There's something about Mr El-Badri

The predictable materialised yet again as OPEC held its quota at 30 million barrels per day following the conclusion of its 165th meeting of ministers. To be honest that's not what the Oilholic hit town for; quota situation was a done deal in most eyes!

In fact this blogger was wondering if we'll have some movement on the appointment of a new secretary general. Arriving in the Austrian capital last night, one heard whispers that Nigeria's petroleum minister Diezani Kogbeni Alison-Madueke was lobbying really hard for the post. Politics and merits aside, such an appointment – should it have happened – would have seen a welcome female Secretary General at the 12 member oil exporters' club.

As such, it turned out to be hot air, at least for this meeting. Instead, the 74 year-old Libyan industry veteran and current Secretary General Abdalla Salem El-Badri saw his term extended yet again. The latest extension takes him through to June 30, 2015 having been first elevated to the post on January 1, 2007. That's coming up to some record for holding the post.

In fact, by this blogger's calculation, the latest extension makes him the longest serving OPEC Secretary General of all time. The reason for the appointment extension is the same as it was at the last meeting, and the one before and so it goes. There is simply no compromise candidate that the two major camps, led by the Saudis and the Iranians can agree on. She might be lobbying hard for the post, but Alison-Madueke's quip to a newswire journalist about the Secretary General being "appointed by consensus" rings true.

And when there is no consensus, you ring for Mr El-Badri. That's what OPEC has done time and again for this powerful post of late. In more, ways than one, El-Badri is a real trooper and the ultimate compromise candidate. He exudes confidence, has a sense of humour, can tackle or swat down often awkward questions hurled at him by scribes, makes the best of an often bad situation and gets along with most.

The Oilholic remembers from his last outing to OPEC HQ when El-Badri was given an ironic round of applause by journalists to bid him farewell, full well in the knowledge that yet again OPEC had failed to name a successor. However, he maintained his sense of humour and went through the entire press conference without as much as a twitch.

Perhaps in appointing him back in 2007, OPEC raised the bar very high. Prior to his arrival at OPEC, the University of Florida educated El-Badri served as Libya's minister for oil and electricity. This was followed by several ministerial stints including one as deputy prime minister from 2002 to 2004.

After assuming the Secretary General's position, El-Badri handled some real challenges and a term that began with oil price first spiking above US$140 per barrel and then dipping below $40, followed by the worst financial crisis in modern history. That the current Secretary General has acquitted himself with distinction is beyond doubt, but time has come for him to move on.

In its repeated failure to name a successor, OPEC isn't doing itself any good. Meanwhile, the decision to reappoint El-Badri was unanimous. To give the last word to the man himself: "My reappointment as OPEC Secretary General was down to the wisdom of ministers and I have no further comment to make."

And there you have it. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: OPEC Secretary General Abdalla Salem El-Badri © Gaurav Sharma, June 2014.

The morning so far at Helferstorferstrasse 17

The scribes, the analysts, the bloggers and the camera crews are all bundled into the media briefing room as the 12 OPEC ministers begin their closed door proceedings for the 165th meeting of the OPEC conference. While an announcement on where the quota will be left at is expected at 14:00 CET, here’s what we know so far. Beginning with (who else) Saudi Oil Minister Ali-Al Naimi, the kingmaker opined this morning that the global oil market was ‘balanced’ at a media scrum.

 

Given all the years the Oilholic has been here, including a previous direct natter with the minister himself, that’s a clear indication that the quota will be staying at 30 million barrels per day (bpd). Elsewhere, those in the wider analysts’ community would perhaps like to know that Libya's man at the table is Omar Ali El-Shakmak, according to a last minute communiqué.

 

Finally, it is manifestly obvious here at Helferstorferstrasse 17 that Nigeria’s petroleum minister Diezani Kogbeni Alison-Madueke is trying to muscle in to the Secretary General’s chair long occupied by Libya’s Abdalla Salem El-Badri, as the organisation has failed to agree on a compromise candidate to succeed him so far.

However, Alison-Madueke has strongly denied lobbying for the position. "The Secretary General is appointed by consensus, not lobbying," she said ticking off a few forceful questioners from newswires.

As for the office stuff, El-Shakmak, who is also officiating as president of the present meeting, acknowledged the deceleration seen this year in the emerging and developing economies who are fast becoming the organisation’s biggest clients.

"India has continued to recover from last year's slowdown, but Russia, China and Brazil have experienced slower output for a variety of reasons. World oil demand is expected to grow by 1.1 million bpd to average 91.2 million bpd in 2014. The bulk of this growth is expected to come from non-OECD countries."

Non-OPEC oil supply is also anticipated to rise this year by 1.4 million bpd to reach 55.58 million bpd. "This growth will mainly come from North America and Brazil, while Norway, the UK and Mexico are expected to decline," El-Shakmak explained.

More importantly, the OPEC Reference Basket has remained fairly stable over the last two years or so, with annual averages ranging between roughly US$105 and $110 per barrel.

"In the past half-year, the Basket has averaged above $104 per barrel from January to May. This is a level that is acceptable to both producers and consumers," he concluded. Indeed sir. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: Media briefing room at the 165th OPEC meeting of ministers © Gaurav Sharma, June 2014.

OPEC vibes, a Libyan matter & market chatter

As OPEC prepares to meet for the first time this year, oil ministers of the 12 member nations should feel reasonably content. The hawks always like the oil price to be in three figures and doves usually like a support level above the region of US$85 per barrel using Brent as a benchmark. Needless to say, both camps are sitting comfortably at the moment and will continue to do so for a while.

Macroeconomic permutations and risk froth is keeping the oil price where OPEC wants it, so the Oilholic would be mighty surprised if the ministers decide to budge from the present official quota cap of 30 million barrels per day. Those going long on Brent have already bet on OPEC keeping its output right where it is.

Over the week to May 27, bets on a rising price rose to their highest level since September 2013. ICE's Commitment of Traders report for the week saw all concerned, including hedge funds, increase their net long position in Brent crude by 6% (or 4,692) to 213,364 positions, marking a third successive week of increases. Going the other way, the number of short positions fell by 7,796 to 42,096.

Wires might be saying that "all eyes" are on OPEC, but not many eyes would roll at Helferstorferstrasse 17 once the announcement is made. Futures actually slipped by around 0.5% as dullness and a minor bout of profit taking set in last week at one point. While the quota level is a done deal, what ministers would most likely discuss, when those pesky scribes (and er...bloggers) have been ejected out for the closed door meeting, is how much China would be importing or not.

Several independent forecasters, including the US EIA have predicted that China is likely to become the largest net importer of oil in 2014. By some measures it already is, and OPEC ministers would like to ponder over how much of that Chinese demand would be met by them as US imports continue to decline.

Other matters of course pertain to the appointment of a successor to Secretary General Abdalla Salem El-Badri, and where OPEC stands on the issue of production in his home country of Libya, which is nowhere near the level recorded prior to the civil war.

In order to pick-up the Libyan pulse a little better ahead of the OPEC meet, yours truly headed to IRN/Oliver Kinross 3rd New Libya Conference late last month. The great and good concerned with Libya were all there – IOCs, Libyan NOC, politicians, diplomats and civil servants from UK and Libya alike.

A diverse range of stakeholders agreed that the race to reversing Libyan production back to health would be a long slow marathon rather than a short sprint. Anyone who says otherwise is being naively optimistic.

Forget geopolitics, several commentators were quick to point out that Libya has had no private sector presence in the oil & gas sector. Instead, until recently, it has had 40 years of a controlling Gaddafi fiefdom. Legislative challenges also persist, as one commentator noted: "The road map to a petroleum regime starts first with a constitution."

That's something newly-elected Prime Minister Ahmed Maiteg must ponder over as he tries to bring a fractured country together. Then there is the investment case scenario. Foreign stake-holding in Libyan concerns is only permitted up to 49% despite a risky climate; the Libyan partner must be the majority owner. The oil & gas business has always operated under risk versus reward considerations. But a heightened sense of risk is something not all investors can cope with as noted by Sir Dominic Asquith, former UK ambassador to Iraq, Egypt and Libya, who was among the delegates.

"There is a long term potential with a bright Libyan horizon on the cards. However, getting to it would be a difficult journey, and particularly so for small and medium companies with a lesser propensity to take risk on their balance sheets than major companies," he added.

Meanwhile, a UK Foreign & Commonwealth office spokesperson said the British Government was not changing travel advice to Libya for its citizens any time soon. "We advise against all but essential travel to the country and Benghazi remains off limits. In case of companies wishing to do business in Libya, we strongly urge them to professionally review their own security arrangements."

Combine all of these latent challenges with the ongoing shenanigans and its not hard to figure out why the nation has become one of the smallest producers among its 12 OPEC counterparts and it may be a while yet before investors warm up to it. However, amid the pessimism, there is some optimism too.

Ahmed Ben Halim, CEO of Libya Holdings Group noted that sooner rather than later, the Libyans will sort their affairs out, even though the journey would be pretty volatile. Fares Law Group's Yannil Belbachir pointed out that despite everything all financial institutions were functions normally. That's always a good starting point.

Some uber-optimists also expressed hope of making Libya a "solar power" by tapping sunlight to produce electricity, introduce it back into the grid and send it via subsea cable from Tripoli to Sicily. Noble cause indeed! Being more realistic and looking at the medium term, with onshore prospection and production getting disrupted, offshore Sirte exploration, first realised by Hess Corporation, could provide a minor boost. Everyone from BP to the Libyan NOC is giving it a jolly good try!

Just one footnote, before the Oilholic takes your leave and that's to let you all know that one has also decided to provide insight to Forbes as a contributor on 'crude' matters which can be accessed here; look forward to your continued support on both avenues. That's all from London for the moment folks; more shortly from sunny Vienna at the 165th meeting of OPEC ministers . Keep reading, keep it 'crude'!

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© Gaurav Sharma, 2014. Photo 1: OPEC HQ, Vienna, Austria. © Gaurav Sharma, 2014.

Brent’s spike: Bring on that risk premium

Last week, the Brent forward-month futures contract was within touching distance of capping an 11-week high. On May 22, we saw the new July contract touch an intraday level of US$110.58; the highest since March 3. In fact, Brent, WTI as well as the OPEC crude basket prices are currently in 'three figure territory'.

Libyan geopolitical premium that's already priced in, is being supported by the Ukraine situation, and relatively positive PMI data coming out of China. Of these, if the latter is sustained, the Brent price spike instead of being a one-off would lend weight to a new support level. However, the Oilholic is not alone in the City in opining that one set of PMI data from China is not reason enough for upward revisions to the country's demand forecasts.

As for the traders' mindset the week before the recent melee, ICE's Commitments of Traders report for week of May 20 points to a significant amount of Brent buying as long positions were added while short positions were cut, leaving the net equation up by 15% on the week at 200,876. That's a mere 31,000 below the record from August 2013.

Away from crude pricing, S&P Capital IQ reckons private equity acquisitions in both the energy and utilities sectors are "poised for a comeback".

Its research indicates that to date this year, the value of global leveraged buyouts in the combined energy and utilities sectors is approaching $16 billion. The figure exceeds 2013's full-year total of $10 billion. Extrapolating current year energy and utility LBO deal value, 2014 is on pace for the biggest year for such deals since 2007, S&P Capital IQ adds (see table on left, click to enlarge).

Meanwhile, in its verdict on the Russo-Chinese 30-year natural gas supply contract, Fitch Ratings notes that Gazprom can go ahead with exporting eastwards without denting European exports. But since we are talking of 38 billion cubic metres (cm) of natural gas per annum from Gazprom to CNPC, many, including this blogger, have suggested the Kremlin is hedging its bets.

After all, the figure amounts to a quarter of the company's delivery quota to Europe. However, Fitch Ratings views it is as a case of Gazprom expanding its client portfolio, and for a company with vast untapped reserves in eastern Russia its basically good news.

In a recent note to clients, the ratings agency said: "Gazprom's challenge historically has been to find ways to monetise its 23 trillion cm reserves at acceptable prices – and the best scenario for the company is an increase in production. The deal is therefore positive for the company's medium to long term prospects, especially if it opens the door for a further deal to sell gas from its developed western fields to China in due course."

While pricing was not revealed, most industry observers put it at or above $350 per thousand cm. This is only marginally lower than Gazprom's 2013 contract price with its Western European customers penned at $378 per thousand cm. As for upfront investment, President Vladimir Putin announced a capital expenditure drive of $55 billion to boot. That should be enough to be getting on with it.

Just before one takes your leave, here's an interesting Reuters report by Catherine Ngai on why the 'sleepy market' for WTI delivery close to East Houston's refineries is (finally) beginning to wake up. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Table: Global LBOs in the energy & utilities sector © S&P Capital IQ, May 2014.

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