Dilma and the Petrobras scandal's aftermath

Bidding Adiós to Buenos Aires, the Oilholic has landed in the bursting metropolis of Sao Paulo, Brazil, one’s penultimate stop in South America before returning to Bogota and flying back home following a two week trip to South America.

Walking down the city’s vibrant Avenida Paulista, a 1.75 mile thoroughfare that has several businesses, financial and cultural institutions (including the Museu de Arte de São Paulo), glitzy skyscrapers, malls, hotels and shops lining up either side of it, one gets a real buzz of modern Brazil.

However, the country’s President Dilma Rousseff would get a largely unwelcome buzz were she to walk down the avenue. Most in Brazil’s commercial heart lay the blame for the Petrobras corruption scandal, uncovered earlier in February, firmly on Rouseff’s door even tough she has not been directly implicated in anything uncovered by corruption investigators so far.

There have been several mass protests here in Sao Paulo, along with Rio de Janeiro and other major Brazilian cities calling for the President to be impeached. As the Oilholic noted earlier this year in a Forbes column, the scandal has politically scarred Rouseff, a former chairwoman of Petrobras’ board of directors, beyond repair in the unforgiving world of Brazilian politics.

Many of those facing investigations and jail time happen to be from her side of the Brazilian political spectrum – the Workers’ Party. That’s what fuels people’s anger. Mass protests grab headlines, but sporadic smaller protests – like one this blogger witnessed on Avenida Paulista – are commonplace (see above left).

For people who call the Americas third-largest oil producer behind the United States and Canada their home, Petrobras has always held a special place in hearts and minds. So to see it humiliated on the world stage and financially wounded by a corruption scandal plays on peoples minds in a struggling economy.

In global terms, according to BP’s latest statistics on the industry, Brazil is the world’s 9th largest oil and gas producer pumping out some 2.95 million barrels per day, with Petrobras as its custodian.  

Furthermore, as the US Energy Information Administration, notes, “Increasing domestic oil production has been a long term goal of the Brazilian government, and discoveries of large offshore, presalt oil deposits have already transformed Brazil into a top-10 liquid fuels producer.”

However, weak economic growth and the scandal implicating several high profile people at Petrobras has reduced the chances for production growth over the short term; at least of the kind that was hoped for back in 2010 according local sources. 

Clearly, going by the mood in Sao Paulo, not many want to let Rouseff off the hook, whether rightly or wrongly. That’s all from Brazil folks, as one leaves you with a view of the magnificent Catedral da Se de Sao Paulo (above right). Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo I: Anti-Dilma Rousseff protests on Avenida Paulista, Sao Paulo, September 23, 2015. Photo II:  Catedral da Se de Sao Paulo, Brazil © Gaurav Sharma, October 2015.

'Crude' implications of Argentina's election

The Oilholic has hopped over from Santiago de Chile for a splash and dash pre-election visit to the Argentine capital of Buenos Aires. Braving fake banknotes, dodgy cab drivers, eateries where prices change daily and a services sector with few scruples if any, yours truly finds himself peeking at ongoing electioneering in the run-up to the October 25th presidential election, standing beside the Obelisco de Buenos Aires.

In all likelihood, a presidential run-off looms for a successor to Cristina Fernandez de Kirchner, who claims to be leaving behind a “crisis free” country where of course inflation is close to 30% by unofficial accounts and the IMF expects the economy to shrink further.

Centre-left candidate Daniel Scioli, handpicked by Kirchner (who cannot seek a third term under the constitution), is vying with centre-right man and Buenos Aires mayor Mauricio Macri. Not many in the Argentine capital, give the “third guy” Sergio Massa, a former ally of Kirchner's (before relations soured), much of a hope. However, his support – should a run-off happen – would be vital. 

The incoming president would have an almighty mess to deal with in a country that has the dubious title of slipping from being a developed economy at the turn of the previous century to a third world country in the 21st century. Both main candidates promise to lower inflation to single digits and stimulate growth. Some (but not all) in Buenos Aires are simply glad Kirchner would be gone.

Discussing what shape the country’s energy policy in general (and oil and gas policy in particular) takes would be pointless before we know who the next occupant of the President’s office is. Much still remains at stake, including Buenos Aires’ continued hostility to offshore oil and gas exploration in the Falkland Islands (or Las Malvinas) as the Argentines call it, given the history of the territory. Despite Kirchner’s whinging to deflect attention from internal political woes, oil and gas explorers in the contentious British territory, claimed by Buenos Aires, are not going to go away.

If anything, the oil price decline, rather than something Buenos Aires does, is likely to have a bigger impact on future prospects. Away from the contentious side issue, it’s the direction of Argentina’s shale exploration that’s of a much bigger significance in a global context.

As the US Energy Information Administration noted earlier this year, if you exclude the US and Canada – only Argentina and China happen to be producing either natural gas from shale formations or crude oil from tight formations (tight oil) at an international level. How the country’s promising Neuquen Basin develops further would have a massive bearing on the economy. But where we go from here, given for instance the Repsol versus Federal Government histrionics of the past, would be anyone’s guess. 

The Oilholic intends to probe the subject more deeply at a later stage both on this blog as well as for Forbes, once we know who the next Argentine president is.

However, for the moment, that’s all from Buenos Aires folks. Yours truly leaves you all with a breathtaking  view of the Andes Mountain range as seen from LAN Airlines flight 1447 coming from Santiago de Chile to Buenos Aires (right). Keep reading, keep it crude!

Update, October 26th: With 96% of the votes counted, according to the AFP, Scioli was marginally ahead with 36.7% of the vote, while Macri had 34.5%. Massa, who came a distant third has accepted defeat but not stated who he would be supporting. A presidential election run-off has been scheduled for November 22.

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© Gaurav Sharma 2015. Photo I: Obelisco de Buenos Aires, Argentina. Photo II: Andes Mountain as seen from flight LAN1447 Santiago de Chile to Buenos Aires, Argentina © Gaurav Sharma, October 2015

Chile holds firm as copper market corrects

As the world’s leading producer of copper, there are grave concerns in Chile about China’s economic slowdown. The Oilholic doesn’t often touch on base metals on this blog, but being in Chile, one decided to break from tradition.

Over the last decade, China has displayed a voracious appetite for copper, with much of it coming from Chile. Clear indications point to a slowdown and even Beijing admits the country’s growth would be nowhere the double digit percentages it has posted in recent years that made the commodities world grow accustomed to the party.

No party lasts forever, and what the Oilholic finds here in Santiago de Chile is that no one need teach the Chileans that lesson. Policymakers, while anxious about it, saw China’s slowdown coming and are in confident mood they’ll weather the storm. The Chilean government can’t ignore the fact that the Chinese consume just shy of 50% of the world's refined copper, and as such Beijing is both directly and indirectly a major trading partner.

However, local economists’ thoughts and financial journals here in Chile appear to suggest one of the world’s leading copper producers is gearing up for a compound annual growth rate in Chinese copper demand in the range 2.5-3.5%; that’s less than half of the near 8% demand noted between 2010 and 2014.

If anything local forecasts are towards the lower end of Wall Street predictions and those put out by major European investment banks including Societe Generale, Barclays and Deutsche Bank. Droughts in Chile and other disruptions have tempered market sentiment on the oversupply front.

Disruptions in PNG and Zambia have also helped as have cuts announced by Glencore. To this effect, local analysts feel while the copper market is heading for leaner times, the effect would be less pronounced than say in the case of nickel or zinc. Supply/demand imbalances will persist but not to the extent feared both in Chile and beyond.

However, there is one thing though. As with oil, given the extent to which commodities have become an asset class, it is worth examining what the punters think. For the few this blogger has had a chance to interact with here in Chile, the copper market remains net short, using the COMEX copper (not LME three-month futures) contract as a benchmark.

The positioning might be net short, but it isn’t as bad as what local analysts noted over the first quarter of this year, especially mid-February to late-March. So right now, smaller end of life miners in Chile appear to be in trouble, but others including the majors operating in the country appear to be holding firm on their cautious outlook.

Finally, past crises have taught most regional governments a thing or two about managing the situation in troubling times. Some like Venezuela consciously choose not to learn, while others like Chile do learn and manage their exposure to volatility better.

There’s no reason to believe why 2015 would be any different. President Michelle Bachelet who oversaw the 2008-09 downturn during her previous stint in office, remains a steady hand, despite declining domestic poll ratings. That’s all for the moment folks as one heads to Buenos Aires for a short pre-election hop. In the meantime, this blogger leaves you with an amazing view from Cerro San Cristobal. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2015. Photo I: Flag of Chile in Santiago. Photo II: Cerro San Cristobal - Santiago, Chile © Gaurav Sharma, October 2015

Curious case of the Pisco Sour

Following a weekend in Lima, the Oilholic has crossed over to Santiago de Chile. However, before one gets down to commodities related matters, there is the not so little matter of ‘not settling’ where the splendid regional cocktail Pisco Sour originates, a subject of much disquiet between Peru and Chile.

But first the recipe – you’ll need 25ml Lemon Juice, one egg white, 50ml Pisco (either Chilean or Peruvian), 20ml simple syrup. Give it an almighty shake with ice cubes, pour from shaker and add a dash of bitters. The end result is that delicious stuff in the photo on the left. That dear readers is the national drink of both Peru and Chile!

The origin of the main liquor base – Pisco, a colourless to yellow amber grape brandy made from distilling grape wine into a high proof spirit (below right) – is hotly contested. First known production dates back to the 16th century. Peruvians claim the name and first production site originates from the town of Pisco, while the Chileans claim the word “pisco”, a derivative of a term for a common bird, was used all along the Pacific Coastline of South America since the early days of Spanish settlers.

Going one step further, should names of towns matter, the Chileans renamed the town of La Unión in 1936 as Pisco Elqui so as to reinforce their claims over the name Pisco. Chile’s Pisco production volume dwarfs Peru’s by a ratio of 10 bottles to one. However, on the international stage Peruvians have the bragging rights as the “finer pisco” (at least in their opinion) is exported 3.5 times more than the Chilean produce.

There was dismay in Santiago, when Lima won a significant battle by being recognised as the original home of Pisco by the European Union in 2013. Yet, Chile’s usage of the word Pisco to describe its brandy cannot be curtailed, given its commonality. So much so for the liquor, but the tussle doesn’t end here! The cocktail is just as hotly disputed. According to bartenders in Lima’s Larcomar area, the cocktail originated in the city and was invented by an American named Victor Morris in the 1920s. 

When Morris, who had been living in Peru since 1903, opened Morris' Bar in Lima, the cocktail became his specialty. However, the recipe underwent several changes until Mario Bruiget, a Peruvian employee of Morris, added Angostura bitters and egg whites to the mix, thus creating the cocktail mix that has stood the test of time since 1926.

However, in Santiago de Chile, the story is widely dismissed. On the contrary, bartenders in the Chilean capital’s Providencia area say it was an English sailor Elliot Stubb who came up with the idea in 1872. Stubb, they say, mixed Key lime juice, syrup, and ice cubes to create the cocktail well known in Chile, some 50 years before the modern Peruvian version was even around.

Rubbish, no proof – retort the Peruvians again, while adding that the Chileans pinched the idea when Morris advertised the drink in 1924 in a local newspaper in the port of Valparaíso, Chile. Guess that doesn’t settle this one then. All the Oilholic can say is – whether sipped in Peru or Chile – it’s a splendid beverage! Cheers! That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo I: Pisco Sour in Lima, Peru. Photo II: Pisco on rocks, Santigo, Chile. Photo III: Enojoying Pisco Sour in Santiago, Chile © Gaurav Sharma, October 2015

Crude conjecture: The IMF & a view from Peru

The Oilholic is just about to wrap-up a touristy weekend in Lima, Peru, before heading over to Santiago de Chile. One arrives barely a week after International Monetary Fund annual meetings held here from October 5 to 12.

The IMF’s decision to choose Lima as the venue had a ‘crude’ subtext; ok perhaps a ‘natural resource’ centric subtext. In March 2014, the fund’s Survey Magazine: Countries & Regions had predicted that commodity exporting countries of the Andean region, including Peru, could achieve sustainable economic growth levels and match the output rates of industrialised economies in percentage terms.

Extractive industries – chiefly oil, gas and mining – would play a growing role, it added. Of course, that was before the oil price started slumping from July 2014 onwards. By the time the first day of the Lima meet arrived this month, the IMF was predicting that should headline regional growth touch 1% over 2015, we’d be lucky. It also confirmed that Latin America would see its fifth successive year of economic output deceleration.

There is clear evidence of the oil price decline hurting Peru. However, as the Oilholic wrote on Forbes.com, the political climate in the run up to the April 2016 presidential election, is also spooking investors. President Ollanta Humala had to appoint his seventh Prime Minister in less than four years earlier this year and is in a tussle with Congress over the state’s role in oil and gas exploration.

All the while, the stars aren’t quite aligning, crudely speaking and are unlikely to do so for a while yet. Both benchmarks are currently languishing below $50 per barrel, and even the Oilholic’s $60 medium term equilibrium projection won’t quite cut it for Peru, where production has been declining since the mid-1990s (though proven reserves have been revised upwards to 740 million barrels).

Soundings over the past week have been anything but positive Latin American oil and gas producers in general, and we’re not just talking about the IMF here. The International Energy Agency said last week that the global economic outlook was “more pessimistic” and expected a marked slowdown in oil demand growth, with the commodities downturn hurting economic activity of exporting nations.

“Oil at $50 a barrel is a powerful driver in rebalancing the global oil market...But a projected marked slowdown in demand growth next year, and the anticipated arrival of additional Iranian barrels will keep the market oversupplied through 2016,” it added. In near tandem with the IEA, several brokers and rating agency Moody’s also revised their respective oil price assumptions “on oversupply and weakening demand.”

Moody's lowered its oil price assumption in 2016 for Brent to $53 from $57 per barrel and for the WTI to $48 from $52 per barrel. The rating agency expects both prices to rise by $7 per barrel in 2017, or a $5 per barrel reduction from its prior forecast.

Steve Wood, a Moody's senior analyst, said, "Oil prices will remain lower for a longer period, as large built-up inventories and oversupply cause oil prices to increase at a slower rate. Although supply should begin to drop as capital spending declines, increased Iranian exports could place additional pressure on oil prices in 2016."

As is evident, sentiment on the supply glut persisting in 2016, is gaining traction. These are particularly worrying times for smaller oil and gas exporters, a club that Peru is a member of. That’s all from Lima folks, as the Oilholic leaves you with a view of the Pacific Ocean from Larcomar. Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo I: IMF Meetings Banner at Lima Airport, Peru. Photo II: A view of the Pacific Ocean from Larcomar, Lima, Peru. © Gaurav Sharma, October 2015

Why ‘chiflados’ in Caracas infuriate Colombians

Colombia and Venezuela haven’t always been the best of friends over the last 15 years, since the late Hugo Chavez swept to power. However, here in Bogota, the Oilholic finds relations between the two neighbours at an all time low, largely down to a select bunch of “chiflados oportunistas en Caracas” (loosely translated as opportunistic crackpots in Caracas), who blame everyone but themselves for  the effects their own mad economic policies, say locals.

But first some background – A general election is slated for 6 December in Venezuela with oil nowhere near the three-figure per barrel price the country needs to balance its budget. Regional analysts fear a sovereign default and monthly inflation according to independent forecasts is in double figures as Caracas hasn’t published official data for a while (even the fudged version). Meanwhile, industrial production is in doldrums as the government continues to print money. 

The Venezuelan Bolivar’s official exchange rate to the dollar is VEF6.34, but you’d be lucky if anyone in Bogota or elsewhere in Latin America would be willing to exchange the greenback for VEF635; forget the decimal point! Price controls and availability have played havoc with what Venezuelans can and cannot buy. More often than not, it is no longer a choice in a country that famously ran out of loo rolls last year. So what does President Nicolas Maduro do? Why blame it all on “conspirators” in Colombia! 

Now hear the Oilholic out, as he narrates a tale of farce, as narrated to him by an economics student at the local university, which this blogger has independently verified. With the Venezuelan Bolívar more or less not quite worth the paper its printed on – as explained above – most of the country’s citizens (including Chavistas, and quite a few regional central banks if rumours are to be believed) – turn to DolarToday, or more specifically to the website’s twitter account, to get an unofficial exchange rate based on what rate the Bolívar changes hands in Cucuta, a Colombian town near the border with Venezuela (The website currently puts the Bolivar just shy of VEF800 to the dollar). 

It is where Venezuelans and Colombians meet to exchange cheap price-controlled fuel, among other stuff from the false economy created by Caracas, to smuggle over to Colombia. The preferred currency, is of course, the Colombian peso, as the dollar’s exchange rate to the Bolívar is calculated indirectly from the value of the peso with little choice to do anything else but. 

The final calculation is extremely irregular, as the Colombian peso itself grapples with market volatility, but what the fine folks in Cucata come up with and DolarToday reports is still considered a damn sight better than the official peg, according to most contacts in Colombia and beyond, including the narrator of the story himself. 

So far so much for the story, but what conclusions did President Maduro take? Well in the opinion of the Venezuelan President, DolarToday is a conspiracy by the US, their pals in Colombia and evil bankers to wreck Venezuela’s economy; as if it needs their help! Smuggling across the border and of course food shortages in the country have been promptly blamed on private enterprise players “without scruples” and Colombians, carefully omitting Venezuela’s National Guard personnel, without whose alleged complicity, it is doubtful much would move across the border.

Maduro subsequently closed the border crossing from Tachira, Venezuela to Norte de Santander, Colombia earlier this quarter. He also announced special emergency measures in 13 Venezuelan municipalities in proximity of the Colombian border. The shenanigans prompted an angry response form President Juan Manuel Santos, Maduro’s counterpart in Bogota. Both countries recalled their respective ambassadors in wake of the incident. 

However, in line with the prevalent theme of finding scapegoats, Maduro’s government didn’t stop there. Nearly 2,000 Colombians have been deported from Venezuela, according newspapers here. Another 20,000 have fled back to Colombia, something which President Santos has described as a humanitarian crisis. Santos also chastised Venezuela at the Organisation of American States (OAS) noting that Caracas was blaming its “own economic incompetence on others” (translating literally from Spanish).

The Colombian President might well have felt aggrieved but he need not have bothered. The chiflados in Caracas know what they are. For example, when Venezuela was hit by an outbreak of chikungunya (last year), a disease marked by joint pains and bouts of fever according to the WHO website, the government’s response was as removed from reality as it currently is when it comes to DollarToday and smuggling across the Colombia-Venezuela border.

At the time, a group of doctors west of Caracas calling for emergency help saw their leader accused of leading a “terrorist campaign” of misinformation. With a warrant was issued for his arrest, the poor man fled the country. Close to 200,000 were affected according media sources outside of Venezuela but government statistics put the figure below 26,500. 

Each time economists and independent analysts challenge any data published by PDVSA or INE or any Venezuelan government institution, it is dismissed by Caracas as “politically motivated.” And so the story goes with countless such examples, albeit an international spat like the one with Colombia are relatively rare. Maduro is also miffed with neighbouring Guyana at the moment, for allowing ExxonMobil to carry out oil exploration in “disputed waters” which prompted a strong response at the UN from the latter.

Expect more nonsense from Caracas as the Venezuelan election approaches. However, here’s one telling fact from Colombian experts to sign off with – over the past year the Venezuelan Bolívar’s value has plummeted by 93% against the peso in the unofficial market. Now that’s something. 

The Oilholic tried to change pesos for the bolivar officially in the Colombian capital, but found few takers and got lots of strange looks! That’s all from Bogota for the moment folks as one heads to Peru! Back here later in the month, keep reading, keep it ‘crude’!   

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© Gaurav Sharma 2015. Plaza de Bolívar, Bogota, Colombia © Gaurav Sharma, October 2015

Latin America's commodities downturn problem

The Oilholic finds himself roughly 5,300 miles west of London in Bogota, Colombia wandering around the city’s rustic and charming La Candelaria area. 

It’s the beginning of a journey through South America to find out how the recent commodities downturn is affecting the market mood and investment outlook in what (still) remains a very commodity-exports driven continent. 

One gets a sense of opportunities missed and dismay from those who saw the downturn coming – not just here in Colombia, but looking outside in at Chile, Argentina, Peru and of course that colossal corruption scandal at Petrobas in Brazil. While the sun was shining, and China’s double digit economic growth was fuelling the commodities boom, attempts should have been made at macroeconomic diversification instead of relying on a party that was bound to end sooner or later.

We’re not just talking oil and gas here; take in everything from minerals to soya beans, or copper specifically in the case of Chile. Most Latin American currencies got marginal power boosters during the commodities boom, if not a case of full blown Dutch disease, which resulted in lacklustre performance from non-commodities sectors that became increasingly uncompetitive and to an extent unproductive over the last 10 years.

The International Monetary Fund reckons come the end of 2015, if headline regional growth touches 1% we’d be lucky. In fact, in its latest update the IMF confirmed that Latin America would see its fifth successive year of economic output deceleration. While past commodity busts have triggered regional financial crises, thankfully not many locally as well as internationally, including the IMF, expect a repeat this time around. That’s largely down to the fact LatAm economies, with notable exception of Venezuela, have not indulged in fiscal populism and daft economic policies.

In sync, ratings agencies, while negative on the economic outlook of many countries in the region, but only fear a sovereign default in Venezuela. However, another negative aspect of dependency on the commodities market is that investment – especially on terms prior to the market correction – would be hard to come by.

Just ask Mexico! As the Oilholic noted in a recent column for Forbes, phase I of round one of Mexico’s oil and gas licensing was a damp squib. Hence, with the September 2015 (phase II) bidding round, the Mexicans had to adjust their thinking to attract (and eventually) secure a decent take-up of available blocks.

Peru’s nascent oil and gas market, Colombia’s emerging and hitherto impressive one face similar challenges as will the copper market in Chile. Argentina faces a general election on October 25th while Brazil is in a technical recession with the IMF seeing few improvement prospects for 2016.

Productivity, in all five countries is down with workers spending hours in a day commuting, and traffic jams (the first of which the Oilholic has already experienced) are legendary enough to give Bangkok and Delhi a run for their money. 

Over the coming weeks yours truly will make sense of it all talking to experts, policymakers, fellow analysts and local folks one is likely to meet and greet while having the odd touristy mumble about. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. La Candelaria, Bogota, Colombia © Gaurav Sharma, October, 2015

Bypassing the Strait of Hormuz from Fujairah

The Oilholic recently found himself roughly 127 km east of Dubai in the United Arab Emirate of Fujairah for a speaking engagement at the Gulf Intelligence Energy Markets Forum 2015.

Among a plethora of crucial subjects up for discussion at a time of low oil prices, much thought in a new place one hadn’t been to before, went towards pondering over an old critical topic – crude oil shipping lanes in the Middle East.

The region's geopolitical tensions have threatened to disrupt oil shipping and other maritime movements at various points over the last five years and counting, even though an actual maritime disruption thankfully hasn’t take place (so far). But whether it’s the Suez Canal, Bab al-Mandab Strait and the Strait of Hormuz, through which a fifth of the world’s oil passes, the threat of naval affray will ever go away.

Back in 2013, barely 12 months on from an Iranian threat to block the Strait of Hormuz, the Oilholic examined nascent mitigation measures to bypass that threat from Oman. However, one got a sense, that Omani overtures also had much to do with challenging nearby Dubai's dominance as a commercial port on the 'wrong' side of the Strait of Hormuz and prone to the Iranian threats.

To this effect, the Omanis are pumping billions into four of their ports – Muscat, Sohar, Salalah and lately Duqm – all of whom face the Gulf of Oman and won’t be affected in the highly unlikely event of the Strait becoming strife and blockade marred.

Of the four, Duqm, an erstwhile fishing village rather than a port, stands to benefit from a new refinery, petrochemical plant and beachfront hotels. However, the UAE’s trump card appears to be its own hub in the shape of Fujairah; the only one of the seven emirates with a coastline facing the Gulf of Oman. With oil-rich neighbour Abu Dhabi as its backer, few would bet against Fujairah.

Indeed, the sleepy and quaint Emirate has woken up, as deliberated by EMF 2015 delegates, with new highways, hotels, supermarkets, ancillary infrastructure - the works! It isn’t just another maritime outlet for the oil industry; storage and petrochemicals facilities are directly linked with over two decades of efforts (and counting) in getting Fujairah to where it is today in infrastructural terms, according to one delegate.

Abu Dhabi’s International Petroleum Investment Company (IPIC), the owner of CEPSA and minority stakeholder in Cosmo Oil and OMV and brains behind the $3.3 billion Habshan–Fujairah oil pipeline, is busy enhancing the now operational pipeline’s onstream capacity from 1.3 million barrels per day to 1.5 million bpd to eventually 2 million bpd. The idea is to pump more and more crude for dispatch avoiding passage of ADNOC cargo via the Persian Gulf. 

Oil storage volume is set to undergo an increment too. Gulf Petrochem, a key player in oil trading world is spending $60 million to boost its storage facilities at Fujairah.

PIC’s Fujairah Refinery project, currently on cards, will process domestic crude oil, including Murban and Upper Zakum, with ready storage and dispatch facilities. And of course, those playing contango would wonder if Fujairah and rival Omani ports could (in the not to distant future) provide a Middle Eastern storage hub to rival onshore storage elsewhere. Discussions with key EMF 2015 delegates under Chatham House Rules point to a high degree of optimism on the subject of enhanced storage in Middle East whether or not contango plays pay-off.

The Oilholic’s feelings are quite clear on contango plays - as one wrote in a Forbes column back in back in February, there will be gains, but those hoping for returns on par Gunvor’s handsome takings from 2008-09 are in for a disappointment. In the strictest sense, what the Omanis and Emiratis are attempting has little do with the current round of contango punts.

Senior ADNOC, Gulf Petrochem, IPIC executives, policymakers and others told this blogger that what’s afoot in Fujairah is about future proofing and providing the region with a world class facility to process, store and ship domestic crude. Everything else would be secondary.

In any case, by the time planned works and storage enhancements come onstream, the current contango play might well be over and done with! That's all from the UAE folks. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2015. Photo 1: Gulf of Oman shoreline. Photo 2: Town Centre, Fujairah, UAE © Gaurav Sharma, September 2015.

Lack of ‘crude’ conclusions from Chinese equities

As another week starts with both Brent and WTI futures trading lower, concerns about China which aren’t new, continue to be brandished about. What the Oilholic does not understand is the overt obsession in certain quarters with the direction of Chinese equities.

The country’s factory gate prices and purchasing managers’ indices haven’t exactly impressed over the last few months. Yet, somehow a stock market decline spooks most despite both the mechanism as well as the market itself lacking maturity. It is also constantly prone to government interference and crackdowns on trading firms.

On one level the anxiety is understandable; the Shanghai Composite Index – lurking just around 3,080-level at the time of writing this blog post – has lost nearly 39.5% since its peak in mid-June. However, it does not tell the full story of China’s economy and the correction it is currently undergoing, let alone its ambiguous connect with the country’s oil imports.

The sign of any mature stock market – for example London or Frankfurt – is that the total tradable value of equities listed is 100% (or above) of the country’s Gross Domestic Product. In Shanghai’s case, the figure is more in the region of 34%, suggesting it still has some way to go.

A mere 2.1% of Chinese equities are under foreign ownership at the moment. Many of the country’s major companies, including oil and gas firms, have dual listings in Hong Kong or New York, which while not an indication of lack of domestic faith, is more of an acknowledgement of impact making secondary listings away from home.

Mark Williams, Chief Asia Economist at Capital Economics, feels panic over China is overblown. “The debacle in China’s equity market tells us little directly about what is going on in China’s economy. The surge in prices that started a year ago was speculative, rather than driven by any improvement in fundamentals. A combination of poor data and policy inaction in China may have triggered recent market falls but the bigger picture is that we are witnessing the inevitable implosion of an equity market bubble,” he said.

Furthermore, current turmoil does not provide any direction whatsoever on what the needs of the economy would be in terms of oil imports. Apart from a blip in May, China has continued to import oil at the rate of 7 million barrels per day for much of this year. That’s not to say, all of it is for domestic consumption. 

Some of it also goes towards strategic storage, data on which is rarely published and a substantial chunk goes towards the country’s export focussed refineries. China remains a major regional exporter of refined products.

Admittedly, much of the commodities market should be worried if not panicking. Over the years, China consumed approximately half of the world’s iron ore, 48% of aluminium, 46% of zinc and 45% of copper. Such levels of consumption could never have been sustained forever and appear to be unravelling. 

Williams noted: “To some extent, China’s recent pattern of weakness in property construction and heavy industry set against strength in services is a positive sign that rebalancing towards a more sustainable growth model is underway. Policymakers in China, unlike their counterparts in many developed economies, still have room to loosen policy substantially further.”

While China’s declining demand is of concern, chronic oversupply in the case of a whole host of commodities – including oil – cannot be ignored either. The current commodities market downturn in general, and the oil price decline in particular, remains a story of oversupply not necessarily a lack of demand.

Another more important worry, as the Oilholic noted via a column on Forbes, is the possibility of a US interest rate hike. The Federal Reserve will raise interest rates; it might not be soon (i.e. this month) but a move is on the horizon. This will not only weigh on commodities priced in dollars, but has other implications for emerging markets with dollar denominated debt at state, individual and institutional levels; something they haven’t factored into their thinking for a while.

In summation, there is a lot to worry about for oil markets, rather than fret about where the Shanghai Composite is or isn’t going. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Shanghai Stock Exchange, Shanghai, China © Gaurav Sharma, August 2014.

Grappling with volatility in a barmy crude market

The oil market is not making a whole lot of sense at present to a whole lot of people; the Oilholic is admittedly one of them. However, wherever you apportion the blame for the current market volatility, do not take the convenient route of laying it all at China’s doorstep. That would be oversimplification!

It is safe to say this blogger hasn’t seen anything quite as barmy over the last decade, not even during the post Lehman Brothers kerfuffle as a US financial crisis morphed into a global one. That was in the main a crisis of demand, what’s afoot is one triggered first and foremost by oversupply. 

As one noted in a recent Forbes column, the oversupply situation – not just for oil but a whole host of commodities – merits a deeper examination. The week before we saw oil benchmarks plummet after the so-called ‘Black Monday’ (August 24) only for it recover by Friday and end higher on a week-over-week basis compared to the previous week’s close (see graph above, click to enlarge)

This was followed on Monday, August 31 by some hefty gains of over 8% for both Brent and WTI. Yet at the time of writing this blog post some 48 hours later, Brent had shed over 10% and the WTI over 7% on Tuesday but again gained 1.72% and 1.39% respectively on Wednesday.

The reasons for driving prices down were about as fickle as they were for driving them up and subsequently pulling them down again, and so it goes. When the US Energy Information Administration (EIA) reported on Monday that the country’s oil production peaked at just above 9.6 million barrels per day (bpd) in April, before falling by more than 300,000 bpd over the following two months; those in favour of short-calling saw a window to really go for it.

They also drew in some vague OPEC comment (about wanting to support the price in tandem with other producers), knowing full well that the phoney rally would correct. The very next day, as the official purchasing managers’ index for Chinese manufacturing activity fell to 49.7 in August, from the previous month’s reading of 50, some serious profit-taking began.

As a figure below 50 signals a contraction, while a level above that indicates expansion, traders found the perfect pretext to drive the price lower. Calling the price higher based on back-dated US data on lower production in a heavily oversupplied market is about as valid as driving the price lower based on China’s manufacturing PMI data indicative of a minor contraction in activity. The Oilholic reckons it wasn’t about either but nervous markets and naked opportunism; bywords of an oversupplied market.

So at the risk of sounding like a broken record, this blogger again points out – oversupply to the tune of 1.1-1.3 million bpd has not altered. China’s import level has largely averaged 7 million bpd for much of the year so far, except May. 

Yours truly is still sticking to the line of an end of year Brent price of $60 per barrel with a gradual supply correction on the cards over the remaining months of 2015 with an upside risk. Chances of Iran imminently flooding the market are about as likely as US shale oil witnessing a dramatic decline to an extent some in OPEC continue to dream off.

But to get an outside perspective, analysts at HSBC also agree it may take some time for the market to rebalance fully. “The current price levels look completely unsustainable to us and a combination of OPEC economics and marginal costs of production point to longer-term prices being significantly higher,” they wrote in a note to clients.

The bank is now assuming a Brent average of $55.4 per barrel in 2015, rising to $60 in 2016 and $70-80 for 2017/18. Barclays and Deutsche Bank analysts also have broadly similar forecasts, as does Moody’s for its ratings purposes.

The ratings agency sees a target price of $75 achieved by the turn of the decade, but for yours truly that moment is bound to arrive sooner. In the meantime, make daily calls based on the newsflow in this barmy market. That’s all for the moment folks! Keep reading, keep it crude!

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© Gaurav Sharma 2015. Graph: Oil benchmark Friday closes, Jan 2 to Aug 28, 2015 © Gaurav Sharma, August 2015.

Resisting $40/bbl, Russia & some ‘crude’ ratings

Following two successive week-on-week declines of 6% or over, last Friday’s close brought some respite for Brent oil futures, although the WTI front month contract continued to extend losses. In fact, the US benchmark has been ending each Friday since June 12 at a lower level compared to the week before (see graph, click to enlarge).

 

Will a $40-floor breach happen? Yes. Will oil stay there? No. That’s because market fundamentals haven’t materially altered. Oversupply and lacklustre demand levels are broadly where they were in June. We still have around 1.1 to 1.3 million barrels per day (bpd) of extra oil in the market; a range that’s held for much of 2015. Influences such as Iran’s possible addition to the global crude oil supply pool and China not buying as much have been known for some time.

The latest market commotion is sentiment driven, and it’s why the Oilholic noted in a recent Forbes column that 2016-17 futures appear to be undervalued. People seem to be making calls on where we might be tomorrow based on the kerfuffle we are seeing today!

Each set of dire data from China, inventory report from the Energy Information Administration (EIA), or a gentle nudge from some country or the other welcoming Iran back to the market (as Switzerland did last week) has a reactive tug at benchmarks. The Oilholic still believes Brent will gradually creep up to $60-plus come the end of the year, with supply corrections coming in to the equation over the remainder of this year.

Away from pricing, there is one piece of very interesting backdated data. According to the EIA, Russia’s oil and gas sector weathered both the sanctions as well as the crude price decline rather well.

For 2014, Russia was the world's largest producer of crude oil, including lease condensate, and the second-largest producer of dry natural gas after the US. Russia exported more than 4.7 million bpd of crude oil and lease condensate in 2014, the EIA concluded based on customs data. Most of the exports, or 98% if you prefer percentages, went to Asian and European importers.

Where Russian production level would be at the end of 2015 remains the biggest market riddle. Anecdotal and empirical evidence points to conducive internal taxation keeping the industry going. However, as takings from oil and gas production and exports, account for more than half of Russia's federal budget revenue – it is costing the Kremlin.

Finally, two ratings notes from Fitch over the past fortnight are worth mentioning. The agency has revised its outlook on BP's long-term Issuer Default Rating (IDR) to ‘Positive’ from ‘Negative’ and affirmed the IDR at 'A'.

The outlook revision follows BP's announcement that it has reached an agreement in principle to settle federal, state and local Deepwater Horizon claims for $18.7bn, payable over 18 years. “We believe the deal has significantly reduced the uncertainty around BP's overall payments arising from the accident and hence has considerably strengthened the company's credit profile,” Fitch said.

The agency added there was a real possibility for an upgrade to 'A+' in the next 12 to 18 months, depending on how things pan out and BP's upstream business profile does not show any significant signs of weakening, such as falling reserves or production.

Elsewhere, and unsurprisingly, Fitch downgraded the beleaguered Afren to ‘D’ following the management's announcement on July 31 that it had taken steps to put the company into administration. The company's senior secured rating has been affirmed at 'C', and the Recovery Rating (RR) revised to 'RR5' from 'RR6'.

As discussions with creditors aimed at recapitalising the company failed, the appointment of administrators was made with the consent of the company's secured creditors who saw it as an “important step in preserving value of Afren's subsidiaries”. It is probably the only “value” left after a sorry tale of largely self-inflicted woes. That’s all for the moment folks, keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Graph: Oil benchmark Friday closes, Jan 2 to Aug 14, 2015 © Gaurav Sharma, August 2015.

Jargon free volume on upstream fiscal design

Takings from upstream oil and gas projects, whether they are small scale or big ticket ones, ultimately determine their profitability – the stuff that shareholders, venture sponsors and governments alike have a keen interest in.

It is why oil and gas companies, both state or privately held, deploy an army of petroleum economists to offer conjecture or calculated projections on what the final fiscal share of such ventures might be.

In this complex arena, both budding petroleum economists and established ones could do with all the help they can get. Industry veterans Ken Kasriel and David Wood’s book Upstream Petroleum: Fiscal and Valuation Modeling in Excel (published by Wiley Finance) goes a long way towards doing just that, and quite comprehensively too.

In a volume of 370 pages, with eight detailed chapters split into sequential sub-sections, the authors offer one of the most detailed subjective discussions and guidance on fiscal modeling that is available on the wider market at the moment in the Oilholic's opinion.

The treatment of fiscal systems, understanding and ultimately tackling the complexities involved is solid, predicated on their own views and experience of understanding the tangible value of upstream projects before, during and when they ultimately come onstream, and what the takings would be.

Kasriel and Wood have also included five appendices and a CD-ROM (in the hardcover version) to take the educational experience further, and accompanying the main text of the title are over 400 pages of supplementary PDF files and some 120-plus Excel files, with an introduction to risk modeling.

What is particularly impressive is the authors’ painstaking effort in cutting through industry jargon, putting across their pointers in plain English for both entry-level professionals and experienced practitioners. Furthermore, the sequential format of the book makes it real easy for the latter lot to jump in to a section for quick reference or for a subject specific refresher. 

Generic treatment of taxation, royalties, bonuses, depreciation, profit sharing mechanics, incentives, ringfencing, and much more, including decommissioning finance, are all there and should withstand the passage of time as both authors have called their combined 48 years of experience in the industry into play, to conjure up a reasonably timeless discussion on various issues. 

Above everything else, Kasriel and Wood’s conversational style makes this book a very purposeful, handy guide on a subject that is vast. The Oilholic is happy to recommend it to fellow analysts, (aspiring, new and established) petroleum economists, policymakers, industry professionals, corporate sponsors and oil and gas project finance executives.

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© Gaurav Sharma 2015. © Photo: Front Cover – Upstream Petroleum: Fiscal and Valuation Modeling in  Excel © Wiley Publishers, March, 2015.