High Noon on oil prices: OPEC vs U.S. Shale
From an article by Catherine Ngai published on 6 Jan 2015 by Reuters under the headline: 
“High Noon on the Gulf Coast: Canada, Saudi oil set for showdown”
NEW YORK (Reuters) – As a test of wills between OPEC nations and U.S. shale drillers fuels a global oil market slump, a brewing battle between Canadian and Saudi Arabia heavy crudes for America’s Gulf Coast refinery market threatens to drive prices even lower.
While the stand-off between the oil cartel and U.S. producers of light, sweet shale oil has captured the limelight in recent months, the clash over heavier grades – playing out in the shadowy, opaque physical market – may put even more pressure on global prices that have halved since mid-2014.
Two factors will come into play over the next few weeks: From the North, new oil pipelines will pump record volumes of Canadian crude to the southern refineries, many better equipped to process heavy crudes than lighter shale oil.
From the Middle East, top exporter Saudi Arabia is offering crude at discounted prices in an attempt to defend its remaining share of the important regional market, which has shrunk by more than half in recent months.
Crude oil inventories in the U.S. Gulf have risen to nearly 200 million barrels, a record high for late December and up some 15 percent from a year earlier.
The build-up comes as Saudi Arabia shifts its focus to fiercely defend what remains of its market in the United States – the world’s largest consumer of oil.
Until recently, it seemed to be holding its own in part thanks to a major expansion of its joint-venture Motiva Enterprises refinery.
Saudi crude sales to the U.S. Gulf rose by a third to a record high of nearly 1 million bpd in the two years to 2012, a period where gushing shale production had begun to displace foreign suppliers.
But this year it has begun to lose ground, with shipments tumbling to 461,000 bpd in October, data from the U.S. Energy Information Administration showed.
Ironically enough, the decline was driven partly by a one-third cut in imports by Motiva, jointly owned by Saudi Aramco and Royal Dutch Shell.
Investors Freak: Oil on its way down to $20 A Barrel?
From an article by Christopher Helman published by Forbes.com on 6 Jan 2015 under the headline:
“Investors Freak As Saudi Inaction Could Sink Oil To $20 A Barrel. Time To Buy?
OPEC is not going to come to the rescue. It is up to American producers to cut oil supplies.
The world freaked out over oil Monday. U.S. crude fell as low as $49.77 a barrel, down about 6%. Brent crude is at $53. This is the lowest price since early 2009, when oil bottomed at $35 less than nine months after hitting a record high of $147.
The Dow Jones Industrial Average fell 331 points Monday. Many reports have blamed oil for the stock market weakness, but that doesn’t really make much sense. All else equal, low oil prices are a boon to economic growth. And besides, considering how high the Dow has risen, 330 points just ain’t what it used to be — merely a 1.8% move. Back in 2008 the Dow suffered 11 days with losses of 4% or more.
Indeed, it’s the pain being borne by energy investors that is dragging down the market.
It used to be that OPEC controlled the world oil market while Saudi Arabia was the designated swing producer. But with the rise of new American oil, that has changed. Henceforth, it will be American oil producers that supply the world’s marginal, high-priced barrels, and American producers that will need to have the discipline (without collusion of course!) to keep from over drilling.
This reality hasn’t quite been accepted by oil companies still waiting for OPEC to take action and cut its own production. Which is why oil prices (and stocks) likely have another big leg down from here.
How far? At least $40. Maybe even $20.
But don’t take my word for it.
Two weeks ago, while most of us were getting merry and happy, the Middle East Economic Survey landed an exclusive interview with Saudi oil minister Ali Naimi. (I encourage everyone with an interest in oil markets to read the full interview for free here.)
In the interview, Naimi said in no uncertain terms that neither the Kingdom nor OPEC has any intention to cut production. He said that Saudi production costs are no more than $5 per barrel, and that marginal costs of development are “at most” $10 per barrel.
Thus, Naimi said, “As a policy for OPEC, and I convinced OPEC of this […] it is not in the interest of OPEC producers to cut their production, whatever the price is.” He added: “Whether it goes down to $20, $40, $50, $60, it is irrelevant.”
Oil companies worldwide have already cut their capital spending and drilling budgets. Rigs are already being mothballed, hedges will roll off, supplies will tighten, WTI discounts to Brent will shrink, bankruptcies and defaults and consolidations will occur…
RELATED
Why Chevron, ConocoPhillips and Royal Dutch Shell Aren’t Safe Investments(TheStreet.com)
Extract: “Can Chevron, ConocoPhillips, Royal Dutch Shell survive in the “new normal?” These companies were once seen as less vulnerable to weak oil prices. No one is thinking that anymore, and growth investors have to wonder what’s going on here.”
Why A BP Shell Merger Is Not A Sensible Option
Why A BP plc (BP) Royal Dutch Shell Merger Is Not A Sensible Option
Bidness Etc discusses how lower oil prices have impacted BP’s stock price, and why the merger with Royal Dutch Shell is not on the cards
By: MICHEAL KAUFMAN
Published: Jan 6, 2015 at 9:46 am EST
Published: Jan 6, 2015 at 9:46 am EST
Crude oil prices have declined sharply this year. West Texas Intermediate (WTI) has already fallen below $50 per barrel for the first time in nearly five-and-half years, with Brent crude hovering around the same level. Several US oil companies are fighting for their survival, especially after the Organization of the Petroleum Exporting Countries (OPEC) decided to maintain its current level of production. WTI and Brent crude were trading at $49.56 and $52.57 per barrel, respectively, during pre-market trading today.
Smaller companies are finding it difficult to survive, as oil and gas exploration activities continue to become less profitable. Larger companies are relying on mergers and acquisitions (M&A) to get them through this downturn. Total M&A activity in 2014 was estimated at $3.5 trillion, which is considered to be the highest since the financial crisis.One potential merger that investors and markets observers always seem to speculate is that of Royal Dutch Shell plc (ADR) (NYSE:RDS.A) and BP plc (ADR) (NYSE:BP).
Much of the speculation is attributable to problems surrounding the British oil major. The company has been a main subject in US courts over the Gulf of Mexico oil spill in 2010, with the US government pushing for $16 billion in damages. In addition, the sanctions imposed on Russia could hurt the company, as BP has a 20% stake in the Russian oil giant Rosneft Oil Co (OTCMKTS:RNFTF).
Plummeting oil prices have also made it difficult to engage in oil exploration and production activities. BP shares are currently trading at their lowest level since June 2012, which has caused many analysts, including Jason Kenney of Santander, to predict that the company will draw bids. BP stock was down 5.30% as of Monday’s market close, trading at $36.10.
Lord Browne, former CEO of BP, had earlier revealed in his memoirs that he intended a merger with Shell in 2010.
However, despite the speculation, Jeremy Warner of the Telegraphbelieves the merger makes little sense. He claimed that BP, at the moment, was not considering a merger option seriously.
He is of the opinion that there is an inverse relation between the performances of the two companies. When one company is doing considerably well, the other ends up facing problems. For instance, when BP acquired a 20% stake in the Russian state-run company of Rosneft Oil Co in 2013, the prospects looked good for the company. At the time, however, the Hague-based Royal Dutch Shell was involved in an accounting scandal, and several environmental concerns had been raised about its drilling practices. Many feel the company made the wrong decision in exploring Nigeria, rather than looking for new reserves in Siberia.
The tables have turned, with BP facing considerable problems due to its Russian investments.
BP is currently valued at 140 billion pounds. Shell is quite better off, and has about double market value. Shell stock was down 4.75% as of Monday’s close, trading at $63.8.
Mr. Warner believes that a merger between the two entities should only take place if both are certain the deal will bring about considerable benefits in terms of cost savings. He added that the companies should have little trouble combining their upstream production and reserves. The question, however, remains as to how much reserves each business will have access to after the merger.
He also pointed out that the downstream sector faces heavy competition, and the overall cost savings could be minimal for the merged entity. The merger could also involve several complexities and transaction risks, which could potentially outweigh the gains. He further outlined that there were better and cheaper alternatives for both companies to increase their reserves.
RELATED BIDNESS ETC ARTICLE
European Energy M&As To Look For In 2015
Market Collapse: 5 percent of Shell’s capital invested in money-losing projects?
From an article by Joe Carroll and Tara Patel published 6 Jan 2015 by BloombergBusinessweek under the headline:
“Oilfield Writedowns Loom as Market Collapse Guts Drilling Values”
Shell, Europe’s largest energy producer, may have as much as 5 percent of its capital tied up in money-losing projects.
Extracts
Tumbling crude prices will trigger a flood of oilfield writedowns starting this month after industry returns slumped to a 16-year low, calling into question half a decade of exploration.
With crude prices down more than 50 percent from their 2014 peak, fields as far-flung as Kazakhstan and Australia are no longer worth pumping, said a team of Citigroup Inc. (C:US) analysts led by Alastair Syme. Companies on the hook for risky, high-cost projects that don’t make sense in a $50-a-barrel market include international titans such as Royal Dutch Shell Plc and small wildcatters like Sanchez Energy Corp.
The impending writedowns represent the latest blow to an industry rocked by a combination of faltering demand growth and booming supplies from North American shale fields. The downturn threatens to wipe out more than $1.6 trillion in earnings for producing companies and nations this year. Oil explorers already are canceling drilling plans and laying off crews to conserve cash needed to cover dividend checks to investors and pay back debts.
Shares Slump
An index of 43 U.S. oil and gas companies lost about one-fourth of its value since crude began its descent from last year’s intraday high of $107.73 a barrel on June 20. The price dipped below $50 on Jan. 5, the lowest since April 2009. The decline represents a $4.4 billion drop in daily revenue for oil producers, which equates to $1.6 trillion on an annualized basis, Citigroup researchers led by Edward Morse said in a Jan. 4 note to clients.
The stocks of oil and gas producers fell for a second day in Europe. Eni SpA, Italy’s largest energy company, dropped as much as 1.9 percent to 13.12 euros in Milan trading after crashing 8.4 percent on Jan. 5.
Royal Dutch Shell Plc (RDSA), the region’s largest oil producer, fell as much as 1.6 percent.
Exposing Risk
The oil-market rout is exposing projects dating as far back as 2009 that were either poorly executed or bad ideas to begin with, Syme’s team said in a note to clients. Shell, Europe’s largest energy producer, may have as much as 5 percent of its capital tied up in money-losing projects.
BP and Shell Slump
From an article by Alan Oscroftpublished by The Motley Fool on 6 Jan 2015 under the headline:
“BP plc, Royal Dutch Shell Plc And Tallow Oil plc Slump Further As Oil Hits New Record Lows”
Extracts
The price of Brent Crude slumped below $55 a barrel yesterday for the first time in more than five years, and there are fears now that it could even dip below $50.
BP is hurting
BP dropped 22.3p on the day, for a 5.4% fall to 388p. And with crashing oil prices added to the company’s still-unfinished Gulf of Mexico business, the shares are now down 26% from their July 52-week high of 527p.
Dividends could be cut if oil drops much lower, but cover for 2016’s predicted payout currently stands at 1.66 times — it could be better, but that’s not too bad.
Same goes for Shell
Things are bad for Royal Dutch Shell, too, with its shares suffering a loss of 112.5p (5%) yesterday to 2,123p. That’s well on the way to reversing the mini-recovery that looked to be starting in mid-December, and takes the shares down 29% now from their 12-month record of 2,991p.
Shell Arctic debacle
Article by Jeremy Cresswell published by EnergyVoice.com on 6 Jan 2015 under the headline:
“Noble Drilling has book thrown at it by Alaskan authorities”
The paper stated: “So obviously, the safeguards in place to date have about as much teeth as a guppy. How do we know the repairs done truly take care of the problems with Noble Discoverer? Because Noble Drilling and Shell say so?”
PREDICAMENT: Drilling rig Kulluk aground in Alaska
Written by Jeremy Cresswell – 06/01/2015 6:00 am
Noble Drilling has been charged with environmental and maritime crimes for operating the drill ship Noble Discoverer and the drilling unit Kulluk in violation of federal law in Alaska in 2012.
Under the terms of a plea agreement filed in the Alaskan federal court early last month, Noble Drilling (US) is pleading guilty to eight felony offences, will pay $12.2million in fines and community service payments, implement a comprehensive “environmental compliance plan”, and will be placed on probation for four years.
In addition, Noble’s parent, Noble Corporation plc which is headquartered in London, has agreed to implement an environmental management system covering its fleet of offshore rigs, wherever they operate in the world.
The Alaskan authorities basically threw the book at Noble Drilling (US), which was charged on eight counts including knowingly failing to maintain an accurate Oil Record Book and an accurate International Oil Pollution Prevention certificate, knowingly failing to maintain a ballast water record book, and knowingly and willfully failing to notify the US Coast Guard of hazardous conditions aboard the drill ship Noble Discoverer.
At the time the offences were committed, the Noble Discoverer was operating under contract to Shell, which intended to use them for drilling in the ice-bound Beaufort Sea.
After leaving its drilling location under tow, the Kulluk ultimately ran aground off the coast of Unalaska when it broke free in bad weather.
The Noble Discoverer, a converted log carrier, was dead-ship towed from Dutch Harbor to Seward due to failures with its main engine and other equipment. It also ran aground.
Noble has admitted that it knowingly made false entries and failed to record its collection, transfer, storage, and disposal of oil in the Noble Discoverer’s and the Kulluk’s oil record books in 2012.
Oil record book entries falsely reflected that the Noble Discoverer’s oil water separator (OWS) was used during periods of time when in fact the OWS was inoperable.
Noble had problems managing the bilge and wastewater that was accumulating in the engine room spaces of the Noble Discoverer. This and other conditions led to a number of problems.
Noble devised a makeshift barrel and pump system to discharge water that had entered the vessel’s engine room machinery spaces directly overboard from the Noble Discoverer without processing it through the required pollution prevention equipment as required by law.
Noble failed to notify the Coast Guard about this system, and took steps to actively hide the fact that it was being used.
In the plea agreement, Noble also admits that it negligently discharged machinery space bilge water from the Noble Discoverer into Broad Bay, Unalaska, on July 22, 2012.
While anchored in Dutch Harbor, the Noble Discoverer’s bilge holding tank 27S overflowed and went overboard, creating a sheen in Broad Bay.
Noble Corporation stated in a press release that it has taken responsibility for these actions and assisted in the investigation and in implementing changes in its vessel and management process.
It said that “concerns related to the Noble Discoverer have been addressed during the renovation and modernisation of the rig which occurred as part of an extensive shipyard programme conducted in Korea and Singapore”.
It has been reported locally in Alaska that Shell intends to carry on using the Discoverer in its next Beaufort Sea campaign.
And an extensive editorial in the Alaska Dispatch News is calling into question the competence of the US Coastguard to carry out inspections and issue approvals. Likewise, relevant federal agencies overseeing Shell’s plans are also criticised.
The paper stated: “So obviously, the safeguards in place to date have about as much teeth as a guppy. How do we know the repairs done truly take care of the problems with Noble Discoverer? Because Noble Drilling and Shell say so?”
RELATED
From The New York Times: 5 Jan 2015
The Moral of the Kulluk
The cover story of The New York Times Magazine on Sunday, “The Wreck of the Kulluk,” by McKenzie Funk, is one of those articles that you can’t put down even though you know how it turns out. The Kulluk was an offshore exploratory drilling rig, owned by Royal Dutch Shell, which, in December 2012, ran aground in some of the most inhospitable waters in the world.
The Wreck of the Kulluk: 30 Dec 2014
Those waters were the Chukchi and Beaufort Seas in the Arctic Circle, more than 1,000 miles from Dutch Harbor, Alaska, the nearest deep-water port. The rig, which had been towed — with great difficulty — to the Beaufort Sea, was in the process of being towed out again, barely two months after the drill bit touched the sea floor, before ice formations would make the route impassable. The Kulluk and its tow soon ran into a series of dangerous storms. Although no one died, Funk keeps you on the edge of your seat by describing in detail the hair-raising ordeal, which led to the tow captain of a rescue tugboat cutting the Kulluk adrift to ensure his own men’s safety. The Kulluk’s crew, meanwhile, was airlifted via helicopter, in a dramatic, and dangerous, rescue.
Funk also does a nice job laying out all the mistakes Shell made. Despite spending $6 billion preparing to explore for oil in this remote part of the world, it didn’t plan adequately, and it cut too many corners. According to the Coast Guard, which investigated the Kulluk disaster, not only had Shell’s risk management been “inadequate,” but there also had been a significant number of “potential violations of law and regulations.”
I came away from Funk’s article, however, with another thought: Even if Shell had done everything right, what were the chances of something bad happening to the Kulluk, or, more broadly, to any drilling program in that part of the Arctic? They were high. Although this area is considered to hold one of the last great oil fields — with an estimated 23 billion barrels — is drilling for it really worth the risks?
The first issue is the weather. One of the reasons this remote location is at least theoretically accessible to oil companies is because of climate change. “There is less ice, and it is receding from the shore,” said Michael LeVine, the Pacific senior counsel of Oceana, an environmental group dedicated to preserving the world’s oceans. But, he adds, climate change is also affecting the wind, the water and the currents. An area that was already remote, cold and dark is something else as well: unpredictable. Companies trying to explore for oil in the region are essentially flying blind.
Then there is the question of whether the government is up to the task of regulating such high-risk ventures. The answer is: probably not. Even after the Deepwater Horizon spill in the Gulf of Mexico — and despitesome improvements in safety regulations — government regulation is still way behind the oil industry. “The technological capabilities and the need for oil companies to drill in more remote places has outstripped the government’s ability to keep up with it,” LeVine told me
There are a host of important environmental issues: the industry hasn’t gotten better at dealing with oil spills since the Exxon Valdez spill 25 years ago, for instance. Yet because the climate is so difficult, the chances of an environmental calamity are increased.
As regular readers know, I am hardly opposed to drilling for oil or gas. Yet this particular high-risk venture seems both foolish and unnecessary. For one thing, the world is awash in oil, thanks to a slowdown in demand and increase in supply because of the fracking revolution. For another, the price of oil is so low as to make new, expensive exploration in the Arctic unprofitable.
Shell still buying Iranian crude
Reuters: Tuesday, Jan 06, 2015
TOKYO – Two of Japan’s biggest buyers of Iranian crude, JX Nippon Oil & Energy Corp and Showa Shell Sekiyu KK, are set to keep their purchases from Tehran largely steady in 2015, their top officials said on Tuesday.
Japanese refiners have been making decisions about how much Iranian crude to buy after consulting with the government on how much they are allowed under Western sanctions on Iran.
Iran and Western world powers failed in November to meet a self-imposed deadline to resolve the standoff over Tehran’s nuclear ambitions, extending talks for seven more months and allowing the Islamic republic to keep exports at about 1 million bpd, down by more than half from 2012 levels.
Oil Price Crash Continues Into 2015
From an article by CLIFFORD KRAUSS and PETER EAVISJAN published in the NY print edition of The New York Times on 6 Jan 2015 under the headline:
“Oil’s Fall Continues Into 2015, and Stock Markets Shudder”
HOUSTON — Oil prices tumbled below $50 a barrel on Monday, spooking global financial markets and signaling that the remarkable 50 percent price drop since June was continuing this year and even quickening.
The new drop in American and global benchmarks of more than 5 percent was accompanied by reports of increased Middle Eastern oil exports, continuing increases in American production and renewed worries about the declining economic fortunes of Europe.
The plunge once again sent fear through global markets.
“It is a very shaky start for the oil market,” said Tom Kloza, global head of energy analysis for Oil Price Information Service. “The norm is a lot of money comes into commodity index funds at the beginning of the year, and that can create a market rally. Today, instead of new money coming into oil, you got some more old money going out of oil.”
The drop in prices has led to a rising tide of oil company announcements in recent days of investment cuts for the coming months.
The last time oil and gasoline prices fell this low was in the wake of the 2008-9 financial collapse, when crude oil fell from well over $100 to below $40 a barrel in a matter of months. Energy analysts say the current price slump is of an entirely different nature, based primarily on a glut of oil being produced in the United States, along with increased production in Canada, Iraq and a handful of other countries.
FROM A RELATED BLOOMBERG NEWS ARTICLE 6 JAN 2015
Tullow Oil and Royal Dutch Shell Plc lost at least 2 percentas crude extended losses below $50 a barrel.
The TRUTH will set you FREE.
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