Final ‘crude’ points of 2012

As 2012 draws to a close, a few developments over the last fortnight are worth mulling over, ahead of uncorking the champagne to usher in the New Year. But first, a word on pricing - the final ICE Brent February futures contract price cut-off noted by the Oilholic came in at US$110.96 per barrel with US budget talks in the background.

 

Over the last two weeks, and as expected, the cash market trade was rather uneventful with a number of large players starting the countdown to the closure of their books for the year. However, the ICE’s weekly Commitment of Traders report published on Christmas Eve made for interesting reading.

 

It suggested that money managers raised their net long positions in Brent crude futures (and options) by 11.2% in the week that ended on December 18; a trend that has continued since November-end. Including hedge funds, money managers held a net long position of 106,138 contracts, versus 95,447 contracts the previous week.

 

Away from Brent positions, after due consideration the UK government finally announced that exploration for shale gas will resume albeit with strict safety controls. Overall, it was the right decision for British consumers and the economy. It was announced that there would be a single administrative authority to regulate and oversee shale gas and hydraulic fracking. A tax break may also apply for shale gas producers; further details are due in the New Year.

 

Close on the heels of UK Chancellor George Osborne’s autumn statement and the shale announcement, came a move by Statoil to take a 21-year old oil discovery in the British sector of the North Sea off its shelf.

 

On December 21, the Norwegian company approved a US$7 billion plan to develop its Mariner project, the biggest British offshore development in over a decade. According to Statoil, it could produce around 250 million barrels of oil or more over a 30-year period and could be brought onstream as early as 2017 with a peak output of 55,000 barrels per day.

 

Mariner, which is situated 150 km southeast of the Shetland Islands, was discovered in 1981. The Oilholic thinks Statoil’s move is very much down to the economics of a Brent oil price in excess of US$100 per barrel. Simply put, now would be a good time to develop this field in inhospitable climes and make it economically viable.

 

Being the 65.11% majority stakeholder in Mariner, Statoil would be joined by minority stakeholders JX Nippon E&P (28.89%) and Cairn Energy (via a subsidiary with a 6% stake).

 

Elsewhere, Moody's changed the outlook for Petrobras’ A3 global foreign currency and local currency debt to negative from stable. It said the negative outlook reflects the company's rising debt levels and uncertainty over the timing and delivery of production and cash flow growth in the face of a massive capital budget, rising costs and downstream profit pressures.

 

“We also see increasing linkage between Petrobras and the sovereign, with the government playing a larger role in the offshore development, the company's strategic direction, and policies such as local content requirements that will affect its future development plans,” said Thomas S. Coleman, senior vice president, Corporate Finance Group at Moody’s.

 

That’s all for 2012 folks! A round-up of crude year 2012 to follow early in the New Year; in the interim here’s wishing you all a very Happy New Year. Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo: Vintage Shell pump, San Francisco, USA © Gaurav Sharma.

Splendid dossier on a secretive "supermajor"

In 1999, the merger of Exxon and Mobil created what could be described as an oil & gas industry behemoth and, using some financial metrics, perhaps also one of the most profitable among the international “supermajors”. Despite being a global entity, for many people ExxonMobil remains an enigma.

 

Its sheer presence on the world stage has its admirers yet critics have labelled it as a polluter, a climate-change denier, a controversial lobbyist, a bully and more. For Pulitzer Prize winning author Steve Coll, there is more to it than meets the eye when it comes to ExxonMobil and its financial performance which is more durable than others in the Fortune 500 list.

 

Minus generalisations or a linear exercise in big oil bashing, this latest work of Coll's – Private Empire: ExxonMobil and American Power – is a pragmatic book about a global brand which, in the author’s words, became the "most hated"  oil company in America after the Exxon Valdez oil spill off the coast of Alaska in 1989.

 

That incident itself provides the starting point for a detailed narrative of just under 700 pages, split into two parts – The End of Easy Oil and The Risk Cycle – containing 28 chapters. Banking on his journalistic tenacity and detailed research work including over 400 interviews, declassified documents, legal and corporate records and much more, Coll has pencilled his unique description of this “Private Empire” and it does not disappoint.

 

ExxonMobil has its dogmas, fears, idiosyncrasies, pluses and minuses and the author delves into these based on anecdotal as well as observed evidence. From an obsession with safety post Exxon Valdez to the moving of its headquarters to Irving, Texas, from “the merger” to an insistence on R.O.C.E (Return on Capital Employed) – Coll has tackled it all.

 

The author opines that far from being an attention seeking ruthless corporate giant in bed with politicians, as popular conjecture would have you believe, ExxonMobil’s legendary lobbying in Washington DC was cleverly and aggressively targeted for maximum effect. While it shunned overt politicising of its presence and affairs, the company benefitted from new markets and global commerce that US military hegemony protected the world over. After all, when fighting a tight corner, ExxonMobil often called in a favour from power brokers on Capitol Hill.

 

While the whole book is a thoroughly good read, for the Oilholic, reading Coll’s description of ExxonMobil’s grapples with "resource nationalism" in developing markets (as its oil output in developed jurisdictions started declining) and its management (or otherwise) of operations in inhospitable countries, were the two most interesting passages.

 

From Aceh in Indonesia to the Niger Delta, from the Gulf of Guinea to Chad, ExxonMobil found itself in alien territory and conflicts it had not seen before. But it strategized, adopted, called in favours and more often than not emerged with a result in its favour; if not immediately, then over a period of time, writes Coll.

 

Every saga needs a cast of characters and this one is no exception. One individual and his portrayal by the author stand out. That’s Lee ("Iron Ass") Raymond, ExxonMobil’s inimitable boss from 1993 to 2005. With a doctorate in chemical engineering, boasting Dick Cheney among his friends and a history of denying climate change, Raymond was by all accounts a formidable character and Coll’s description of him does not disappoint. One mute criticism the Oilholic has is that its borderline gossip in parts but one supposes the gossip joins the dots in a weighty narrative.

 

In summation, this blogger found the book to be a definitive one on ExxonMobil and by default a glimpse into the wider ‘crude’ world, it’s wheeling and dealing. The Oilholic would be happy to recommend it to anyone interested in the oil business, its history, market dynamics and the geopolitical climate it is inextricably linked with.

 

Those interested in business, finance and economics would also enjoy this book as would the mainstream non-fiction reader in search of a riveting real world account. Finally, it would also be well worth the while of students of financial journalism to read and learn from Coll’s craft.

 

© Gaurav Sharma 2012. Photo: Front Cover – Private Empire: ExxonMobil and American Power © Allen Lane / Penguin Group UK.


Why Iran is miffed at (some in) OPEC?

The talking is over, the ministers have left the building and the OPEC quota ‘stays’ where it is. However, one OPEC member – Iran – left Vienna more miffed and more ponderous than ever. Why?

Well, if you subscribe to the school of thought that OPEC is a cartel, then it ought to come to the aid of a fellow member being clobbered from all directions by international sanctions over its nuclear ambitions. Sadly for Iran, OPEC no longer does, as the country has become a taboo subject in Vienna.

Even the Islamic Republic’s sympathisers such as Venezuela don’t offer overt vocal support in front of the world’s press. Compounding the Iranians’ sense of frustration about their crude exports being embargoed is a belief, not entirely without basis, that the Saudis have enthusiastically (or rather "gleefully" according to one delegate) stepped in to fill the void or perceived void in the global crude oil market.

Problems have been mounting for Iran and are quite obvious in some cases. For instance, India – a key importer – is currently demanding that Iran ship its crude oil itself. This is owing to the Indian government’s inability to secure insurance cover on tankers carrying Iranian crude. Since July, EU directives ban insurers in its 27 jurisdictions from providing cover for shipment of Iranian crude.

Under normal circumstances, Iranians could cede to the Indian demand. But these aren’t normal circumstances as the Iranian tanker fleet is being used as an oversized floating storage unit for the crude oil which has nowhere to go with the speed that it used to prior to the imposition of sanctions.

The Obama administration is due to decide this month on whether the USA will renew its 180-day sanction waiver for importers of Iranian oil. Most notable among these importers are China, India, Japan, South Korea, Taiwan and Turkey. US Senators Robert Menendez (Democrat) and Mark Kirk, have urged President Obama to insist that importers of Iranian crude reduce their purchase contracts by 18% or more to get the exemption.

So far, Japan has already secured an exemption while decisions on India, South Korea and China will be made before the end of the month. If the US wanted to see buyers cut their purchases progressively then there is clear evidence of this happening. Two sources of the Oilholic’s, in the shipping industry in Singapore and India, suggested last week that Iranian crude oil exports are down 20% on an annualised basis using November 23 as a cut off date. However, a December 6 Reuters' report by their Tokyo correspondent Osamu Tsukimori suggested that the annualised drop rate in Iranian crude exports was actually much higher at 25%.

Of the countries named above, Japan, South Korea and Taiwan have been the most aggressive in cutting Iranian imports. But the pleasant surprise (for some) is that India and China have responded too. Anecdotal evidence suggests that Chinese and Indian imports of Iranian crude were indeed dipping in line with US expectations.

When the Oilholic visited India earlier this year, the conjecture was that divorcing its oil industry from Iran’s would be tricky. Some of those yours truly met there then, now agree that Iranian imports are indeed down and what was stunting Iranian exports to India was not the American squeeze but rather the EU’s move on the marine insurance front.

If Iran was counting on wider support within OPEC, then the Islamic republic was kidding itself. That is because the Organisation is itself split. Apart from the Iraqis having their own agenda, the Saudis and Iranians never get along. This splits the 12 member block with most of Iran’s neighbours almost always siding with the Saudis. Iran’s most vocal supporter Venezuela, is currently grappling with what might (or might not) happen to President Hugo Chavez since he’s been diagnosed with cancer.

Others who support Iran keep a low profile for the fear of getting embroiled in diplomatic wrangling which does not concern them. So all Iran can do is moan about OPEC not taking ‘collective decisions’, hope that Chinese patronage continues even if in a diminished way and stir up disputes about things such as the appointment of the OPEC Secretary General.

The dependency of Asian importers on Iranian crude is not going to go overnight. However, they are learning to adapt in fits and starts as the last 6 months have demonstrated. This should worry Iran.

That’s all from Vienna folks! Since it’s time to say Auf Wiedersehen and check-in for the last British Airways flight out to London, the Oilholic leaves you with a view of his shadow on a sun soaked, snow-capped garden at Schönbrunn Palace. Christmas is fast approaching but even in the season of goodwill, OPEC won’t or for that matter can’t come to Iran’s aid while the US and EU embargo its exports. Even cartels, if you can currently call OPEC one, have limits. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Empty OPEC briefing room podium following the end of the 162nd meeting of ministers, Vienna, Austria. Photo 2: Schönbrunn Palace Christmas market © Gaurav Sharma 2012.

OPEC 'maintains' production quota @ 30mbpd

OPEC has maintained its production quota at 30 million barrels per day (bpd) following the conclusion of its 162nd meeting in Vienna, Austria. Member Iraq is yet to be included in the current daily production figure, while Libya would be shortly, it said.

The oil producers group also announced that current Secretary General Abdalla Salem el-Badri's term will be extended for one more year with effect from January 1, 2013 but did not assign any reason for the extension. Under existing norms, an OPEC Secretary General usually steps down after two terms in office.

Sources say, the unexpected move was down to the inability of OPEC members to unite behind a common candidate for the office of Secretary General. The issue has been in the background for some time now.

OPEC said it had reviewed the oil market outlook and the existing supply/demand projections for 2013 in particular. It added that ministers had noted the price volatility witnessed throughout 2012, which in its opinion "remained mostly a reflection of increased levels of speculation in the commodities markets, exacerbated by geopolitical tensions and, latterly, exceptional weather conditions."

It also observed mounting pessimism over the global economic outlook, with downside risks continuing to be presented by the sovereign debt crisis in the Eurozone, high unemployment in the advanced economies and inflation risk in the emerging economies.

Hence, OPEC delegates noted that although world oil demand is forecast to increase marginally during the year 2013, this is likely to be more than "offset by the projected increase in non-OPEC supply" and that projected demand for OPEC crude in 2013 is expected to contract to 29.7 million bpd. This, it said, was "largely behind" its decision to maintain the current production level.

OPEC added that "member countries would, if necessary, take steps to ensure market balance and reasonable price levels for producers and consumers." In taking this decision, member countries confirmed that they will swiftly respond to developments that might have a detrimental impact on an orderly oil market.

Apart from an extension of el-Badri’s tenure, OPEC has appointed Yasser M. Mufti, Saudi Arabian Governor for OPEC, as Chairman of the Board of Governors for 2013, and Ali Obaid Al Yabhouni, UAE Governor for OPEC, as Alternate Chairman for the same period, also with effect from January 1, 2013. OPEC said its next meeting will convene in Vienna, Austria, on May 31, 2013.

Despite persistent questioning by the assembled scribes about details on individual members' quotas, OPEC did not divulge them or how they will be enforced. That's all from the OPEC HQ! Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo:  OPEC Secretary General Abdalla Salem el-Badri at the conclusion of162nd OPEC meeting on December 12, 2012, Vienna, Austria © Gaurav Sharma, December 2012.

Initial soundbites before things kick-off at OPEC

The delegates and ministers have walked in, the press scrum (or should you choose the term g*ng b*ng) is over and the closed door meeting has begun – all ahead of a decision on production quotas and the possible appointment of a new secretary general.

Smart money is on OPEC maintaining output at its current level of 30 million barrels per day (bpd), with the Saudis curbing their breaches of set quotas and the cartel reporting a real terms cut in November. No one smart would put money on who the new OPEC Secretary General might be.

But before that, there are as usual some leaks here and some soundbites there to contend with. These generally nudge analysts and journalists alike in the general direction of what the decision might be. Arriving in Vienna ahead of the meeting, Saudi Arabia’s oil minister Ali al-Naimi, the key man at the table, shunned the international media to begin with and chose to issue a statement via his country’s national press agency.

In his statement, Naimi said the main aim of the December 12 meeting is to keep the balance of the global crude markets in order to serve the interests of producers and consumers. He added that balancing the market will help the growth of the global economy. Since then, he has maintained the same line in exchanges with journalists.

As expected, the Iranians feel a cut in production was needed, saying their fellow members are producing 1 million bpd more than they ought to be. Iran said OPEC’s statement last month, that economic weakness in some major consuming countries could shave off 20% from its global demand growth outlook for 2013, lends credence to their claim. However, a delegate admitted there was "little need to change anything" and that the current US$100-plus OPEC basket price was "ok."

Walking in to OPEC HQ, UAE Energy Minister Mohammad bin Dhaen al-Hamli told the Oilholic that he "hopes to solve" the issue of who will be the next Secretary General. Libya's new oil minister Abdelbari al-Arusi, said he was "happy with OPEC production levels.”

Meanwhile, two key men are not in Vienna – namely Kuwait’s oil minister Hani Abdulaziz Hussein and Venezuela’s Rafael Ramirez. According to a Venezuelan scribe, the latter has sent Bernard Mommer, the OPEC representative for Venezuela’s oil ministry, in his place so he could support President Hugo Chavez, who is undergoing cancer surgery in Cuba. Ramirez added that Venezuela did not believe it was necessary for OPEC to increase production quotas and that the market was “sufficiently” supplied.

Finally, in his opening address, Iraqi oil minister and president of the conference Abdul-Kareem Luaibi Bahedh said OPEC faces a period of continuing uncertainty about the oil market outlook. "To a great extent, this reflects the lack of a clear vision on the economic front. The global economy has experienced a persistent deceleration since the beginning of the year...In the light of this, world oil demand growth forecasts for this year have been revised down frequently," he added.

Turning to the oil price, he said it had strengthened in the six months since June. "For its part, OPEC continues to do what it can to achieve and maintain a stable oil market...However, this is not the responsibility of OPEC alone. If we all wish to benefit from a more orderly oil market, then we should all be prepared to contribute to it. This includes consumers, non-OPEC producers, oil companies and investors, in the true spirit of dialogue and cooperation," said the Iraqi oil minister.

Meanwhile, as a footnote, the IEA raised its projections for non-OPEC supply in 2013 in its Monthly Oil Market Report published on December 12. The agency said global oil production increased by 730,000 bpd to 91.6 million bpd in November. With non-OPEC production rebounding "strongly" in November to 54.0 million bpd, the IEA revised up its forecasts for non-OPEC fourth quarter supply by 30,000 bpd to 53.8 million bpd. For next year, IEA expects non-OPEC production to rise to 54.2 million bpd; the fastest pace since 2010.

It also added that OPEC supply rose by "a marginal" 75,000 bpd to "31.22 million bpd". IEA said the OPEC crude supply increases were led by Saudi Arabia, Angola, Algeria and Libya but offset by recent production problems in Nigeria. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo:  OPEC briefing room at 162nd meeting of OPEC, Vienna, Austria © Gaurav Sharma, December 2012.