Trouble at the South Korean mill

The Oilholic finds himself 5,506 miles east of London in Seoul, South Korea, on the first leg of a round the world trek, alongside a fact finding mission for an upcoming Forbes article. 

In tandem with this blogger’s arrival in South Korea, was that of the USS John C. Stennis, the US Navy’s nuclear-powered aircraft carrier as tensions in the Korean Peninsula run high. With neighbouring North Korea’s leader Kim Jong-Un (once again!) promising nuclear armageddon, Seoul and Washington are in the midst of their annual ongoing joint Key Resolve and Foal Eagle exercises to instil regional confidence.

To be perfectly honest, South Koreans have seen it all before – their Northern neighbour’s shenanigans are hardly the stuff that is keeping the intelligentsia occupied or the subject of much chatter in cafés and bars dotted across the capital. The primary concern remains whether recent economic stimulus measures are cutting through or not.

The economic health of South Korea also matters to oil and gas analysts like yours truly, as the country is among the biggest global importers of the crude stuff, relying on the importation of 97% its fuel needs having negligible domestic hydrocarbon resources. Crude oil consumption is currently around 2.5 million barrels per day, almost all of which is imported, making South Korea the fifth largest oil importer in the world.

In wake of the MERS virus outbreak in South Korea last year and increasingly lacklustre consumer confidence, the government unveiled a $20 billion economic stimulus package in July 2015. Among the most eye-catching measures was the introduction of tax cuts on automobiles – the very domestically engineered sort yours truly saw whizzing across Seoul, and ones that happen to be household brands across the world.

However, while the MERS virus might be a thing of the past, the country's economic malaise persists worrying the Bank of Korea and the government alike. Exports contracted 18.5% in January, while the economy grew 2.6% in 2015. It prompted the central bank to revise South Korea’s growth forecast for the current year down to 3.0% from 3.2%.

Nonetheless, petrochemical and refining exports are proceeding at pace, given that three of the 10 largest refining facilities in world happen to be in South Korea. And crude oil imports are – so far – holding firm at current averages of 2.3 to 2.5 million bpd. However, one questions whether the said levels can indeed be maintained. 

That’s despite a further $5 billion in stimulus measures announced by the government in February, including the extension of automobile tax cuts. There’s definitely trouble at the South Korean mill! That’s all from Seoul folks as the Oilholic leaves you with a view of traffic zipping past the city’s Dongdaemun Gate. This blogger’s next stop is Taipei; more from there shortly. Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2016. Photo: Dongdaemun Gate, Seoul, South Korea © Gaurav Sharma, March 2016

Aubrey McClendon (1959 – 2016): A flawed titan?

On Saturday, March 5, a riverfront in USA’s Oklahoma City saw well wishers, former employees, friends and family of controversial energy sector entrepreneur Aubrey McClendon, gather to pay their respects, following his death in a car crash on March 2; a day after being indicted on bid-rigging charges following an antitrust investigation by the US Department of Justice.

In keeping with his swashbuckling life, the end, when it came, was just as dramatic. While a police investigation into the crash is still ongoing, reports said the Chevy Tahoe McClendon was driving slammed straight into a cement wall, despite the driver having had multiple opportunities to avoid the collision. It was also revealed that he was not wearing his seat-belt.  

That was the final act of a glittering, albeit controversial oil and gas industry titan. As the shale bonanza took off stateside, McClendon was one of the poster boys of rising US natural gas production, taking Chesapeake Energy – a company he co-founded in 1989 at the young age of 29 – to the second spot on the country’s top gas producers’ roster by volume.

But in 2013, he was ousted from Chesapeake following damaging revelations that he had personal stakes in wells owned by the company. An accompanying corporate governance crisis tarnished his reputation further.

Yet, McClendon’s penchant for lavish spending never subsided. His investments in property, restaurants and businesses are littered across Oklahoma City. Famously, in 2008, he brought the National Basketball Association's Supersonics franchise to Oklahoma City from Seattle, renaming them Oklahoma City Thunder.

Following the Chesapeake debacle, McClendon marked a return to the industry by setting up a new company – American Energy Partners. Being the wildest of wildcatters, he made bets, not all of them sound, worth billions of dollars buying land with potential for oil and gas drilling.

However, all was not well with the US Justice Department set to haul him to the courts. He was alleged to have put in place a scheme between two “large oil and gas companies” to not bid against each other for leases in northwest Oklahoma from December 2007 to March 2012, to keep the price of leasing drilling rights artificially low, the Department of Justice said a day before his sudden death.

The American antitrust law – Sherman Act – which McClendon was accused of violating carries a maximum prison sentence of 10 years and a $1 million fine. 

None of this mattered to the hundreds who gathered on Saturday at Oklahoma City's Boathouse District to pay their respects to McClendon, with a formal public memorial service due on Monday at a local community church.

For them, the state in general and the city in particular, McClendon was instrumental in reviving the regional economy. As for the US shale industry, his impact in the history books – the good, the bad, the ugly, the unproven and the controversial. However, in his untimely passing, it is McClendon’s ingenuity that ought to be remembered by most.

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© Gaurav Sharma 2016. Photo: A shale drilling site © Chesapeake Energy.

Fitch joins Moody’s in cutting oil price estimates

Barely a month after Moody’s drastically revised its oil price assumptions, rival Fitch Ratings followed suit last week. Writing to clients, Fitch said its new base case is for Brent and WTI oil prices to average $35 per barrel in 2016. 

It had previously expected oil to average $45 per barrel. However, Fitch’s long-term base case price assumptions remain unchanged at $65 per barrel. The ratings agency said its drastic revision was down to a combination of stock build-up over the mild winter, higher-than-expected OPEC production in January and increasing evidence that global economic growth for the year will be weaker than previously forecast.

“This suggests there will still be a supply surplus in the second half of 2016, albeit reduced from current levels, and that markets will probably only reach a balance in 2017. Even then, very high inventories will limit price increases,” Fitch added.

In light of recent volatility, Fitch’s reworking of price assumptions is hardly a surprise, and on Jan 21st rival Moody’s had done likewise. The latter lowered its 2016 price estimate for both Brent WTI to $33 per barrel.

In Moody’s case, for Brent, it marked a $10 per barrel reduction from the rating agency's previous estimate, and for WTI, a $7 reduction. It currently expects both benchmark prices to rise by $5 per barrel on average in 2017 and 2018. The move also represented Moody’s second revision is as many months, having already slashed estimates back in December.

Terry Marshall, Senior Vice President at the ratings agency, said, "OPEC countries continue high levels of production in the battle for market share, contributing to the current oil glut despite moderate consumption growth by key consumers such as China, India and the US.

“In addition, we expect the rise in Iranian oil output this year to offset or exceed production cuts in the US."

So more cheer for the bears it seems, but little else. Volatility is likely to persist until June, but for the record, the Oilholic expects a very gradual climb in the oil price towards $50 per barrel from then onwards, as one wrote in a recent Forbes column. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2016. Photo: Oil production facility © Cairn Energy

Get used to crude swings & volatility

Oil markets are likely to face further bouts of volatility. When Saudi Arabia and Russia, together with Venezuela and Qatar, offered the false hope of a so-called production freeze packaged in the shape of market support last week, the Oilholic wasn't the only one who did not buy it.

Predictably, oil futures rose by over 7% towards the middle of last week, but rapidly slipped into negative territory as Iran, while welcoming the move, did not say whether it would participate. In any case, the move itself was a farce of international proportions.

The Russians can’t raise their production further, while the Saudis have little exporting to room to justify a further output hike. So for market consumption it was packaged as a freeze, subsequently undermined by both countries who said they had no intentions of cutting production. It might well have been the first joint move on output matters between OPEC and non-OPEC producers, but it virtually came to naught.

Unless a clear pattern of production declines appears on the horizon, market volatility will persist. That sort of clarity won’t arrive at least before June, with swings between $25-40 likely to continue, and yes a drop to $20 is still possible.

OPEC will need to announce a real terms production cut of 1.5 million barrels per day to make any meaningful short-term difference to the oil price by $7-10 per barrel, and even that may not be sustainable with non-OPEC producers likely to be the primary beneficiaries of such a move.

Expect more of the same, and more downgrades of oil and gas companies by ratings agencies of the sort the market has gotten used to in recent months. After Fitch Ratings downgraded Shell last week, Moody’s moved to place another 29 of its rated US exploration and production firms on review for downgrade over the weekend.

Meanwhile, the latter also said continued low oil prices could have an increasingly negative impact on banks across the Gulf Cooperation Council (GCC). This could occur both directly - by a weakening in governments' capacity and willingness to support domestic banks - and indirectly, through a weakening of banks' operating conditions, Moody’s added.

Khalid Howladar, senior credit officer at Moody's, said, "Despite low oil prices and a high dependency on oil revenues across the GCC countries, banks' ratings in the region continue to benefit from their governments' willingness to tap accumulated wealth to support counter-cyclical spending."

But continued oil price declines signal "increasing challenges" to the sustainability of this dynamic, he added.

Finally, some news from the North Sea to end with – Genscape has flagged up the shutdown and restart of BP’s 1.15mn bpd Forties Pipeline System in a note to clients. It caused the April ICE Brent futures contract price to spike before falling slightly on February 12, but nothing to be overtly concerned about.

The system was shut due to an issue at the Kinneil fractionaction terminal, located where the flow from the North Sea on the Forties pipeline system is stabilised for consumption. Elsewhere, North Sea E&P firm First Oil is reportedly filing for involuntary administration, according to the BBC.

Enquest and Cairn Energy will takeover its 15% stake in Kraken field, east of Aberdeen in the British sector of the North Sea. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2016. Photo: Oil rig in the North Sea © BP

Ho hum moves for fewer oil drums

In case you have been on another planet and haven’t heard, after weeks of chatter about coordinated oil output cuts by OPEC and non-OPEC producers, we finally had some movement. The Oilholic deploys the word 'movement' here rather cagily.

Three OPEC members led by heavyweight Saudi Arabia, with Qatar and Venezuela in tow, joined hands with the Russians, to announce a production ‘freeze’ at January’s output levels  on Tuesday, provided ‘others’ agree to do likewise. 

The most important others happen to be Iraq and Iran who haven’t exactly come out in support of the said freeze just yet. Even if they do agree, or in fact all OPEC members agree, the freeze would come at production levels deemed to be historical highs for both the Russians and OPEC. In case of the latter, industry surveys and data from aggregators as diverse as Platts and Bloomberg points to all 12 exporting OPEC nations collectively pumping above 32 million barrels per day.

Predictably, the oil futures market treated the news of the 'freeze' with the sort of disdain it deserved. The price remains stuck in the range where it has been and short-term volatility is likely to last; so much of what transpired was, well, exceedingly boring from a market standpoint, excepting that it was the first instance of OPEC and non-OPEC coordinated action in 15 years. 

If OPEC really wants to support prices, an uptick in the region of $7-10 per barrel would require the cartel to introduce a real terms cut of 1.5 million bpd. Even then, the gains would short-term, and the only people benefitting would be North American players. Some of them are the very wildcatters, whose tenacity for surviving when oil is staying ‘lower for longer’, OPEC has so far failed to work out with any strategic coherence. Expect more of the same in a market that's still awash with crude oil. 

Finally, just before one takes your leave, it seems Moody's has placed on review for downgrade the Aa3 ratings of China National Petroleum Corporation (CNPC), Sinopec Group, Sinopec Corp, China National Offshore Oil Corporation (CNOOC Group) and CNOOC Limited.

The ratings agency has also placed on review for downgrade the ratings of the Chinese national oil companies' rated subsidiaries, including Kunlun Energy Company Limited, CNPC Finance (HK) Limited, CNPC Captive Insurance Company Limited, CNOOC Finance Corporation Ltd, and Sinopec Century Bright Capital Investment Limited.

In a statement, Moody’s said global rating actions on many energy companies, reflect its efforts to "recalibrate the ratings in the energy portfolio to align with the fundamental shift in the credit conditions of the global energy sector." Can’t argue with that! That’s all for the moment folks! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo: Oil exploration site in Russia © LukOil