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01 February 2014

Press review 01-02-2014 - Petroleum majors struggling

In spite of stable petroleum prices above 110 $/b throughout the year, international petroleum companies struggled to produce relevant profits in 2013. Investors expectations are far from being met in some of the largest companies in the sector. This week a deluge of not-so-good news hit the media, with the broad acknowledgement that petroleum resources are becoming increasingly expensive to find and develop. The optimism towards petroleum prices in the wake of the agreement between NATO and Iran over the later's Nuclear programme seems now forgotten.

The first observation to take is the progressive concentration of remaining cheap petroleum resources in a limited number of countries: Middle East, Russia and little else. Perhaps light petroleum resources are left in the Arctic, but these won't come cheap either. Another conclusion is a likely world wide slow down in exploration activity; barring the resurgence of Iraq in the market this could bring forward relevant price movements in the years ahead.

Financial Sense
Why Turning a Buck Isn’t Easy Anymore for Oil’s Biggest Players
Jeff Rubin, 30-01-2014

Judging by pump prices, Canadian drivers might think oil companies were rolling in profits that only move higher. Lately, though, the big boys in the global oil industry are finding that earning a buck isn’t as easy as it used to be.

Royal Dutch Shell, for instance, just announced that fourth quarter earnings would fall woefully short of expectations. The Anglo-Dutch energy giant warned its quarterly profits will be down 70 percent from a year earlier. Full year earnings, meanwhile, are expected to be a little more than half of what they were the previous year.

The news hasn’t been much cheerier for Shell’s fellow Big Oil stalwarts. Exxon, the world’s largest publicly traded oil company, saw profits fall by more than 50 percent in the second quarter to their lowest level in more than three years. Chevron and Total, likewise, are warning the market to expect lower earnings when fourth quarter results are released.
The figures spent by the industry in recent years are simply staggering.
Wall Street Journal
Big Oil Companies Struggle to Justify Soaring Project Costs
Daniel Gilbert and Justin Scheck, 28-01-2014

Chevron Corp. CVX -0.76% , Exxon Mobil Corp. XOM -0.33% and Royal Dutch Shell RDSB.LN +0.49% PLC spent more than $120 billion in 2013 to boost their oil and gas output—about the same cost in today's dollars as putting a man on the moon.

But the three oil giants have little to show for all their big spending. Oil and gas production are down despite combined capital expenses of a half-trillion dollars in the past five years. Each company is expected to report later this week a profit decline for 2013 compared with 2012, even though oil prices are high.

One of the biggest problems: Costs are soaring for many of the new "megaprojects" to tap petroleum deposits needed to replenish depleting fields.
The impact is not restricted to exploration, cuts all across the board are expected.
Oil industry starts to squeeze costs, wages
John Kemp, 30-01-201

Cutting the cost of everything from salaries and steel pipes to seismic surveys and drilling equipment is the central challenge for the oil and gas industry over the next five years.

The tremendous increase in exploration and production activity around the world over the last ten years has strained the global supply chain and been accompanied by a predictable increase in operating and capital costs.

When oil and gas prices were rising strongly, petroleum producers and their contractors could afford to absorb cost increases.
Shell seems to be in particularly difficult moment. Although still profitable, the company is on a asset selling spree to cover costs.
Oil giant Shell in Brazillian oil field sell-off

Shell, led by new chief executive Ben van Beurden, said it is selling a 23 per cent stake in the Parque das Conchas project to state-owned energy firm Qatar Petroleum International.

It will continue to operate and own a 50 per cent stake in the field which produces around 50,000 barrels of oil a day. Its shares climbed 11p to 2242½p.

The move is part of Shell’s aim to raise around £9billion in cash over the next two years. Last week it off-loaded a £690million stake in a gas scheme in Australia and is also believed to be considering selling a £600million stake in its Houston to Houma oil pipeline in the US.
It is interesting to note the sort of stakes Shell is dispatching. As pointed out before in this review, Arctic and pre-salt petroleum resources are likely unprofitable at present prices. Can the market ever sustain the price levels required by these resources?
Royal Dutch Shell halts Alaska exploration as profits fall

Oil giant Royal Dutch Shell is stepping up asset disposals as part of a strategy that will see the company "changing emphasis" in 2014.

The changes will involve Shell stopping its exploration programme in Alaska.

On Thursday, Shell posted 'clean' profits - which strip out the impact of oil price movements - of $2.9bn (£1.7bn) for the last quarter of 2013, down from $5.6bn on the period in 2012.

It comes a week after Shell issued a "significant" profits warning.
Exxon is also feeling the pinch. In this particular article the blame is set on declining production from conventional resources.
Reuters Canada
ExxonMobil Profit Tumbles As Energy Production Tapers
Ernest Scheyder, 30-01-2014

Exxon Mobil Corp (XOM.N: Quote), the world's largest publicly traded oil company by market value, posted lower-than-expected quarterly profit on Thursday as it failed to offset declining production but spent heavily to find fresh reserves.

The problem of declining production at legacy oil and natural gas wells has become endemic for multinational energy groups, which have tried to offset the trend by launching massive and risky exploration projects.

Exxon's oil and natural gas production dropped 1.8 percent in the fourth quarter from year-ago levels, with natural gas production falling around the world and oil output slipping in half the regions where the company operates.
This week started with several warnings on China's economy that in some cases bordered hysteria. There is however a piece of news in the midst of the swirl that is worth following. Given the breathless growth in China's coal industry, the possibility of a relevant default in the sector is somewhat strange. To see what impact this evolving story may have on China's (and the World's) coal output.
China Bank Regulator Said to Issue Alert on Coal Loans

China’s banking regulator ordered its regional offices to increase scrutiny of credit risks in the coal-mining industry, said two people with knowledge of the matter, signaling government concern about possible defaults

The coal industry has come under scrutiny as investors seek repayment of a 3 billion-yuan ($496 million) trust product that’s facing default because the miner that borrowed the funds collapsed. A default threatens to shake investor faith in China’s $1.67 trillion trust industry and add to challenges to the Communist Party’s ability to ensure stable growth in the world’s second-biggest economy.

“As a result of output cuts, they don’t have much cash flow and thus they can’t repay loans and debt,” Lau said. “The fact that the government is giving warnings and not bailing out defaults will be good for industry consolidation, indicating it is letting the market shoulder the burden of its own risks.”
More disillusion regarding source rock petroleum came out of the US this week. The booms in Dakota and Texas do not seem straightforward to reproduce elsewhere.
New Frontiers: The Cline shale might not be the next big thing

[...] So, does the Cline contain the 30 billion barrels of recoverable oil that was widely-touted in the press?

“I don’t think we would agree that’s a viable number,” Benjamin Shattuck, research analyst at energy consultants Wood Mackenzie, said. “Twelve to 18 months ago, the Cline was the next big thing. But the data just wasn’t there to support it.”

While some operators have had some success, that has been confined to “a very limited scope of the play,” Shattuck said. “So far variability has been high and results not that great, and at the same time, results improving in the Wolfcamp to the west.”
The media has been largely quiet on Iraq, in all likelihood because it is cut from the regions controlled by the Sunni. Largely overlooked were these important words left by the Deputy Prime Minister for Energy that point to real impacts on the country's exporting capacity.
Iraq says Syria war spillover hinders oilfields, pipelines
Peg Mackey, Lin Noueihed and Julia Payne, 28-01-2014

Spillover attacks from the civil war in Syria have hindered development of Iraq's gas and oil reserves and a major pipeline to the Mediterranean has been blown up dozens of times, Iraq's top energy official said on Tuesday.

Violence in Iraq climbed back to its highest level in five years in 2013, with nearly 9,000 people killed, most of them civilians, according to the United Nations.

"The ongoing conflict in Syria has resulted in an increasing number of terrorists using vast desert areas between Syria and Iraq to establish bases from which they have carried out attacks against the civilian population and economic targets and infrastructure," Deputy Prime Minister for Energy Hussain al-Shahristani said.

"Attacking the energy sector has been among their top priorities to deprive the country of its main revenue source," he said.
Platts published a somewhat detailed map of Petroleum and Gas infrastructure in Iraq; well worth some minutes of contemplation. Click on the small version below for the real thing.

Another largely overlooked story was the call for international monetary reform by a former head of the World Bank. As repeated several times in this space, this is a natural consequence of the economic power drain from NATO forced by high resource prices.
China Daily
Replace dollar with super currency
Michael Barris, Fu Jing and Chen Jia, 29-01-2014

The World Bank's former chief economist wants to replace the US dollar with a single global super-currency, saying it will create a more stable global financial system.

"The dominance of the greenback is the root cause of global financial and economic crises," Justin Yifu Lin told Bruegel, a Brussels-based policy-research think tank. "The solution to this is to replace the national currency with a global currency."

Lin, now a professor at Peking University and a leading adviser to the Chinese government, said expanding the basket of major reserve currencies — the dollar, the euro, the Japanese yen and pound sterling — will not address the consequences of a financial crisis.
This week the 2014 Formula One season kicked off with the first official tests. The past few years the sport has made great efforts to become relevant in the transition to a high petroleum price economy. The flywheel that Williams designed in 2009 is one of the results of these efforts that seems ever more closer to commercial application.
Energy Harvesting Journal
Formula One derived energy storage technology

Williams Advanced Engineering, the division of Williams that commercialises Formula One derived technologies, is embarking on a project to install flywheel energy storage technology in two remote Scottish island communities to help stabilise their power grids, improve energy efficiency and reduce emissions from non-renewable power sources.

The Isle of Eigg and Fair Isle will be the first sites in Europe to install Formula One developed composite flywheel energy storage technology into their power networks. Originally pioneered by Williams for Grand Prix racing following the introduction of Kinetic Energy Recovery Systems (KERS) into the sport in 2009, the technology has since been introduced by Williams into a range of applications outside of Formula One such as hybrid buses and Le Mans winning racing cars. The project is being partially funded by an extended grant from the Department of Energy and Climate Change's (DECC) Energy Entrepreneurs Fund which aims to encourage innovation in the low carbon sector.
Formula One is undergoing this year what is perhaps the deepest technological overhaul in its history. The power train was completely redesigned to achieve a quantum leap in efficiency. The following video has the details.

Have a great weekend.

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