A Russian deal, an Indian election, Libya & more

While the Europeans are busy squabbling about how to diversify their natural gas supplies and reduce reliance on Russia, the country's President Vladimir Putin hedged his bets earlier this week and reacted smartly by inking a 30-year supply deal with China.

No financial details were revealed and the two sides have been haggling over price for better parts of the last decade. However, yet again the Russian president has proved more astute than the duds in Brussels! Nevertheless, the Oilholic feels Russia would have had to make substantial compromises on price levels. By default, the Ukraine standoff has undoubtedly benefitted China National Petroleum Corp (CNPC), and Gazprom has a new gas hungry export destination.

Still there is some good news for the Europeans. Moody's believes that unlike in 2008-09, when gas prices spiked in the middle of the winter due to the cessation of Russian gas supplies to Europe via Ukraine, any temporary disruption via Ukraine would have only have a muted impact.

"This opinion factors in a combination of (1) lower reliance on Ukraine as a transit route, owing to alternative supply channels such as the Nord Stream pipeline which became operational in 2011; (2) low seasonal demand in Europe as winter has come to an end; and (3) gas inventories at high levels covering a full month of consumption," the ratings agency noted in a recent investment note.

Meanwhile, a political tsunami in India swept the country's Congress party led government out of power putting an end to years of fractious and economic stunting coalition politics in favour of a right-wing nationalist BJP government. The party's leader Narendra Modi delivered a thumping majority, which would give him the mandate to revive the country's economic fortunes without bothering to accommodate silly whims of coalition partners.

Modi was the chief minister of Gujarat, one of the country's most prosperous provinces and home to the largest in the refinery in the world in the shape of Jamnagar. In many analysts' eyes, regardless of his politics, the Prime Minister elect is a business friendly face.

Moody's analyst Vikas Halan expects that the new BJP-led government will increase natural gas prices, which would benefit upstream oil & gas companies and provide greater long term incentives for investment. Gas prices were originally scheduled to almost double in April, but the previous government put that increase on hold because of the elections.

This delay has meant that India's upstream companies have been losing large amounts of revenue, and a timely increase in gas prices would therefore cushion revenues and help revive interest in offshore exploration.

"A strong majority government would also increase the likelihood of structural reform in India's ailing power sector. Closer co-ordination between the central and state governments on clearances for mega projects and land use, two proposals outlined in the BJP's manifesto, would address investment delays," Halan added.

The Oilholic agrees with Moody's interpretation of the impact of BJP's victory, and with majority of the Indian masses who gave the Congress party a right royal kick. However, one is sad to see an end to the political career of Dr Manmohan Singh, a good man surrounded by rotten eggheads.

Over a distinguished career, Singh served as the governor of the Reserve Bank of India, and latterly as the country's finance minister credited with liberalising and opening up of the economy. From winning the Adam Smith Prize as a Cambridge University man, to finding his place in Time magazine's 100 most influential people in the world, Singh – whose signature appears on an older series of Indian banknotes (see right) – has always been, and will always be held in high regard.

Still seeing this sad end to a glittering career, almost makes yours truly wish Dr Singh had never entered the murky world of mainstream Indian politics in the first place. Also proves another point, that almost all political careers end in tears.

Away from Indian politics, Libyan oilfields of El Sharara, El Feel and Wafa, having a potential output level 500,000 barrels per day, are pumping out the crude stuff once again. However, this blogger is nonplussed because (a) not sure how long this will last before the next flare up and (b) unless Ras Lanuf and Sidra ports see a complete normalisation of crude exports, the market would remain sceptical. We're a long way away from the latter.

A day after the Libyan news emerged on May 14, the Brent forward month futures contract for June due for expiry the next day actually extended gains for a second day to settle 95 cents higher at US$110.19 a barrel, its highest settlement since April 24.

The July Brent contract, which became the forward-month contract on May 16, rose 77 cents to settle at US$109.31 a barrel. That's market scepticism for you right there? Let's face it; we have to contend with the Libyan risk remaining priced in for some time yet.

Just before taking your leave, a couple of very interesting articles to flag-up for you all. First off, here is Alan R. Elliott's brilliant piece in the Investor’s Business Daily comparing and contrasting fortunes of the WTI versus the LLS (Louisiana Light Sweet), and the whole waterborne crude pricing contrast Stateside.

Secondly, Claudia Cattaneo, a business columnist at The National Post, writes about UK political figures' recent visit to Canada and notes that if the Americans aren't increasing their take-up of Canada's energy resources, the British 'maybe' coming. Indeed, watch this space. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: Pipeline, India © Cairn Energy

Contextualising what’s afoot in Spain

No one can argue that Spain is among the big beasts of the euro zone, a country boasting high profile companies from banking to oil and gas. However, all is not well with this beast. The financial crisis and subsequent property market crash have taken their toll.

At present, the country has one of the highest unemployment rates in the euro zone, rising public debt and low consumer confidence.

To understand Spain's current economic malaise, one must contextualise the past – from recent politics to socioeconomics issues, from past histories to recent discontent. Veteran journalist William Chislett's brilliantly concise book - Spain: What everyone needs to know - helps you do just that.

The author, who had his first brush with Spain in 1970s and has lived there since 1986, begins the narrative by touching on the country's often turbulent history from the seventh century to the Franco years, and recent past either side of the Madrid bombings.

Chislett demonstrates strength in brevity, as this book of just under 230 pages, split into seven parts touches on the key protagonists who shaped or help shape Spain for better or for worse. In each case, from Franco to Zapatero, the author has interpreted trends and sentiments as he perceived them with a sense of balance, wit and proportion which is admirable.

Privatisations of state-owned companies from telecommunications to banks and of course that oil and gas behemoth called Repsol are duly mentioned with details of how, when and why Spain crossed that bridge. With the summary done, Chislett turns his attention to what lies ahead for the euro zone's fourth largest economy currently grappling with huge socioeconomic problems.

You can literally breeze through this splendid book and be wiser for it if Spain interests you. The Oilholic is also happy to recommend it to students of economics, the European Union project and those of a curious disposition with a thirst for improving their general knowledge about a country, its people and the challenges they face as a nation.

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© Gaurav Sharma 2014. Photo: Front Cover – Spain: What everyone needs to know © Oxford University Press, July 2013.

‘INA’ grumpy mood: MOL & Croatia’s government

The Oilholic finds himself in a jovial mood in sunny Zagreb. However, Hungarian oil company MOL and the Croatian Government are being rather grumpy with each other these days. The reason behind it all is the management of INA or Industrija Nafte, Croatia's national oil company in which the government holds around a 45% stake and MOL a slightly higher 47% stake.

INA has its origins in state-ownership, followed by privatisation; a trend which is not uncommon in this part of the world. It has an E&P arm with ongoing activity closer to home in the Adriatic Sea and Pannonian Basin, and abroad in Egypt and Angola. It also had gas exploration projects in Syria, brought to an abrupt halt in wake of the country's civil war.

INA's R&M operations include both of the Croatia's strategic refining assets – namely Rijeka Refinery (capacity 90,000 bpd) and Sisak Refinery (60,000 bpd) and retail forecourts. According to local analysts and whatever one can gather from media outlets, tension between MOL and Zagreb has been simmering since 2011.

Strain is evident and both parties are so at each other that it is out in the open. A scribe tells yours truly that MOL feels the Croatian Ministry of Economics is riddled with red tape and has conjured up a bad regulatory framework for the sector in general, which is hurting INA by default.

However, Minister Ivan Vrdoljak says it is MOL that has "failed" to deliver on its promise of incremental strategic investment. Another bone of contention is INA's loss-incurring gas trading arm which the government was supposed to have taken over but hasn't so far.

As if that was not enough, a Croatian court found former Prime Minister Ivo Sanader guilty of allegedly taking a bribe from MOL in 2008 for permitting it to gain market dominance. Both Sanader and MOL deny the charge. The country's Supreme Court is currently considering Sanader's appeal against his 10-year sentence, passed by the lower court while he remains behind bars on a multitude of charges.

Meanwhile, an informed source says trust between MOL and the Croatian government "is right out of the window". Sounds much better when locals say so in Croatian, but sadly the Oilholic cant replicate the sound-bite not being able speak any. Those in the outside world might be forgiven for wondering what the fuss is about and its all to do with upstream operations rather than the country's two refineries. INA operates these out of necessity to meet domestic distillate demand above than anything else.

For it, the Pannonian basin holds very good potential. According to the US Geological Survey, the area could have something in the region of 350 million barrels of oil equivalent (boe) by conservative estimates. The figure could rise to lower four digits if overtly optimistic regional projections are followed, so yours truly won't follow them.

Everyone from the Romanians to the Austrians want in, and Croats and Hungarians – should they stop their squabbling – could jointly work on their share too in this hydrocarbon hungry world. Additionally, the north Adriatic Sea offshore prospection is currently yielding INA (and its Italian partner Eni) 15.8 million boe per day.

The latest round of talks aimed at resolving the dispute have been going on since last September, with very little to show for. The next round of talks is scheduled for the end of the month. Here's hoping 'crude' sense prevails or their partnership mementos from 2003 might just end up in the City's Museum of Broken Relationships (see left). In the interim, please take any quips, claims and figures touted by either party with a pinch of salt!

Away from it all, one footnote to boot before yours truly enjoys some cultural pursuits and beverages here – ICE's latest commitment of traders report for the week ending April 29 noted that bets on a rising Brent price have risen to their highest in eight months as money managers, including hedge funds, increased their net long position in Brent crude by 0.3% to 204,488, marking a fourth successive week of increases.

Traders in the category decreased their long positions by 2,464, but the number of short positions also fell, by 3,039 to 47,800, the lowest level since the end of August. That's all from Zagreb folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo 1: St. Mark’s Church as seen from Lotrščak Tower, Zagreb, Croatia. Photo 2: The Museum of Broken Relationships, Zagreb, Croatia © Gaurav Sharma, May 2014.

US prices at the pump & that export ban

Each time the Oilholic is Stateside, one feels obliged to flag up petrol prices at the pump, often a cause of complaint from US motorists, spooking presidents to seek a release of the Strategic Petroleum Reserves.

 

So here's the latest price snap (left) from a petrol station at Mission San Jose, California captured by yours truly while in the South San Francisco Bay. And the price is per gallon, not litres, a pricing level that drivers in Europe can only dream of. With the shale bonanza, chatter is growing that the US should end its ban on crude oil exports. The ban was instituted in wake of the 1973 OPEC oil embargo and has been a taboo subject ever since.

However, the prices you see above are the very reason a lifting of that ban is unlikely to end over the medium term. Argument used locally is the same as the one mooted for the unsuccessful bid to prevent US natural gas exports – i.e. end consumers would take a hit. While in the case of natural gas, industry lobby groups were the ones who complained the loudest, in the case of crude oil, consumer lobby groups are likely to lead the fight.

That's hardly an edifying prospect for any senator or congressman debating the issue, especially in an election cycle which rears its head every two years in the US with never ending politicking. Just ask 'now Senator' and Democrat Ed Markey! But to quote someone else for a change – Senate Foreign Relations Committee Chairman Robert Menendez, another Democrat, has often quipped that lifting the ban would benefit only major oil companies and could end up "hurting US drivers and households" in the long run with higher gasoline prices.

 

Not all Democrats or US politicians are opposed to the lifting of a ban though. Senate Energy and Natural Resources Chairman Mary Landrieu and Republican Senator Lisa Murkowski support a lifting of the ban. Both recently called on the EIA to conduct a detailed study of the effects of crude oil exports.

 

"This is a complex puzzle that is best solved with dynamic and ongoing analysis of the full picture, rather than a static study of a snapshot in time," they wrote in an April 11 letter to EIA Administrator Adam Sieminski.

 

However, in all honesty, the Oilholic expects little movement in this front. Read up on past hysteria over the slightest upward flicker at US pumps and you'll get your answer why. One must be thankful that the debate is at least taking place. That too, only because US crude oil inventory books keep breaking records.

Earlier this month, the market was informed that US inventories had climbed to their highest level since May 1931. So what are we looking at here –  stockpiles at Cushing, Oklahoma, the country's most voluminous oil-storage hub and the delivery point for New York futures, rose by 202,000 barrels in the week ended April 25.

 

The news trigged the biggest WTI futures loss since November last year as a Bloomberg News survey estimated the net stockpile level to be close to 399.9 million last week. That said, nothing stops the likes of Markey from blowing hot air or speculators from netting their pound of flesh.

 

According to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) on Friday, traders and speculators increased their overall bullish bets in crude oil futures for a fifth straight week, all the way to the highest level since March 4 last week.

 

The non-commercial contracts of crude oil futures, primarily traded by large speculators and hedge funds, totalled a net position of +410,125 contracts for the week ended April 22. The previous week had seen a total of +409,551 net contracts. While this represents only a minor change of just +574 contracts for the week, it is still in throes of a bull run. That's all from San Francisco folks! Keep reading, keep it 'crude'!

 

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© Gaurav Sharma 2014. Photo: Gasoline prices at a station in Mission San Jose, California, USA © Gaurav Sharma, April, 2014.

Crude viewpoints from the Bay Area

The Oilholic finds himself in the San Francisco Bay Area yet again for the briefest of visits. By force of habit, one couldn't help doing a bit of tanker spotting from a vantage point some 21 floors above on a gloriously sunny day. More importantly, it's always a pleasure to discuss the stock market prices of companies behind what these metallic behemoths at sea are carrying.

The trading community appears to be in bullish mood close the midway point of 2014. Yours truly spoke to seven traders based here, most of whom had a buy recommendation on the big four services companies, which is not entirely unexpected. Five also had a buy recommendation on EOG Resources, a company the Oilholic admits has largely gone under his radar and Enterprise Products Partners, which hasn't.

 

The former, according IHS Energy data, saw a 40% rise in value to just under US$46 billion in 2013, making the company the largest market capitalisation gainer for upstream E&P companies last year. Now that is something. It is blatantly obvious that the liquids boom in North America is beginning to drive investment back into all segments of the oil & gas sector.

 

"Stock market is rewarding those with sensible exposure to unconventional plays. Hell if it goes on the way it has, I might even recommend Canadian E&P firms more frequently, Keystone XL or not," quips one trader. (Not to detract from the subject at hand, but most said even if Keystone XL doesn't get the go ahead from the Obama administration, future isn't so bleak for Canadian E&P; music to the ears of Chinese and Korean businessmen in town.)

Midstream companies are in many cases offering good returns akin to their friends in the services sector, given their connect to the shale plays. Okay now before you all get hot under the collar, we're merely talking returns and relative stock valuation here and not size. And for those of you who are firm believers of the 'size does matter' hypothesis, latest available IHS Energy data does confirm that the 16 largest IOCs it monitors posted a combined market capitalisation of $1.7 trillion at the end of 2013, a little over 10% above their value the year before.

Yet, oil majors continue to divest, especially on the refining & marketing (R&M) side of the business and occasionally conventional E&P assets where plays don't gel well with their wider objectives. Only last week, BP sold its interests in four oilfields on the Alaska North Slope for an undisclosed sum to Hilcorp.

The sale included BP's interests in the Endicott and Northstar oilfields and a 50% interest in each of the Liberty and the Milne Point fields. Ancillary pipeline infrastructure was also passed on. The fields accounted for around 19,700 barrels of oil equivalent per day (boepd). Putting things into context, that's less than 15% of the company's total net production on the North Slope alone and near negligible in a global context.

BP said the deal does not affect its position as operator and co-owner of Prudhoe Bay nor its other interests in Alaska. But for Hilcorp, which would become the operator of Endicott, Northstar and Milne Point and their associated pipelines and infrastructure pending regulatory approval, it is a sound strategic acquisition.

Going back to the core discussion, smart thinking could, as the Bay Area traders opine, see all sides (small, midcap and IOCs) benefit over what is likely to be seminal decade for the North American oil & gas business between now and 2024-25.

As Daniel Trapp, senior energy analyst at IHS and principal author of the analysis firm's Energy 50 report, noted earlier this year in a note to clients: "While economic and geopolitical uncertainty will certainly continue driving energy company values, it is clear that a thought out and well-executed strategy positively affects value.

"This was particularly true with companies that refocused on North America in 2013, notably Occidental, which saw its value expand 24%, and ConocoPhillips, which grew 23% in value."

There seem to be good vibes about the performance of North American refiners. As promised to the readers, yours truly wanted to know what people here felt. Ratings agency Moody's said earlier this month that North American refiners could retain their advantage over competitors elsewhere in the globe, with cheaper feedstock, natural gas prices, and lower costs contributing to 10% or higher EBITDA growth through mid to late 2015.

Those with investments and stock exposure in US refiners reckon the Moody's forecast is about right and could be beaten by a few of the players. A few said Phillips 66 would be the one to watch out for. Question is – what will these companies do with their investment dollars going forward in light higher profits, as the case for pumping in more capex into existing infrastructure is not clear cut, despite the need for Gulf Coast upgrades.

Additionally, most anecdotal evidence here in California suggests tightening emissions law in the state is price negative in particular for Tesoro and Valero, but Phillips 66 could take a hit too. In essence, not much has changed in terms of the legal parameters; only their impact assessment in 2014-15 is yet to reach investors' mailboxes.

On a related note, here is an interesting piece from Lior Cohen of the Motley Fool, examining the impact of the shrinking Brent-WTI spread on refiners. Valero and Marathon's first quarter performance could be negatively impacted as the spread narrows, the author reckons.

Overall, in the Oilholic's opinion what appears to be an abundance of low-cost feedstock from inexpensive domestic crude oil supply will continue to benefit US refiners. While North American refiners should be content with abundance, Europeans are getting pretty discontent about their reliance on Russian gas.

Despite obvious attempts by the European Union to belatedly wean itself off Russian gas, Fitch Ratings reckons the 28 member nations group would be pretty hard pressed to replace it. In fact, an importation ban on Russian gas to the EU would cause substantial disruption to Europe's economy and industry, according to the agency.

Painting a rather bleak picture, Fitch noted in a recent report that the immediate aftermath of such a move would see the region suffer from gas shortages and high prices due to its limited ability to reduce demand, source alternative supplies and transport gas to the most affected countries.

A surge in gas prices after a ban would probably also have knock-on effects on electricity, coal and oil prices. Industry would bear the brunt of supply shortages as household demand would be given priority. A lengthy ban on Russian gas – described as "a low-probability, but high-impact scenario" would see gas-intensive sectors such as steel and chemicals being heavily hit.

This would accelerate the closure or mothballing of capacity that is suffering from low profitability due to competition from low-cost energy jurisdictions such as the US or Middle East.

In 2013, Russia supplied 145 bcm of gas to Europe, and the latter would have great difficulty in sourcing alternative supplies. "Increased European gas production and North African piped gas could offset a small proportion of this. Tapping into the global LNG market would yield limited volumes as Europe's Russian gas demand equates to nearly half of the world's LNG production, which is already mostly tied to long-term supply contracts. Hence, gas and other energy prices could surge," the agency noted.

In theory, Europe has plenty of unused LNG regasification capacity, which could help replace some Russian supplies. But the majority of plants are located in Southern Europe and the UK, far away from the Central and Eastern European countries that are most reliant on Russian gas. So there you have it, and it should help dissect some of the political hot air. That's all for the moment from San Francisco folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo 1: San Francisco skyline from 4th Street with an oil tanker heading to Oakland in the background. Photo 2: Port of San Francisco, California, USA © Gaurav Sharma April, 2014.