Talking Russia, China, shale 'debt' & more in Texas

The Oilholic finds himself in Houston, Texas for Baker & McKenzie’s 2015 Oil & Gas Institute. When yours truly was last in Texas back in February, the mood was rather sombre as leading oil futures benchmarks were still on a downward slide.

That was then, what we have now is stagnancy in the US$50-75 per barrel price range which probably encompasses both the WTI and Brent. We are not getting away from the said range anytime soon as one noted in a column for Forbes last Friday before flying out here.

Given the nature of such discourse, some delegates here at the Institute agreed and others disagreed with the Oilholic’s take on the short-term direction of the oil markets, especially as a lot is going on in this ‘crude’ world that such industry events are particularly sound in bringing to the fore.

The 2015 instalment of this particular Baker & McKenzie event had a great array of speakers and delegates – from Shell to Citigroup, Cameron International to Chevron. The legal eagles, the macroeconomists, the internationalists, the sector specialists, the industry veterans, and of course the opinionated, who never sit on the fence on matters shaping the direction of the market, were all there in good numbers.

(L to R) Louis J. Davis, Greg McNab, Natalie Regoli, James Donnell and David Hackett of Baker & McKenzie discuss the North American Market in wake of the oil price decline

The situation in Russia propped up fairly early on in proceedings. Alexey Frolov, a legal expert from Baker & McKenzie’s Moscow office, was keen to point out that it was not just the sanctions that were hurting Russia’s oil & gas industry; related macroeconomics of the day was sapping confidence away as well.

But Frolov also pointed to a degree of resilience within Russian confines, and a more flexible domestic taxation regime which was helping sustain high production levels unseen since the collapse of the Soviet Union. It does remain unclear though how long Russia can keep this up.

Meanwhile, Cameron International’s Vice President and Deputy General Counsel Brad Eastman flagged up something rather interesting. “We see Chinese companies continue to back rig building projects, even if they are being mothballed elsewhere in the world given the current market conditions. Chinese companies wish to continue their march in to the rig-building industry.”

Here’s China indulging in something that is really bold, some say unusual. So even if no one is exactly queuing up to buy or lease those Chinese rigs, it is another example that China operates on a whole different level to rest of the natural resources players and participants.

As for US shale, people say there is distressed debt out there and the end might be supposedly nigh for some small players. Well hear this – based on the Oilholic’s direct research here in Texas of looking into 37 independent US players, sometimes known as mom n’ pop oil & gas firms, and another 11 mid-sized companies; a dollar of their debt would fetch between 83 cents to 92 cents if hypothetically sold by their creditors.

That’s hardly distressed debt even at the lower end of the range. On hearing the Oilholic’s findings, Louis J. Davis, Chair of Baker & McKenzie’s North America Oil & Gas Practice, said: “An 8 to 17 cents discount does not constitute as distressed. Rewind the clock back to 2008-09 and you’d be looking at 35 to 40 cents to the dollar on unprofitable plays – that’s distress. This is not.”

Quite simply, creditors and investors are keeping the faith. But to curb the Oilholic’s enthusiasm, alas Davis added the words “for now”.

“You have to remember that many players [both large and small] would be coming off their existing oil price hedges by the end of the current calendar year. That’s when we’ll really know who’s in trouble or not.

“However, blanket assumptions that US shale, and by extension some independents are dead in the water, is a load of nonsense. Usual caveats apply to the Bakken players, but nothing I know from clients large or small in the Eagle Ford suggest otherwise,” Davis concluded.

As with events of this nature, the Oilholic of course wears several hats – most notably for Sharecast / Digital Look and Forbes. Hence, it’s worth flagging up other interesting slants and exclusive soundbites mined for these publications by this blogger.

The subject of oil & gas mergers and acquisitions in the current climate dominated the Institute’s morning session, as one wrote on Forbes earlier today. How to deal with the prospect of Iran’s possible return to the crude oil market also came up. Click here for one’s Sharecast report; treading carefully was the verdict of experts and industry players alike.

Separately, a Pemex official described in some detail how UK-listed oil and gas companies were sizing up potential opportunities in Mexico. Lastly, yours truly also had the pleasure of interviewing Anne Ka Tse Hung, a Tokyo-based partner at Baker & McKenzie, for Sharecast on the subject of the LNG industry facing a buyers’ market.

Hung noted that the market in Asia had completely turned on its head for Japanese utilities, from the panic buying of natural gas at a premium in wake of the Fukushima tragedy in 2011, to currently asking exporters to bid for supply contracts as competition intensifies and prices fall. That’s all for the moment from Houston folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2015. Photo: A panel session at the Baker & McKenzie 2015 Oil & Gas Institute, Houston, Texas, USA © Gaurav Sharma, May 2015.

UK election result's impact on British Energy Inc

By all accounts, result of the UK General Election on May 7 was simply stunning. Pollsters got it horribly wrong, Prime Minister David Cameron’s Conservative Party returned with a majority against all expectations, Scottish National Party bagged 56 out of 59 parliamentary seats in the ‘oil hub’ of Scotland - all the ingredients to excite politically minded scribes and the general public alike. The Oilholic began his experience at Ellwood Atfield’s splendid election night bash in Westminster (photo above left) ushering in news of the first exit poll predicting the Conservatives were going to be the largest party with 316 members of parliament.

As events unfolded into early hours of the morning and late afternoon the next day, Cameron’s Conservatives returned with 331 MPs and a slim majority putting to bed all talk of a hung parliament. This blogger was up when Labour heavyweights Ed Balls, Douglas Alexander, Jim Murphy and Liberal Democrats ministers Vince Cable, Ed Davey, Lynne Featherstone and Danny Alexander all lost their seats.

Resignation of the hapless Labour leader Ed Miliband who managed to deliver his party’s worst election result since 1983 followed, along with that of Nick Clegg, now former deputy prime minister and Liberal Democrat leader. Cameron soon walked back into Downing Street after meeting the Queen and telling her he’d now form a majority Conservative government.

Having enjoyed the drama of election night well into sunrise the next day, it’s worth pondering what the result means for the UK’s energy industry in general and the oil and gas business in particular. Afterall, the Oilholic did fret about the direction of the market in his pre-election column for Forbes.

For starters, Ed Miliband’s barmy energy price freeze isn’t going to happen. A daft idea, daftly presented to maximum populist effect just didn’t work and is now in the dustbin of political history. This blogger expects ratings agencies to ease up both on UK-listed energy utilities Centrica, the owner of British Gas, and SSE, another service provider as well as the sector in general. 

Unsurprisingly, both stocks jumped as the entire London market welcomed the result on May 8 morning with the FTSE 100 momentarily returning back above 7,000 points. Nonetheless, Cameron’s government faces a very serious challenge of planning investment towards creaking energy infrastructure – from nuclear to renewables – ensuring the lights are kept on. By some estimates, the required capital expenditure could be as high as £330 billion by 2030.

Switching to the mainstream oil and gas business, both the Conservative victory in the UK and an SNP landslide in Scotland are broadly positive for various reasons. As this blogger has noted before, Chancellor George Osborne’s taxation policies turned positive for the industry towards the end of the last parliament, as the oil price decline began to bite North Sea players. 

Collective measures put into effect back in March imply that the UK’s total tax levy would fall from 60% to 50%, giving a much needed breather to those prospecting in the North Sea. Any further stimulus measures for the better are unlikely to be disrupted by the SNP, even if they do have a broader agenda of roughing up other government programmes both North and South of the Scottish border.

This is broadly good for the industry, as it goes through a challenging period and grapples with the restructuring in Aberdeen triggered by companies as large as BP and as small as independent operations services providers. 

Finally, turning attention to the new energy minister Amber Rudd, a Conservative MP for Hastings, who has been appointed as the successor to Ed Davey; the choice is a great one. Obviously, her credentials are solid or she wouldn’t be here. Gauging the response of the wider industry, most have welcomed the appointment.

Rudd is seen as conscientious and hard working minister. Even Greenpeace sent out a release welcoming her to the job, hoping that she’d bring the same energy to implementing the Climate Change Act, as she did to fight the corner of fisheries in her last government remit.

With a challenging portfolio, Rudd has her work cut out and we wish her well, especially as she sets about the arduous task of attracting investment to the sector. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Ellwood Atfield election night party, May 7, 2015 © Gaurav Sharma

Streamlining ‘crude’ corporations in tough times

In tougher times, operational efficiencies - often brought about by digital streamlining - do matter and the oil and gas business is most certainly going through a rough patch. Yet, despite living in an increasingly digital world, most in the business view IT through a prism of functionality rather than one of enablement and efficiencies. 

Afterall, when you think of the energy business in general and big oil in particular, it is all about physical assets, drilling and generating not servers and computers. Sometimes, a change of circumstances provides the necessary jolt and that circumstance has been the oil price decline. 

As every oil and gas and oilfield services company, large or small, listed or independent is scrambling around to save costs; suddenly many are meaningfully warming up to the premise of IT services management [or ITSM] - a concept that has been around for a while, but has not tickled the fancy of big oil to the same extent as big banking or big pharma.

With IT driven processes streamlining and merging functions ranging from human resource management to data management, organising emergency response to a centralised incident logging platform - the idea is has savings at its core. The Oilholic went exploring its potential at the recently concluded Knowledge 15 Convention in Las Vegas, Nevada; an event put together by ServiceNow (NYSE:NOW), one of the market leaders in the sphere. 

 

The company has been notching up the concept with each passing year. From giving the corporate world its Platform as a Service (PaaS) offering to Software as a service (SaaS), to IT and infrastructure as service, ServiceNow simply defines what it brings to the solutions table these days as “Everything as a Service”.

Banners proudly proclaiming the strategy were all around the Mandalay Bay Convention Centre; venue of the event (see photo above). Everything is indeed in play - name a process optimisation slant, and a solution could be conjured up, as ServiceNow CEO Frank Slootman told this blogger in an exclusive Forbes interview.

And while the oil and gas sector remains behind the curve, attitudes are changing according to Slootman. Most in big oil are keenly observing how alternative energy and utilities companies are adopting ITSM to improve procedures and save costs, as the Oilholic noted in another Forbes article. 

Furthermore, KPMG’s IT advisory partner Phil Crozier opines that a wave of mergers and acquisitions within the sector could further the drive. “Hypothetically speaking, let’s look at Shell’s bid for BG Group. The person who is in-charge of IT operations in that sort of a setting does not get told how to bring two organisations together, merely a percentage of some sorts – say 20% – to take off the cost base.

“Now, the only way you can efficiently achieve those sorts of savings would be via process efficiencies and simplification in the approach taken by the two firms. That’s where digital process optimisation comes in.”

That drive is gathering momentum. The Oilholic found several energy sector executives around the convention floor eagerly exploring ITSM avenues. ServiceNow already counts the likes of Valero, Statoil, GDF Suez, GE Energy and several others among its growing client portfolio in the sector.

However, there is still a long way to go before ServiceNow or its bitter rival BMC can put the sector at par with ITSM adoption at big pharma, big finance or big tech. Anecdotal evidence suggests 2015-16 could see many big oil sceptics recognise the potential, even if under financial duress.

Of course, for the moment, you’ll just have to take the Oilholic’s word for it. One found it very difficult to get sector executives to talk about their potential plans on record. The topic is a sensitive one and outsourcing – which forms a component of all this – has been a political hot potato for better parts of a decade.

Here at Knowledge 15, some delegates even claimed to have reduced their headline back-office costs by as much as 50% over a period of 5 to 8 years. The potential for savings and efficiencies is almost, always accompanied by a reduction in headcount. As for the oil and gas sector, forget the back office - currently its shedding employees back, front and centre.

While it’s hard to be dispassionate about job losses, this is about something deeper. To quote one energy sector executive: “A dollar saved elsewhere in the organisation via effective ITSM solutions deployment for procedural matters, could be spent in upstream operations which is what every oil and gas exploration company is really about.”

IT driven streamlining seems to be finally bringing about that belated realisation for some. That’s all for the moment folks! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2015. Photo: ServiceNow’s ‘Everything as a service’ banner at Knowledge 15, Las Vegas, Nevada, USA © Gaurav Sharma, April 2015.

The ostentatious & those 'crude' percentages

The Oilholic finds himself gazing at the bright lights of Las Vegas, Nevada once again after a gap of five years. This gambling hub's uniqueness is often the ostentatious and loud way it goes about itself. The oil market had its own fair share of loud and exaggerated assumptions last week.

Sample these headlines – “Brent spikes to 2015 high”, “Oil markets rally as shale production drops”, “Brent up 10%.” There is some truth in all of this, and the last one is technically correct. Brent did close last Friday up 10.03% relative to the Friday before, while WTI rose 8.41% and OPEC's basket of crude oil(s) rose 10.02% over a comparable period (see graph blow right hand corner).

Bullish yes, bull run nope! This blogger believes market fundamentals haven't materially altered. There is still too much crude oil out there. So what's afoot? Well, given that one is in a leading gambling hub of world, once 'the leading one' by revenue until Macau recently pinched the accolade, it is best to take a cue from punters of a different variety – some of the lot who've been betting on oil markets for decades out of the comfort of Nevada, but never ever turn up at the end of a pipeline to collect black gold.

Their verdict – those betting long are clutching at the straws after enduring a torrid first quarter of the year. Now who can blame the wider trading community for booking a bit of profit? But what's mildly amusing here is how percentages are interpreted by the media 'Las Vegas size', and fanned by traders "clutching at the straws", to quote one of their lot, 'Las Vegas style'.

For the moment, the Oilholic is sticking one's 2015 forecast – i.e. a mid-year equilibrium Brent price of $60 per barrel, followed by a gradual climb upwards to $75 towards the end of the year, if we are lucky and media speculation about the Chinese government buying more crude are borne out in reality. The Oilholic remains sceptical about the latter.

Since one put the forecast out there, many, especially over the last few weeks wrote back wondering if this blogger was being too pessimistic. Far from it, some of the oldest hands in the business known to the Oilholic, including our trader friends here in Las Vegas, actually opine that yours truly is being too optimistic!

The reasons are simple enough – making assumptions about the decline of US shale, as some are doing at the moment is daft! Make no mistake, Bakken is suffering, but Eagle Ford, according to very reliable anecdotal evidence and data from Drillinginfo, is doing pretty well for itself. Furthermore, in the Oilholic’s 10+ years of monitoring the industry, US shale explorers have always proved doubters wrong.

Beyond US shores – both Saudi and Russian production is still marginally above 10 million bpd. Finally, who, alas who, will tell the exaggerators to tackle the real elephant in the room – the actual demand for black gold. While the latter has shifted somewhat based on evidence of improved take-up by refiners as the so called “US driving season” approaches, emerging markets are not importing as much as they did if a quarter-on-quarter annualised conversion is carried out.

Quite frankly, all eyes are now on OPEC. Its own production is at a record high; it believes that US oil production won’t be at the level it is at now by December and its own clout as a swing producer is diminished (though not as severely as some would claim).

Meanwhile, Russian president Vladimir Putin declared the country's financial crisis to be over last week, but it seems Russia’s GDP fell between 2% to 4% over the first quarter of this year. The news caused further rumbles for the rouble which fell by around 4.5% last time one checked. The Oilholic still reckons; Russian production cannot be sustained at its current levels.

That said, giving credit where it is due – Russians have defied broader expectations of a decline so far. To a certain extent, and in a very different setting, Canada too has defied expectations, going by separate research put out by BMO Capital and the Canadian Association of Petroleum Producers. Fewer rigs in Canada have – again inserting the words 'so far' – not resulted in a dramatic reduction in Canadian production.

Finally, here's an interesting report from the Weekend FT (subscription required). It seems BP's activist shareholders have won a victory by persuading most shareholders to back a resolution obliging the oil major to set out the potential cost of climate change to its business. As if that's going to make a difference - somebody tell these activists the oil majors no longer control bulk of the world's oil – most of which is in the hands of National Oil Companies unwilling to give an inch!

That's all for the moment folks from Las Vegas folks, as the Oilholic turns his attention to the technology side of the energy business, with some fascinating insight coming up over the next few days from here. In the interim, keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Paris Casino on the Las Vegas Strip, Nevada, USA © Gaurav Sharma, April 2015. Graph: Oil benchmark prices - latest Friday close © Gaurav Sharma, April 17, 2015.

Perspectives on a changing energy landscape

That we're in the midst of a profound change in the energy markets in unquestionable. However, fossil fuels still remain the default medium of choice. Within those broader confines, the oil market is seeing a supply-driven correction of the sort that probably occurs once in a few decades.

Meanwhile, peak oil theorists are in retreat following in the footsteps of peak coal theorists last heard of during a bygone era. However, what does it all mean for the wider energy spectrum, where from here and what are the stakes?

Authors and industry experts Daniel Lacalle and Diego Parrilla have attempted to tackle the very questions in their latest work The Energy World is Flat: Opportunities from the end of peak oil (published by Wiley).

In a way, the questions aren’t new, but scenarios and backdrops evolve and of course have evolved to where we currently are. So do the answers, say Lacalle and Parrilla as they analyse the past, scrutinise the present and draw conclusions for future energy market pathways.

In this book of 300 pages, split by 14 interesting chapters, they opine that the energy world is flat principally down to "ten flatteners" along familiar tangents such as geopolitics, reserves and resources, overcapacity, demand displacement and destruction, and of course the economics of the day. 

Invariably, geopolitics forms the apt entry-point for the discussion at hand and the authors duly oblige. As the narrative subtly moves on, related discussions touch on which technologies are driving the current market changes, and how they affect investors. Along the way, there is a much needed discussion about past and current shifts in the energy sphere. You cannot profit in the present, unless you understand the past, being the well rounded message here.

“New frontiers” in the oil and gas business, today’s “unconventional” becoming tomorrow’s “conventional”, and resource projections are all there and duly discussed.

To quote the authors, the world has another 1.5 trillion barrels of proven plus probable reserves that are both technically and economically viable at current prices and available technology, and another 5 trillion-plus barrels that are not under current exploration parameters but might be in the future. Furthermore, what about the potential of methane hydrates?

Politics, of course, is never far from the crude stuff, as Lacalle and Parrilla note delving into OPEC shenanigans and the high stakes game between US shale, Russian and Saudi producers leading to the recent supply glut – a shift with the potential to completely alter economics of the business.

What struck the Oilholic was how in-depth analysis has been packaged by the authors in an engaging, dare one say easy reading style on what remains a complex and controversial discussion. For industry analysts, this blogger including, it’s a brilliant and realistic assessment of the state of affairs and what potential investors should or shouldn’t look at.

The Oilholic would be happy to recommend the book to individual investors, energy economists, academics in the field and of course, those simply curious about the general direction of the energy markets. Policymakers might also find it well worth their while to take notice of what the authors have put forward.

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© Gaurav Sharma 2015. © Photo: Front Cover – The Energy World is Flat: Opportunities from the end of peak oil © Wiley Publishers, Feb, 2015.