learning solution to work on a BlackBerry we wouldn't urge them to adopt an Android OS system, or Apple OS. Ultimately, that's their call. We have a young team here who will tailor a course to the clients' IT requirements and subsequently licence it to them, rather than it being the other way around." A wise line to take indeed! That’s all for the moment folks! Keep reading, keep it 'crude'!

NOTE: November 1, 2013 - To read this blogger's interview with Atlas CFO Graeme Park for CFO World click here.

 

To follow The Oilholic on Twitter click here.

 

To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo: Atlas HQ, Energy Park, Aberdeen, Scotland © Gaurav Sharma, October 2013.